What actually triggered 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 normal, excuses abound. Regulatory uncertainty. Scalability points. The reality is that many rewards packages undergo a worthless destiny as a result of their tokenomics haven’t been rigorously thought of. Let’s now take a more in-depth take a look at what classes could be realized from this collapse, and name upon everybody constructing in Web3 to take heed and keep in mind that with no rigorously applied and sustainable tokenomics construction, you, too, will get despatched dwelling as a result of “one thing went mistaken.”

In early August, the costs of the native currencies for 2 Reddit communities, MOON and BRICK, swelled about 40% and 76% respectively after cryptocurrency alternate 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 the moment 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 expertise 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 group. 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 cell app. Customers may entry their Vault to verify their Group Factors stability from totally different subreddits, or switch and spend tokens.

r/CryptoCurrency Moons ($MOON) launched in Might 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 based mostly on consumer exercise. 

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

So why shut down their tokens? Within the subreddit submit saying the top of the Group Factors program, which will likely be phased out by early November, Reddit made an effort to indicate that they had been making an attempt to exchange 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 packages successfully reward customers with money. They’re not utilizing a token or blockchain expertise.

Reddit is lacking the true downside they bumped into. Once they launched the Group Factors program, they hadn’t found out 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 standard a given subreddit was, or how fiercely devoted its group, there’s merely no substitute for actual financial demand relating to worth creation. Customers would have their tokens distributed as soon as a month, and verify the Vault within the cell 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 stress. That they had no incentive to carry them. No technique to generate yield on them. And finally no cause to go on making an attempt to earn them since they simply continued to extend in provide and reduce in worth.

We’ve additionally seen tokenomics issues destroy token worth for even high-quality and broadly 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 large your consumer base or how loyal your group, in case you are constructing a token-based rewards system in Web3, it’s important 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 in case you don’t take the time to assume this via and work out a viable resolution, then you definitely, too, will find yourself on the ash heap of Web3. Looking at a defunct webpage questioning what went mistaken, holding a bag of nugatory tokens, with no place to go however dwelling.