Getting a blockchain startup on track

Previously covered:

  • Majority of blockchain startups go through a similar starting cycle in terms of their network growth, especially in the earlier stages. 
  • Since the value of a crypto project is determined by the scope of its community, apart from having a great product, getting beneficial and contributing users onboard is one of the primary goals for crypto startups.
  • Marketing for a crypto startup is a very costly and complicated process. Cutting on the direct advertising in favor of distributing bonuses and incentives towards early adopters and supporters has proven to be an effective community building strategy. Meanwhile, the marketing gap can be filled in by launchpads, which not only serve as marketing tools for startups, but also help in bringing the right community towards the projects’ initiative. 

There is a whole diverse blockchain zoo out there, with a wide variety of functional P2P systems, and a whole lot more of them to be built. 

The first requirement for a new crypto project is infrastructure. Projects can connect to infrastructure either by building it (nodes, holders), or by attaching it to an existing protocol (blockchain). In this entry, we will focus on small- and medium-sized projects, which tend to use existing protocols for their operations.

Any “crypto project” is basically an application built on top of a brand new P2P payment system with a native digital asset of its own. In most cases, there is no intrinsic value or predetermined price for this asset. So, its value can be established only through the processes of supply and demand. 

And what any and every project which employs its own internal token requires is liquidity. As a crypto project emits its own tokens, it is considered a unit of exchange and is subject to growth, deflation and all other processes inherent to cryptocurrencies. The main value of the crypto project is derived from the community, and appreciation of token begins with growing the user-base. Thus, the objective of a startup to have a value is achieved by building a community, accumulating and holding its user-base and liquidity, and accordingly – its value.

What does “System Value” mean in P2P systems?

In the case of the P2P cryptocurrency system “number of participants” = “liquidity” = “demand”. In other words, with more users you have a bigger chance of existing demand at every moment. And, since our default system is P2P with no fixed price and limited supply, demand is the only parameter that affects the price.

Therefore, for a peer-to-peer system, “Price” is a function of “demand”, and “demand” is a function of “number of users”.

A big chunk of a startup capital is usually directed towards the goal of acquiring a user-base. Meanwhile, the market spending curve of user-acquisition is almost always tending towards rising expenses. The cost of acquiring the first batch of users is tending towards rising as the spots for the “early-adopters” get taken, until the project hits the “critical mass” point, where the network effect will begin to take its course.

Critical mass

Critical Mass is often described as the number of participants or size of the network needed to allow the platform itself to auto-generate its own growth — essentially by having a value perception that grows faster than the growth of the network. It is also the point when the utility of new users equals the price paid for their acquisition. Therefore, it is critical to focus on getting early adopters as this is crucial for the long-term success of a project. [22 WP]


So, how fast is the network growing? To do this, it is customary to use Metcalfe’s law, which states that that a network’s impact is the square of the number of nodes in the network. For example, if a network has 10 nodes, its inherent value is 100 (10 * 10). 

After reaching a critical mass point, each new user brings more value to the system than the previous one. 

For a crypto token, network effect usually occurs when the growth of the network/community aligns with the appreciation of the token. As the community grows, the token adds value to the platform and accelerates network effects. This aligns participants of the network to work together toward a common goal — the growth of the network and the appreciation of the token. And this is how the most successful projects reach this goal – they tie the token to the core action of the network’s growth.

Saturation of demand

The algorithmic result of the network effect does not last forever, though. As the number of participants grows, the system may gradually enter a state of demand saturation. 

The saturation, or congestion point is reached when each additional extra user exceeds the capacity of the existing system and actually decreases the value obtained by every other user instead of increasing it. In practical terms, each additional user increases the total system load. Imagine a taxi service, which has reached a driver capacity to guarantee a less-than-5 minute waiting time for its customers, fully covering the area where it is operating. At this point adding new “drivers” to the taxi-park will only become a deteriorating aspect, lessening earnings of working drivers.

So, around this congestion on saturation point, the line of network growth tends to flatten. The contribution from each user becomes quite predictive and adds less to the value of the system.

Therefore, the overall value growth in the system will usually look something like this:

Skyrocketing and then slowing network growth often triggers sell-out trends among investors. It signals them to dump their acquired tokens “on highs”. This effect is especially noticeable in case if a project does not have a strong, fitting community built around. Having a great product is great and all, but having a solid user-base, appreciating the project for its use-case instead of a solely speculative opportunist interest, is what really seals the deal for a crypto project. Simply said, the project has to create a stimulus for its investors to hold/use the token for as long as possible and add to the community. There are several ways to contribute to this goal, including starting out with a right audience and adding community-incentivization on top of it. And this is actually what launchpads, such as PolkaPad are providing for starting out projects, but we will get into that later.

Breaking the S-curve

Generally peer-to-peer exchange systems themselves are built around commoditized supply: in general,because they provide only one main use case

 This is the arrangement that acts as a platform for this S-curved graph. Commoditized networks are prone to network saturation. This is the “perfect” environment for the asymptotic network effect. 

But in some of the cases, when there are more use cases for the network’s currency (differentiated supply), we may see a graph that continues to grow after the saturation point. Differentiated supply implies more use-cases, thus, more different value propositions for the same platform. They can strengthen or weaken network effects accordingly. It’s also a great example of how additional features (e.g., scaling, increased throughput, and improved transaction speeds) can help the value proposition evolve, shift, or even create a new trajectory of network effects.

Those who wish to understand the topic more deeply, might read in this article.

User acquisition cost in the new system

Each user in the system has its own acquisition cost. And the closer to the critical mass, the higher the cost (due to the depletion of the early-adopters base, the need to compensate for churn, etc.). After reaching a critical mass, the cost of attracting users can be reduced to almost zero. This can be done based on Rogers’ Diffusion of Innovations Theory [22]. Therefore, it is critical to focus on getting early adopters [23] as this is crucial for the long-term success of a project. At later stages, there are retention / competition / TVL fascination costs, but we will not consider them in this topic.

The graph of costs and network growth looks similar to this. As you can see, up to the point of reaching critical mass, there is significant market spending involved. 

It’s important to mention, that blue is transactions between community or community and some decentralized entities and not the revenue of the startup itself. 

In most cases, a startup will receive a share of every transaction or can emit a little amount of tokens for a time. Startup revenue is shown there as a dark blue space. 

Community Incentivization

The project always has a need to maintain a sense of community to keep investors and users at the bay. This can be done by:

1. Direct advertising.

2. Stimulating the audience

Direct advertising is very diverse in terms of: the complexity of targeting, the cost of onboarding, regulatory nuances, and so on. In other words, direct advertising of such projects is VERY expensive. So much so that if you distribute these funds to the audience, it will be noticeable to them. 

Therefore, the project has an option to spend part of the marketing budget not on direct adverts, but simply distribute it to the participants directly. This also solves the incentivisation issue, since distribution of these funds among participants usually comes with set periods and conditions.

There are some of the existing tools for incentivizing the audience:

  1.  Referrals

A project participant who has registered on the recommendation of another participant.

Their essence lies in the fact that the exchange provides a unique link that can be shared with everyone. If an interested person clicks on this link and registers, both participants receive a reward.

For example, in October 2019, the Coinsbit crypto exchange distributed $200 to all newbies who came through a referral link. Partners who brought referrals received 25, 50 or even 100 dollars for each newcomer.

  1.  Ambassador

The Ambassador program is a collaboration between a cryptocurrency company and ordinary users at the very start of the project. In other words, a cryptocurrency project that is just starting to enter the crypto market offers volunteering. Users can voluntarily participate in the development and PR of the project, for which they can later be credited with tokens of this company (which have not yet gone into general sale on exchanges).

  1. Quests (Airdrops)

The easiest way to increase the audience of owners: just distribute the minimum number of tokens to their addresses for the simplest actions. A token for a like on twitter, and two for a repost, for example.

Quests can be non-transparent too. The rules and qualifications for distribution of tokens never reach public domain and participants are figuring them out on their own, trying out different methods and expanding projects’ marketing while they’re at it.

  1. Bounties.

These are special programs that are aimed at advertising and all kinds of popularization of new startups that go out to sell their tokens. The initiators of the project receive information support and certain marketing services without a large-scale investment of fiat money. Users receive tokens of a new digital currency for their work, which they can exchange for fiat or a more well-known cryptocurrency (most often Bitcoin or Ethereum). If the participants of the bounty campaign believe in the bright future of the startup and the service it offers, then they may not immediately dump their earned coins, but hold them until the price increases.

By endowing community members with new roles, the decentralization of blockchain-based communities brings changes to the design of user incentive mechanisms. Users’ social capital, share capital, social feedback, and economic feedback positively affect their active participation behavior and shows overall 

And this is the marketing strategy that is being actively employed by startups with the help of Launchpads, which we will get into in our next installment.

Conclusion

The growth of a majority of new systems in the crypto sphere are subject to a similar scenario in terms of its network growth: getting the first batch of supporters, reaching critical mass and then reaching a point of saturation.

Since the value of a crypto project is determined by the continuity of its community, apart from having a great product, getting “right” – contributing and active users onboard is one of the primary goals for any crypto startup.

Marketing for a crypto startup is a very costly and complicated process. Cutting on the direct advertising in favor of distributing bonuses and incentives towards early adopters and supporters has proven to be an effective community building strategy. Meanwhile, the marketing gap can be filled in by launchpads, which not only serve as marketing tools for startups, but also help in bringing the right community towards the projects’ initiative. 

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