Introduction: Aligning your offerings to your target users
In this section, we will perform an assessment of the ecosystem you are building and analyze your target demographic to help you achieve product market fit.
Where there is a product there are users. Where there are users, there exists the need to understand and assess what these users are interested in: their motivations, how they will act and the effect that this will have on the product. This is even more important in web3 projects since the feedback loop and incentives are much stronger and directed due to tokenization.
Users are driven by their desires which lead them to perform different tasks to try and achieve these desires. One of the fundamental principles of economics is that users respond to incentives, meaning that they can be incentivized to perform a certain task. This is important to understand since web3 is built upon aligning users' desires with those of the project, creating a win-win scenario.
Just because users respond to incentives doesn’t mean that you throw everything and the kitchen sink at them hoping to get the desired outcome. It implies that there must be an understanding of what the user is interested in (aka their desire and motivation) since they will not respond to other forms of incentives as well (or at all). Simply put: Say we asked you to complete a task and if you did we would pay you in apples, would you do it? The answer is that it depends if you’re interested in apples or not.
Sustainable crypto-economic networks function by being able to incentivize engagement from their user base by appealing to what they want and giving it to them in exchange for something beneficial for the network. This is what it means to have aligned incentives. Aligned incentives often lead to stronger communities.
The goal is to create a system that understands its users, optimizes for their desires and aligns their actions with those that benefit the protocol (aka a win-win).
In this phase of the Tokenomics Design Framework, we'll be looking at:
- Who are your users?
- What tasks do they perform within your project and what is their motivation
- What value do they create in doing these tasks
- What tasks do you want users to be doing/not doing?
- What incentives can you put in place to encourage/deter these behaviors?
- What does this incentive look like when put in place?
Resources & further reading
Who are your Users?
To create an effective Tokenomic system you need to understand who your project's different types of users are and get a sense of the general role they play within the ecosystem. This may not seem important, but it is the foundation upon which your incentives will lie.
Helpful Prompts
- Who are your project's different users, and what is their general role within the ecosystem?
Resources and further reading
Tasks
List all the different types of users interacting with your project.
Assign a "name" and write a brief description for each type of user. Try to put together an exhaustive list. The next few tasks in this section will prompt you to analyze each type of user and provide more granular insights on "who they are, "what drives them," and "what incentivizes them." Accordingly, don't be afraid to get super specific when identifying types and "sub-types" of users.
For example, if you're building a DEX, you will likely identify "Traders" as a user "type". This type of user can then be further broken down into:
- Makers: those that provide liquidity to the DEX
- Takers: those that remove liquidity from the DEX
Tasks & Motivations
Now that you have determined who will be interacting with your product and briefly explained what role they play. It's time to think about the specific tasks they will be carrying out and their underlying motivations for doing so.
Helpful Prompts
- What specific tasks does each of these users do?
- What is their motivation for doing each of these tasks? Why will your target users use your product or services? What are their core motivations and how do they align with what you are offering?
Resources and further reading
Tasks
Add "tasks" & "motivations" for each user interacting with your project.
Fill in the “Task" column with each user's specific tasks. Fill in the "Motivation” column with each user's motivations for performing said tasks. Don't overthink this, and try to be as concise as possible. It's better to brainstorm first and perhaps add a few too many than leave out important considerations. You can always delete it later on.
Note that a single user type may perform multiple tasks. We recommend you limit each row to a single task with a unique motivation. If it is the case that you have a user type that performs multiple different tasks or a user type that performs the same task with multiple motivations, then add them twice (two rows) and add the specific task & motivation for each.
For example, if you're building a DEX and have identified "Makers" and "Takers" as two types of users / traders on your platform, you may want to subdivide the users further as follows:
- User: Makers
- Task: Provide liquidity to DEX by depositing assets to liquidity pool
- Motivation: Profit
- User: Takers
- Task: Remove liquidity from DEX by swapping
- Motivation: Asset exchange
- User: Takers:
- Task: Remove liquidity from DEX by swapping
- Motivation: Arbitrage
Value Creation
It’s important to understand that, in the same way that the project creates value for users, users can (and should) create value for the project. Understanding the value that each user creates for the project is a must.
Helpful Prompts
- How does each user create value for the product?
- If your target audience is successfully onboarded and becomes users of your product or services, how do they create value for the project?
Resources and further reading
Tasks
Indicate "value creation" for each of the users interacting with your project.
Fill in the “value creation” column for each user you've determined. Think through the positive implications of each user's actions. Value creation might be painfully obvious, such as "User pays fees when performing the indicated task". Other times, the value creation might be less obvious.
Regardless, it is important to remember that this is a two-way street. The project creates value for its users, and users create value for the project.
Behavior Framework
If we’re going to align users with the project we first need to determine what we want users to be doing and not be doing. This relates to value creation. Users create value and value is what the project looks to maximize. Similarly, users can also harm the project and be extractive, we can also deter certain actions through incentives.
Helpful Prompts
- What tasks do you want users to be doing (what brings value to the project)?
- What tasks do you NOT want users to be doing (what removes value from the project)?
Helpful Resources
- Empathy Mapping: A Comprehensive Guide to Understanding and Prioritizing User Needs in UX Design Process
- Leveraging Behavioral Insights for Effective Token Design: A Comprehensive Guide to Enhancing User Engagement and Participation in Blockchain Ecosystems.
Tasks
Indicate a "desired behavior" for each of the users interacting with your project.
Fill in the “desired behavior” column for each user you've determined. What do you want each user to be doing in an ideal world?
NOTE: if you find multiple desired behaviors for the same user, this probably means that this type of user can be further broken down into sub-users. Feel free to create another row and copy inputs from previous tasks (User, Description, Tasks, Motivation, and Value Creation) and then differentiate the two rows with unique "desired behaviors" for each.
Incentives
Now that you know (1) what your users respond to, (2) what you want your users to do and (3) not do, you can expand upon this by thinking of different carrots (incentive rewards) and sticks (punishment) that will encourage and deter desired/undesired behaviors respectively.
Helpful Prompts
- How do we incentivize our desired behaviors?
- How do we deter our undesired behaviors?
Helpful Resources
- Rethinking DeFi Tokenomics: A Comprehensive Analysis of Current Token Design and Incentives in Decentralized Finance
- Incentive Mechanisms in Tokenomics: A detailed guide on the role and design of incentive mechanisms in tokenomics, crucial for aligning stakeholder behaviors with the project's goals.
Tasks
Indicate an "incentive" for each of the users interacting with your project.
Fill in the “incentives” column for each user you've determined. What sort of reward do you plan to dangle in front of this user to encourage them to perform the task you've indicated?
Don't feel pressured to be super specific at this point. For example, suppose you intend to distribute token rewards to a group of users that perform a specific task. In that case, you don't need to indicate the precise calculations used to determine the number of token rewards. Keep things high level.
Mechanisms
In the previous step, you thought about a general incentive to get a user to perform a certain task or be deterred from performing an undesirable one. An incentive mechanism is a more concrete implementation of an incentive idea.
Incentive mechanisms can be thought through lens of "ideas" and "design". For example:
- Incentive idea: Reward users for performing swaps with the DEX
- Incentive mechanism design: Reward users with tokens based on the amount of volume they trade, the frequency, and consistency. The more volume, frequency, and consistency the user trades the more they should be rewarded.
Ideally, these incentive mechanisms should translate more easily to code.
Helpful Prompts
- How can a token help to build a mechanism from the abstract incentive that drives our desired behaviors?
Resources and further reading
Tasks
Indicate a "mechanism" for each of the users interacting with your project.
Fill in the “mechanism” column for each user you've determined. You've already indicated an abstract way you intend to incentivize each user; now is the time to get tactical. That said, you still should not get paralyzed by precise calculations or on-chain distribution methodologies.
We can get to more specific calculations later when we model out our mechanisms.
Take the following example of a DEX "trader":
User: Takers
- Task: Remove liquidity from DEX by swapping
- Motivation: Asset exchange
- Value Creation: Pay fee for trading
- Desired Behavior: Increase trade volume
- Incentives: Reward for high trade volume
- Mechanism: Pay token rewards to users with highest trade volume
Side Effects
Nobody is perfect, this holds for incentive mechanisms also. There are likely downsides and side effects to the incentive mechanisms that you detailed in the previous step. These side effects can range from affecting the user group that they’re applied to or another user group entirely.
Helpful Prompts
- What are the side effects of these incentive mechanisms, how could they backfire, and for whom?
Resources and further reading
Tasks
Think through potential "side effects" for each of the "incentives" and "mechanisms" you've aligned to users interacting with your project.
Fill in the “side effect” column for each user you've determined. Be as objective as possible and allow yourself to go down the rabbit hole to explore the potentially negative implications of incentivizing your users.
This exercise should force you to iterate on some of your past inputs and think critically about the tradeoffs involved with the carrots you plan to use to catalyze "tasks" and "desired behavior".
Repeat this task and fine-tune your "mechanisms" until you find the best incentive mechanisms with the most acceptable side effects.