Web3, crypto, whatever you want to call it. It’s brought lots of eyeballs and a unique set of marketing challenges and opportunities to conquer which are not traditionally present in Web2 marketing. In this comprehensive analysis, we will explore five fundamental marketing strategies, quantify their success, and highlighting the key metrics that have led to their effectiveness. By breaking down each strategy, we will provide a clear and easy-to-understand guide to navigating Web3 marketing.
Part 1: The Five Core Marketing Strategies in Web3
1. Loyalty Rewards Systems
Loyalty rewards systems provide users with incentives to continue using a project over time, often in the form of token rewards or other benefits. These systems can help improve user retention and engagement. Camelot, a project on Arbitrum that provides swaps for eco-specific tokens, has implemented a loyalty rewards system in the form of xGrail, an escrowed governance token that users can earn and allocate to different plugins for a variety of benefits.
There are also third party platforms which help facilitate loyalty rewards if the project doesn’t want to directly implement this strategy into their mechanism design. These include the likes of Galxe, Guild, and many more.
2. Referral Programs
Referral programs reward users for bringing new users to a project, usually in the form of token rewards or other incentives. These programs can be a cost-effective way to attract and retain users, as they leverage the power of word-of-mouth marketing. GMX, a leading perpetuals decentralized exchange (DEX) on Arbitrum, has utilized a successful referral program that has resulted in significant referral volume and revenue. GMX’s referral program has arguably been one of the best examples of Web3 native growth driven by the users of the protocol.
3. Airdrops
Airdrops are the distribution of a project's tokens to a large group of users, often for free or at a significantly reduced cost. They can serve as a way to jump-start user engagement and incentivize new users to explore a project's ecosystem. Airdrops have been utilized by various networks and projects in crypto. The most recent and notable airdrops being those of Arbitrum and Optimism.
The effectiveness of airdrops is highly debated, coming from both the users’ and projects’ side. Such conversations really impact the narrative and ultimate value capture of an airdrop depending on whether they drive positive or negative sentiment in the community of users who have been loyal and active users throughout the developing stages of the network or project’s growth.
There are two major problems I see that plague airdrops. These include sybil attacks and airdrop farming. The sybil attacks are damaging to the legitimacy of the airdrop because of the large acquisition of tokens by people who set up a multitude of wallets to farm the airdrop and collect as much of it. On the backend of these larger players there are smaller players who are equally, if not more toxic. They flood communities with FUD and desperation, clearly only present for the benefit of the airdrop rather than the benefit of being early and ad contributing as a value add user to a protocol.
4. Community Engagement
Community engagement involves interactive community events, normally in held in Discord, that encourage users to participate in various tasks or challenges, often with the promise of token rewards or increased roles within the community Discord. This helps most with retention, and it is objectively the hardest to quantify out of these 5 in terms of effectiveness.
However, fostering growth through organic engagement is probably one of the biggest green flags to look out for in a project. It speaks to the teams long term commitment to being involved with their users, creating a tight and active community. Check out factomind’s take on organic growth and community engagement.
As a contributor to DeFi startups’ marketing efforts, it is probably the most beneficial to guarantee a product market fit to begin with the more organic community engagement method of marketing.
This goes back to the very simple idea of making a product that a few users absolutely love. Get their feed back. Use that feedback to take action on the product development and community engagement.
"At YC, we were challenged to do things that don't scale -- to start with the perfect experience for one person, then work backwards and scale it to 100 people who love us. This was the best piece of advice we've ever received."
Brian Chesky, Founder, Airbnb (YC W09)
5. Discounts and Coupons
Discounts and coupons incentivize users to participate in a project by offering reduced costs or other benefits. This strategy can help bootstrap liquidity and user engagement. Dopex is an options trading platform on Arbitrum with a visibly active team, constantly shipping new products. They already have a deep and loyal base of users. They propose implementing discounts/coupons in the rDPX v2 tokenomics, which includes several mechanisms designed to ensure robust liquidity and incentivize user participation.
Olympus DAO pioneered the concept of discounts and coupons within the DeFi space as a means to protect against mercenary liquidity, attract and retain long-term investors, and create a compelling marketing strategy that others could emulate in the future. By offering coupon bonds and discounts on their native tokens, Olympus DAO incentivized users to commit their capital for extended periods, effectively ensuring a stable foundation for the project's growth. This approach not only helped Olympus DAO stabilize its token price but also established a precedent for other projects to follow. By focusing on long-term value creation and promoting committed liquidity providers, Olympus DAO set a new standard for managing liquidity and fostering sustainable growth in the DeFi ecosystem. This strategy has since been adopted by various projects, and soon Dopex which we’ll dive into further.
Part 2: Quantifying Success and Identifying Key Metrics
To determine the success of these marketing strategies, we can analyze various factors, such as token price, total value locked (TVL), market cap, cost per user, and general utility (like earning protocol revenue).
First, The Case Against Tokens
To preface my analysis, I should be transparent about my personal bias towards tokens/airdrops and why I chose to analyze airdrops at the network level. I personally believe there’s a lot of projects with mediocre token mechanism designs at best. The majority of cryptocurrency tokens are created to drive speculation, hype, and initial liquidity for a protocol. However, the long term viability of these token mechanisms is non-existent because traders (the majority of DeFi participants) prefer to take profit and move to the next opportunity. Given that airdrop recipients receive their allocations relatively simultaneously, if it’s common knowledge the asset will be sold off by profit takers, then it makes sense to try and sell early, usually leading to charts like the one from LooksRare a highly anticipated NFT marketplace innovation. Regardless of the success of the platform itself, the token has failed to accrue long term sustainable value.
Although I maintain this position, there are some exceptions. I do think that if tokens and airdrops are to exist then it makes sense for them to be used at the network level for specific purposes such as gas payment and governance. There are also a lot of interesting projects working hard to deliver token mechanisms which address the lack of value accrual in tokens. Such projects have been included in the real-yield narrative, suggesting they deliver sustainable rewards/incentives to token holders rather than dilutive or unsustainable rewards.
Airdrop: Arbitrum vs Optimism
Comparing Arbitrum and Optimism, we can observe the impact of airdrops and quests on their respective TVLs. While Optimism had the opportunity to overtake Arbitrum in TVL, it ultimately failed to do so. This suggests that airdrops alone do not guarantee liquidity retention, as other factors, such as user satisfaction and project quality, play a significant role in long-term success.
These insights are not only present in the magnitude of each protocol’s TVL, but also directly from user feedback. The sentiment was obviously better following the Arbitrum airdrop, whereas participants of the Optimism airdrop felt slighted due to the effort that some qualifying quests required. Arbitrum did not go without hiccups in their first months after the airdrop, disgruntling the community with some miscommunicated actions around their first proposals.
While this strategy is the best method to reward early users, it may invite more self interested market participants rather than those interested in the long run success of the protocol conducting the airdrop. Many times this breeds toxic community behavior and can actually detract from the success seen in the run up to the air drop. Some call this buying the hype and selling the news. Altogether, airdrops work they just aren’t the best.
Innovative Protocol Level Marketing Strategies
In the case of GMX, Dopex, and Camelot, we can analyze their TVL, volume, and social metrics like Twitter followers. GMX leads in TVL and followers, which is expected due to its first-mover advantage on Arbitrum and the nature of perpetuals requiring more liquidity. Dopex ranks second, as options trading requires periodic pooling of liquidity, while Camelot comes in last due to being the newest of the three and serving a niche purpose.
GMX - Referral Program
https://stats.gmx.io/referrals/arbitrum
Total Referral Volume: $15,764,919,374
Total Volume: $92,850,865,634
Referall / Total: 16.97%
Revenue from referrals: ~ $15.7M
Paid out to affiliates: $1,213,173
Clearly this is an efficient way to attract liquidity and earn revenue, and it continues to print! Some of the highest affiliate payouts and daily referral volumes have been in the past couple of months.
Enabling users to share in the success of the exchange aligns incentives for long term success and increased use of the platform. By using rebates to reward affiliates and discounts to reward traders, the GMX referral program incentivizes users to become affiliates and for traders to use affiliate links.
I’ve begun with this strategy to keep my analysis concise and actionable. If you’re looking for the best, proven way to attract liquidity and retain it, the referral program is it. It is a reflection of both word-of-mouth marketing and influencer marketing, making it perfect for crypto given the constraints not found in traditional web2 marketing.
Generally advertisers compete in highly competitive auctions for space on websites, betting on the best location to post their ad, accrue eyeballs, and have the users come to them through clicks. From my perspective the referral program brings the product to the user, eliminating a lot of the economic rents collected by search engines and websites in advertising auctions.
Dopex - Coupons & Discounts
Dopex is anticipated to launch the rDPX v2 tokenomics, composed of several mechanisms that work together to ensure robust liquidity for dpxETH, and other Dopex Synthetic Coins to come in the future.
The mechanisms being developed include:
Bonding
Liquidity Provider Management
rDPX/ETH Permissioned AMM
rDPX-ETH Perpetual Put Pools
Peg Stability Modules
Option Writer Rebate System
$dpxETH Utility
By bonding users can get dpxETH at a discount, and help provide deep liquidity to the rDPX/ETH pair, reducing the circulating supply of rDPX. In addition option writers will act as a backstop (minimum 93.75%) and be paid with decaying bondable rDPX if they expire ITM. You can find more specific details on these outlined in the rDPX v2 Whitepaper linked above.
Although we can't really quantify these discount/coupon incentives yet, it's pretty evident that users are excited about the update. With volume increasing in SSOV3 and the rDPX price increasing as well. Such designs have proven robust in the past such as the one designed and implemented by Olympus DAO. The main opportunity for the protocol is to attract and retain liquidity. If properly executed, this could imply deeper and stickier liquidity creating more capital efficiency within their protocol.
Camelot - Loyalty Program
Camelot is another project displaying excellent mechanism design especially when it comes to building it in a way which engages their community and generates sustainable liquidity growth. This comes in the form of their loyalty rewards system, based on xGrail, the staked representation of Grail (Camelot’s native token).
Straight from docs: xGRAIL is a non-transferable escrowed governance token, corresponding to staked GRAIL. It can be earned from yield-generating staking positions (spNFTs), or through direct GRAIL conversion.
The central use case for xGRAIL is the ability to allocate it to Plugins. The operation consists of staking xGRAIL into the token contract and assign the deposited amount to a plugin in exchange for various benefits.
The majority of the protocol earnings are redistributed to users allocating xGRAIL to the Dividends plugin. These dividend allocatoors are making bank:
Max Grail Supply: 100,000 Grail
Circulating Supply: 9,591
Allocations: 8,969.07 xGRAIL
Current Distribution: $109,754.3
Per Token: $12.24
And liquidity is over 100,000,000
Insights To Keep In Mind When Designing Product and Marketing
From what I’ve discovered, product and marketing go hand in hand. The kinds of strategies I’ve mentioned are not successful because they convince you to use the product. Instead they incorporate the user into the design to benefit from long term use and support of the product. This aligns incentives between users of the product and those delivering it to contribute positively. Most importantly it generates sustainable liquidity to the protocol.
These findings provide three key insights for designing go-to-market strategies:
1. Liquidity is the most important objective. Attracting liquidity usually involves offering incentives, such as those delivered through proper token/mechanism design or referral payouts.
2. Users are essential for liquidity. Engaging content and a reputable product are required to acquire users. Trustworthy projects with long-term usability are preferred over short-lived alternatives. A sequence to keep in mind: Attract users → users generate revenue → liquidity providers benefit from the user generated revenue for the risk they took to provide liquidity → satisfied users continue to use the product → satisfied liquidity providers continue to LP.
3. Prioritize organic growth alongside incentives. Referral-based marketing, akin to word-of-mouth, has proven to be the strongest strategy when delivering liquidity attraction/retention and user acquisition/retention at scale. Every DeFi protocol should have a consistent stream of content and elaborate plans for engaging the community organically or with minor rewards. This helps create a more tight knit community, and if done right a way for that community to identify within web3.
Part 3: Conclusion and Future of Web3 Marketing
In conclusion, we have examined five core Web3 marketing strategies, quantified their success, and identified key metrics that contribute to their effectiveness. Web3 marketing differs significantly from traditional Web2 marketing. Users have a heightened emphasis on trust, community, and ownership since they represent their use with capital. Protocols face constraints on how they can reach the user, forcing successful new products to truly differentiate themselves from incumbents with their token/mechanism design to benefit loyal users.
To achieve long-term success, protocols must cater to these expectations while bootstrapping their projects with sufficient liquidity through their go-to-market strategies. By understanding and implementing these strategies and insights, projects in the Web3 ecosystem can optimize their marketing efforts and maximize their chances of success.