Variant Partners How Web3 projects use tokens to incentivize and guide market supply

Original author: Mason Nystrom, Variant Fund investment partner
Original translation: Luffy, Foresight News
Token incentives can attract supply-side participants to the market, overcoming the cold start problem. However, not all supplies are the same.
Active supply refers to the need for continuous participation in the market; passive supply refers to the need for initial guidance but minimal ongoing maintenance.
Markets with active supply are more sticky once they reach a certain scale and often have higher defensibility because the compound nature of demand provides better economic benefits for suppliers. Whoever reaches the maximum demand liquidity first wins.
In contrast, markets with passive supply can rapidly expand supply without a matching level of market demand, but their stickiness is not guaranteed. Builders can use these characteristics to guide tokenized markets, but they need to know how to balance it.
Active vs. passive markets
Active supply markets tend to be defensive, while passive markets are easier to scale. To understand this, it is necessary to first understand their general characteristics, each of which has certain limitations.


Labor and resources
Active supply is like labor. So far, people cannot rent out their brainpower passively like they can rent out storage space. For example, Braintrust is a decentralized professional network that requires a continuous supply of talent to meet employers’ real-time demands.
Corresponding to labor is resources, such as hardware, NFTs, and capital. These are typical representatives of passive supply. For example, the car data sharing network DIMO requires users to purchase and connect DIMO hardware devices. After paying a one-time fee, the device continues to transfer vehicle data to the DIMO network with minimal further input from the user.
Opportunity cost and sunk cost
In active supply markets, supply-side participants choose markets with the best income/revenue and token appreciation potential. Axie Infinity promotes a play-to-earn model, competing with other users in markets where income can be earned through labor. Without strong organic demand, active markets must constantly compete with all other ways users spend time to earn tokens.


However, in passive markets, supply-side participants need to invest assets upfront, resulting in a certain sunk cost. Therefore, as long as it is profitable, supply-side operators will passively provide physical assets to the market. For example, GPU owners are incentivized to provide their computing power to the GPU market. Even in cases of supply-demand imbalances, passive markets can use token incentives to support a large supply.
Quality-dependent supply vs. quality-independent supply
When you have a clear understanding of supply quality, expanding the market becomes much easier. Markets with passive supply are more suitable for this situation as they have physical supply, compared to markets with active supply. This is because their supply usually comes with quantitative limits, making it easier to improve quality. For example, GPUs have different quantitative classifications (e.g., A 100 and RTX 4090), and their supply is closely related to quality.


This situation is rare in active supply markets because these markets need to deal with the high variability of human capabilities. The quality of gig platforms like Braintrust or Nosh depends on their workers, but demand-side customers have different standards for these workers.
Implications for token design
So, how should builders guide and scale tokenized markets? How do market supply characteristics affect token design?
Active supply markets
For active supply markets, token design has several key points:
Scale token incentives with demand growth
Incentivize supply-side loyalty, quality, or reliability
Establish dynamic incentive mechanisms
In passive markets, supply can wait for demand to catch up (e.g., Filecoin). But the situation is different in active markets because people face high opportunity costs. Therefore, builders must prioritize demand-side growth to remain competitive. However, tokens can help guide initial demand to attract supply-side participants to join the market.
One strategy to scale active markets is to dynamically expand supply-side incentive measures, making token distribution closely related to growth. One related mechanism is to introduce supply in a permissioned manner, providing a stable yield for supply-side participants, thereby maintaining the participation and reliability of supply-side labor.
In any case, the constraints of these active supply markets actually make them stickier in their development: as demand increases, they are able to provide more stable income. From an incentive design perspective, these tokenized markets should focus on providing continuous rewards to maintain user activity on the platform. Additionally, they should dynamically adjust these rewards to incentivize users who provide stable supply, rather than those who may churn.
However, while token incentives are valuable for guiding supply and demand, there may need to be some innovation in service, verification, and reputation to expand supply quality, an important characteristic of active supply markets.
In this regard, tokenized markets must learn from traditional custody markets. For example, RealReal and StockX offer verification services to ensure the legitimacy of physical supply. Similarly, Braintrust acts as an intermediary and provides a quality assurance layer in its market products, while using tokens to help introduce supply.
Active supply markets that can leverage token effects can do better. By using equity-based intermediary networks or token-incentivized verification and management layers, quality assurance processes can be strengthened and more efficient markets can be created.
What about markets where supply and demand come from the same user? For example, NFT markets or play-to-earn games like Axie and Stepn?
These markets that can transform when adjusting token incentive measures need to be more flexible, as they are most likely to discover the speculative flywheel of tokens and blur organic demand. Such markets can help mitigate the reflexiveness of growth by incorporating lock-up into token rewards to incentivize long-term participation. Active supply markets should incentivize the diversity of supply to attract more professional consumers and professional suppliers, rather than retail supply, which may be more fickle.
Passive supply markets
For builders of passive supply markets, token design can also provide important insights:
Actively expand the number of suppliers to achieve commercially viable scale
Establish stronger defensibility by locking suppliers through demand-side products (e.g., SDKs, APIs) or proprietary hardware
Incentivize supply-side loyalty, quality, or reliability
Passive supply markets typically need to reach a certain supply threshold for the market to be commercially viable (i.e., generating strong demand), so builders should initially focus on increasing the supply. Additionally, this supply is usually measured in quantity rather than quality. For example, data collection networks like DIMO, Hivemapper, and Wynd require a large amount of data to make the aggregated data or services built on them valuable.
Since all passive supply markets are easier to expand, new entrants will not ensure demand just by aggregating enough liquidity. Instead, it often requires competing on products by building SaaS components (e.g., SDKs and APIs) to help demand access the market. GPU markets like IO.net offer aggregation services, making it easier for end computing users to access GPUs. Similarly, DIMO has built a market that allows DIMO token owners to purchase services for their vehicles.
Another way to make passive supply markets more defensible is to transition from commoditized supply to proprietary supply. Wireless network markets like Helium and XNET are using proprietary supply to build their telecommunications infrastructure.
Finally, considering the high sunk costs of passive supply markets, as long as the return exceeds operating costs, supply-side participants usually continue to provide services to the network. When sunk costs are high and opportunity costs are low (e.g., Blackbird restaurant accepting FLY tokens), supply-side participants are more likely to stay because they have intrinsic incentives to provide services to the market. In contrast, when high sunk costs and high opportunity costs coexist (e.g., GPU owners providing services to the computing market), demand or token rewards may be the decisive factor for supply-side participants to allocate resources.