Dark Side of the $MOON: What the collapse of Reddit Community Points teaches us about Web3 tokenomics

This image comes from the now-defunct page for Reddit’s Community Points documentation. It should serve as a sobering warning and reminder to all projects considering launching a token in Web3. As usual, excuses abound. Regulatory uncertainty. Scalability issues. The truth is that many rewards programs suffer a valueless fate because their tokenomics have not been carefully considered. Let’s now take a closer look at what lessons can be learned from this collapse, and call upon everyone building in Web3 to take heed and remember that without a carefully implemented and sustainable tokenomics structure, you, too, will get sent home because “something went wrong.”

In early August, the prices of the native currencies for two Reddit communities, MOON and BRICK, swelled about 40% and 76% respectively after cryptocurrency exchange Kraken listed them for trading. The Moonboys were overjoyed. But just over two months later, on October 17, Reddit announced in the r/CryptoCurrency subreddit that while they saw some future for Community Points, there was currently no path to scale it across the platform.

Just like that, the program was shutting down. So, what happened? Let’s start with the basics.

The Reddit Community Points system was an experimental Web3 user rewards system. It leveraged blockchain technology to give users points for their interactions and contributions to the platform. Community Points are, sorry, were, digital tokens earned by engaging in certain subreddits and could unlock special access or perks within a community. It started out on the Ethereum blockchain, and then migrated to Arbitrum Nova, a layer-2 scaling solution that launched in 2021.

Reddit Community Points were stored in “The Vault,” which was an Ethereum wallet in the Reddit mobile app. Users could access their Vault to check their Community Points balance from different subreddits, or transfer and spend tokens.

r/CryptoCurrency Moons ($MOON) launched in May 2020. Moons were the Community Points ERC-20 tokens given as user rewards for upvotes on posts and comments on the r/CryptoCurrency subreddit. More upvotes, more Moons. Simple. Moons were also earned by engaging in polls and other activities on the subreddit. Moons were distributed monthly based on user activity.

r/FortNiteBR Bricks ($BRICK) were a popular Community Points token as well. These were earned in a similar manner and also distributed to users in their Valut once a month. It’s worth noting that the subreddits r/CryptoCurrency and r/FortNiteBR are very popular, with 6.6 million and 2.6 million members, respectively.

So why shut down their tokens? In the subreddit post announcing the end of the Community Points program, which will be phased out by early November, Reddit made an effort to show that they were trying to replace the good parts of the program. Pointing out the launch of their new Contributor Program, and the continued use of subreddit karma and gifs. This is all well and good, but these programs effectively reward users with cash. They’re not using a token or blockchain technology.

Reddit is missing the true problem they ran into. When they launched the Community Points program, they hadn’t figured out a sustainable tokenomics model. There was no cycle of economic activity driving continuous demand, and more importantly, use of these subreddit tokens. Regardless of how popular a given subreddit was, or how fiercely devoted its community, there is simply no substitute for real economic demand when it comes to value creation. Users would have their tokens distributed once a month, and check the Vault in the mobile app and feel a rush of gratification, but then what? Dump them on the market?

Ultimately the only thing users had to decide was when to turn their token distributions into sell pressure. They had no incentive to hold them. No way to generate yield on them. And ultimately no reason to go on trying to earn them since they just continued to increase in supply and decrease in value.

We’ve also seen tokenomics problems destroy token value for even high-quality and widely adopted projects like STEPN and Gala. If there had been genuine economic models around these tokens, users wouldn’t be dumping them, and Reddit wouldn’t have shut down Community Points and reverted to a fiat reward system.

So, what is the lesson here?

It doesn’t matter how big your user base or how loyal your community, if you are building a token-based rewards system in Web3, it is vital that you design a system of economic activity around the token that provides sustainable tokenomics and incentives for continued engagement while driving value to the token that is shared across all stakeholders.

It’s not easy, but if you don’t take the time to think this through and figure out a viable solution, then you, too, will end up on the ash heap of Web3. Staring at a defunct webpage wondering what went wrong, holding a bag of worthless tokens, with no place to go but home.

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