Why Incentivized Testnets Set Protocols Up for Success

Proof-of-Stake (PoS) blockchains have become increasingly popular in recent years, evidenced by (1) the transition of Ethereum from a Proof-of-Work blockchain consensus mechanism to PoS, (2) the growing Cosmos ecosystem (PoS L1 appchains), and (3) other new PoS L1s on the rise (Aptos, Sui).

Given that PoS consensus mechanisms are dependent on a network of validators, this presents two key challenges for projects when launching their network:  

1. In-house testing conveys minimal value if the network is dependent on a set of decentralized external stakeholders performing consensus; and
2. Nodes can be costly and take meaningful skill and effort to maintain

Consequently, this trend has contributed to the rise of incentivized testnets—first pioneered by Cosmos in their Game of Stakes program—as a mechanism to test blockchains in a decentralized and risk-mitigated manner before officially launching core functionalities.

So what exactly is an incentivized testnet, how are they typically structured, and what are some key considerations for running a successful program?

Let’s dive in.

1. What is an incentivized testnet?

An incentivized testnet is an (often gamified) program where external validators, developers, and other users are encouraged to utilize and participate in testing a blockchain network in return for rewards.

Historically, the primary use case of incentivized testnets has been to test Proof-of-Stake infrastructure. In this context, a successful incentivized testnet program enables protocols to

(1) bootstrap a robust network of node operators to help guarantee network stability and sufficient decentralization at launch, and

(2) simulate a decentralized PoS network to test the underlying infrastructure and identify bugs/issues.

Since node operation requires time, money, and know-how, the core team allocates rewards (most commonly in the form of the protocol’s native token, or stablecoins) to incentivize participants.

Recently, incentivized testnets have also begun to evolve beyond testing staking and validator infrastructure and have found alternative use cases. Projects today are able to incentivize the testing of a whole host of features and functionalities, from smart contract deployment to governance voting, trading, cross-chain infrastructure, security measures, and general protocol use.

2. How should teams think about structuring an incentivized testnet program?

While incentivized testnets vary in size, purpose, and timeline, several thought exercises may be helpful for consideration when ensuring a successful, properly incentivized testnet program.

Define the program purpose

Incentivized testnets can be implemented with a variety of goals in mind. Identifying the most critical components of the protocol to test in a decentralized manner is a great starting point for honing in on downstream considerations such as the size of the program, eligibility requirements, and success criteria. While the majority of programs have focused on the performance and security of node infrastructure, other purposes may also be suitable for testnets.

For example, trading/lending protocols have also utilized testnets to educate early adopters and test the performance and functionality of their exchange and lending + borrowing mechanisms. GravityDEX’s program successfully recruited over 11K traders to not only test the DEX’s ability to create market efficiency and ensure adequate liquidity, but also identify critical bugs that were fixed prior to official launch.

To provide an overview of notable examples:

Determine program eligibility requirements

Eligibility requirements ensure that applicants must meet a minimum bar in order to participate. For validators—hardware requirements for node operation, previous validator experience signaling technical competence, or even geographic diversity ensuring wide node distribution are common considerations to curate testnet participation. Conversely, ensuring sufficient participation may also be an important consideration to allow adequate decentralization of the network (e.g., historical programs have ranged from below 100 to more than 2.8 K participating validators, with other participant types like stakers, developers, or traders uncapped).

Programs testing exchange functionality and borrowing/lending protocols like GravityDEX, Umee, and Sei Network are less stringent (and in some cases have an educational focus), as participation confers lower risk vs. node operation and rewards can be capped based on performance.

Lastly, KYC is almost universally a requirement for incentivized testnet programs as a precautionary measure for the compliant distribution of testnet rewards and the prevention of Sybil attacks from interfering with the program (which can sometimes still occur —see Cosmos Game of Stakes).

Design the program and incentivize the right behavior

Perhaps the most important aspects of incentivized testnets are the program design and the implementation of rewards to ensure: (1) comprehensive testing of all functionalities and (2) allowing participants (i.e., the community) to gain appropriate experience in preparation for mainnet.

Incentivized testnets are commonly separated into phases or stages to allow focused testing of various network components in piecemeal fashion to ensure comprehensiveness. For example, the Sui testnet is divided into at least three stages—first focusing on validator set-up and code deployment, then economic mechanisms (e.g., staking delegation) and DeFi primitives, and finally validator performance. Nevertheless, testnet timelines frequently prove to be unexpectedly long, highlighted by Solana’s Tour de Sol, which was originally planned for three stages over 3 - 4 months but lasted ~14 stages over ~1.5 years.

Testnet rewards are most frequently issued in the form of the native token following mainnet launch (stablecoins may be used as an alternative), with many recent projects like NuCypher and Sei Network allocating ~1% of total token supply to their testnet programs.

Rewards often fall into two categories—milestones/task-based and performance-based. The former compensates participants based on the completion of specific tasks or the identification of critical bugs/issues, and can be effective for performing targeted stress-testing of specific features. On the other hand, performance-based rewards (e.g., validator uptime, trading performance, or maximizing TVL) can aid protocols in bootstrapping community experience, which will be invaluable at network launch.

Lastly, another consideration is whether the testnet should be adversarial (where participants are pitted against each other) or cooperative. Adversarial programs are highly competitive and encourage participants to coordinate attacks (within certain bounds) against each other in order to stress-test game theory mechanics, and can be crucial for validating network durability in the face of eventual bad actors.

Extend testnet success to mainnet

The importance of community curation to a launching project is a theme we’ve consistently highlighted in previous blog posts. In a similar vein, the community built and experience acquired from a testnet program are critical levers that can further ensure network excellence from Day 1.

Validators gain vital operational experience, developers become familiar with available tools and documentation, and community contributors develop educational content and support systems—all of which are critical for bootstrapping a high-quality community. Continuing to actively engage with testnet participants even into mainnet launch ensures the community sticks around.

For example, Oasis issued more than 20 grants as part of the testnet program to further incentivize the development of tooling. Solana Foundation offered Tour de Sol validators the opportunity to receive a delegation of tokens from the treasury.  Other projects like Cosmos and NEAR have held multiple testnet programs over several years as a way to continually engage with the community for incentivized testing purposes.

Closing

Incentivized testnet programs are not insignificant undertakings—they require substantial operational overhead, active engagement with and education of the validator and developer communities, and typically last from weeks to months. Thoughtfully designed testnets, however, can prime projects for launch and help bootstrap quality communities even before mainnet is live.

CoinList is dedicated to helping projects streamline their processes and fulfill compliance requirements, so that teams can focus on building and engaging with their communities. Our services include providing KYC checks, and, where available, facilitating testnet reward distributions and managing asset custody—not to mention sourcing participants from our vibrant community of validators, developers, and crypto-native users.

To learn more about how we can best support your incentivized testnet, reach out to us today.

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