Author: Builders
Compiled by: TechFlow
According to American businessman Eric Ries, product-market fit (PMF) refers to “the moment when a startup finally finds a critical mass of customers that resonate with its product.”
While Web2 and Web3 startups are different, the classic wisdom about product-market fit applies just as much in crypto as it does in the crypto space: find it, or fail.
This raises the question: should product-market fit be achieved before issuing a token?
The simple answer is that it depends on the extent to which your product requires tokens to implement PMF. The positioning of the product in token usage will determine when is the best time to introduce tokens.
In this article, we will explore the issues of issuing tokens before reaching PMF and under what circumstances it may be appropriate to do so.
The Problem with Issuing Tokens Before Product-Market Fit
Frankly speaking, there are many tokens on the market that do not play a key role in the products they serve.
For crypto products that do not rely on tokens to operate, efforts should be made to achieve product-market fit before issuing tokens, as the decentralized nature of these projects makes it extremely difficult to make adjustments after launch. For example, governance tokens may be an important part of a project’s ecosystem, but they are not core to the product itself.
Introducing tokens too early can hinder the process of finding product-market fit by distorting incentives, influencing user behavior, and entrenching certain product elements. In addition, it is often difficult to modify the economic model of a token after issuance, even if these adjustments are critical to achieving product-market fit. And, while token incentives can attract users in the early stages, they cannot ensure long-term user retention or solve underlying product problems that must be addressed before launch.
Applicable scenarios for issuing tokens before product-market fit
For some crypto products that use token design as their core (although there are not many such products), tokens are actually necessary for product functionality and must be released before finding product-market fit.
For example, in some cases, tokens are critical to finding product-market fit, including Layer 1 blockchains that gain economic security through miners or validators, such as Bitcoin, Ethereum, Solana, and Binance Chain, or Decentralized networks like Helium and Dimo, which need to rely on token issuance to provide initial support for the supply side of the network.
Although less common, some DeFi networks do require tokens to properly align incentives in the network (excluding governance). The token networks of these products must function properly in order to achieve scale and incentive alignment.
Situations where it is not appropriate to issue tokens before product-market fit
While many products have issued tokens, few crypto products actually rely on tokens to operate. The most common use of tokens is to efficiently initiate user acquisition (or eventually exit liquidity). Blur is a prime example of this strategy working effectively. They used the incentives of their native token to successfully launch a “blood-sucking attack” on OpenSea, which was the leading NFT market at the time.
While tokens can play a role in kickstarting user acquisition, if the product doesn’t truly achieve product-market fit, user activity is bound to drop significantly when these incentives end (see all the major airdrops in 2024)
Conversely, if a product already works well on its own, adding incentives to promote user growth (and in many cases decentralized governance) can greatly accelerate its development.
Take Compound as an example. Although they have a native token for governance, this token is not critical to their core product, which is decentralized lending. Even before the introduction of Token, Compound had already achieved significant success in the market.
Similarly, Uniswap had already captured most of the market share of decentralized trading with the second version of its protocol before launching its token. They effectively resisted SushiSwap’s “blood-sucking attack” by issuing their own token.
Recently, Polymarket found excellent product-market fit in its decentralized prediction market, where users can bet on the outcomes of real-world events using USDC instead of native tokens with volatile prices.
In summary, unless your product truly requires a token, it is best to consider issuing a token after you have achieved product-market fit. Otherwise, the token may hinder rather than promote your growth.
Legal Notice
Token issuance is not available in the United States (and its territories), Canada, and certain other locations.
This blog post was published by CoinList Global Services Ltd. or its subsidiaries. CoinList does not provide investment, legal or tax advice, and this post should not be considered as such.
