The world of blockchain and decentralized applications (dApps) is rapidly evolving, and tokens are the real deal there! They are like digital assets used to represent a certain value or utility in a particular ecosystem.
In the context of web3, tokens are often leveraged for fundraising and product adoption. By creating a token economy, startups can also reward users for taking certain actions or getting services. This incentivizes people to get more involved in the ecosystem, build a tight-knit community, and, in turn, boost growth.
But here's the thing, not all web3 products need tokens to be on fire. In fact, introducing them too early can be a total buzzkill and distract from the real goal of product-market fit. So, how do you know when it's the right time to drop those tokens like they're hot?
That's what I’m gonna talk about in this article. So, sit back, relax, and get ready to learn all about tokens in web3 products. We’ll explore the different strategies that startups use to release them. And I hope this material will help you figure out which one is the best for your specific situation.
Token sales before product launch
One common strategy for startups is to issue tokens before launching their product. It is a risky plan but potentially lucrative for early-stage companies.
By selling tokens, startups can raise capital to fund product development and marketing efforts. The amount of cash raised through a digital assets’ sale depends on the demand for them and the terms of the sale — sometimes it's like an auction, other times it's a fixed-price offering. And, if the tokens go up in value, early investors can make a serious profit. In fact, in 2020 alone, startups made a bank with $1.5 billion raised through Initial Coin Offerings (ICOs), according to TokenData.
But, there's a catch. As I said at the beginning, issuing tokens before the product launch might also be a risky move. Why? Well, a major drawback is that early investors can be more interested in profiting from the expected increase in token value rather than in the web3 product itself. In other words, they want quick cash instead of supporting the project for the long run and believing in its growth. This can lead to a lack of long-term support for the business, and may ultimately result in negative publicity for it. There is another worst-case scenario that’s highly probable — if your product fails to find a market, the token's value may plummet, resulting in losses for investors.
Despite these risks, issuing tokens before the product launch can still be a lucrative strategy for startups, particularly in the blockchain and crypto space. In March 2021, Solana raised $40 million in a token sale, indicating the continued interest and demand for crypto assets.
KinEcosystem is a great example of a startup that crushed it with a token economy. It is a blockchain-based ecosystem that was designed to allow developers to create and deploy dApps with a tokenized rewards system. Some of the apps within the KinEcosystem include Kik, a messaging app that integrates Kin, and Perfect365, a makeup and beauty app that allows users to earn Kin for sharing their photos and engaging with other users.
They issued its token, KIN, before the product launch as a way to raise funds for the development of the KinEcosystem. The founders got $98 million through their ICO in 2017 and have since gained a significant user base. Despite the risks involved in issuing tokens before a product launch, KinEcosystem's success demonstrates that it can be a smart move for startups, especially in the blockchain and crypto space.
By the way, Kin didn’t just pop up from the thin air. I mentioned it on purpose as it is one of our clients. The Kin team turned to Lazarev.agency to go through radical innovations — a redesign of the 5-year-old website. The results were impeccable. The fresh and vibrant website has been a hit with Web3 enthusiasts, resulting in a 120% boost in organic traffic. This project is our huge accomplishment, and we couldn’t be more thrilled with the outcome. Feel free to check the success story by following this link.
So how to mitigate the hazards related to the early token launch and only benefit from that? From my experience, startups should have a solid business plan and a web3 product that offers real value to its target audience. But wait, there is more.
It’s also crucial to check out the legal and regulatory situation to avoid any headaches later on. Startups also need to think about the competition and demand for their product — that'll affect how interested investors are.
When setting up a token economy, founders need to make sure the incentives and rewards make sense for their long-term goals. Plus, they gotta have a plan for managing the crypto assets and keeping them valuable.
Fundraising-wise, there are different options to consider, like straight-up equity or debt financing. Maybe even a combo of different methods could work. The key is to figure out what is the best for your startup's specific needs. All in all, with careful planning and execution, companies in their initial phase can leverage token sales to raise funds and build a community of early adopters.
Tokens after product launch
Another effective strategy for releasing tokens is to do so after the web3 product has been launched. This allows startups to incentivize product adoption and drive engagement among users. Tokens are used as rewards for performing certain actions, such as referring new users, completing tasks, or providing feedback. What for? This creates a token economy that fosters a sense of community and engagement around the project.
One of our clients, Metastaq, allows businesses to do just that — design NFTs, manage, collaborate on, and distribute them with little or no effort. To deepen your knowledge on this topic, we invite you to read the article detailing our collaborative efforts on the project.
Releasing tokens after the web3 product launch has a ton of benefits, and it’s certainly a safer and more effective strategy to grow and scale your business. For one thing, users are way more likely to check out your product if they know they can earn tokens for it. Plus, as it becomes more popular, the digital assets can increase in value, adding even more excitement and momentum to the mix. In fact, according to data from DeFi Pulse, the total value locked in decentralized finance protocols, which often use tokens, exceeded $80 billion in 2021, up from just $1 billion at the beginning of 2020.
One example of a startup successfully implementing a token economy is Axie Infinity, a blockchain-based game that allows users to earn tokens for completing in-game tasks. As of February 2022, Axie Infinity had over 1 million daily active users and had generated over $3 billion in transaction volume, demonstrating the potential for tokens to drive engagement and adoption in web3 products.
However, there is always a fly in the ointment. The potential drawbacks to releasing tokens after the product launch are also there. Actually, when it comes to the web3 world, risks are inevitable, any way you slice it. Users may not see the value in the token and may not be motivated to participate in the token economy. This can lead to a lack of engagement and adoption of the product. To avoid this issue, it is critical that startups create a fair and sustainable token distribution system that aligns incentives with the long-term success of the product. What else? That’s our next stop here.
Token release: Balancing risks and rewards
When it comes to releasing tokens, you gotta think it through carefully. One big thing to keep in mind is where your product is at in terms of development. For example, if it's still being worked on, releasing tokens before the launch could be a smart move to get funds for product development and marketing. On the other hand, if your product is already out there, using tokens to encourage people to use it more could be a good plan.
As evidenced by ConsenSys, the top 50 dApps by transaction volume all have their own tokens, demonstrating the crucial role of crypto assets in fostering engagement with decentralized applications.
Now, both of these strategies have their upsides and downsides, so you need to think about your target audience, funding needs, and marketing goals to decide which one will work best for you. Let's take a closer look at those factors.
The target market for the product plays a crucial role in determining the optimal token strategy. Notably, different user demographics may be more or less incentivized by the opportunity to earn tokens. For example, a survey by Grayscale Investments found that 41% of millennials and 43% of Gen Z have invested in cryptocurrencies, indicating that younger, tech-savvy users may be more inclined to engage with products that utilize token economies.
The current market conditions should also inform the token strategy for a given startup. In a highly competitive market, releasing crypto assets can be a way to differentiate the product and drive adoption.
When it comes to designing a token, there are several key factors to consider beyond just the product development stage, target audience, and market conditions. Here are some additional points to keep in mind:
- Technical considerations: While it's important to focus on the big picture goals, don't forget about the nitty-gritty technical stuff. You want to make sure your token is secure, scalable, and plays nice with other systems out there. That might mean calling in some experienced blockchain developers to double-check your smart contract code and make sure it can handle the demands of the ecosystem. After all, you don't want your token to crash and burn before it even gets started, right?
- Regulatory compliance: If you're running a startup in the cryptocurrency and blockchain world, you gotta keep regulatory compliance in mind at all times. It's crucial to stay on top of the latest rules and requirements, like KYC/AML stuff, taxes, and securities laws. You might need to get some help from legal experts to make sure your token follows all the laws and rules. Don't risk getting in trouble — make sure you're playing by the book!
- Token economics: It can make or break your web3 product success, did you know it? Yeah, it's true! There are a bunch of things to consider like how much of the token is available and how many people want it, what it can be used for, and what the overall market for crypto looks like. It's super important to set up token economics in a way that makes people want to use it and keeps the project growing for the long haul.
Overall, startups must carefully weigh the benefits and drawbacks of each token strategy and consider various factors such as product development stage, target audience, and market conditions to determine the optimal approach for their specific circumstances.
Tokens are super important for web3 products, and whether to release them or not is a big decision for startups. If you wanna launch your tokens before your product, that's usually a good way to get some cash for development and marketing. But if you're already up and running, tokens can be used to encourage people to use your product more. Both options have their pros and cons, so startups gotta think hard about what's best for them.
But hey, if you've got a blockchain project in mind and you're looking to make it a success, we've got your back! Lazarev.agency has been designing web3 products from scratch for 8 years, working with startups at all stages. Go ahead and check the cases — we have every reason to be proud of them. We can help you with everything from product-market fit to development strategy, token design, technical issues, dashboard design and more.
Make sure your web3 product is a hit. Book a free consultation with us and let's make it happen!