History of Traditional Referral Systems
In the era of Web 2.0, numerous groundbreaking companies emerged, a feat made possible by the advent of the internet. One such notable entity was the FinTech startup PayPal. Like any innovative venture, these companies encountered unique challenges. PayPal, in particular, grappled with the task of expanding its platform through user onboarding. Unlike the present-day abundance of well-established ad networks with defined customer demographics, PayPal faced the absence of such resources. Moreover, investing heavily in advertising for a fledgling company without an established user base seemed impractical.
To address this predicament, PayPal devised a strategic solution—implementing a referral system. This innovative approach aimed at incentivizing both the referrer and the referee, offering a $20 reward to each. Now, let's delve into why this strategy proved successful and explore its underlying dynamics.
Putting People On
Trust Extension
Social Transaction
Program as Tutorial
The initial facet of PayPal's referral program that warrants examination is the act of referring itself. Human nature exhibits a genuine inclination toward being the trendsetter within one's friend group, introducing novel experiences such as new music, food, and more. This stems from a psychological phenomenon known as the "innovator" or "early adopter" mindset. People derive satisfaction and a sense of identity from being the first to discover and share something valuable, creating a dynamic where individuals feel a heightened sense of pride and influence when introducing their peers to innovative concepts. This psychological reward reinforces the act of referring, making it an effective strategy for PayPal to tap into this innate human desire and drive user acquisition through word-of-mouth recommendations.
The second facet of PayPal's referral program to scrutinize is the extension of trust, or the extendability of trust towards the platform through the proxy of their friend. This aspect capitalizes on a psychological phenomenon where individuals are more willing to take a chance on a relatively unknown or new platform if it comes recommended by a trusted friend. This is rooted in the concept of "trust transfer" – the idea that the trust invested in a friend extends to the recommended platform. In essence, the referral acted as a trust endorsement, making PayPal appear less of a gamble for potential users. Even in the absence of widespread recognition, the presence of a personal recommendation from a friend mitigated the perceived risk and encouraged individuals to explore the platform with a greater level of confidence.
The third aspect of PayPal's referral program to consider is the nature of money itself, acknowledging that money serves not only as a medium of exchange but also as a social interaction. Money is fundamentally intertwined with various social interactions, being exchanged between individuals in a myriad of transactions. This social dimension of money fosters a unique connection between people and their financial interactions.
The fourth and final aspect of PayPal's referral program worth exploring is its unintentional role as a tutorial for the underlying product. As discussed earlier, money is not just a medium of exchange but also a social interaction. When users made referrals, they likely invited friends or family members with whom they would engage in future monetary transactions, aligning with the intended use of the platform.
An additional mechanism at play was the requirement for users to add a credit card or bank account to receive the referral bonus. This unintentionally facilitated the onboarding process, preparing users to send or receive money. Furthermore, upon receiving the bonus, users had the opportunity to test the platform with the free funds they received. This testing phase would have been less effective, or potentially eliminated altogether, if a different reward, such as a gift card or coupon, had been offered. Unlike cash, these alternatives have limited applications and wouldn't allow users to fully explore the underlying service as a payment provider.
It is crucial to note that the inception of the referral program stemmed from the perception that traditional advertising was too risky and expensive. Therefore, the program aimed to ensure that the cost of acquiring a user through referrals remained lower than traditional advertising expenses. Over time, the reduction in the cash reward, while still maintaining program effectiveness, was a strategic move to manage operating costs and sustain the balance between user acquisition and financial sustainability.
History of Token Distribution Methods
Why Did Proof of work fail?
Proof of work predominantly faltered, and in some instances succeeded, primarily due to the inherent randomness associated with receiving a reward. This characteristic rendered it more akin to a sweepstakes drawing model than a practical distribution method. Consequently, the need to manage operating costs became imperative. Without a guaranteed reward to offset these costs and given the fluctuating difficulty of Bitcoin's hashrate, specialized machines emerged to align with these divergent dynamics.
In essence, these specialized machines became highly sought-after commodities, equalizing the disparities between rewards and costs. This surge in demand, however, led to an increase in the price of these machines, effectively pricing out the casual crypto enthusiast from engaging in profitable mining activities. The unpredictability of reward distribution coupled with the emergence of specialized equipment created a landscape where profitability in mining became a pursuit primarily reserved for those with substantial resources and technical expertise.
Why did ICOs fail?
Initial Coin Offerings (ICOs) faced substantial challenges, primarily stemming from susceptibility to Sybil attacks and regulatory ambiguities, notably concerning unregistered securities. However, focusing specifically on their role as a distribution method, ICOs encountered failure due to capital constraints among participants. The fundamental driving force behind participation was often a rush to get in early with the intention of exiting as swiftly as possible.
Why did Airdrops fail
Airdrops encountered challenges as a distribution method, reminiscent of the issues faced by ICOs, including the vulnerabilities to Sybil attacks and misalignment of users. However, the issue of misaligned users could be mitigated through strategic adjustments, such as implementing phased airdrops over time or targeting specific users with verifiable on-chain credentials, as exemplified by the approach adopted by Celestia with developers. This targeted and phased strategy sought to address the inherent weaknesses, making airdrops more resilient and aligned with the genuine needs of the project and its community. However this approach is still susceptible to Sybil actors.
Why Hardware based TierDrops will succeed?
The integration of physical hardware with tiered token airdrops presents a promising solution to challenges associated with token-based distribution. In this approach, physical hardware, such as specialized devices can be utilized to enhance the security and authenticity of token distribution.
By leveraging physical hardware, the distribution process gains an added layer of trust and verifiability. Additionally, physical hardware can offer a tangible and reliable means of identity verification, reducing the risks associated with Sybil attacks and ensuring that tokens are allocated to legitimate users.
This combination of hardware and tiered token model complements this by implementing a controlled release of tokens over time. This strategy mitigates issues related to misaligned users and prevents a rush for quick profits that often characterize rapid token distribution methods.
Market Opportunity
The benefits of this token distribution model extend to the broader crypto ecosystem, allowing for the exploration of hardware expansion and the creation of new business and token economic models for retail and enterprise clients. For instance, a device requiring a minimum amount of tokens to measure foot traffic can establish a unique marketplace and foster relationships between businesses and customers by providing valuable insights. These insights, such as traffic frequency, average amount spent, and conversion rate, enable businesses to make informed decisions on employee labor allocation and discount planning.
This data exchange can be incentivized through a token loyalty program, where the most frequent shoppers are rewarded with "cashback" tokens. Accumulated "cashback" tokens can then be used as a payment method to buy goods and services at a discounted rate. Customers, after collecting a certain amount of "cashback" tokens, may choose to burn them to qualify for eligibility into a time specified tier of varying multipliers. This could include earning 2x the normal amount during regular visits and accessing features such as exclusive discounts or promotions, either delivered physically or digitally, such as through Non-Fungible Tokens (NFTs).
The model outlined here empowers foundations and teams to generate capital by selling the device in fiat currency, thereby decoupling the funding process from token allocation. This strategic approach liberates their capital table for subsequent fundraising rounds, fostering increased retention within their team and community.
Moreover, this model enables the foundation or team to undergo a more precise valuation assessment by potential investors within the network. The inclusion of a traditional hardware component in the business enhances the clarity and familiarity for valuation purposes.
This model facilitates the distribution of hardware devices through established enterprise and retail customers, entities already held in high trust by the general public. Therefore, it addresses and mitigates the trust issues commonly associated with direct-to-customer startups.
The model induces buying pressure on the token, as a mandatory minimum amount is necessitated for the activation of the device.
The model facilitates token appreciation by motivating users to utilize their accumulated tokens for purchasing goods and services, offering customers discounted prices. Simultaneously, businesses benefit by generating additional revenue through the circumvention of credit card processing fees.
Furthermore, the model promotes token appreciation through the incentivization of tier locking as a burning mechanism. This approach not only supports the adoption of an inflationary token model crucial for the sustained longevity of the loyalty program but also enables scalability with the increasing user base and distribution of rewards. Additionally, it incorporates an internal balancing mechanism, potentially evolving into a deflationary model over time based on usage.
The model enables the streamlining of marketing and advertising efforts while also attracting prospective customers to patronize your store, thereby aiding in the bootstrapping process.
Additional Models
In an enhanced version of this model, the incorporation of exclusive retail hardware, particularly retail-specific gaming consoles, emerges as a strategic initiative. The core concept revolves around stimulating heightened sales for a specific retailer, as the exclusive nature of the hardware offers unique rewards and benefits. This exclusivity not only boosts console sales but also serves as a platform for web 3 game developers, providing them with immediate access to an established user audience. The symbiotic relationship between the exclusive retail hardware and web 3 game developers fosters a dynamic ecosystem where increased console sales translate into a broader and more engaged user base for developers, amplifying the overall success and sustainability of the model.
Tokens As a Form of Advertising
Tokens have evolved into a contemporary medium for advertising, proving to be an optimal means of user onboarding. While traditional airdrop methods have historically remained relatively static, the introduction of hardware-based airdrops introduces innovative distribution techniques. This paradigm shift unlocks novel ways to bootstrap specific applications, marking a departure from the conventional approaches observed thus far.
Location based Airdrops
Implementing location-based airdrops presents a pioneering approach to user engagement. By leveraging geographical data, these airdrops can strategically target users in specific locations, enhancing the relevance and effectiveness of promotional efforts. This nuanced strategy not only fosters user acquisition in regional markets but also aligns with the context of dating apps, where proximity and local connections play a significant role. Location-based airdrops thus offer a tailored and geographically targeted promotional avenue, elevating the potential for successful user onboarding and heightened application visibility within specific communities.
Customer Based Airdrops
The implementation of customer-based airdrops, exemplified by the Solana mobile phone initiative, represents a groundbreaking exploration into innovative distribution methodologies within the cryptocurrency space. By specifically targeting and rewarding customers, it transforms the traditional airdrop concept into a strategic tool for customer retention and acquisition.
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Additional Literature
https://tokendynamics.xyz/tokenomics-101-the-principles-of-tokenomics
