Incentives were always an integral part of the consumer market. Every time we go to the shop to buy some food, we see special offers and discounts. The goal their manufacturers pursue is to stand out from competitors, to persuade you to buy the product. We all like to get something for free, to receive a gift or a special offer, even though our rational mind tells us that there's no such thing as a free lunch. It's human psychology - everyone likes to be special and valuable.
For most companies, incentives only serve to bring in more customers, to increase brand awareness. If you open a barbershop and place coupons in the local newspaper, more people will come to you. But even if you decide against incentives, a signboard will provide an influx of clients anyway.
But there are other businesses, called multi-sided platforms (MSPs), who gain profit by connecting two or more groups of users. For them, incentives are crucial, especially on the start. For example, you want to start a taxi app like Uber - you act as a middleman between drivers and their clients, offering an app via which they can interact. When the app is ready, you put it on the App Store or Google Play, but nothing happens - nobody wants to use the app. That's because no client would need the taxi app with no available drivers. On the other hand, no driver would want to offer their services on the app with no clients. In this case, just to start the business, you need to offer incentives to both the drivers and the passengers to use the platform.
Incentives in this example means mostly financial incentives. But in general, according to Deci and Ryan's self-determination theory of motivation, there are extrinsic and intrinsic motivation. Financial incentives fall into an extrinsic bucket (activity is done for its instrumental value), while intrinsic motivation refers to getting inherent satisfaction in the action.
The utility of the multi-sided platforms like taxi apps, online marketplaces or video platforms depends on the number of participants, and to become successful, they need to achieve network effect. That's why MSPs have a challenge in their early stage, which is the lack of motivation for users to join. This is where blockchain technology steps in, promising to overcome this problem by offering utility tokens to early users and thus motivating them to join as soon as possible, and not only with financial incentives. In case of blockchain, users are compensated for the lack of utility at the start. Moreover, token ownership encourages people to stay on the platform for a long time. Tokens can incentivize all participants to hold them and increase their value. With the growth of the platform utility, the incentives can be reduced, as the native utility compensates for the reduced incentives.
It's important to differentiate between native and on-chain tokens. Native tokens were historically the first and appeared in the proof-of-work system. They are used to pay transaction fees or stake in proof-of-stake systems. The most famous example is Bitcoin, a token, inherent to a blockchain protocol. Unlike Bitcoin, on-chain tokens, introduced by proof-of-stake, are issued on top of a blockchain, using smart contracts. There was no initial distribution of Bitcoin - the mechanism simply rewards the miners, incentivized for their computational service. Ethereum, on the other hand, had an initial distribution - the genesis supply was sold and a portion of it was allocated to the Ethereum Foundation.
The initial distribution is especially important for crypto multi-sided platforms, as it is the way to bootstrap the network at the start, create a base of users, network operators etc. For example, a blockchain video platform should care a lot about genesis distribution, because the quantity and quality of early users are important for its successful journey.
Incentivizing the first users is very different between centralized and decentralized platforms. In 2005, when Youtube was just starting its journey, it took out ads paying women $20 to upload dating videos. It was just a financial incentive with 0 intrinsic motivation for users to join. Decentralized platforms, on the other hand, offer token holders benefits that go far beyond the financial aspect, as they introduce governance systems and give their users voting rights. Having the power to influence the decision-making of the platform appeals to intrinsic motivation, because it allows users to share their own vision and get heard.
That is the idea behind DAOs - Decentralized Autonomous Organizations, which represent a new trend in the blockchain industry. This new type of organization appeared only recently (the first DAO was established in 2016), and it still lacks proper definition. In Advances in Computers (Volume 115, 2019) Singh and Kim define it as scalable, self-organizing coordination on the blockchain controlled by smart contracts. I consider this definition the most accurate. DAOs are focused on creating governance systems which allows users to own the share of the organization and actively participate in its development and decision-making.
Speaking about video platforms, unlike centralized Youtube, which offers mostly monetary incentives (the above example of $20 for dating videos, or just revenue from ads in your videos), with non-monetary parts limited to Youtube Play Buttons, decentralized platforms offer something different. While the monetary incentives to join can be low at the start, some of them are betting on intrinsic motivation by offering freedom of speech and a new, fairer internet where “anyone could speak and anyone could have a voice”, as Odysee's CEO Jeremy Kauffman put it. They do offer financial incentives as well, but the powerful force of incentives can be fully unleashed only through DAO.
It's interesting that, though there are quite a few decentralized video platforms, none of them are DAOs, given that the use case of video platforms is exactly what the DAOs are most suitable for - incentivizing the participants to be actively engaged with the platform for a long time. I conducted research and found only one video platform that is described as a DAO, though it's still being developed. This project is Joystream, and it is very interesting in terms of incentives. Joystream offers a Founding Members Program to its early participants who help to build a DAO by participating in its testnet governance and working groups. For these activities they are supposed to be rewarded with mainnet tokens. In other words, the project has started to build its base of active users even before the platform is ready. And when the network will be launched, these users will own and rule the network, as there will be no CEO or a company - the project will be run solely by the community.
This model of token distribution is very different from airdrops, which are still so popular in crypto space. No doubt, airdrops are very useful at creating hype around the project. One example is the recent airdrop of Aptos, who distributed the value of approximately 3000$ per person to those who had registered on their site or had minted their NFT. Almost all crypto publics actively discussed this news, which brought a lot of exposure and attention to the project. But will this airdrop help to acquire long-term community members, dedicated to the project? I don't think so. For this purpose, something else is required, and that is what DAOs and different long-term community programs can offer.
However, in case of DAOs, another question arises - the problem of decentralized and fair distribution of governance tokens. It's not only the problem of meeting the expectations of the community, whose time and efforts should be appreciated, it's also the security matter. If token holders rule the platform and make important decisions, it's crucial to prevent the token from accumulating in the hands of one or several people, who can seize the power and do what they want. The fair allocation of tokens is one of the main aspects, which allows the project to win in the long run.