This real-world business is growing 80% a year w/ a most downloaded mobile app & 100 million users.

Their secret? Tokenization.

7 lessons web3 projects can learn from them on how to use tokens to drive growth without being a ponzi:

Sweatcoin started in 2016 w/ a simple idea of motivating people to exercise by earning tokens from tracked steps. Earned sweatcoins can then be used to spend or get discounts on real-life goods & services.

Unlike most web3 projects that get a short time in the sun & die, Sweatcoin has enjoyed steady growth for 6 yrs. It’s now one of the most downloaded fitness apps in the world & on track to reach 175 million users this yr.

7 lessons web3 projects can learn from them on how to use tokenization to grow:

(Note: I’m an investor in Sweatcoin. This post is for education. None of it is investment advice.)

1. Get clear on what business you are *really* in

What business is Sweatcoin in? If you answer “move to earn”, you’re wrong.

A business is a process that creates profit. Key process that drives bottomline is often different from what a company sells on surface. E.g. Marriott is in real estate biz & Costco in inventory management biz, even though their product names don’t suggest that.

In same notion Sweatcoin is in the advertising biz— a platform that helps retail brands get exposure to targeted audience.

This is an established biz model w/ proven best practices to follow. What’s new here is simply how the company executes that model (using tokenization to attract an audience).

For founders: think about what tried-and-true biz model you can combine w/ tokenization to create innovation while improving your chance of success.

2. Use tokenization to solve cold-start problem, not product-market-fit problem

Imagine if Sweatcoin were to execute the same move-to-earn idea w/o its own token.

To attract an audience it’d have to pay cash for people to walk. But to get cash it’d have to sell advertising to brand partners. But to attract brand partners it’d need an audience. ’Tis your typical chicken & egg problem for mkt place platforms starting out.

Tokenization allowed Sweatcoin to get around this cold start problem elegantly:

It pays tokens for users to walk (no cash cost upfront)—> w/ an audience attracted it gets brand partners on board—> w/ advertising revenue it supports token value by paying for product discounts that users earn tokens to get.

In a sense the token acts like a “bridge loan” from users to get project off ground. For this to work though, you need project to be viable, i.e. solves a real user problem & can be profitable w/ or w/o token.

Token gives a project great flexility in cashflow management. It doesn’t make a non-viable project viable.

For founders: think about how your project would work without a token. Can it still make it?

3. Focus token incentives on KPIs that actually matter

Tokens are a great tool to incentivize user behaviors you want. But if you’re not clear abt what performance indicators (KPI) are actually relevant, you’d waste a powerful tool on things that don’t matter.

E.g. NFT platforms that reward txns end up w/ wash trading problem. DeFi lending platforms that incentivize borrowing end up w/ stacked loans (users using borrowed amount as collateral to borrow more & repeat).

These incentives lead to temp improvement in certain metrics (txn volume, TVL) that turn out not that relevant to project’s long term health after all.

For Sweatcoin here’s a dilemma. The app tracks user movement in background w/o user having to do anything. That’s convenient for users but no good for brand partners, who want audience engagement & there’s no engagement if users don’t open the app.

So app engagement is a KPI that matters. But how do you make users open app w/o pestering people?

To solve this Sweatcoin built in various ways for users to earn extra tokens by engaging w/ app. E.g. once a day if you open app & click this button you get 2x token rewards for your steps in next 20 mins.

For founders: Token incentives are not free. Figure out what user actions actually matter for your growth & profitability and focus incentives on those.

4. Bring demand from outside the metaverse

Metaverse is all the rage but truth is metaverse economy is tiny compared to real life economy, for now.

Web3 projects that purely operate in digital sphere don’t have a vibrant economic ecosystem to lean on to power product demand & tend to end up as self-referencing ponzis.

Or they source demand from one another, which is not much better b/c again the entire metaverse ecosystem is not big enough to power that many real unicorn projects at least at current stage.

That’s why for web3 to grow mainstream one should think abt how to bring value-added & demand from real economy to drive growth.

Focusing on partnerships w/ diverse brands in both real life & metaverse is a key part of making growth sustainable for Sweatcoin.

For founders: think abt how you can be the bridge btw real economy & metaverse in creative ways.

(BTW, like this so far? I help you get smarter about web3 & macro. Subscribe to my newsletter for updates.)

5. Token utility is more important than limiting token supply

Sweatcoins never had a supply ceiling. That didn’t stop users from using the app. You may argue that supply is less of an issue as of today b/c sweatcoins haven’t traded on exchanges, i.e. users couldn’t sell.

That’s true. But what’s also true is the token has real utility in that it’s used to redeem products & services from brand partners and ultimately backed by Sweatcoin’s revenues. That gives a fundamental incentive for users to keep stacking tokens even w/o opportunity to sell.

For utility tokens, ideal token emission rate should match the rate of project growth, so it doesn’t hurt token value but at same time doesn’t unnecessarily encourage “up only” financial speculation either.

Granted that’s hard to do esp given volatility of crypto mkt, which brings me to:

6. Protect project from crypto market cycles in early stage

Sweatcoin didn’t issue its tokens on a blockchain at the beginning b/c at the time no blockchain could handle the txn speed & volume it needed (it’ll be converting to a NEP-141 token on Near in September).

Looking back, if it had issued the token on-chain earlier, it could have prob grown much faster, taking advantage of speculative “adoption” & mkt liquidity benefits.

On flip side though, it would also have been negatively affected by huge downside price swing of crypto mkt (case in point: the utility token from competitor Stepn has dropped 99% in price since May).

Reality is crypto mkt is too small & immature at this stage to allow for much price trend differentiation among tokens. Price correlation of most tokens is > 80% regardless of what the token is about.

Not having a token tradable on-chain saved Sweatcoin from becoming a collateral damage of crypto mkt swings in project’s early days when such distractions could have been extra challenging.

For founders: 2ndary mkt token liquidity has huge value. That’s the point of tokenization after all. But think abt how mkt volatility may affect your core biz & what you could do abt it. And is having your token tradable on exchanges from day 1 necessarily a good thing?

7. Use staking to distribute value-added, not to solve token demand problem

As so many web3 projects lack product-market fit & don’t have real utility for tokens, many have resorted to old tricks of 3rd world countries trying to defend a weak currency.

One such trick is to incentivize users to stake their tokens in exchange for high interest rates generated from new token emission, kicking the can of token demand problem down the road.

Raising interest rate to prevent capital outflow is a legit emergency tactic, but is in no way a measure to support value of either token or fiat currency in long term.

If done right, staking is a great way to increase user engagement & loyalty. And sharing the benefits of project growth w/ users is a web3 ethos after all. But for staking yields to be sustainable, it needs to come from biz profit, not token emission.

For founders: if you don’t have revenues to share yet but still want to offer staking, at least have a real roadmap of how future profits will convert to staking yields & make the latter sustainable. Or you’d be perpetuating an unhealthy equilibrium for your token that may be hard to get out of later.