Crypto Protocols without incentives are little more than glorified "decentralized databases." They primarily store domain-specific data, such as social interactions or user activity, and beyond that, they offer little utility. This is problematic because a "decentralized database" on its own lacks a compelling product-market fit: it is slow, expensive, and, ultimately, provides minimal value compared to more efficient Web2 solutions.
Because these crypto protocols are just data storage layers, they have to rely on applications to drive any meaningful usage. However, relying solely on the application layer to achieve product-market fit is risky in a decentralized environment. The data stored in such crypto protocols is inherently portable, which means any application built on the protocol—even one that successfully attracts users and grows—can see its hard-earned data and network effect being siphoned away to competing applications. This is a fundamental issue in a non-cooperative game among application developers, where no one has a true incentive to contribute to a shared, decentralized resource if they cannot capture value from it.
Consequently, decentralized databases become unattractive to developers. Why invest in building an application if any competitor can just fork or freely tap into the data you generated? This challenge is exacerbated in the early stages of a protocol, where gaining distribution and building a user base is especially challenging without a clear value proposition.
To counteract this issue, crypto protocols are often forced to build their own applications to bootstrap liquidity and usage. In doing so, they hope to kickstart activity and prove that their "decentralized database" has value. By creating a vertically integrated application that relies on the protocol, they can generate the initial momentum required to attract users, liquidity, and, eventually, third-party developers.
However, this approach comes at a cost: it can be hostile to other application developers who might otherwise want to build on top of the protocol. When the protocol—acting as both the infrastructure and the application—dominates the ecosystem, it can deter third-party social apps from entering. The resulting ecosystem ends up being more centralized around the protocol’s own application, which is far from the vision of a thriving, open, decentralized platform.
Incentives are the missing piece of the puzzle. Crypto Protocols need mechanisms that actively encourage participants—users, developers, curators, and others—to engage with the system. Properly designed incentives create a positive-sum game where everyone benefits from the growth of the protocol, not just the original developers. Incentives can motivate developers to build applications without fear of losing value, as they can earn rewards that align with their contributions to the protocol. They can also encourage users to adopt the protocol, provide liquidity, and contribute to its success.
Several well-known crypto protocols have successfully embedded incentives to align participants and drive growth:
Automated Market Makers (AMMs): AMMs like Uniswap have created powerful incentives for liquidity providers. By allowing anyone to contribute liquidity to a pool and earn a share of the trading fees, AMMs have effectively bootstrapped liquidity from a wide range of participants. This model ensures that liquidity providers are directly rewarded for their contributions, creating a self-sustaining ecosystem where traders benefit from deep liquidity, and liquidity providers are incentivized to keep participating.
Bitcoin Mining: Bitcoin's proof-of-work consensus mechanism is an excellent example of incentive design that aligns network security with participant rewards. Miners are incentivized to contribute computational power to secure the network in exchange for block rewards and transaction fees. This incentive structure has helped Bitcoin maintain a high level of security and decentralization, as miners are directly rewarded for their role in securing the network and validating transactions.
Prediction Markets: Decentralized prediction markets like Augur or Polymarket incentivize participants to provide accurate information by allowing them to bet on future outcomes. Users are rewarded for their accurate predictions, which, in turn, ensures that the market reflects the most probable outcomes. This mechanism encourages participants to contribute valuable insights, and the collective intelligence of the market benefits everyone by providing reliable forecasts.
Instead of merely being a "decentralized database," a protocol with well-designed incentives becomes a dynamic ecosystem with growth mechanisms built into its core. This transforms the protocol from passive infrastructure into an active agent of its own growth—one that has the capacity to solve cold-start problems, attract developers, and, ultimately, build genuine network effects.
For decentralized social crypto protocols, financialization and incentive design are not just optional features—they are necessary components to foster growth, ensure sustainability, and avoid the stagnation that has plagued many "decentralized databases" in the past. By embedding growth mechanisms and incentives at the protocol level, we can enable a more cooperative, thriving ecosystem that aligns the incentives of all participants, rather than relying on one-off applications to create value in isolation.
26 comments
It's absolutely brutally to build a full Farcaster client. https://paragraph.xyz/@dgcast/why-do-crypto-protocols-need-incentives
https://www.decentralised.co/p/financialisation-of-social-networks?utm_source=post-email-title&publication_id=796552&post_id=150568654&utm_campaign=email-post-title&isFreemail=true&r=2i6286&triedRedirect=true&utm_medium=email
Open thread about Farcaster Leave a thoughtful comment or critique about Farcaster. I'll read through all of the replies, boost the interesting comments and possibly send invites to some people.
Favorite protocol, love to "login with FC" to different apps and hope that will continue to happen with more crypto and social apps. No more login with email
We've been doing a lot in Latam to onboard users who are already in Web3. This is more of an observation than a critique: it can be challenging to keep up with all the changes and opportunities. I noticed several people mentioning that after being away for just a few days, they returned to see changes in the channels and felt confused. This weekend, most of our content focused on making sure Spanish speakers understood the updates and knew how to join the Spanish-language channels. BTW, I shared this on X today https://x.com/monitalan/status/1843285148533702692
This will totally sound like I'm trying to kiss your ass, but I'm not: I grew up very much online. The internet was really important to me, and was very influential on my life. But for the past 10 years or so, I had stopped using most social media. I lurked extensively on Reddit and Twitter, but I never commented. Everything had become so mean and toxic, and everything felt like one big commercial. Prior to coming here, I had been mourning the loss of how the internet used to feel to me. But here, I feel like I've found the good parts of the internet again. Like they've been here all along, and I just didn't know where to look for them. I've made new friends, and learned a lot of new things. I feel connected to the world again. But in a positive way, not a toxic way. I'm really optimistic about the protocol, in particular. And I'm excited to see what happens over the next few years.
short story
I read the replies.
Not long ago, you mentioned that we need to focus on improving content. However, I believe the issue could be resolved much more quickly if we focus more on inviting interesting people.
What keeps the interesting people interested in sticking around?
Interesting people are interested in interesting people. I think content is the consequence, not the cause.
I still dont understand why there has been no initiative to bring content creators through an incentive program. I understand you wanna get the product right first, but there would be value in sourcing a certain category of content creator, with aligned incentive with the blockchain space for ex., pay them to actively develop their audience on Farcaster and see how that plays out in terms of UA and stickyness. You often say Farcaster lacks interesting content, this would be one way to start adressing it.
What incentives would make top tier content creators switch over? How do you find up and coming content creators before they are famous?
You need to hire a top growth specialist! :))) Joke aside (or is it?), the incentive is money. You'd have to pay them at first. If good content is the blood of the network and what will drive more organic adoption, you need some way to kickstart it. The challenge is to make it sustainable, because you can't keep paying them forever, so you need to transition them into more organic reward system, like $degen, $moxie or others community driven initiatives. That's where the selection of the content creator is crucial, because they have to have aligned values with the space, and somehow believe in the potential of a decentralized social. As for up & coming content creators, I have no idea tbh. But that's another problem. You could start with already established ones.
@scoutgamexyz side quest…
orthogonal clients are going to be important but imo they aren't going to be *the* funnel for new users creating orthogonal media functionality via the flagship client using things like miniapps will draw the ppl that the protocol needs in, especially when paired with onboarding ppl directly to a channel
What about leveraging people's existing cred in other social media to smooth their entrances here? Give people who are already proven qDAU 3 months free storage so they can check out how it is here. Likely they will have earned enough in those 3 months to easily pay the storage fees going forward.
I'm enjoying the openness of it, and how easy it (still) is to engage, make new connections and new friends. As a critique i sometimes fear that someday it becomes like the old app where big accounts only talk with big accounts while the rest just speak to walls. Still, I have faith. 💙
Can we simply limit the FC updates like do it on a monthly basis or atleast thrice a month? There's always something new everyday, it's hard to keep up 😢
https://paragraph.xyz/@dgcast/why-do-crypto-protocols-need-incentives
activititypub actually don't have the issue here https://paragraph.xyz/@dgcast/why-do-crypto-protocols-need-incentives
https://paragraph.xyz/@dgcast/why-do-crypto-protocols-need-incentives Why we are building degencast.wtf
👍 500 $DEGEN
/microsub tip: 99 $DEGEN