Retelling of an essay by Arthur Hayes

13 February 2024

Ex-BitMEX CEO Arthur Hayes, in his essay "Points Guard," looks at the differences in investment and customer acquisition between Web2 and Web3 projects, and the impact of these differences on the ownership structure of the companies. He details various aspects of cryptocurrencies, ICOs, revenue farming/mining liquidity and loyalty programs.

The Cryptology team has made it easy for you to find and translate the article. And also prepared a paraphrase of the author's reflections.


In my essay I want to delve into the evolution of ownership structures and methods of raising investment funds in crypto projects. The purpose of this essay is to show why loyalty programs as a way to engage users are a natural extension of previous methods of engagement and fundraising. Many of the companies that Maelstrom invests in will be releasing their tokens in 2024, and you can expect to hear about loyalty programs, each with the goal of incentivizing the use of their protocols. Thus, I want to discuss why loyalty programs exist and how they will drive adoption in this cycle.

Web 2 vs. Web 3

Who your shareholders/token holders are and what is promised to them, be it cryptocurrency or otherwise, is critical to the success of any business venture

Whether you are the founder of a Web 2 or Web 3 startup, attracting and retaining users will be the most challenging and costly component of your business.

Between 2010 and 2020, the dominant model in Web 2 was as follows: Venture capital funds sought out promising startups that were already showing initial interest from users. They then injected significant funds into these startups, which served as the "fuel" for their rapid growth and massive user engagement. User attraction in Web 2 often occurs through discounts and free services. Remember the "battle" of cab apps: low prices were paid for by venture capital funds. This can be seen as an investment in exchange for users.

Venture capital firms made IPOs the goal of their investments. A successful listing on the stock exchange was the final point in their investment itinerary. IPOs gave everyday people a chance to become co-owners of successful Web 2 companies. This is TradFi's tool for "throwing money at retail". However, the "plebs" whose contributions made the company successful are paradoxically prohibited from owning an early stake in the company due to regulatory restrictions.

Investing in early stage Web 2 startups is a very risky endeavor. 90% of companies fail, resulting in the loss of all investment. However, many investors do not realize this risk and blame the government for their losses. Regulators, citing the need to protect the "plebs", restrict access to crowdfunding. They compare startups to Facebook and MySpace, arguing that not all can be successful. 
But on the other hand, IPOs are a source of huge revenues for TradFi's "gatekeepers." Let's go through the list of those who get money from the IPO process:

  1. Investment banks, who act as guarantors of the IPO, take home between 2% and 7% of the capital raised.
  2. Lawyers make hundreds of thousands and sometimes millions of dollars preparing and filing prospectus and other offering documents. Being a paper-pusher has never paid so well.
  3. Auditing and accounting firms make hundreds of thousands of dollars on each transaction by preparing audited financial statements. Quickbooks are on steroids!
  4. The exchanges charge huge listing fees. Nasdaq Labs anyone?

The trust cartel described above loves IPOs. A few successful IPOs in a calendar year ensures that everyone at TradFi gets their huge bonuses. But without a hungry hoard of retail buyers who are denied the opportunity to invest earlier at much lower prices, there would be no buying pressure to create a successful IPO. That's why retail buyer participation should be saved for the end, not the beginning, of the fundraising lifecycle.

IPO fees may seem lootable, but until cryptocurrencies came along, there was no other way to publicly raise funds. Many successful companies were created through this system. But it's time to move forward and look for better ways to fund.

From a user perspective, the main problem with forming Web 2 companies is that using a product or service does not result in capital accumulation for the company providing it. You don't get shares of Meta by scrolling through your Instagram feed. You also don't get shares of ByteDance while you're destroying your brain watching teenagers dancing like Cardi B on TikTok. These centralized companies take your attention, your actions, and your money, and yes, they provide a service or product you like, but that's it. And even if you want to invest, you can't do it unless you're rich and well-connected.

Participation ≠ Ownership

Bitcoin paradigm shift

Bitcoin and cryptocurrencies have ushered in a new era in the startup world. Since 2009, when bitcoin was launched, it became possible to reward project participants with ownership in the company. This gave rise to a new generation of startups - Web 3 startups based on decentralized principles and the use of cryptocurrencies.

Before you could buy bitcoin on an exchange since 2010, the only way to acquire it was through mining. Miners, using electricity, confirm and secure transactions, which creates and maintains the network. They are rewarded for this activity in the form of newly mined bitcoins.

Participation = ownership

The essence of Web 3 is to give users a voice and the ability to own a part of the project in which they participate.

Initial Coin Offering (ICO)

Cryptocurrency markets have revolutionized crowdfunding for startups. Web 3 startups, by abandoning fiat and embracing bitcoin, can bypass TradFi. Launching an ICO allows them to raise funds by offering tokens in exchange for bitcoin. Believing in the team and the vision of the project gives them the opportunity to own a piece of the new network. Web 3 gives people the opportunity to own a part of the Internet and participate in its development.

In 2014, Ethereum became the first major project to hold an ICO. The Ethereum Foundation sold Ether (the fuel of a virtual decentralized computer) for bitcoins. In 2015, the Ether was distributed to the buyers. The Ethereum ICO was a success and raised funds for the development of the network. The Ethereum ICO was a turning point in the history of cryptocurrencies and demonstrated the potential of this technology to raise funds.

ICOs experienced rapid growth and then stabilized. The record-breaking fundraiser was ICO (EOS), which raised $4 billion in ETH in a year. However, EOS is an example of how an ICO can be both successful (in fundraising) and unsuccessful (in blockchain functionality). ICO history teaches us that it's not just the amount of funds raised that matters, but the real value of the project.

As time went on, the projects got shittier and shittier, but the amounts raised grew. This happened because for the first time in history, anyone with an internet connection and some cryptocurrency could own a piece of what was being marketed as the next hottest tech startups. The retail industry came into play, making many of the cryptocurrency brethren deadly rich.

ICO mania peaked in the fall of 2017, when Chinese regulators imposed an outright ban on them. Exchanges like Yunbi were shut down overnight, and many projects that had recently raised money from Chinese retail investors returned the funds. Around the world, regulators seeking to protect the trust cartel from competition in early-stage fundraising ideas sprang into action, and ICO issuance disappeared.

ICO investors gave money back and became motivated marketing agents for projects. However, just because you sold tokens at a high price didn't mean someone would use your product. Ownership depended only on the money invested, not the use of the protocol. ICOs were a step forward, but we could have done better.

Profitable Farming

DeFi summer, from a northern hemisphere perspective, started in mid-2020. A lot of projects launched during the bear market period of 2018-2020 started to be actively utilized. Tokens were already being quoted, as many of these projects had conducted ICOs or token presales followed by a public token generation event (TGE) by mid-2020. Project foundations allocated large amounts of tokens to reward community members who performed valuable actions.

Many of these projects, such as Uniswap, AAVE, and Compound, were focused on borrowing, lending, and trading. They wanted users to borrow, lend, and/or trade their cryptoassets using their protocols. In exchange for performing these actions, the protocols instantly issued freely tradable tokens. Thus, revenue farming was born. Traders borrowed, lent, and traded cryptocurrencies on these platforms with the specific goal of earning the protocol's control token. In many cases, the trader lost money just to be able to "farm" or earn more tokens. As the tokens rose in value relative to the market value, traders found themselves in profit. All of this assumes that you sold at the top; many did not, and all that activity was wasted.

From the project's perspective, all this activity increased trading volumes, total blocked value (TVL), and the number of unique wallets interacting with the protocol. These metrics convinced investors that DeFi was working and creating a parallel financial system run solely by code on decentralized virtual computers.

Participation = ownership

All was well, except that the DeFi summer demonstrated the dangers of uncontrolled token issuance. DeFi projects need to find smarter and more sustainable token distribution models to incentivize usage and ensure long-term growth.


Farming as a tool to attract users died with the 2021 cryptocurrency bull market. But in its aftermath, Points was created and has quickly become the primary pseudo-ICO tool for fundraising and user engagement for projects in the current bull cycle.

Points combines the best aspects of ICOs and revenue farming.


Allow millions of retail cryptocurrency users to purchase a piece of a new project.

But when you sell something retail, some regulators call it a "security" and require you to do a bunch of stuff you don't want to do... namely stop selling shit to poor people.

Revenue farming

Gives out tokens to users for using the protocol, but if you act too aggressively - it will inflate the final supply of tokens too quickly, and once the price of tokens drops, the user will no longer have an incentive to use the protocol. Imagine that the project awards you points for interacting with the protocol. These points can be converted into tokens, which are then withdrawn to users' wallets for free, but the price of the tokens is completely opaque and determined by the project. There is no guarantee that the points will be converted into tokens at all.

Are points a contract between the project and the user for material reward? No.

Is there any form of money, fiat, cryptocurrency or otherwise, that is exchanged between the user and the project for points or tokens? No.

Is the project completely free to convert points to tokens and the timing of their eirdrop? Yes, the project has complete freedom in these matters.

Let's make a few more assumptions:

1.A small but talented team of engineers is able to do without a bloated staff. This is an advantage of the software.

2.The security of the first level blockchain is ensured by its architecture.

3.Users pay transaction fees in native tokens, thereby paying in part for the validators or miners who keep the network secure.

4.Are in-house lawyers needed? If the project is decentralized, probably not. Once the fund is created, the main work of lawyers is minimized.

The main task of the project is to attract users. This is the task of marketing and business development. Provided a quality product is created, all expenses will be spent on attracting users. However, building a terrific project with little to no venture capital funding is quite possible. The project needs money to attract users, and points are a new and exciting way of guerrilla marketing. With points, a project doesn't limit itself to an aggressive token issuance schedule. That's because the ratio of points to tokens can be changed at any time. There is no contract that says a project must meet a certain points to token ratio.

The points system allows the project to incentivize desired user behavior, thereby increasing the long-term value of the service. Many successful crypto projects are essentially two-sided markets. Points help to trigger network activity and overcome the problem of "cold start". Dynamically calibrating the issuance of points based on user actions allows the project to achieve exactly the type of interaction it desires. The use of points allows the project to be less dependent on pre-sales of tokens to venture capital investors. Venture capital is typically used to pay for user engagement. Points can solve this problem. In doing so, a project can implicitly sell its token at a higher price through an opaque points program than in a transparent round.

Points are good for the project, but what about regular users?

The declining popularity of ICOs means that retail investors should be wary of the timetables for unlocking tokens owned by VCs. Simultaneous investment by retail investors and the unlocking of a venture capital fund's stake can lead to serious losses.

Using a points system allows projects to raise funds without the need for large-scale token presales. This allows retail investors to "invest" earlier and potentially at lower prices than after TGE (token generation).

While the exact timing of airdrop and the ratio of points to tokens has yet to be determined, the points system may be a fairer way to reward users for their participation in the project.

A points program is only effective if there is a high degree of trust between users and project founders. The user trusts that after interacting with the protocol, their points will be converted into tokens at a reasonable price within a reasonable time frame. As points programs proliferate, there will be unscrupulous participants who abuse this trust. Eventually, an egregious case of abuse of trust that involves a large sum of money could spell the demise of points as a fundraising and user engagement tool. But we haven't gotten to that point yet, so I'm not worried.

Whistle everyone up. Conclusion

Like it or not, every successful project, and by successful I mean token growth, will run a points program before the TGE. This will ensure that the protocol is utilized, the hype surrounding the eventual tokens being thrown into the air, and the public listing of Pump Up The Jam!

I am a businessman, not a priest. The only dogma I adhere to is "the number is growing!".

If scores create a better match between users and protocols, then LFG.

If the trust cartel further loosens fundraising controls for new and innovative tech startups because scoring will be seen as a better mechanism for user engagement and fundraising, sign me up.

I hope this essay provides some insight into what points are and why I believe they will be the foundation of the most successful tokenization startups in this cycle. Maelstrom has bags, and I'm not ashamed to tell readers about them. Expect many more essays about the exciting projects in our portfolio that are launching tokenization programs before their eventual TGE. My body is ready, how about yours?

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