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.
The Problem with "Decentralized Databases"
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.
Challenges for Developers
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.
The Cost of "Product-Led Protocol Development"
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.
The Importance of Incentives
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.
Examples of Effective Incentive Design
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.
From Passive Infrastructure to Active Ecosystem
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.
The Role of Financialization and Incentive Design
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.
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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.
I enjoy it here more than X because I know I’ll get interesting replies when discussing non crypto stuff. If I post non crypto stuff on X, it’s a ghost town.
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
How can new people on Farcaster grow their audience now? There are no mechanics for them to post in channels if they aren’t members. Channels with public join links are easy to access, but you have to search for them manually. Would it make more sense for them to post without using channels at all, and could they still grow and be seen? PS: I'd appreciate it if you could invite me to become a member here :) I promise not to shitpost about memecoins
Main grievance so far, follow up by @juli and my response goes a step deeper on the struggle https://warpcast.com/div/0x38116625
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…
Think @kenny had solid thoughts to share regarding a well worn conversation re chrono and reply bumping… > Me using my late lunch hour to tap the like button on all the thoughtful responses to Dan’s query. Heart with a side of Moxie. Kenny offered his consistent take and I’ll agree on the point that it sometimes can be hard to find the active conversation here, yet maybe it’s cause I don’t use trending much, yet perhaps more so it’s because conversations still get fractured. Not sure the solution. https://warpcast.com/kenny/0x0db4ed3c
i like
tell me how you really feel
i think it’s helping fix my self inflicted tik tok brain rot. my attention span has improved a lot since getting this app bc you kinda have to focus on what’s happening / the constant changes to understand what’s going on. i also have been reading a lot more since that’s most peoples preferred form of expression on here. & although my friends / acquaintances irl have expansive hobbies they all tend to share the same views especially on ai since most of them are traditional artists & designers. so it’s been really eye opening to see the community built on/around ai. i was getting kinda jaded for a while but the update helped & muting any phrases related to moxie helped too. i feel out of the loop, however, i don’t like anything about it except airdrops ig? not trying to be ungrateful, but it was getting to much before muting key phrases.’
been using the channel to cast fc feedback only for a long time - can i get an invite?
main critique is I’m short about 600k followers than I expected by now
Bigger picture take: I like that Farcaster's approach is that decentralization doesn't negate leadership. You can value decentralization & have leaders. Farcaster has leaders. You make decisions. Some people love it. Some people disagree. But you do it knowing that you are the builders & have a vision and are living in this 24/7. You seek our input. You listen to us. But you make decisions. I think more web3 projects would benefit from that approach. And I like being a part of the journey even if I don't agree with every decision.
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
đź‘Ť 500 $DEGEN
/microsub tip: 99 $DEGEN