Psychological ownership is the key to retaining users and achieving success for many Web2 products, and it is also an important factor that Web3 products lack.

Written by: Li Jin, Co-founder of Variant

Compiled by: Leah, Foresight News

This is an article published in Harvard Business Review, discussing how ownership needs to be not only granted technically, but also felt and accepted. This "psychological ownership" is the key to many Web2 products retaining users and becoming successful, and I think this is an important factor missing from the network and products in Web3.

Every year in early December, Spotify launches the Spotify Wrapped campaign, which attracts a large number of users to participate and share. This campaign aims to let users share the songs and artists they listened to in the past year, while showcasing the music culture on the Spotify platform. This is a very smart viral marketing strategy that does not require Spotify to buy paid ads. Instead, users will create their own Wrapped cards on the Spotify platform and actively share data about their music listening habits, including the songs they listen to, artists, number of plays, play time, etc.

Spotify Wrapped leverages a behavioral concept called psychological ownership — a sense of belonging to a product or service. Over the past decade, psychological ownership has become a core part of our interactions with digital products. Despite the lack of tangible or legal ownership, digital goods and applications foster psychological ownership and loyalty in users through personal investment, control, mastery, and alignment with their self-identity. Users are more likely to continue to engage with and contribute to tech products that provide a sense of belonging.

For Web3 projects, psychological ownership would seem to go hand in hand with actual digital asset ownership. But in reality, crypto projects often experience the opposite: user interest is often transactional, mercenary, and ephemeral.

In the next era of the Internet, where products provide users with ownership through cryptocurrency, builders can learn a lot about psychological ownership from other categories of products/services. By applying this perspective, crypto projects can cultivate a stronger sense of psychological ownership, leading to healthier user retention and sustainable ecosystems.

Why psychological ownership is important for companies and products

Think about the products or apps you use every day and the emotions they evoke. Some physical and digital products feel utilitarian and unspectacular: using an Uber for a ride or a one-off meeting app probably doesn’t elicit any real emotion. Others inspire loyalty or affinity because of personal investment: your carefully curated music playlist or your Twitter profile, for example.

This psychological sense of ownership is different from legal ownership: individuals can feel a sense of ownership without being the legal owner of a product or service, and vice versa. For example, my social media profile reflects a sense of ownership, not true ownership. Conversely, individuals can legally own something without having a psychological sense of ownership: few people feel emotionally attached to a company because of a stock or exchange-traded fund (ETF), for example.

Over the past decade, new digital products, services, and business models have disrupted the traditional relationship between consumers and goods/services—moving from purchasing and outright ownership of products to acquisition and subscription models. This shift in relationship introduces new levers and opens up additional design space for cultivating psychological ownership.

Psychological ownership is important because it changes behavior. Research shows that it can increase customer loyalty, help word-of-mouth referrals, and enhance customers’ willingness to pay. In the public sphere, high levels of psychological ownership increase people’s sense of responsibility and stewardship, encouraging behaviors such as trash removal from public lakes or donations to public institutions. In digital communities, psychological ownership leads to “increased satisfaction, self-esteem, and quality of contributions.”

A study on music streaming is particularly revealing here. The move from physical music ownership (CDs, vinyl, tapes) to digital ownership (buying singles or albums) to digital access (streaming platforms) is known as the shift to a “post-ownership economy.” In theory, it’s easier than ever for users to leave an app and switch to a competitor because the switching costs are low. However, research has found that once users have taken the time to familiarize themselves with an app and personalize their experience — e.g., building a public profile, curating playlists, customizing recommendations — they are reluctant to use an app even when potentially superior alternatives exist.

It’s worth noting that users develop a stronger psychological ownership of a particular platform or app. But in the age of streaming, users’ affinity with specific artists or albums is fading as investment and direct connection decrease.

How to cultivate psychological ownership?

Product builders can actively cultivate users’ psychological ownership. Consumer research has revealed some drivers of users’ sense of ownership, which has implications for product design:

Invest in yourself

When people invest time, energy, effort, or money in a product, they feel a stronger sense of psychological ownership over it. “The more effort people put into a pursuit, the more they perceive its value,” says one study on the so-called “IKEA effect,” named after the Swedish retailer IKEA, which sells self-assembled furniture kits.

In the digital realm, people invest in products in many ways: by customizing avatars or profile pictures, posting content on social media, and providing feedback to the platform’s parent company. On TikTok, for example, users intentionally interact with videos in the hope of customizing their feeds (e.g., “leave a comment so the TikTok algorithm remembers your preferences”). When users spend years on an app accumulating a large amount of content, such as tweets and blog posts, their sense of personal ownership increases, as evidenced by the uproar surrounding Elon Musk’s acquisition of Twitter.

control

Providing a sense of ownership over a product/service can also create a connection. This often means offering features like giving users the power to create, customize, and express preferences, allowing users to shape the experience themselves. Interestingly, these strong feelings of ownership can also backfire on companies. In 2014, when Apple automatically added a U2 album to all users’ iTunes libraries, it caused backlash because it undermined users’ sense of control. Slate found this “deeply disturbing and may portend a scary future — one in which corporate owners have absolute control over users’ tastes and cultural preferences.”

Deep understanding

A sense of familiarity often inspires a sense of ownership. I'll designate a local restaurant as my go-to breakfast spot because I've memorized the menu and have a favorite table. Software products can also exhibit this characteristic: users can become familiar with a wide range of user functions within a particular application. For example, when a user masters all of an email client's shortcuts and becomes familiar with the user interface, his ownership and loyalty to the application will increase significantly. But in reality the backbone of email is an open protocol, so switching costs are theoretically low. This goes hand in hand with self-investment: by investing time, users can develop a deeper understanding of the app.

Consistency between self and object

Finally, the congruence between a product’s attributes and a user’s self-concept—called self-object continuity—can build psychological ownership. Users are more likely to gravitate toward brands that most closely match their self-image, whether imagined or real, and people are more likely to use apps that match their self-concept. The migration of social media users is a good example, as older generations took over Facebook, and millennials fled to Instagram and Snap. As Generation Z came of age, they carved out their own space on TikTok.

Cryptocurrency Ownership: A Natively Digital Form of Ownership

Cryptocurrency ownership can be viewed as an internet-native property system, similar to how legal ownership is enforced through legal contracts. In the cryptocurrency context, ownership is enforced through the blockchain. Because it is governed by a decentralized protocol, cryptocurrency ownership is internet-native: independent of any legal jurisdiction or central authority.

Cryptocurrencies and blockchains offer the possibility of building a user-owned internet, where networks and products turn users into owners through native tokens. But simply handing out tokens to users is not enough; users need to feel like owners in order to co-create the success of networks, contribute to their growth, and stay engaged over the long term.

Blockchain brings a new twist to the psychological ownership question. First, the use of blockchain makes it easier to leave any particular interface or platform (such as an NFT marketplace or wallet) because users can take their assets with them. While Web2 platforms were able to foster strong psychological ownership in users by investing time and effort in creating content or customizing the user experience, Web3 may make users' feelings of ownership more closely tied to the underlying crypto assets and creators, rather than to the platform. On the other hand, products can turn users into owners by distributing tokens, which can enhance the sense of psychological ownership because users become actual shareholders and have governance or economic rights.

Second, in the context of cryptocurrency, psychological ownership can have different effects. High psychological ownership is closely associated with behaviors such as active participation or contribution to the community, long-term retention, and evangelism. In contrast, low psychological ownership may exhibit speculative, short-termist behavior, such as flipping assets, using products for the purpose of harvesting airdrops, and such people have low participation rates in governance.

For builders in the cryptocurrency space, the challenge and opportunity lies in exploring how to design products with a stronger ownership experience and sense of “belonging.”

Cryptocurrency and psychological ownership: drivers and barriers

In the traditional gaming world, skins (i.e., aesthetic items that can be used to customize a player’s in-game appearance) are a $50 billion market. In contrast, NFT fashion (an emerging field that has already seen big names like Dolce & Gabbana and Karl Lagerfeld launch collections) is only a $245 million market, less than 1% of the size of the video game skin market. Cryptocurrency ownership of NFTs is arguably a “stronger” form of ownership that is independent of a single gaming company’s database. Why does this gap exist?

Psychological ownership is one explanation. A strong sense of ownership over game characters makes users willing to buy skins at scale. In contrast, today, fashion NFTs offer limited opportunities for self-investment beyond financial expenditures, making it difficult for users to exert control, and for other users to see the NFT and attribute its characteristics to the owner. (Projects like the fashion NFT marketplace and digital wardrobe DRAUP are clearly accidents.)

Let’s examine some of the drivers of psychological ownership and analyze where various crypto projects do well (or poorly) in reinforcing users’ feelings of ownership:

Invest in yourself

Crypto projects are often good at attracting users to invest their time, energy, and money, but this does not necessarily translate into a sense of belonging. Take the practice of rewarding users with tokens for performing certain actions - known as liquidity mining - which has been widely adopted by blockchain games, NFT marketplaces, and DeFi protocols. However, while they are often successful in driving a surge in initial usage, they rarely translate into long-term user traffic. For example, Nansen's analysis of liquidity mining activity among DeFi users showed that "42% of liquidity miners quit on the day of the project launch,... By the third day, 70% of users will withdraw from the contract."

Why do these projects — projects that are literally meant to generate a return on investment — so often fail at maintaining long-term user retention?

One explanation is that most token distribution mechanisms attract users who are looking for short-term profits rather than interested in using the product itself, which means that when other opportunities offering higher returns on investment emerge, the project's user churn rate will rise.

If that’s the case, then re-examining the problem could present opportunities. Historically, most tokens have been used to stimulate growth with little thought to fostering long-term sustainability: they attract users to join a new network/product by promising future airdrops or ongoing token rewards. This is a weak strategy for building a sense of belonging. But what if the order is reversed: belonging first, token ownership second? Products identify key drivers of user belonging and tie token rewards to those factors, so that tokens are used to promote belonging, strengthen user attachment, and cultivate user engagement habits. This is exactly what successful incentive programs in Web2 do — Uber or Doordash offer guaranteed earnings programs to new drivers, who gain a deeper understanding of how these apps work, fostering a sense of belonging, which in turn strengthens the connection between drivers and the relevant apps. Blur’s token airdrop follows a similar model, making tokens contingent on users taking actions such as using new features and providing liquidity to NFT markets.

Deep understanding

If creators can build a sense of psychological ownership among token holders, this means transforming a speculative user base that sees creators as a potential revenue stream into a long-term oriented engaged community that values ​​their relationship with creators. To illustrate how this works, let’s look at Bonfire, a platform that lets Web3 creators build custom experiences for token holders, including exclusive content, contests, and airdrops. By enabling fans to invest time in the creator community and gain a deeper understanding of the creator’s work, Bonfire drives users to feel a deeper sense of ownership beyond just owning a token.

control

Various Web3 communities are tying creative and engaging control experiences to token ownership. For example, Shibuya’s White Rabbit animated film allowed users to stake their NFT Producer Passes to vote on the next chapter, with over 80% of token holders participating. Mad Realities, an interactive content platform, allows NFT holders to control different elements of its dating show, such as voting for the winning couple and influencing the set design. Creating richer control experiences around user crypto tokens can foster a stronger sense of belonging and loyalty.

The trick here is that users have to care about a certain type of control and feel a certain amount of influence in order to value their asset ownership. One reason proposal participation rates in DeFi protocols are below 20% is that average users may feel like they have minimal influence, reducing their sense of control.

Consistency between self and object

Some crypto communities have a very high correlation between token ownership and identity: users buy and display NFTs, and even change their usernames or profiles to indicate which groups they are associated with, which also marks their identity and beliefs (e.g., Bitcoin and laser eyes). This emotional attachment and consistency with self-identity will keep holders at a very high retention rate and give the NFT a high value.

Crypto projects can foster higher user retention and loyalty by adhering to a clear set of values ​​that resonate with owners. For builders, their opportunity lies in refining their positioning, improving their storytelling, clarifying their position, attracting users who resonate with this mission, and making them further evangelists.

Case Study: NFTs and Social Tokens

Another interesting example of the power of self-object consistency comes from the Web3 creator economy. At the beginning of 2021, social tokens were widely predicted as a new type of asset that would quickly gain recognition in helping creators achieve profitability and incorporating user investment into creators. However, NFTs have surpassed social tokens as an asset type that achieves these goals. One explanation is that NFTs have had greater success in creating psychological ownership among users. In particular, visual NFTs easily enable self-expression and social signaling, which inspires users to have a greater emotional connection to the assets they own. While social tokens appear abstract and difficult to understand due to the lack of real-world counterparts, NFTs initially gained traction as digital artworks or collectibles, which have a high degree of psychological ownership in the offline world. Further, the categories of NFTs that have seen the greatest growth and adoption are those that help to demonstrate certain beliefs about oneself, while other emerging NFT categories (such as writing, podcasts, music) have greater challenges as a mechanism for expressing personal identity due to the lack of venues for display and consumption.

Build psychological ownership through better relationships

Given the above, how can builders in the crypto space put these ideas into practice? Putting the concept of psychological ownership into practice requires building a different relationship with users, changing their perceived role in the project, and co-creating with users. Here are some possible manifestations of this relationship.

Interoperability and user control

I have a hypothesis that users feel a stronger sense of belonging on Web2 platforms, while in Web3, the sense of belonging is more strongly reflected between the underlying crypto assets, communities, and creators. This is because crypto technology enables interoperability and data portability: by building on open, decentralized ledgers, users have a stronger sense of control and "belonging" to their assets. They can access their tokens from any crypto wallet, buy and sell NFTs from any market, and participate in tokenized communities through various social software. In contrast, in Web2 applications, users' data, content, points, etc. are stored in centralized databases, and users have control in the context of a specific application, which creates a sense of belonging to the platform.

For example, in decentralized social networking protocols such as Lens Protocol, user profiles, follower relationships, and content are all represented in the form of NFTs. This means that any client can be built on top of Lens Protocol and users can access their own data. When a user downloads an application built on Lens Protocol, their existing social connections and content are visible in the initialization interface. In this case, users have a much greater sense of control and ownership over their content and relationships, but their loyalty to any given application may decrease.

In Web3, fostering psychological ownership and defensibility of products relies on other drivers. These include self-investment through customization or distribution of tokens; intimate knowledge through user habits; self-object consistency with clear brand identity; or the discovery of proprietary product elements like better algorithms and off-chain data. Crypto app builders can learn from the world of email or podcasts, where certain products have captured significant market share despite being built on open data (Spotify has 27% of podcast listening, Gmail has 30% of the email market).

User co-creation: public creation and governance

Research shows that involving customers in the creative process and giving them some decision-making power can improve product reputation, increase users' love for the product and willingness to pay, and increase users' willingness to defend the product in public. This is because allowing customers to become co-creators can enhance their sense of control over the product, deepen their understanding of the product, and enable them to invest time and energy in the creation of the product.

This fits in with the growing trend among startups to “build in the open,” where progress is shared publicly and public feedback is solicited as a means of fostering a community of early adopters. In crypto, user co-creation also manifests as governance, where stakeholders are able to vote on the direction of a project or protocol by holding tokens. In crypto, user governance is often given as a benefit to token holders, rather than a prerequisite. Given the role of fostering user engagement in fostering psychological ownership, it may be worthwhile to make participation in collaboration and co-creation a prerequisite to becoming an owner or receiving an airdrop.

Psychological ownership and asset ownership are the foundation for building a user-led Internet

Psychological ownership is a key factor in many successful products, especially in the Internet age, where countless alternatives are just a click away. Products that give us a strong sense of "belonging" continue to strengthen their stickiness as we use them.

In crypto, the new technological innovation is an internet-native ownership system that allows users to become owners of any product through tokens. This has led to some projects growing rapidly due to user ownership - but it has also led to some famous failures and has led to rampant speculation. I believe these adverse effects occur because users have a relative lack of psychological ownership and the lack of exploration by projects has led to tokens attracting mercenary users, which ultimately undermines the long-term success of the project.

Instead, tokens can be strategically deployed to encourage users to invest time, energy, and money, exert control and leadership, and demonstrate their identity and beliefs, which are prerequisites for users to feel like owners. Research in traditional finance has highlighted the potential of combining actual asset ownership with psychological ownership. A study by Columbia Business School found that in a fintech app, if users choose certain specific brands or stores and receive stocks after shopping, these users will increase their weekly consumption by 40%. The researchers concluded that stock ownership increases brand loyalty. The key is that users tend to choose the brands they hold shares in and invest time in those brands to gain stock authorization - this is significantly different from the ownership path of buying ETFs or mutual funds, which requires almost no personal investment other than capital. From the perspective of psychological ownership, this experiment cultivated users' "sense of belonging" to the brand by giving users a sense of control over the company, triggering users to have a deeper understanding of those brands, and making users invest time and money in the company.

The potential for products in the crypto space is that when ownership of assets is distributed in a broader, systematic way, and, crucially, combined with psychological ownership, it becomes a new and powerful tool to enable products to grow faster, improve user retention, disrupt the existing landscape, and build long-term sustainable networks.