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 Web 3 Economics: Value to Users
Happy May! 🌹🌸💐 hope you had a great weekend!
If you’ve been following all the buzz in Web 3, you would have heard of “tokens.” It’s a fairly complex topic, and today we look at how a token model incentivizes users differently than traditional Web 2 models.
We will write more posts on the topics of Tokens and Cryptoeconomics, since there are so many angles we can take with such a foundational Web 3 topic. But we have to start somewhere!
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Early Users and Super Users
As a user, customer, patron (or whatever you want to call it) in the traditional world (Web 2 and before), your relationship with a company, supplier or simply the person / entity selling you the goods or service was merely transactional.
It works like this:
Company X offers to sell you a product and service, and you pay whatever the price is to acquire that good or service.
After that transaction has taken place, you both move on with life.
The next time you come back as a user, you pay for it again, but it’s still just transactional. Other models like subscriptions have different mechanics but are still largely transactional (you pay for something, you get a product or service).
There isn’t necessarily anything wrong with this picture, but we wonder if there is some under optimization in this system.
In the current system, a business’ relationship with their users is largely all the same, regardless of which type of user: early user, super user, average user.
Let’s further explore this by first defining Early Users and Super Users.
Early User: they adopt a product earlier than anyone else. These are the users taking a bet on a nascent product for one reason or another. They are your earliest believers.
Super User: they keep coming back to your product and service over and over again. They are likely evangelists of your product and tell others about it… they are your biggest fans.
In the current startup / company building model, the story goes something like this… founders have an idea, they build a product, they raise money from investors to build the company, they acquire users and they sell the product to the users (ideally for more than what it cost you to build it). You spin this flywheel over and over until you build a massive company and everyone goes home happy.
Wait… does everyone go home happy? … well… not necessarily.
In this example, the founders, investors and (early) employees participate in an outsized outcome, but do the users (especially the Early and Super users) get their fair share?
And fair is of course subjective, but something about this picture feels off.
Your Early Users and your Super Users… effectively your earliest believers… had no mechanism to participate in the upside and value creation of the company. Whether the startup becomes a 1BN company or a 100BN company, the users have the same outcome. But what about things like loyalty programs, you might ask — aren’t I rewarding my users? If you have to ask the question, then probably not… remember in a 100BN outcome, is the loyalty program worth even a percent of a percent of that?
In the above picture, users are merely a cog in this ecosystem.
Let’s unpack this ecosystem further and talk through some mechanics, and in doing so, maybe we can get some ideas on how to change (and even optimize) this ecosystem.
Startup Co raises $xM dollars from VCs. Founders are giving up equity to investors in exchange for money. But what does Startup Co do with that money?
Startup Co has two big costs, Product Development (largely employee salaries, which are lower than average because of equity upside offered to employees) and Go-to-Market costs. In a consumer / user driven startup, a large part of this is customer acquisition costs or CAC.
Startup Co spends money on CAC… with the goal to acquire users. Startup Co does this by buying ads, paying ad platforms (that take a cut and have ever-increasing costs because of limited internet real estate and increasing demand from other startups) to serve ads to prospective users.
So effectively, Startup Co is giving up some equity to acquire users, but the users don’t see any of that equity, i.e. users don’t participate in any of the upside economics.
Startup Co is also fighting a battle of increasing costs on ad platforms to just capture a moment of a user’s attention. And even if you acquire the user, they might end up leaving, or worse, they see the ad but never click on it, and you still have to pay for that cost. And remember in some sort of roundabout way, Startup Co is paying with equity to play in this system (it just goes through a lot of layers that makes it feel like you aren’t).
And if you believe you are building a big company, it feels pretty expensive to pay with equity (in a system with increasing costs) for users that may just churn... But given you are an early company with nothing more than a big dream and some nascent product, it’s unlikely you can get around paying with equity.
Okay, so what?
Token Based Economies
What if there was a mechanism to just give the equity (or value capture mechanism) to your users and cut through all the middlemen in this ecosystem? If Startup Co believes in rewarding their Early Users and their Super Users, then couldn’t giving them equity extend their LTV (lifetime value) and all the things that come with it?
Enter Token based models and Web 3’s big experiment with tokens.
The simplified logic goes something like this:
You launch a project and you want users to take a look at your product, provide feedback, contribute to your project, evangelize your project by telling others about it… all the while, hopefully the user is getting some utility from using what you’ve built (even though it’s early).
Since you are asking a lot from your users in this example, you should be incentivized to incentivize them because having a bunch of users contribute en masse to your project will create value.
For users who exhibit certain behaviors or who fit certain segments (e.g. Early Users, Super Users), you airdrop them tokens for their early contributions.
This gives the user an opportunity to participate in the upside or future value that your project creates.
So here is the big idea: The above model blurs the line of what it means to be a “user” and instead potentially turns the user into a “psuedo-extended team member” or community member, where they have an economic incentive to help grow the project.
Because now that a user can also be a token holder, they (just like the project founders) also want the token value to increase… the user can actively influence the value of the token by contributing to the project.
Let’s look at a simple example: You are a user and you stumble upon a really awesome, but early and nascent product… but you love the product.
Before token based models: the user is at best interested to tell other people about the product out of some intrinsic interest… but they weren’t really (economically) incentivized to do so.
With a token based model: the user is now incentivized to tell other people because it may literally accrue value to an asset they hold (e.g. a token in the project).
NOT saying all users will behave this way if given tokens!
But token models are interesting to explore in terms of incentivizing Early Users and Super Users.
Early Users and Super Users by definition probably want your product and platform to succeed above the average user on your platform, otherwise they would just be average.
Why not reward this behavior by giving them upside and making them superheroes on your platform? Instead of fighting a race to the bottom of a digital marketing game that doesn’t reward users or make them sticky… can you flip the script and reward your users?
And while the founders are still ultimately paying with equity (just like under the status quo), tokens might end up becoming a win/win situation for both parties: instead of paying an ad company to acquire new users, founders are now paying existing users to serve as champions. If all goes well, arguably this investment could go further than the status quo because it’s in the best interest of Early and Super Users to create future value (their tokens will be worth more if Startup Co takes off). Everybody’s interests are aligned.
This matters because humans need better than the status quo to actually change. If founders are just moving money from one bucket to another for limited value, tokens aren’t worth it.
So….. is the juice worth the squeeze? 🍋
Of course, this can/does get complicated: how do you reward Early Users, how do you reward Super Users? Like most things, the details are important, but logically we can think about this with curves.
Maybe for Early Users, the earlier a user joins, the more they get rewarded and each incremental user that joins gets a little bit less until Startup Co feels like they have gotten enough users to offer an insignificant amount of upside.
Super Users have a different curve: as the user proves they are using more of your product, buying more of your product, evangelizing more of your product, you can reward this type of behavior.
These are just high level and illustrative examples of what is possible with a token model that includes your users.
No one size fits all
A token based model will NOT improve a poorly designed business model and ecosystem. If the underlying product, service and community isn’t well thought-out, a token based model will just accelerate the poor design, and you might end up getting behaviors where users farm your project’s token, sell it and move on.
The misconception in Web 3 is that you can add a token to everything and all of a sudden it’s going to work. That is nowhere near reality…
The hard work isn’t in implementing a token model, the hard work is in designing an ecosystem that can be powered by a token where all stakeholders (users included) can create value together and then capture the value created.
All of these concepts are still works in progress and will likely evolve many times before different projects and communities find what works for them.
What works for one project or ecosystem may fail terribly for another. What models work today may also crash and burn tomorrow.
We are early. Web 3 is early.