DePIN x Compensation

Welcome back to DePIN Snacks! Each week, we cover a recent web2 startup fundraise and explore why crypto-based networks will win long-term.

Today’s topic: employee incentives.

Last week, SocialCrowd raised a $2.5m Seed for its incentivization platform for frontline employees. It works like this:

• Employers buy points from SocialCrowd in bulk

• SocialCrowd designs quests that help improve the company’s operations

• Employees complete quests to earn points via SocialCrowd’s app

• Employees redeem points for gift cards (tax-free!)

SocialCrowd focuses on industries with large frontline/blue-collar workforces like restaurants, retail and healthcare that can drive improvements in operating efficiency and customer experience by incentivizing employees directly for doing valuable tasks. In almost every case, these types of businesses spend substantially more on labor than they take home in operating profits—by definition, relatively modest improvements in labor efficiency have an outsized impact on operating margins & therefore cash flow.

Is a 15% productivity boost achievable at the scale of tens or hundreds of millions of frontline employees? We think the answer is yes—and then some.

There’s empirical evidence to support our thinking: a seminal paper on performance-based pay by economist Edward Lazear studied 3,000 employees of a car windshield manufacturer as they transitioned from a fixed hourly pay ($/hr) to performance-based pay ($/windshield) in the mid-1990s, measuring a +44% increase in employee productivity over the subsequent nineteen months.

There are three levers by which performance-based pay impacts labor efficiency:

1. Incentive effect: “good” employees have a bigger positive impact

2. Sorting effect: “bad” employees earn less and quit or get fired at a faster rate

3. Tax effect: incentive-based pay can benefit from income tax exemptions

Lazear’s study found the +44% boost to be equal parts incentive and sorting effect. Today’s platforms add a third benefit—tax exemption—since for American employers, rewards fall under the fringe benefits exemption and therefore incur no income tax.

Today, platforms like SocialCrowd - or its mobile-first competitor, Perry - enable front-line/blue-collar workers to get paid like hedge fund managers: proportional to the value they create, with real skin in the game, and through a tax-efficient structure.

The proof is in the pudding: in the healthcare sector, Perry is already raising nurse productivity, increasing caregiver retention, and improving compliance rates by double-digit percentages. Extrapolated across >50m frontline workers in the US, it’s feasible that the winning platform unlocks >$100B of economic value in the US alone.

Why will a crypto-based platform win? At every step of the process, crypto enables stronger incentive alignment between employees and employers:

1. Quest Design. Quests needs to do two things: engage employees, and improve outcomes for employers. Without crypto, platforms must design quests in-house and/or push the responsibility to employers—neither scenario is ideal. Over time, the winning platform will transform from a two-sided marketplace (employees <> employers) to a three-sided marketplace (employees <> employers <> mechanism designers). An open ecosystem of quest-creators will inevitably drive more innovative, engaging experiences for employees and better, faster outcomes for employers. For example, quests will become gamified with mechanisms like streaks / levels / loot boxes / etc.

2. Quest Verification. Even a well-designed quest is useless if it cannot be properly verified; otherwise, rogue employees submit fake data and earn fraudulent rewards. Without crypto, these platforms are limited to using verified data from employers (via integrations to e.g., payroll, accounting and HR software). Crypto-powered verifiability solutions like Opacity widen the aperture of potential data sources to any web2 platform—even consumer-focused ones that employers have no access to. For example, frontline employees could earn boosted points for using Fitbit or Apple Health data to prove they got >8 hours of sleep the night before a double-shift.

3. Points Redemption. Offchain points are pretty uninteresting: the only thing you can do with them is exchange them for gift cards. Onchain points are much more interesting: they are effectively a tokenized claim on an employer’s promise to offer performance-based incentives to its workforce in the future. DeFi enables onchain points to be instantly traded / borrowed / leveraged / securitized (points backed by credit-worthy companies with a strong commitment to performance-based pay will be valued higher, all else equal, than points without those qualities). All this drives a better, fairer experience than gift cards for employees who deserve control over their hard-earned rewards. To give a sense of the scale, Starbucks - one of the largest gift card issuers - generates (or steals—depending on your perspective) $200m/yr from customers whose gift cards ‘expire’. That represents 14% of Starbucks’ outstanding gift card balances that go unused each year, which is effectively negative interest paid by customers for the privilege of enhancing SBUX shareholder returns. Crypto fixes this!

If you’re working on new ways to incentivize and compensate frontline workers, reach out on twitter @danconia_crypto or telegram @salgala 🌎️