Understanding what an incentive platform is
In the decentralized finance (DeFi) ecosystem, capital is a crucial component for growth. Blockchains and DeFi protocols compete to attract liquidity, as Total Value Locked (TVL) is a key success indicator. Additionally, user engagement is paramount — DeFi protocols need to encourage participation and ensure users interact with their products.
One of the most effective ways to achieve these goals is by creating incentive campaigns through incentive distribution platforms, which help projects allocate rewards to users in exchange for their engagement and liquidity provision.
Why are crypto incentive platforms important?
DeFi is often described as a mercenary industry where liquidity is mobile and driven by incentives. To attract and retain liquidity, protocols, DAOs, foundations, and blockchains frequently distribute tokens or points as rewards. These incentives encourage users to perform various actions such as lending, providing liquidity to pools, or simply holding a token instead of selling it.
Managing these incentives efficiently is a complex task, which is why dedicated incentive distribution platforms have emerged to handle the process.
How do crypto incentive platforms work?
Incentive platforms automate and optimize the distribution of rewards based on user activity.
The process typically involves taking snapshots of liquidity provided by users within a specified timeframe. The complexity arises because incentives usually operate within a fixed budget, meaning that as more liquidity is deposited, individual rewards decrease.
Additionally, different users contribute varying amounts of liquidity for different durations, requiring intricate calculations to fairly distribute rewards. Managing these calculations at scale demands robust data processing capabilities.
Types of incentive platforms
Social vs. DeFi platforms
Social Incentives
Platforms like Galxe and Layer 3 reward users for engaging in social interactions, such as participating in governance, completing social media tasks, or referring new users.
Onchain DeFi incentives
Platforms like Merkl distribute rewards based on on-chain activities, such as providing liquidity to specific pools or interacting with DeFi protocols.
Custodial vs. non-custodial platforms
Custodial platforms
Example - Royco. Users deposit liquidity directly into vaults managed by the platform, which then redistributes rewards based on predefined criteria.
Non-custodial platforms
Example - Merkl. Users retain control over their funds by depositing liquidity directly into protocol dApps. Rewards are then distributed without requiring users to relinquish custody of their assets.
How to choose an incentive platform?
For protocols who want to grow
Choosing the right incentive platform depends on the specific assets and behaviors a protocol wants to incentivize. Key considerations include:
- Supported chains: Some platforms operate on specific blockchains, limiting asset distribution options.
- Customization level: Platforms like Merkl offer highly customizable campaigns with detailed parameters for optimizing engagement.
- Reward type: Some platforms allow the distribution of various asset types, while others have limitations.
For users who want to earn
Users should evaluate incentive platforms based on:
- Liquidity compatibility: Ensure the platform supports the tokens and chains you hold.
- Reward opportunities: Check APRs and daily reward distributions to maximize earnings.
- Security & reputation: Always verify that the platform is reputable and not engaging in scammy behavior.
How to earn incentives?
Most crypto incentive distribution platforms have user interfaces. The general process involves:
- Visiting the platform’s website or app.
- Connecting your crypto wallet.
- Browsing available reward opportunities.
- Completing the required actions (e.g., staking, providing liquidity, interacting with smart contracts).
- Claiming rewards from the user dashboard once they become available.
How to launch incentive campaigns?
Platforms like Merkl enable web3 projects to launch incentive campaigns seamlessly. The process typically involves:
- Selecting the asset to incentivize.
- Setting campaign duration and reward distribution schedule.
- Customizing parameters to create a unique and engaging incentive program.
- Funding the rewards wallet and deploying the campaign.
With Merkl, users can further gamify their campaigns, improving engagement through flexible reward structures and advanced distribution mechanisms.
What’s the best incentive distribution platform?
The best platform depends on the specific needs of a web3 project or DeFi user:
For security & customization - Merkl is a top choice due to its non-custodial nature, forwarder option (rewarding users even when liquidity is held in third-party smart contracts), cross-chain reward capabilities (rewards on a different chain than the incentivized asset) and variable or fixed APR options. It supports over 40 blockchains.
For simple airdrops or staking product - basic incentive platforms may suffice for small-scale, one-time reward distributions to a predefined group of addresses.
Incentive distribution platforms play a vital role in DeFi by optimizing liquidity attraction and user engagement. Choosing the right platform depends on the level of customization, security, and asset compatibility required. Whether you’re a protocol looking to design a sophisticated incentive campaign or a user seeking to maximize rewards, understanding how these platforms function will help you make the best choices in the ever-evolving DeFi landscape.
