We have an incentive problem.

With crypto protocols. With SocialFi. With Web3.

Spend any time on Lens or Farcaster, and you’ll notice a familiar pattern. Users discussing declining daily active users. Scroll a bit further, and you'll see debates about the potential for an airdrop. Keep scrolling, and you’ll find people strategizing how to monetize their work—whether through pumping a meritless token or minting an NFT.

Here’s the core issue: We’ve created structures and patterns that cannot and will not sustainably drive revenue or adoption. Why?

Incentives.

By definition, an incentive motivates or encourages someone to do something. It can also mean a payment or concession designed to stimulate output or investment.

Incentives are everywhere in crypto. Chains and protocols offer airdrops to drive participation. Developers choose chains based on grants, developer tools, or user activity. But these incentives often miss the mark. Worse, they can backfire.

Many people liken crypto and Web3 to a collection of nation-states, so let’s use a macroeconomic example to unpack the incentive problem.

In Why Nations Fail, the authors argue that a country’s success often boils down to one thing: incentives. Take the United States and Mexico. Early in modern North American history, the U.S. stood out with its free-market economy and emphasis on innovation. Tax credits, accessible bank funding, and other incentives made it an obvious choice for companies looking to build and grow. Mexico didn’t offer the same advantages, so businesses gravitated north.

The same logic applies to blockchain developers. When choosing where to build, they evaluate incentives—grants, developer tools, user activity, and coding environments. These factors drive decision-making.

But incentives don’t stop there. Chains and protocols regularly dangle airdrops to attract users. Perform X number of transactions or hold Y amount of funds, and voilà, free tokens. And it works—thousands of users flock to participate.

But here’s the catch: there’s a dark side to these incentives. While they create bursts of activity, they often fail to foster sustainable engagement.

The Hidden Cost of Incentives

Let’s explore a classic experiment by Edward Deci, which revealed how external rewards can undermine intrinsic motivation.

Deci asked college students to play with a Soma cube—a 3D puzzle that’s engaging but not overly frustrating. During the first session, students were simply encouraged to play. When Deci left the room, he quietly observed. Many students kept working on the puzzle out of genuine interest.

In a second session, Deci introduced a twist. He offered one group monetary rewards for solving the puzzle. While they worked diligently during the session, the shift came when Deci left the room. The rewarded group largely lost interest, while the unpaid group continued to engage.

The takeaway? External rewards often kill intrinsic motivation. Once the carrot disappears, so does the interest.

Sound familiar? This dynamic plays out in crypto every day. Airdrops and rewards attract users, but as soon as the payouts stop, so does the activity. Like Deci’s paid participants, these users rarely form a deeper connection with the platform.

Incentives Aren’t Building Long-Term Engagement

Consider SocialFi. Daily active users on Lens peaked during the Bonsai airdrop, then cratered. Linea, Scroll, and ZKsync Era face similar issues. Transactions surge with incentives but vanish when the money does.

Some argue this is fine—after all, incentives get people in the door. But let’s be blunt: That shit’s stupid and the project/protocol will die. That mindset is shortsighted. 

This transactional thinking won’t create lasting Web3 ecosystems. It won’t drive meaningful DeFi adoption. And it won’t build the loyalty that great projects and protocols need to thrive. 

Rewards Kill Exploration

Let’s examine another experiment to understand the broader limitations of incentives.

Imagine being handed colorful index cards with words printed on them. You’re told you’ll win a prize if you memorize the words. Afterward, you’re asked to recall the card colors. Odds are, you’d struggle—especially compared to someone who wasn’t offered a reward.

This is "incidental learning" in action. When chasing a reward, we focus solely on achieving the goal, ignoring broader details. We play it safe, avoid risks, and stick to predictable strategies.

For crypto projects, this creates a troubling dynamic. Incentives encourage users to "check the box" rather than experiment, explore, or genuinely engage. This undermines innovation and long-term growth.

Users simply won’t break the app, not often at least, and not without being explicitly asked to. The incentives offered undermine that.

The Creative Trap

Even creators aren’t immune to the downside of rewards. Research shows that paying artists often stifles creativity, leading to lower-quality work. Many of us have experienced this: a hobby we once loved turns tedious when it becomes a job.

It’s that they often clash with what crypto aims to achieve

It’s not that financial incentives are inherently bad. Not necessarily. I’m saying that they undermine what crypto is trying to accomplish: systems fueled by genuine interest and long-term engagement. I want everybody to get paid. It’s the alluring part of crypto for me. But the research is clear:

"Money is the medium of exchange in all modern economic systems, so monetary payments rewards have to be dispensed. But there are better and worse ways of doing that. It is better, for example, not to think about rewards as a way to motivate people. Rewards are part of the work contract, so you would not have workers without rewards. But research suggests that, to the extent that rewards are "used" for any function other than retaining workers, it ought be merely to acknowledge or signify a job well done. Rewards can be used as a way to express appreciation, but the more they are used as motivators-like the bonus plan in the publishing house—the more likely it is that they will have negative effects." - Edward Deci

The Path Forward

So, what’s the solution?

The challenge with incentives is they work extremely well in the short term but poorly in the long term. If your goal is a burst of activity, airdrops make sense. They’ll attract a lot of users and get them to do a very specific thing so long as you’re willing to pay. But once the payments stop, the activity does too.

One alternative is offering unexpected rewards. Research shows this method is less damaging to motivation, but it has limitations. You can only surprise users once. After that, they expect rewards—and they’re pissed when they don’t materialize.

Arbitrum is a prime example. Its unexpected airdrop thrilled early users, turning many into loyal advocates—including my brother. After receiving his airdrop, he was over the moon, singing Arbitrum’s praises to anyone who’d listen. But now? That same brother won’t even consider a project unless he expects an airdrop. He’s not alone, either. This growing sense of entitlement pressures every project to offer airdrops, trapping the ecosystem in a cycle where incentives are no longer surprises—they’re demands.

If you’re building for the long term, the solution is clear: design environments where users want to engage—without putting money at the forefront.

Building for Engagement

Here’s how we can rethink incentives:

1. Improve UX and choice architecture. Make interactions seamless and intuitive.

2. Prioritize usefulness and engagement. Build projects people genuinely want to use.

3. Introduce goal gradients and point economies. Progress bars, achievements, and points can tap into intrinsic motivation.

4. Leverage social incentives. Let users donate to causes or participate in meaningful actions.

We don’t need 100 clones of the same NFT marketplace. We need innovation. We need projects that capture interest and imagination.

Right now, many in Web3 default to financial incentives because they’re easy. But easy isn’t sustainable.

It’s time to think beyond the short term—and build systems that truly resonate.

But we haven’t. Maybe because we’re lazy, or maybe just because we think that money is the best incentive. And we’re not wrong. We’re just short-sighted.