What really caused its collapse

This picture comes from the now-defunct web page for Reddit’s Group Factors documentation. It ought to function a sobering warning and reminder to all tasks contemplating launching a token in Web3. As ordinary, excuses abound. Regulatory uncertainty. Scalability points. The reality is that many rewards applications endure a worthless destiny as a result of their tokenomics haven’t been fastidiously thought of. Let’s now take a better take a look at what classes may be discovered from this collapse, and name upon everybody constructing in Web3 to take heed and keep in mind that and not using a fastidiously carried out and sustainable tokenomics construction, you, too, will get despatched dwelling as a result of “one thing went improper.”

In early August, the costs of the native currencies for 2 Reddit communities, MOON and BRICK, swelled about 40% and 76% respectively after cryptocurrency trade Kraken listed them for buying and selling. The Moonboys had been overjoyed. However simply over two months later, on October 17, Reddit introduced within the r/CryptoCurrency subreddit that whereas they noticed some future for Group Factors, there was at present no path to scale it throughout the platform.

Identical to that, this system was shutting down. So, what occurred? Let’s begin with the fundamentals.

The Reddit Group Factors system was an experimental Web3 consumer rewards system. It leveraged blockchain know-how to offer customers factors for his or her interactions and contributions to the platform. Group Factors are, sorry, had been, digital tokens earned by partaking in sure subreddits and will unlock particular entry or perks inside a neighborhood. It began out on the Ethereum blockchain, after which migrated to Arbitrum Nova, a layer-2 scaling resolution that launched in 2021.

Reddit Group Factors had been saved in “The Vault,” which was an Ethereum pockets within the Reddit cellular app. Customers may entry their Vault to test their Group Factors steadiness from totally different subreddits, or switch and spend tokens.

r/CryptoCurrency Moons ($MOON) launched in Could 2020. Moons had been the Group Factors ERC-20 tokens given as consumer rewards for upvotes on posts and feedback on the r/CryptoCurrency subreddit. Extra upvotes, extra Moons. Easy. Moons had been additionally earned by partaking in polls and different actions on the subreddit. Moons had been distributed month-to-month primarily based on consumer exercise. 

r/FortNiteBR Bricks ($BRICK) had been a well-liked Group Factors token as effectively. These had been earned in the same method and likewise distributed to customers of their Valut as soon as a month. It’s value noting that the subreddits r/CryptoCurrency and r/FortNiteBR are extremely popular, with 6.6 million and a couple of.6 million members, respectively.

So why shut down their tokens? Within the subreddit publish saying the top of the Group Factors program, which will probably be phased out by early November, Reddit made an effort to point out that they had been attempting to interchange the nice components of this system. Stating the launch of their new Contributor Program, and the continued use of subreddit karma and gifs. That is all effectively and good, however these applications successfully reward customers with money. They’re not utilizing a token or blockchain know-how.

Reddit is lacking the true drawback they bumped into. After they launched the Group Factors program, they hadn’t discovered a sustainable tokenomics mannequin. There was no cycle of financial exercise driving steady demand, and extra importantly, use of those subreddit tokens. No matter how fashionable a given subreddit was, or how fiercely devoted its neighborhood, there may be merely no substitute for actual financial demand in the case of worth creation. Customers would have their tokens distributed as soon as a month, and test the Vault within the cellular app and really feel a rush of gratification, however then what? Dump them available on the market?

In the end the one factor customers needed to resolve was when to show their token distributions into promote strain. They’d no incentive to carry them. No method to generate yield on them. And in the end no motive to go on attempting to earn them since they only continued to extend in provide and reduce in worth.

We’ve additionally seen tokenomics issues destroy token worth for even high-quality and extensively adopted tasks like STEPN and Gala. If there had been real financial fashions round these tokens, customers wouldn’t be dumping them, and Reddit wouldn’t have shut down Group Factors and reverted to a fiat reward system.

So, what’s the lesson right here?

It doesn’t matter how massive your consumer base or how loyal your neighborhood, in case you are constructing a token-based rewards system in Web3, it’s vital that you simply design a system of financial exercise across the token that gives sustainable tokenomics and incentives for continued engagement whereas driving worth to the token that’s shared throughout all stakeholders.

It’s not simple, however when you don’t take the time to suppose this via and determine a viable resolution, you then, too, will find yourself on the ash heap of Web3. Observing a defunct webpage questioning what went improper, holding a bag of nugatory tokens, with no place to go however dwelling.