Web3’s Not So Secret Weapon

The open secret to?Web3’s?growth is its power to manifest self fulfilling prophecies. How? By enlisting?Mission Driven Users (MDUs).

Let me elaborate with a thought experiment.

The A Side

Imagine you, my esteemed reader, have a start-up idea. You want to disrupt Fiverr. You want to do that by setting up another talent marketplace that charges less than half their take-rate on transactions (10% vs Fiverr’s ~25%). How? Your plan is to only use incentivized referral programs to attract both the talent and the clients to your marketplace. Your bet is that you can then minimize spend on other sales and marketing and?voila: your blended CAC is slashed.

Well, you’d be unlikely to progress much further than a ppt deck. Incentivized referral programs are now?standard practice. You won’t crack a sustainable advantage with them, even IF you manage to solve the cold start problem.

You would have a tough time convincing investors. Or even entice your discerning users with a lower take rate promise.

The A side is a no-go from the start.

The B Side

In walks?web3.

"Web 3 is the internet owned by the builders and users, orchestrated with tokens."

Packy McCormick

You can now use code to reward?governance tokens?(closest thing to equity in web3) in exchange for valuable user actions. At scale!

So you take your deck and update it. Instead of selling equity to investors and using the proceeds to fund your referral program; you bypass the middleman and offer the equity directly to your user base. For every successful referral, they now receive a small fraction of the equity in your marketplace. Seems like a subtle change at first. You wonder if it would even fundamentally change your unit economics.

Yet, the B-side uplift could be profound.

The Uplift Hypotheses

To start with, you now have a powerful narrative to rally your users:?a low-cost marketplace owned and governed by those who help create it.

Much more moving than?“I will offer you 10% instead of 25%”.

When your users buy into your vision, they pay more attention to what they can do to help you. Not solely out of the generosity of their spirits. They know that helping you earns them your equity. And?access?to your early stage equity is worth more to them than cash. They can unlock asymmetric returns that until now have been inaccessible to all but a selected few founders and VCs.

The narrative, the agency and the motive are the three powerful ingredients that give you your secret weapon: Mission Driven Users (MDUs).?MDUs are like the first hires at a mission driven company. They go above and beyond base expectations:

• MDUs dig much deeper into their contact books and spend much more social capital to promote your marketplace compared to normal users.?Braintrust?- the first user-owned talent marketplace (and one of the most intriguing non finance web3 projects) - has created a global community of?700k freelancers?(pending confirmation) and $35m in gross service volume run rate one year after launch with “zero marketing dollars spent outside their referral engine”. And they already have enterprises like Goldman Sachs, Nestle, and Nike working with them (though credit for these also goes to the experienced?founding team)
• MDUs are stickier and more forgiving on their path from sign up to ‘Aha Moment’ to habit formation. Look at the passion with which the Ethereum developer ecosystem perseveres despite persistent challenges around?scalability, cost and volatility. Keeping with the Braintrust example, the “website feedback” channel on its?Discord Server is filled with constructive feedback from its 45k members. Think about the probability of you giving detailed and continuous feedback to a young start-up you’ve tested as a user, when there are plenty of existing alternatives!
• MDUs may even contribute to the operations. In Braintrust, community members participate in day to day operations by?vetting talent, creating L&D content, or even contributing code to the development of the platform. Bounty programs, where token prizes are offered for completion of a specific project by the community, are standard practice in web3. Key advantages of bounty programs compared to typical crowdfunding projects are (a) deep familiarity of participants with the project and its context; and (b) alignment of the participants interest with the outcome of the project beyond a one-off transaction

In short, MDUs can reduce your CAC, increase your LTV and improve your operating leverage. You just might be able to slash your take rate after all.

Your marketplace is starting to look disruptive. But..

A few ifs and buts remaining

Before rushing out to start your user owned marketplace - there are a few points worth considering:

1. Equity incentives might not resonate in all corners of the market.?A more risk-averse user persona (e.g. some management consultants based on my recent user interviews) or users with more immediate financial needs (eg?ride hailing drivers) may put more value on cash today than the equity you offer them. If cash is worth more to your users, it would be harder to align incentives for the long term and beyond an initial transaction. And financial user incentives may not be appropriate at all in some corners: enterprise users or public sector employees
2. The MDU effect may wear off at scale.?When your tokens are accessible by everyone and you’ve scaled to a certain point; your MDU effect is likely to get?diluted. Your users no longer have privileged access to the upside. And the upside is more limited now anyhow. And they will have less incremental impact in helping you grow further. At some point owning a Braintrust token will not be dissimilar to owning a Fiverr stock with more influence. So you would have to make sure you have other growth engines in place by then to sustain your advantage
3. Tokens are not free.?Tokens can be many things: utility tokens (similar to loyalty points, usable within the ecosystem) or governance tokens (similar to equities and tradable for cash usually). They are not cash out. But they are not free. The former has an opportunity cost of lost revenue in one way or another. The latter is the equity you have sold to your user instead of an investor. The challenge you will face in both scenarios is that it is very difficult for an early stage project to put a dollar amount on these and make informed decisions on your spend
4. Your valuation becomes a compounding loop.?As your valuation grows, your MDUs are more incentivized to help you grow, and their actions help grow your marketplace which in turn leads to your valuation increasing. A virtuous cycle that’s missing in traditional companies. But the reverse will also be true. Crypto market trends push your valuations down. Your MDUs may become less inclined to earn your tokens. Your growth engine slows. Your marketplace is now worth less. Your MDUs are even less excited to help you grow the marketplace. The way you design your?bonding curve?can amplify or dampen this compounding factor
5. Token issuance could become more strictly regulated in the US.?There is some uncertainty about what type of token would the?SEC consider an equity. The stricter the SEC’s interpretation of the Howey Test vis-a-vis token issuance is, the more cost prohibitive it would be for you to use tokens as an answer to your cold start problem

Should you be taking this experiment?

All that said, will your marketplace be as disruptive as your pitchdeck claims? The answer is a very confident: maybe! Nuance is definitely less exciting, but hopefully more compelling. Here’s a checklist that might help you assess if your marketplace lands on the ‘yes’ side of the spectrum:

• Is equity (ie promise of asymmetric returns at a future date) a meaningful incentive for your users?
• Do you have a compelling narrative to capture their imagination? Why should your distributed marketplace exist?
• Do you have a clear set of actions they can perform to help (and earn your tokens)?
• Do you have some initial ideas on how to sustain an edge once you scale and your MDUs naturally transition into being just ‘U’s

Tick these boxes and dive in. Start a user owned marketplace (here’s a?prioritized list) or just explore the web3 technology. Don’t be put off by all the headlines about price speculation (and manipulation). Web3’s potential for designing new value props, business models and growth strategies is exhilarating. It goes far beyond crypto’s use case as a digital currency. And the technology is starting to catch up to what we need to support scalable user applications.

If like me, you are new to this universe of web3, and are interested in learning more, here is a non-exhaustive list of resources I have found very helpful in the past couple of months:

• Videos:?Andreessen Horrowitz Crypto Start-up School
• Books:?Token Economy,?Blockchain Basics, or?The Infinite Machine
• Discord:?SeedClub
• Essays: Packy McCormick’s Essays on?Ethereum,?Solana, and?DAOs
• Podcasts:?The Defiant?or?The Bankless

Credits

• Special thanks to folks who read and gave me feedback on the early versions of this article: Mark C.; Alireza R.; Jafar O

This article was originally published on Mirror.xyz on October 6th 2021