Original authors: Li Jin and Jesse Walden, both partners of Variant
Original compilation: Luffy, Foresight News
We founded Variant with the vision that the next generation of the Internet would turn users into owners through tokenization. Leveraging tokens as user incentives is very effective for bootstrapping infrastructure networks like Bitcoin and Ethereum. But so far, the application layer has not seen a successful model for using tokens to grow the network. Instead, there are many examples where distributing tokens actually attracts more speculators and mercenaries than real users, hampering continued user growth and retention, thereby confusing product-market fit.
Given these failed experiences, many view application token issuance as a misguided attempt, but we don’t think so. Instead, we believe the right answer is to continually iterate on token design to achieve a more bottom-up ownership distribution model, which we call “progressive ownership.” This approach focuses on deepening app user loyalty through product-market fit.
In this framework, we outline the token distribution mechanisms of previous generations: PoW mining, ICOs, and airdrops, along with their main lessons and issues. We then propose steps and strategies for a new token distribution model that we believe can sustainably grow applications through early product-market fit. Through this playbook, apps can leverage user ownership to deepen existing user loyalty, paving the way for further growth and retention.
Three eras of token distribution
Cryptocurrency token distribution models have gone through three main eras:
Proof of Work (2009-present): Hardware Mining
ICO (2014-2018): capital formation
Airdrop (2020-2023): Guided use
Each model lowers the barriers to entry while expanding access, so each era is naturally accompanied by a new round of growth and development in the field.
1. Proof-of-work era (2009 to present)
Bitcoin pioneered the idea that anyone willing to run software on their machines (“mining”) could participate in maintaining a permissionless network in exchange for tokens that represented ownership of the network. Miners who invest more computing power have a greater chance of receiving rewards, thus promoting the process of specialization in investing in computing resources.
The PoW era has shown that token incentives are very effective in guiding the supply of tokens in the network, where the value of contributions can be quantified. Crucially, capital assets (hardware) are not the same as financial assets (BTC), which force miners to sell financial assets to cover costs. As specialized hardware becomes a necessary cost, miners must have more capital assets in the game, but this change is starting to lock out ordinary players.
2. ICO Era (2014-2018)
The ICO (Initial Coin Offering) era marks a major departure from the proof-of-work distribution model: projects raise funds and distribute tokens by selling them directly to potential users. In theory, this approach allows projects to bypass intermediaries such as VCs and bankers and reach a wider range of participants who can share in the benefits of the products and services they will use.
The promise of this model attracted entrepreneurs and investors and inspired a wave of speculation. Ethereum launched via an ICO in 2014, providing the blueprint for many projects in subsequent years, including large ICOs in 2017-2018 such as EOS and Bancor. But the ICO era is rife with fraud, theft and a lack of accountability. The failure of many ICO projects, coupled with strict regulatory scrutiny, led to its rapid decline.
ICOs highlight blockchain’s capabilities for permissionless global capital formation. But this period also demonstrated the need for projects to have more thoughtful token design and distribution models that prioritize community coordination and long-term development rather than just capital terms.
3. Airdrop Era (2020-2023)
In 2018, an SEC official stated that Bitcoin and Ethereum were not securities because they were “sufficiently decentralized.” Therefore, many projects design tokens that contain governance rights and distribute them widely to users to achieve full decentralization.
Unlike ICOs, airdrops reward users for their historical usage. This model kicked off the DeFi Summer of 2020, and liquidity mining became all the rage.
While airdrops are a shift toward a more user-centered and community-driven ownership distribution model, users rarely need to participate in the game, and most airdrop users choose to sell their tokens after receiving them to convert ownership into revenue.
Many projects undergo airdrops before establishing real product-market fit. Airdrops attract bots and short-term, profit-seeking users who are solely motivated by incentives rather than putting ownership in the hands of users who are aligned with the long-term success of the project. The rush to claim and sell tokens confuses signals about product-market fit and leads to price booms/busts.
Many founding teams rushing to launch token projects try to adhere to vague regulatory litmus tests for adequate decentralization. This necessitates a governance referendum on project decisions, and most token holders don’t have the time or knowledge to vote. Before and even after reaching product-market fit, projects require founders to continue to iterate quickly. Airdrops often prove to be a mismatch between growth strategy and startup organizational execution.
We believe the main lesson from the airdrop era is that the pursuit of full decentralization has caused many projects to deviate from product-market fit. Instead, token allocation should be more thoughtfully targeted to power users, with more weight given after early product-market fit is verified.
Each era of token distribution stimulates application growth and development. Image source: USV
A new framework for token distribution: progressive ownership
Progressive ownership is built on progressive decentralization, meaning tokens are not a substitute for product-market fit. This approach uses financial incentives, in part, to gradually increase user loyalty and retention, ultimately leading to ownership. In this model, users are incentivized with a share of revenue (such as ETH or stablecoins), but can decide to exchange their personal income for tokens that represent ownership of a proportional share of the communitys revenue.
This is beneficial for users, who can transition between income and ownership fluidly, with fewer steps than the previous default of converting tokens into income. It also enables users to tailor financial participation to the risks and levels appropriate to their circumstances.
There are also advantages for builders, who can use revenue share incentives to drive growth, build loyalty, retain control, and iterate quickly without wasting energy in an obsession with full decentralization. Additionally, founders can still work to achieve liquidity through tokens while mitigating the risks associated with broad, untargeted token distributions.
Progressive ownership is only an option for those projects with early product-market fit and revenue sharing. While most crypto projects currently have relatively small revenue scales, the list of projects that fit this criteria is growing. Optimism has generated approximately $30 million in revenue so far this year. MakerDAO collected $16 million in fees from the protocol in October and has seen average monthly revenue compound growth of 25% over the past year. ENS generated revenue of $1.1 million in the past month.
Progressive ownership shifts token distribution from an opt-out to an opt-in model, potentially creating stronger loyalty and network effects due to more stakes in the game. As loyal users upgrade to owners, their financial interests become more aligned with the success of the network and have an incentive to encourage others to join, creating a virtuous cycle of growth. Users or developers who choose ownership are more likely to be inclined toward long-term investments, just like startup employees with stock options.
In contrast, in an airdrop model, loyalty may be compromised as most users choose to sell their tokens and convert them into income, creating downward pressure on prices. Research shows that suffering losses as a shareholder reduces customer satisfaction and loyalty to the company. By choosing ownership, networks can mitigate these boom and bust cycles and the consequent erosion of user goodwill.
Progressive Ownership Strategy
Progressive ownership is divided into 3 steps:
Create products that meet user needs
Leverage on-chain revenue sharing to drive growth, retention and defense
Allows advanced users to gain economic ownership (e.g. trading revenue from tokens)
1. Create products that meet user needs
This is the hardest step. The foundation of the progressive ownership model begins with developing products that serve users in novel ways. As Li recently noted: Successful startups provide step-by-step feature improvements that enable people to achieve core needs.
By meeting these needs, from income to esteem, apps can find product-market fit and even foster psychological ownership.
2. Leverage on-chain revenue sharing for growth, retention and defense
Projects can adopt an on-chain revenue sharing model to allow users to share in the success of products/services and deepen their interest and commitment.
A prime example is Zoras Protocol Rewards, which allocates a portion of revenue to creators and developers to drive NFT minting. This approach not only improves user retention but also enhances protocol defensibility.
Some projects stop there - in fact, its the normative playbook for Web2 companies, from Substack to OnlyFans to YouTube to X/Twitter. Revenue sharing is a powerful attraction and has obvious scale effects.
But the reason that goes further than revenue sharing is that economic ownership can more meaningfully align users with the long-term success of the platform rather than allowing them to capture short-term gains. Users with financial ownership will have a better understanding of how their contributions drive the growth of the platform.
3. Allow advanced users to take financial ownership
Finally, the most committed super users can choose ownership through tokens that include economic and governance rights. This transformation is not automatic and passive, but user-chosen. For example, the most valuable users as measured by revenue generated can choose to: 1) earn a share of the revenue in the form of ETH/stablecoins, or 2) receive a proportional share of the project’s native token.
In choosing the latter, users are exchanging some of their personal income for a share of the communitys overall income. If the network grows, the communitys revenue will grow, and the token should enable them to participate proportionally. Additionally, tokens may provide governance over key protocol parameters, such as fees or revenue share variables, to ensure long-term consistency.
There are more implementation details to work out. Should users stake their tokens to earn platform fees? Should the token be locked? Without going into too much detail, let’s give a few hypothetical examples:
Returning to Zora, approximately 1,008 ETH (approximately $2 million) has been distributed in protocol rewards to date. These rewards are revenue shares distributed primarily to NFT creators driving the minting activity, but also to developers and curators. In the progressive ownership model, top Zora income sources can choose to claim Zora tokens instead of ETH. How many creators and developers would choose to do this? It may be a small percentage, but those who do will have a meaningful stake in the game and potentially become more active and motivated to grow the network.
Another hypothesis is Farcaster, which charges individual users an annual fee of about $7 to store data on the network. Imagine if the protocol shared revenue with developers. The developer can then choose whether to pass that value on to the end user. Alternatively, developers can convert a portion of their revenue share into protocol tokens, allowing them to participate in the growth of the ecosystem and the governance of key protocol parameters.
Precedent for Web2 Loyalty Model
Progressive ownership model with business researcher James Heskettcustomer loyalty ladder(2002), the ladder consists of four stages: “loyalty (repeat purchases), commitment (willingness to recommend the product or service to others), apostolic behavior (willingness to persuade others to use the product or service), and ownership (willingness to recommend the product or service) service improvement).
Progressive ownership recognizes that customer loyalty requires ever-deepening psychological ownership. As users move up the income ladder into tokens, they feel increasing levels of psychological ownership, ultimately becoming more vocal advocates for the product as if it were its owners, and taking more responsibility for its continued success.
This emotional connection can be fostered through financial leverage (revenue shares) as well as product elements (personalized experiences, interactive features, and user input) that make users more inclined to become long-term stakeholders.
Leveraging financial ownership to solidify user loyalty is also consistent with research in the public equity space, which suggests that equity can increase brand loyalty among existing users. As Li said:
A Columbia Business School study found that in a fintech app where users received shares for purchasing certain brands, weekly spending on those brands rose by 40%…users intentionally chose to hold shares Brand or store shopping.
A new era of token distribution
Progressive ownership strategies are significantly different from previous eras of token distribution. While ICOs and airdrops serve primarily as bootstrapping tools, they often prove ineffective at motivating organic users. As a result, entrepreneurs often go astray in finding product-market fit.
In a progressive ownership model, revenue sharing stimulates growth and solidifies loyalty, ultimately enabling users to proactively choose ownership, ensuring that only the most committed users become stakeholders. This paves the way for a community of advocates dedicated to the long-term success of the network. While this model may encounter unforeseen challenges, it ties in well with the precedent that economic ownership increases loyalty.
How progressive ownership relates to a fully decentralized compliance framework is the subject of another article. The industry will need novel compliance arguments that enable teams to continue building great products while empowering power users through ownership. This is something we plan to move forward with at Variant.
Innovations in token distribution foster new growth and development in the ecosystem, and the playbook is still being written. We are excited to see future iterations of how tokens are distributed.
Thanks to Nathan Schneider, Joel Monegro, Liam Horne, Jackson Dahl, Jacob Horne, Chris Dixon, Fred Wilson, Mario Laul, Ben Leventhal, Joey Santoro, Scott Moore, David Phelps, Benny Giang, Lakshman Sankar, Henri Stern, Cooper Turley, and Variant Feedback from team members Caleb Shough, Alana Levin, Geoff Hamilton, and Jack Gorman helped improve this article.
