#4: Tokens are eating the world and why Web3 is here to stay

We live in times of unprecedented uncertainties. While the Covid #pandemic is not an issue anymore, the consequences of the war in #Ukraine continue to affect the economic situation in the West, destabilizing Europe, distorting the global balance of power and leading to a global nutrition crisis. Supply chains remain under pressure, prices for natural resources skyrocketed, wealth gaps are widening, and the everlasting dream of never-ending globalization seems to be coming to an abrupt end. The new term circulating around media these days is hyper-regionalization. Some have seen that coming, the most have not.

At the same time, expansionist monetary policy, particularly during the Covid Pandemic, has triggered an increase in inflation in the EU and the US at unprecedented pace. Global economic growth is weakening, posing challenges for investors, policy makers, and of course, the global markets, with the NASDAQ down 25% and the total crypto market down ~70% from their respective ATHs (July, 2022). For many critics that signals the end of the “hype” around the vision of #Web3.

It is 1995

In fact, that vision has just started to unfold. We are witnessing the birth pangs of a new technology reshaping the way digital business is done. The assets empowering these ecosystems, which we call crypto-currencies, in fact are stem cells of innovation. Owning a crypto asset is like owning a stock in a growing ecosystem on the basis of which projects are realized that create real world value and hence, revenues and profits. The ecosystems sell blockspace and serve as a virtual mall for vendors from all digitally related verticals to plug into. But as these ecosystems unfold, of course there are challenges to overcome and trust to be built. Consequently, they are more volatile as asset classes than others that have been around for decades.

In 2023, the market situation for Web3 is special, as the crash was also caused by the systemic failure of some relevant market movers (Terra LUNA, Celsius, Voyager, FTX). The misconception that arised from these developments is that decentralized finance has failed. But this conclusion is entirely wrong. It is?centralized finance?that has failed, with startup banking entities like Celsius that got overleveraged. Decentralized Finance protocols worked perfectly well, and continue to do so. Misconceptions and misunderstandings are part of the innovation cycle we are in. The toxic mix of industry events and macroeconomic downturns poses a tremendous stress-test to the industry. But despite these market conditions, the Web3 industry is continuing to see constant growth. While the fundraising environment for Web3 founders is extremely challenging, the current stress test as already cleaned the market - and continous to do so, wiping out the bad seeds - and many of the good projects that will survive and succeed will come out much stronger than before. I am convinced about that for the following reasons:

1. If we assume that the internet is not going away, than we can assume that it will continue to evolve into the Web's third iteration.
2. Despite the downtrend in valuations, the business fundamentals have not changed at all and Web3 adoption is continuing to follow the patterns of the early internet in terms of usage.
3. The value proposition of Web3 business models is becoming increasingly clear, with concrete cases being build by institutional players.
4. The industry sees a massive inflow of talent that see the challenges of the industry as massive opportunities.
5. Opponents of the space have become proponents. Black Rock, Fidelity, Schwaab, Citadel, Deutsche Bank - all these entities are endorsing cryptocurrency, or at least, Bitcoin.

For the last 7 years, Web3 adoption rate has followed the same patterns as the internet in the 1990’s. If the trend holds, reports predict between 1 to 1.5 billion Web3 users by 2027. That is at least a 5x increase from today’s estimate of around 200 million users. If the mid-term vision unfolds, 10% of the world’s GDP is expected to be stored on public blockchain technology by 2027. That would be a market of $13.4 trillion USD. Tokenisation will play a key role in unfolding that vision. It could be Web3's super app.

Tokens: New mindsets to unlock huge potential

Web2 has enabled user generated content and a platform economy, but at the cost of these platforms gatekeeping the ecosystems that provide the content. Centralized platforms are what defines the current era of Web2, and for good reasons: Platforms like Amazon, Facebook, Ebay and Twitter are the Go-To-Market response for businesses in this era of the internet. The vast majority of value accrues to these platforms, not to the users. They combine a number of intermediary services, and this way justify their take rates. For them, it is tremendously important to significantly invest in sales and marketing, to generate leads and retain customers. One infrastructural challenge of the internet as we know it is that it is build around exactly that — Marketing. Ownership and value in Web2 does not play a significant role.

These platforms match supply and demand. But not only that, they are using the users as products, all in pretty much the same way. A user enters the platform, usually for free. The platforms takes the data, not rewarding the user for the fact that they provide it. The platform sells the data to advertisers, who then again target users with advertisement. The platform takes the bulk of the advertisement share.

Web3 can change these approaches significantly. Why? Because it promises to be a trustless, transparent ecosystem with as few intermediaries as possible. In many way, Web3 is a deplattformization, allowing for platformless communities. If communities can thrive without a platform, fundamentally, all value accrued belongs to the community. The cake may not get bigger, but it will distributed among those who create value, in oposition to those who capture it by serving as intermediaries.

Web3 intends to be an internet of value, instead of just being an internet of information and communication. The new digital primitive to achieve this goal is known as?tokens. Tokens change the logic of digital business. They can represent scarcity, they can represent a means of measurement, they can represent a reward. By buying a token, customers are becoming part of an ecosystem.

Platforms like OpenSea and Coinbase are exactly that. They are not selling tokens per se, they are providing access into ecosystems and communities — the product they sell is called belonging.

A snapshot of what is to come

As the technology is just starting to unfold its potential, there are only a few players to look at in order to validate this thesis at the moment. But the numbers that we have at hand are astonishing to say the least. In the content industry, Web3 proves to be much better for the creators than Web2. The instrument Web3 uses is tokens.?I have elaborated on the mechanics of NFTs for the content industry in previous articles, and the numbers proof the point of that logic. As a16z’s recent crypto report points out, Web3 platforms have drastically lower take rates than the internet giants today. OpenSea’s take rate is at 2.5%, compared to 30% of the Apple Store, 45% for YouTube and almost 100% for Facebook, Twitter and Instagram.

“You know something is profoundly wrong with our economy when Big Tech has a higher take rate than the mafia”

If you look at revenues created by different sources, NFTs offer creators a whole new way to monetize directly with their fans. The average payout per creator on OpenSea in 2021 was at USD 174,000, vs. USD 636 per artist on Spotify, USD 405 per channel on YouTube and 10 Cents per user on Facebook. Note that the “k” is missing behind these numbers. What do these numbers tell us? Web3 is still small, but it is extremely powerful. For the content industry, NFTs are part of a new business logic that introduces the concept of provenance to the digital world and ultimately, rewards creators for creating a community, and they reward communities for keeping themselves interesting.

The concept of Web3?fundamentally challenges the current way businesses operate and even go to market, as it shifts the priorities. The traditional approach to get started is investing in traditional marketing to entice and acquire new customers.?Tokens offer an alternative to boot-strapping networks. Instead of spending funds on these traditional tools, core developer teams can use tokens to bring in early users. The reason they are joining is the underyling reward mechamism. Early token holders will be rewarded for their early contributions when network effects weren’t yet obvious or started — that is true for devs, but also for community managers, investors, partners, and other types of supporters. Tokens make early contributors evangelists who bring more people to the network. This mechanism of community makes early users in web3 more powerful than the traditional business development or salespeople in web2. In a sense, it disrupts the current risk-reward ratio. Tokens hence can be seen as shareholdings with governance power. When you buy a token, fungible or not, you join a community. Tokenization disrupts the strategies of starting an online business in the future.

There is no one size fits all

Speaking about ecosystems and tokens, I often hear the following question:

“How do I know which ecosystem will be winning? What if I buy ADA, ETH, and AVAX, but Algorand’s ecosystem will be the one that is used?”

The answer for the ecosystems is the same as the answer for the business models. There is no one size fits all solution, but there is frameworks that can be established. We should not forget that the things we call cryptocurrencies are stem cells that incubate their own ecosystems. So the way they are individually architected might offer advantages for some, and disadvantages for other usecases.

I like the way Maggie Hsu from Andreessen Horowitz as described it in an article on Web3 mindsets, tactics and metrics:?“The biggest mindset shift is moving from planning to something more like gardening”.

Web2 companies are guided by a top-down vision. It’s the founders (and to some extent the investors) that carry the entire responsibility for defining a vision, growing a team and planning and executing against that vision. In Web3, founders are gardeners. They set up the space for the cultivation of ideas, and they help nurture products they deem successful. They provide the initial governance structure, usually in the form of a whitepaper, but at the end of the day, founders optimize for protocol usage and quality of community. These ecosystems are much less hierarchical, much more democratic, and hence, more actors are championing the success of a given project. There is plenty of projects out there, plenty of DAOs that make that concept of distributed ownership a reality, plenty of community initiators that used NFTs to make a community come to life, and of course, many other token-enabled cases that implement the logic of value and ownership.

To stick with the example of a gardner, in Web3 it is about the soil you provide. And while there might be many similarities, there are also many differences about which soil you need to pick, even within the same vertical.

Let us look at the publishing industry for example. Will physical books ever disappear? I personally doubt that. Books have something magical. They use language to create worlds. To lower your pain, to give hope, to educate, to manipulate, to motivate and to sooth. Books initiate a sense of adventure, or a sense of calm. And the tool a book uses is language.

“Language was the first Metaverse. When I speak to you, you create a world in the back of your head. A book is like a token that provides access into a new reality that you create in your mind.” Jamiel Sheikh

That sentence is not only philosophical, it also has some relevant business implications that should be considered. Is an alternative to the book at all necessary? E-Book sales are declining globally, while the market of physical books seems to be quite solid. People will always read, and it is, even for a Web3 enthusiast like myself, absolutely possible that the core business of publishing will not be negatively affected by Web3. But the potential for alternative, additional creaticity and consequently revenue streams is massive. Authors often are thought leaders, companions, idols and coaches, people to look up to and people to learn from. All these assets are what communities are made of. Web3 can be a huge marketing opportunity in the metaverse, it can offer alternative experiences, but a DAO could also decide on how stories are continued — and the community decides that.

Build or be eaten

Business leaders in the future will face many challenges, but one task they should certainly tackle is understanding the potential impact of Web3 on their profit pools, and equally important, the potential new opportunities that might arise. The solutions should be to focus on ecosystems. Those that offer the right ecosystems for their industry have the unique opportunity to disrupt — themselves, and the competition.

Ultimately, there is no alternative, if today’s market-movers do not want to be lagging behind or become dependend. One thing is crystal clear: OpenSea and Coinbase, just to name a few, powerful Web3 brands, have internalized the potential and have their feet in the door of the content industry. They might have the tech-stack, but as of today, the competitive advantage lies with those that own the communities, that understand the business of creation and curation. Tokens are the key to unlock huge potential. If these players build their ecosystems based on the demand of their creators, chances are that they will be better off in a few years than they are today.

Tokens indeed are earing the world. There is a succesfull tokenization based business for almost every imaginable business model. Audius mirrors Spotify, Sorare and TFC mirror EA, Livepeer mirrors youtube, compound in a sense mirrors any large bank like J.P.Morgan, and decentralized messaging services like KIN mirror Whatsapp. The innovation is increasing. The value these businesses provide is immanent. Will they all sustain through the stress of time? Certainly not. But just like the ecosystems they are built on, some of them will. And those that sustain will be huge, and those who are at the table early get the biggest piece of the cake. In that sense: Bon Appetit!