Alex Fatuliaj
November 29, 2023
Tokenomics Tuesday

They are not the same


Token holders and users are not synonymous terms. The former is someone who holds your token, the latter is someone who uses your product. Oftentimes that someone is both a token holder and a user, but we must not mistake that as meaning the terms are synonymous - they are not.

Token holders care about tokenomic metrics: pump at launch, TVL, staking yield, price appreciation, and so on. On the other hand, users care about your product; if they can earn on top of using the product then that’s a benefit, but not the goal. Again, sometimes the two overlap, but they’re not synonymous.

What is the relationship between token holders and users, and who should we prioritise to maximise value? Let’s dive in.

What is the relationship between token holders and users?


It very much so depends on the project that you’re building.

If you’re a DeFi lending and borrowing protocol that uses the token for liquidity provision (lending), then token holders are key users of the ecosystem. Here, the overlap between the two is massive because the only thing users can do is lend and borrow, which requires the token (although borrowers sell the token for more usable currency). I also added “governors” because most DeFi protocols allow token holders to vote on fees and other intrinsic details, hence, these people can be considered key users as well.

DeFi lending and borrowing protocol

However, if you’re a Web2 focused property marketplace where the token is used for governance, then your users (i.e. buyers and sellers of the properties who don’t particularly care about governance) are not going to be the same as token holders. The only time the two cross paths is when the users make the transaction, and the protocol uses the token to conduct it via account abstraction.

RWA marketplace

These examples bring forward an interesting tangent: most tokens don’t play intrinsic roles within an ecosystem, thereby creating this divergence between token holders and users. This problem arises when the token isn’t derived from the product, but instead created primarily as a vehicle for fundraising to avoid giving up equity, or as a gimmick asset to acquire new users or to get them to stay. But in order to fundraise with a token, investors must believe that people will buy it, so these two points aggregate into one: tokens are commonly used for user acquisition and retention.

Herein lies the issue. What projects are acquiring with the token are not users, but token holders, which is fine in some cases (as we discussed with the DeFi example) but not fine in other cases (like the RWA marketplace), where this distinction becomes incredibly important some time after launch. I’ll be focusing on the latter cases from now on.

Let’s think about it via an analogy...

Imagine a coffee shop with free WiFi. You have two types of people inside: those who come to buy the coffee, and those who just come to sit inside for the free WiFi. Sure, from the outside, it looks like the coffee shop is busy and therefore high quality, so it incentivises more people to come and try the coffee: even people who come just for free WiFi indirectly increase revenues. Additionally, advertisers may start to pay the coffee shop to put up ads given the great foot traffic.

However, the issue starts to build under the hood as the coffee shop reinvests its revenue into improving the WiFi, instead of improving the coffee, service, and food: the number of people who come and stay for WiFi keeps growing, but the number of people who come for coffee doesn’t (they try it, and leave).

Then one day, a new coffee shop opens with better WiFi. Every single person who was there for WiFi leaves to the new coffee shop. The advertisers also leave. Whatever advertisers there are left just make the experience worse for coffee buyers, so the buyers start to dwindle also. And now, what seemed to be a great business, hopefully has just enough revenue to survive.

  • Coffee shop = project
  • Coffee = product
  • WiFi = staking yield / TVL / airdrops / things token holders care about
  • Advertising revenue = revenue from selling tokens (so when most advertisers leave, that’s like the team making less money from selling the token because its price decreased due to token holders selling)

The same way that coffee buyers and WiFi users are not the same person, neither are users and token holders.

However, as I said above, this distinction becomes incredibly important some time after launch. This is because there is a point up to which it makes sense to focus on incentivising new token holders to join the project.

When should you incentivise token holders?


As shown in the diagram below, token holders are relatively much cheaper and faster to acquire than actual users. This is because as a project, you can have marketing campaigns about potential airdrops, how big your TVL is, and staking yield (this is literally how Blast became so popular so quickly), which have a lot of viral potential given the nature of the crypto space. It’s cheap and easy. And just like with the coffee shop, and Blast, it really helps with marketing and popularity.

But this is short lived. There comes a point where the token holders stop caring about your yield and TVL, and start to look for something shinier and newer.

The relationship between time and value with reference to users and token holders

Users, on the other hand, are much harder to acquire requiring more time and capital, but once you get the ball rolling your growth is greatly assisted by network effects.

There is a point in time after which it is clearly objectively better to focus on users, but focusing on token holders before that can be a massively advantageous play, predicated on a strategy that maximises the benefits of both.

The downfall of many crypto projects comes from failing to gain real users before the hype surrounding the project dies. Let’s explore how to avoid that, and how to maximise the value of both parties.

How to maximise the value of both parties


Focusing on the token holders at the beginning to gain a huge marketing boost, and then trying to convert those holders into actual users within the time period indicated by the yellow bands, is the ideal* scenario.

  • With a successful marketing boost and an increase in token price, the extra revenue from selling tokens from the treasury can be used to improve the product, start marketing to actual users, and developing a stronger connection between the token and the users.
  • Projects can also piggy back off the marketing and financial stats boost to raise more capital at higher valuations by selling equity, which can then be used on same things as mentioned above (although you need to consider how your protocol accrues value to token investors and equity investors: read more here).

*Ideal being the key word, because it is incredibly hard to convert token holders into users given the fact that the former came for yield and the latter for the product. This incredible difficulty is what ruins most projects - they think they can convert, but they can’t. People greatly overestimate the genuineness of retail’s intentions in crypto.

So, what should you actually do?


Well, firstly, realise that there is opportunity cost in everything that you do. Sure, you can focus your time and capital on token holders, but that comes at the opportunity cost of improving your product or marketing for real users.

Secondly, realise that it’s almost impossible to turn your token holders into users, unless you’re a protocol like the DeFi example above where the token is an intrinsic part of the ecosystem.

I would propose that the best thing to do is focus on token holders, benefit from extra marketing and hype, then start to shift your focus onto marketing for real users and improving the product. This includes stopping paying influencers to say “Super high % APY on project X” to paying PR companies to release updates about your new features, for example.

This, as per the diagram above, will be around the same time as the gap between the value of token holders and the value of users reaches it’s widest point before starting to narrow again. This is at a similar time that the hype and/or new wallets start to plateau, which is a much easier data point to track.

If you miss this window, you can still turn it around, but it would be harder because now you’ll be dealing with FUD, seemingly botted social media accounts, low revenues, competitors with better products and more loyal users, and so on.

P.S. I would also propose going to a token economist that can derive token utilities from your product, thereby making it much simpler to avoid these issues to begin with 😉 I happen to know just the one: enquiries@simplicitygroup.xyz


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