Token Gating Explained

Token gating is a method web3 projects use to provide their followers with exclusive benefits. Combined with the security and transparency provided by blockchain, token gating contributes to a deeper connection between creators and their audiences.

This article aims to explain how token gating works, what benefits crypto projects and their communities can get with its help, and highlight some of its most popular use cases.

Key Takeaways

• With token gating, blockchain projects limit access to exclusive features or products.
• The transparent nature of blockchain makes it possible to verify that users possess specific tokens. Smart contracts, in turn, provide them with access to different perks automatically.
• Thanks to token gating, projects can increase customer loyalty and monetization. Users, in turn, earn rewards and get access to exclusive content.
• On the other hand, token gating cuts off a large share of users and creates cost barriers. Also, the volatile nature of cryptocurrencies makes the whole process unpredictable.
• Token gating use cases include premium access to specific content, loyalty programs with VIP perks, tickets to various events, and incentives for students of online courses.

What is Token Gating?

When something is limited, our wish to possess it always grows, doesn’t it? This is the psychological trick marketers use to boost the interest across the target audience.

Token gating relies exactly on this trick. It is a way that blockchain projects use to limit access to specific features or products and thus grow their audience.

Perhaps, the most popular example of token gating is when “holders only” gain access to exclusive content, a right to attend specific events, or a possibility to participate in private discord channels.

In such cases, tokens are the keys that help users access all these benefits. Projects, in turn, reward supporters and increase hype around their products.

How Does Token Gating Work?

Token gating requires a user to possess a digital token on a specific blockchain such as Ethereum or TRON. This token can be fungible like any ERC-20 or TRC-20 tokens, or non-fungible (NFT).

A project that uses token gating creates a smart contract that operates under the following conditions:

1. A token holder connects his or her wallet to the dApp of the project.
2. The wallet requires signing a gasless transaction for verification.
3. The signature proves that this particular user owns the private keys of this wallet.
4. The transparent nature of the blockchain enables the project to identify if this wallet stores the required tokens.

After that, the smart contract automatically provides users who possess these tokens with access to whatever perks the project offers.

Token Gating Advantages

Token gating provides a number of benefits both for businesses and for their customers. 

Pros for businesses

• Increased token utility. With the help of token gating, crypto projects can provide token holders with exclusive content or services. Thus, they can enhance user engagement and, at the same time, increase the value of their tokens.
• Monetization opportunities. Token gating can help projects generate additional income by selling premium memberships or exclusive access to specific features or products.
• Security. Backed by blockchain, token gating contributes to a more secure access control making sure that only verified users have exposure to specific features.
• Increased community loyalty. With token gating, projects can build a more loyal community by cutting off users with a lower level of engagement.

Pros for users

• Exclusive access. Token holders get access to premium content and features that are not available to anybody else. 
• Incentives and rewards. Holders of specific tokens can benefit from higher staking rewards.

Token Gating Disadvantages

Despite all these advantages, there are also a few concerns to keep in mind. Here are a few negative aspects of this tool.

Cons for businesses

• Limited accessibility. Token gating created additional barriers cutting off a huge share of users who would otherwise get engaged with the project’s products.
• Volatility. The fluctuations in the token price can harm the predictability of access to gated features and content. What’s more, it can result in users’ dissatisfaction and make them eventually churn.

Cons for users

• Cost barriers. On the internet, most of the content has always been free. This is something that the majority of users are accustomed to. Therefore, the necessity to pay for specific features can alienate many of the project fans.
• Liquidity problems. Users may find it challenging to sell such tokens on the open market due to their narrow application.

Token Gating Use Cases

Crypto projects have widely adopted token gating for the sake of all the benefits it provides. What’s more, a whole bunch of token-gating tools have emerged to make developers’ lives easier.

Yet, the use cases of this technology spread beyond blockchain-based ecosystems. Here are some of some examples of how token gating can be applied.

Premium access to content

Artists, musicians, and other content creators can use token gating to grant access to unreleased tracks, specific videos, private concerts, and other exclusive media.

For example, in March 2021, a Canadian musician Grimes used the token gating technology to sell exclusive visual content and music. Eventually, the solution helped her earn close to $6 million in a matter of 20 minutes.

Membership and loyalty programs

With the help of token gating, retailers can implement loyalty programs granting their customers additional discounts, early access to sales, or exclusive products. Private clubs can make use of this technology, too, by providing token holders with VIP membership access.

Thus, Starbucks which has long been known for its passion for Bitcoin, released an NFT-based loyalty program in 2022. With its help, Starbucks’ customers and employees got an opportunity to purchase and earn digital collectibles that provided them with “new benefits and immersive coffee experiences”.

Event ticketing

The organizers of concerts, festivals, conferences, and other events can issue tokens that act like tickets providing their holders with access to these events.

Here are some examples of real-life events that have already made use of this technology:

• Coinbase released NFT merchandise granting VIP access to the Governors Ball Music Festival.
• The music and arts festival conglomerate Coachella partnered with OpenSea to release NFT collections granting virtual and real-life VIP experiences to their holders.
• An independent pop artist Thomas Pipolo launched NFTs as a part of his crowdfunding campaign. The tokens also acted as backstage passes with the most expensive ones granting their holders free entry to his concerts for a lifetime.

Online education and courses

E-learning platforms and educational institutions can limit access to the materials they provide via token gating. Students with specific tokens at hand can access exclusive courses, webinars, e-books, etc.

It may take a while for traditional universities and colleges to adopt this practice. Yet, many blockchain-focused educational projects rely on this technology from the very start. 

For example, students at LearnWeb3 earn Polygon-based NFT badges for completing different courses. 

Another educational platform BitDegree incentivizes its students with tokens that open access to specific materials.

Bottom Line

Token gating is an innovative tool increasing the connection between projects and their followers. By offering unique perks to token holders, projects create a sense of exclusivity and increase the engagement of their audiences.

Although such an approach may alienate a huge portion of users, those who remain usually prove to be the most dedicated fans. Thus, token gating acts as a filter that helps projects find the gems in their user bases and cut off all the rest.