Bridging the encryption gap: exploring the hot start problem of sustainable rise

Author: Tina Dai Source: X, @howdai27 Translation: Shanooba, Golden Finance

In the world of Crypto Assets, ‘hot start’ (i.e., launching Token to quickly start rise) has become a popular strategy for new projects to quickly gain follow. My fren and investor Mason recently discussed this concept, explaining why some projects choose this approach. But like everything in Cryptocurrency, hot start is a double-edged sword. In this article, we will delve into the impact of launching Token before product-market fit and explore strategies that may help projects achieve more sustainable rise across the gap.

Why Choose Hot Start for Projects

Mason’s article elaborates on the appeal of the cold start problem. Essentially, it uses Token - even the promise of Token - to overcome the classic cold start problem that plagues new networks and market points.

Mason proposed that the strategy is particularly effective in two situations:

• Red Ocean Market: In a fiercely competitive space, known demand, Tokens can help latecomers quickly navigate Liquidity and user base. Think of the rapid rise of GMX and dYdX in the Derivatives market, or Blur in the Non-fungible Token trading space. Recent success stories have used points to guide LRT, lending platforms (such as Morpho), and bridges (such as Layer0).
• Passive Supplier Network: When the work to be done is primarily passive - stake, provide Liquidity, or run setups and forget the hardware - Token has proven to be a powerful incentive. Examples here include Grass or Morpheus.

The hot start driven by speculation and fear of missing out can indeed trigger network effects. But that’s the problem.

Pitfall: Token market fit ≠ Product market fit

Although the initial surge in Token prices may feel like a victory, it is important to recognize that Token market fit is different from product market fit. Token market fit is simple: in the long run, prices pump because there are more people who believe in price pump than those who believe in price drop. Blue-chip Tokens like BTC and Ethereum are examples of this, as they have demonstrated significant price appreciation over time by attracting consistent holders.

However, product-market fit is about creating real and sustainable value through product improvements and community, as opposed to the distinction between holding Tokens for price speculation and using them to solve real-world problems. BTC and Ethereum have successfully achieved this transition: BTC by solidifying its role as digital gold, and Ethereum by creating real network utility to incentivize developers and users to participate in its ecosystem, transcending mere speculation.

Most projects have never successfully transitioned from Token market fit to product market fit. This disconnect can be dangerous, potentially masking a lack of real utility and leading to unsustainable, speculation-driven rise. Teams may find themselves catering to Tokenholders rather than actual users, leading to misaligned priorities and potentially resulting in unsustainable rise driven by speculation and marketing hype.

Bridging the Gap between Encryption: From Token Market Fit to Product Market Fit

A hot start may ignite a flame, but the quality of the fuel—your product and your community—is the key to keeping the flame burning. In order to build a sustainable encryption project, it is crucial but rare to transition from pure token market fit to a combination of token and product market fit. This reflects the concept of “crossing the chasm” promoted by Geoffrey Moore.

If you are committed to the hot-start method, strategic tokenomics can win you time to bridge the gap in product-market fit. The key is to carefully balance between token supply and demand while strategically developing tokenomics that closely integrate with the success of the product and network. This approach aims to create a symbiotic relationship where token value becomes increasingly correlated with real utility and adoption metrics, rather than pure speculation. As the project matures, tokenomics should transition from an initial rise catalyst to a sustainable, value-driven mechanism that directly reflects and enhances the health and expansion of the ecosystem.

The following are some strategies to consider when the project crosses the encryption divide and shifts from attracting speculators to providing real utility for a broader user base:

Initial launch:

• Promote compelling narratives: In the cryptocurrency field, compelling stories can be as powerful as the technology itself. Weave a story that connects your token roadmap with real-world impact or product advancements to attract mission-driven early adopters. Remember, people invest in stories they believe in; a well-told story can turn token holders into passionate advocates, driving adoption and long-term commitment to project success.
• Strategically Low Fluctuation (Cautious): Launch with limited token supply to generate initial follow and value, while reserving a large amount of tokens for future incentives. This approach sacrifices immediate fundraising for greater long-term control over token allocation, enabling continuous user acquisition and retention as the project aligns with the product market fit. However, please note that low fluctuation makes tokens highly sensitive to market conditions. This may result in extreme fluctuation, potentially causing tokens to behave like meme assets before achieving significant product appeal.
• Targeted Layered Airdrop: Strategically allocate your initial Tokens to users who align with the long-term vision of your project. Give priority to potential contributors such as developers, content creators, or active community members rather than short-term speculators. Implement a layered system where different user categories receive different quantities of Tokens based on their potential value to the ecosystem. Clearly communicate the criteria for future Airdrops after your Tokens enter the market, creating a roadmap that rewards continued participation and behaviors that contribute to the rise and success of the project.
• Initial stake incentives: Implement a stake system with higher initial rewards, which decrease as network participation rises. This approach is commonly seen in the DePin project, incentivizing early holders to maintain their positions, reduce selling pressure, and cultivate a loyal core user base.
• Liquidity Guide: follow creates efficient and well-balanced Liquidity pools to facilitate organic trading activity while retaining the majority of tokens for future ecosystem development and user incentives. To kickstart Liquidity, consider providing token incentives to those who participate in providing liquidity.
• Introducing Basic Token Utility: Implement a simple, clear token use case at launch to ensure immediate value in your ecosystem. Keep it simple: for example, holding X tokens earns Y benefits (such as exclusive non-fungible tokens, future whitelist spots, or special user status). This approach ensures that your token has practical utility even at the outset, encouraging adoption and retention while laying the groundwork for more complex use cases as your project develops.

Crossing the Divide:

• Adaptive Supply Plan: Develop a transparent, flexible Token supply plan in response to the rise of the network and product milestones. This approach ensures that Token supply rises in sync with the real development of the ecosystem, incentivizing meaningful user participation rather than pure speculation.
• Tokenomics Linked to Product Success: As the product matures, strategically expand token use cases, shifting towards a model where token value is directly related to the use of the product and the rise of the network. For example, implementing buyback mechanisms, revenue sharing, or protocol destruction. Projects such as MakerDAO, Lido, and selected exchange tokens demonstrate how tokenomics closely linked to product success can benefit more from a hot start. Consider integrating your token into a broader loyalty program, rewarding holding and active platform participation, creating a symbiotic relationship between token value and ecosystem health.
• Layered stake incentives: Implement a multi-layer system that rewards long-term holding and active participation. This can include Node sales, upfront cost increases, and incentives for long-term commitment. Provide upgraded benefits based on holding time and participation level, such as enhanced governance rights, higher returns, or exclusive features.
• Community Cultivation: Cultivate a user base that believes in your project’s long-term vision, rather than just pursuing short-term gains. However, please note that even the most enthusiastic community has a “price-driven half-life” - if the token price does not ultimately reflect the success of the project, their enthusiasm will wane.
• Strategic Partnership: Establish cooperative relationships to enhance the value proposition of your ecosystem. Ideally, these should not only focus on reward-based cooperation, as those are short-term relationships. If Token rewards are offered, one way to encourage ongoing value is to implement vesting around milestones.

These proposed strategies are designed to balance price stability while buying time for the project to achieve true product-market fit. The goal is to create a flywheel where Token value and product utility reinforce each other, ultimately transitioning from speculative interest to a sustainable ecosystem rise.

Case of PMF Token Release

Given the risk posed by the hot start issue, the release of latencyToken until the product-market fit is achieved is a strong argument. Taking Magic Eden as an example, they have built a successful Non-fungible Token market and established a strong user base before considering Token. This approach allows them to focus on product development and user acquisition without being disturbed by Token price fluctuations. When they eventually launch Token, it injects new vitality into their platform, reinvigorates user engagement, and opens up new paths for growth and ecosystem expansion.

Launching a Token is like starting a fire. If you have enough kindling and the Token accelerator works well, it will ignite easily. Otherwise, you’ll need to work hard to prevent the weak flame from extinguishing.

By releasing Token after PMF, projects can:

• Reward real users, not speculators, even if it means making bad actors uncomfortable.
• Use Token as a proven product accelerator rise.
• Better cope with regulatory waters, and utilize creative business models or value capture mechanisms.
• Use Token launch as a powerful marketing campaign for established products.

This strategy is not without challenges - compared to hot-start competitors, you may initially rise slower and you may look at CoinMarketCap and think ‘if we had Token, that could be us.’ But the trade-off is the potential for a more sustainable, organic rise and ultimately building a more valuable network (and Token).

The future belongs to projects that master Token-driven rise art

In the constantly evolving field of Crypto Assets, the path from Token release to sustainable growth is not a binary choice between hot start and cold start, but a spectrum of strategic decisions. The real challenge is to carefully balance: leveraging tokenomics to catalyze initial attraction while building genuine utility and community engagement.

Successful projects will be those that see Token as a powerful tool in a broader ecosystem, rather than the ultimate goal. They will create mechanisms that combine speculative interest with real-world value creation, effectively bridging the gap between early adopters and mainstream users with Token. Ultimately, thriving projects will be those that master the art of driving rise with Token, using it to accelerate the realization of true product-market fit rather than as a substitute for it.