Why Web3 Incentives Are Broken (And How to Fix Them)
Stop monetizing your users. Start monetizing what they do.
The Incentive Death Spiral
Incentives in Web3 are fundamentally broken, and part of the reason why they’re broken is that most businesses are monetizing the wrong things.
Businesses that try to monetize the user and extract capital directly from the user are exactly how they end up with dead ecosystems, failing partnerships, and dApps that no one uses. The graveyard of Web3 projects is littered with platforms that charged fees, extracted value, and watched their users flee to the next incentive farm.
There’s a better way.
The Paradigm Shift: Monetize Actions, Not Users
The real way to build incentives and drive monetization is not by monetizing the user, but by monetizing what the user does and the results of what the user does.
Using this method protects and incentivizes the user to continue doing what they’re doing. It also gives the business an ongoing supply of revenue that can be monetized and used to drive other incentives, so long as the business knows what the user is doing, why they’re using the platform, how they are using it, and what they’re particularly using it for.
Why Traditional Web3 Monetization Fails
Think about the typical Web3 business model:
If I build an application and expect users to spend money on that application, there are only a couple of ways to extract capital from it. Almost always, it’s going to result in fees that we charge the user, or they spend money on something they are getting from said platform.
This creates a lose-lose scenario:
- Users feel extracted from and leave
- Businesses can’t generate sustainable revenue without users
- The ecosystem dies
What You Should Actually Be Monetizing
The real thing that you can incentivize and get revenue from is the action of what that user is doing, the behavior that the user is exhibiting.
Here’s what actually matters:
- How many swaps in a given amount of time
- How many purchases were made over a specific time period
- How many trades in a specific amount of time
- The patterns between these actions
- The sequence and timing of behaviors
- The context around why users take these actions
All of that information is what is actually valuable, not the value of the individual action itself.
The Difference Between Transaction Value and Behavioral Value
Let’s break this down with a concrete example:
Old Model — Monetizing Transaction Value:
- User swaps $100 worth of tokens
- Platform charges a 0.3% fee
- Platform makes $0.30
New Model — Monetizing Behavioral Value:
- User swaps tokens 47 times in a month, always between 2–4 PM EST
- User only swaps on mobile
- User typically swaps the same token pairs
- User’s swap frequency increases 3x after market volatility spikes
This behavioral data is valuable to:
- Market makers who want to optimize liquidity windows
- Protocol developers who want to improve mobile UX
- Trading platforms that want to predict volume spikes
- Liquidity providers who want to position capital efficiently
The behavior pattern is worth far more than the transaction fee ever was.
Why Businesses Can’t See This
Businesses have always been looking for ways to get information on their users — how to better incentivize them, how to build applications they’ll actually use, what’s wrong with their product, and where people fall off in the user journey.
The reason why businesses have not been able to identify this is that they’re looking for the wrong insights in the wrong place.
Instead of trying to extract revenue from the user, they need to be looking for ways to determine the value of the information that the behavioral data the user creates.
The Exponential Value of Behavioral Data
Every action is valuable. But here’s where it gets interesting:
If you multiply this behavioral insight across a specific ecosystem that has a specific purpose or use case, the information about why that user’s actions are valuable grows exponentially.
Example: A DeFi lending protocol
- One user borrowing $1,000 = minimal insight
- 10,000 users with borrowing patterns showing they all borrow more during market dips = actionable intelligence
- That intelligence can be monetized by selling anonymized behavioral insights to:
- Other protocols are optimizing their treasury strategies
- Market analysts are predicting liquidity crunches
- Risk management platforms are building better models
- Liquidity providers are timing their capital deployment
The behavioral patterns create a new revenue stream that doesn’t extract from users — it monetizes the insights their actions generate.
How This Actually Works in Practice
So how do businesses get access to that information and turn it into revenue?
Step 1: Data Collection
Partner with a business that is able to collect behavioral information, analyze those trends, and present them in a digestible, ruthlessly efficient, click-optimized UI that allows the company to actually determine the behavior of a specific user or subset of users.
Step 2: Insight Generation
This behavioral analysis allows businesses to determine how to better build their platforms, applications, dApps, or marketplaces. The insights drive product decisions, marketing strategies, and partnership opportunities.
Step 3: Monetization Without Extraction
The business also protects that information using cryptography and zero-knowledge proofs while working with the business to help map out their ecosystem and actually drive value by monetizing the actions and the information generated from that ecosystem — not the users themselves.
The Revenue Model That Actually Works
Here’s how the sustainable revenue model looks:
Traditional Web3:
- Charge users fees → Users leave → Revenue dies → Project dies
Behavior-Based Web3:
- Collect behavioral data → Generate insights → Sell anonymized insights to stakeholders → Revenue funds better products → Users benefit from better products → Users stay and generate more behavioral data → Cycle repeats
The key difference: users aren’t the product, and they’re not being charged. Their behavioral patterns create value that benefits the entire ecosystem.
Why This Protects Users Instead of Exploiting Them
When you monetize behavior instead of users, the incentive structure flips:
You want users to be MORE active, not to pay MORE fees.
This means:
- Lower friction = more actions = more valuable data
- Better UX = more engagement = better behavioral insights
- No fee extraction = user retention = sustainable data generation
The business succeeds when users succeed. That’s the alignment Web3 has been promising but failing to deliver.
The Privacy Component
None of this works if you’re just building Web2 surveillance capitalism with tokens attached.
The behavioral data must be:
- Collected consensually through transparent SDK implementation
- Anonymized completely so individual users can never be identified
- Cryptographically protected using zero-knowledge proofs
- Controlled by users who can opt out at any time
When done right, businesses get the insights they need, users maintain their privacy, and the ecosystem generates sustainable revenue that doesn’t depend on extracting value from users.
Web3 incentives are broken because we’re still thinking like Web2 businesses extract value from users, charge fees, and hope they don’t leave.
The fix is simple in concept but requires a fundamental mindset shift:
Stop trying to monetize your users. Start monetizing what your users do.
Build systems that generate revenue from behavioral insights, not transaction fees. Create ecosystems where more user activity means more value for everyone, not just more extraction.
The businesses that figure this out will be the ones still standing when the next cycle inevitably separates the sustainable projects from the ponzi schemes masquerading as protocols.
