POINTS² : web3’s attempt to lure LPs by gamifying protocol airdrops with referrals and ‘play to earn’ logic
How DeFi becomes a playground for point hunters who seek to amplify their protocol airdrops by signing up their friends and family to earn ‘points squared’.
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
DeFi represents a transformative shift moving away from Banks as we know them toward a less centralized model: peer-to-peer finance — where everyone can participate at any time.
At the heart of this evolution are innovative incentive mechanisms to attract users and liquidity to new protocols — much-memed ‘point systems’, which have become a cornerstone in attracting and maintaining traction within web3. ‘Point systems’ are designed to reward users for their participation in the ecosystem: these rewards, in the form of future airdrops, not only incentivize users to provide liquidity but also to engage in various other activities like staking, borrowing and lending, and even large scale referral networking. So as it stands everyone refers everyone else, including their grandmothers!
At this stage, Point Systems are crucial for new protocols, as liquidity is the lifeblood that ensures smooth trading and efficient market functioning — while increasing gamification and participation from money-hungry degens is exactly what everyone needs to supercharge their marketing and GTM (most really need degens to even survive at all given the degen 100x leverage on perps for instance!).
But ser…gib Liquidity Providers… plz fren…
LPs supply the market with the necessary funds by locking their assets into protocols. In return, they receive tokens, which represent their share of the pools or positions, and sometimes even entitle them to a portion of the fees generated by the platform (and… that’s definitely not a security at all!).
Web3 teams rely heavily on these LPs to ensure sufficient liquidity is available for trading activities, lending supply, or simply liquidity on a new L2 (ie — Blast, Manta, Mode). This is where the point system comes in handy as an additional layer of incentive for these providers. By offering points or rewards, protocols and L2s alike encourage LPs to deposit a lot more assets than they would for regular usage because they have an opportunity to multiply their airdrop (by referring their friends to deposit assets too) thereby increasing the overall liquidity available on the platform or network. This not only benefits the providers through increased rewards but also enhances the user experience for other participants by ensuring smoother trading, lower slippage, and better pricing, and simultaneously increased TVL for the protocol.
DeFi has significantly evolved since DeFi Summer, particularly in how it incentivizes and retains users. Initially, DeFi protocols primarily relied on straightforward interest-bearing models for attracting liquidity. However, as the sector matured, there was a shift towards more gamified, complex, and appealing incentive structures, giving birth to today’s point systems emerging as ‘sophisticated’ methods that reward participation but also foster community engagement and loyalty at the same time.
Incentivizing Participation with Point Systems
Point systems are ingeniously designed to create a win-win scenario for both the platform/protocol and the liquidity providers. By participating in these systems, LPs can earn additional rewards, or multiply their rewards, often in the platform’s native token, which can either be traded or reinvested into the system for further gains, while the protocol gains deeper liquidity/TVL, a loyal community, and an all-around better product.
For instance, some apps even introduce tiered systems where points can lead to higher rewards or privileges within the ecosystem. This gamified approach encourages not just initial participation but sustained engagement over time. One innovative aspect of these point systems is how they integrate referral programs. Participants are encouraged to refer friends and other users to the platform, which ultimately expands the user base exponentially. Referrers are rewarded with additional points or tokens, creating a powerful network effect that drives growth for the issuer.
While point systems offer significant benefits, however, they are not without challenges. The primary concern is the sustainability of these incentives. Over-reliance on token rewards can lead to inflationary pressures, reducing the token’s value over time and acting in a counterproductive way for the issuer. Furthermore, as the market fluctuates, the actual value of these rewards can vary, affecting the predictability and attractiveness of the incentives. Another challenge lies in ensuring the fairness and security of the system. DeFi platforms must implement robust mechanisms to prevent manipulation and ensure that the rewards are distributed equitably among participants.
Some novel approaches link point systems with the platform’s governance, enabling users to have a say in the future direction of the protocol — thus creating a sustained interest in the protocol's continuity, but also diluting governance decisions to include speculators (which can be a double-edged sword. This aspect of decentralized governance, while ideal in theory, has faced challenges in practice. The distribution of governance tokens, can sometimes also lead to centralization if a few users accumulate a large portion of these tokens, all things to be considered by issuers when establishing a point system.
Integrating Referral Programs
Referral programs have become a staple in DeFi point systems, serving as a crucial mechanism for ecosystem growth. By incentivizing current users to invite new ones, DeFi platforms can expand their user base organically, yet exponentially. These programs are typically structured in a way that rewards both the referrer and the referee, where virtually no participant loses, creating a trifecta of benefits for all parties involved (the protocol, the user, and his referrals).
Referral programs often use tiered structures, where rewards increase with the number of users referred — similar to quadratic funding mechanisms. This approach not only encourages more referrals but also keeps users engaged with the platform, as they have a vested interest in its growth and everybody’s success. This method of expansion harnesses the power of network effects, ie social effects, where each new user potentially brings more users, leading to substantial growth. For this, the design of these referral programs is key; they must be attractive enough to motivate users to participate but also sustainable to prevent abuse and ensure long-term viability.
Points Squared
Points have amazing network effect. But what is even better than the network effect? Network Effect Squared. With the explosion of new L2s and new protocols on these ‘Superchains’, ‘Appchains’, and ‘Meshchains’ (Optimizm, Polygon, and Avax all have ‘subnets’ of sorts where easy to spin up rollups just seem to explode), we witness an increasing multiplication of point systems on top of point systems.
One good example of this is Manta Pacific, a new rollup on Polkadot that used points to lure large amounts of liquidity (around $900M at the time of writing), and then proceeded to make use of that liquidity in new ‘sub-point systems’ in the various apps on the chain. This effectively makes the liquidity not only sticky but also allows for participants to keep earning while they explore the different apps on new chains.
The Points Squared logic is smart because instead of just earning points in one system there is a system inception that emerges where users suddenly earn points on top of points, for the underlying blockchain AND from the protocol used on that blockchain.
The Eigen Layer ecosystem is another prime example of how this plays out in practice:
When applied with referral logic and multilevel reward logic these systems become super powerful community growth tools unlike anything we have ever seen. Ultimately we are witnessing the hyperfinancialization of attention, leading to what we have called ‘SocialFi networks’ in past articles.
But although in theory, these systems are a win-win-win for everybody, when crypto is involved scammers are not far. Users must remain vigilant as malicious systems can become a serious money trap if these are set up by scammers with ill intent.
All that Glitters is not Gold
While point systems and referral programs offer many benefits, however, they also come with risks. Regulatory compliance is a significant concern, as the legal framework surrounding DeFi and token-based incentives is still evolving. Platforms must navigate these regulations carefully to avoid potential legal issues, primarily related to security laws and regulations.
Another risk is market volatility. Since rewards are often in the form of tokens, their value can fluctuate significantly, affecting the real value of the incentives. This volatility can impact user participation and the overall stability of the platform.
Point systems in DeFi have become a game-changer, enabling platforms to attract and retain liquidity in innovative ways by combining financial incentives with gamified elements and community governance. At this stage however seemingly every protocol and new chain has some sort of point system, ultimately making it hard to keep track and know which ones are legit and which ones are set up by scammers to once again rob you of your coins. The integration of referral programs has further propelled this growth, leveraging social networks and community ties, enhancing user engagement and platform growth — every single system however needs to be researched and audited in depth to make sure it is legit and not a scam rug.
As DeFi continues to grow and mature, we can expect to see further innovation in how platforms incentivize and engage their users. These developments will likely shape the future of web3, offering more inclusive, efficient, and user-centered financial services. As the points system landscape continues to evolve, so too will the mechanisms for incentivizing and rewarding participation, shaping the future of liquidity provision. The sustainability and regulatory compliance of these systems, however, remain areas of ongoing focus and development. One thing we all know is that DeFi is not without its risks. YES, for real. So participants must understand the decentralization illusion and be aware of the potential risks associated with new traps put out by scammers.
The future of DeFi and its point systems is bright but requires careful navigation, and as regulatory frameworks evolve, DeFi platforms will need to adapt to ensure compliance while continuing to innovate. So stay cautious out there, don't get scammed, and DYOR!
Joining the district0x DAO
For more information about the district0x network:
- Head to our Onboarding Terminal for all links at a glance
- Check out our Education Portal for all things #web3
- Join the official AI-supercharged Discord server
- Join our Telegram channel
- Watch our YouTube intro video and live streams on Twitch.tv
- Subscribe to email updates or to our subreddit forum
- Follow us on Twitter, Facebook, and Instagram
