Recent high-profile data licensing deals such as those between OpenAI and News Corp and Reddit underscore the need for high-quality data in AI. Frontier models are already trained on much of the internet—for example, Common Crawl, which indexes about 10% of all web pages, is used for LLM training and contains over 100 trillion tokens. 

An avenue for further improvement in AI models is to expand and enhance the data they can train on. We’ve been discussing mechanisms for how data could be aggregated—particularly in a decentralized way. We’re especially interested in exploring how decentralized methods could help generate new datasets and economically reward contributors and creators. 

One topic of discussion within crypto in the last few years is the idea of data DAOs, or collectives of individuals who create, organize, and govern data. The topic has been covered by Multicoin and others, but the rapid advancement of AI is a catalyst for a new “why now?” of data DAOs. 

We wanted to share our thinking around the topic of data DAOs, in pursuit of the question: how can data DAOs accelerate AI development?

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Data in AI Today

Today, AI models are trained on public data, either via partnerships like the News Corp and Reddit deals, or by data scraping on the open internet. For example, Meta’s Llama 3 was trained on 15 trillion tokens from publicly available sources. These approaches have been effective at aggregating large amounts of data quickly—but they have limitations, both in terms of what data they collect and how. 

First, the what: AI development is bottlenecked by data quality and quantity. Leopold Aschenbrenner has written about the “data wall” that limits further algorithmic improvements: “Very soon, the naive approach to pretraining larger language models on more scraped data could start hitting serious bottlenecks.” 

One way to push out the data wall is to open up availability of new datasets. For example, model companies are unable to scrape login-gated data without violating most websites’ terms of service, and, by definition, don’t have access to data that has not yet been aggregated. There are also vast quantities of private data that are out of reach for AI training today: think enterprise Google Drives, company Slacks, personal health data, or private messages. 

Second, the how: Under the existing paradigm, companies that aggregate data capture the majority of the value. Reddit’s S-1 features data licensing as a major anticipated revenue stream: “We expect our growing data advantage and intellectual property to continue to be a key element in the training of future LLMs.” End users who generate the actual content don’t see any kind of economic benefit from these licensing deals or from the AI models themselves. This misalignment may stifle participation—already there are movements to sue generative AI companies or opt out of training data sets. That’s not to mention the socioeconomic implications of concentrating revenue in the hands of model companies or platforms, without passing a share along to end users. 

The Data DAO Effect

A common thread runs through the data problems outlined above: they benefit from scaled contributions from a diverse, representative sample of users. Any individual data point might be negligible in value to a model’s performance, but collectively, a large group of users can aggregate novel data sets that are valuable for AI training. This is where the idea of data DAOs can fit in. With data DAOs, data contributors could see economic upside from contributing data as well as govern how that data is used and monetized.

What are some gaps in the current data landscape that data DAOs could address? Below are some ideas—note that this list is non-exhaustive, and there are certainly other opportunities for data DAOs:

Real-world data

In the decentralized physical infrastructure (DEPIN) world, networks like Hivemapper aim to collect the world’s freshest global map data by incentivizing dashcam owners to contribute their data, as well as incentivizing users to contribute data via their app (for instance about road closures or repairs). One lens through which to view DEPINs is as real-world data DAOs, where the data set is generated from a network of hardware devices and/or users. That data is of commercial interest to various companies, with revenues accruing back to contributors in the form of token rewards. 

Personal health data

Biohacking is a social movement in which individuals and communities take a DIY approach to studying biology, oftentimes by experimenting on themselves. For example, individuals may consume different nootropics to boost brain performance, or test different therapeutics or environmental changes to enhance sleep, all the way up to injecting oneself with experimental drugs.

Data DAOs could bring structure and incentives to these biohacking efforts by organizing participants around common experiments and methodically collecting results. Revenue that is earned by these personal health DAOs, for instance from research labs or pharma companies, could be passed back to the participants who contributed results in the form of their own personal health data.

Reinforcement learning with human feedback

Fine-tuning AI models with RLHF (reinforcement learning with human feedback) involves leveraging human input to improve the performance of AI systems. Often, the desired profile of the feedback giver is an expert in their field, who can effectively assess the model’s output. For example, labs may seek math PhDs to improve the math capabilities of their LLMs, etc. Token rewards can play a role in sourcing and incentivizing expert participation through their speculative upside, not to mention the global access afforded by using crypto payment rails. Companies like Sapien, Fraction, and Sahara are working in this space.

Private data

As publicly available data becomes exhausted for AI training, the basis of competition will likely shift towards proprietary datasets, including private user data. Vast amounts of high-quality data remain inaccessible behind login walls and in direct messages, private documents, etc. Such data could not only be effective in training personal AIs, but contain valuable information that isn’t accessible on the public web.

However, accessing and utilizing this data poses significant challenges, both legally and ethically. Data DAOs could offer a solution by enabling willing participants to upload and monetize their data and govern how it is used. For example, the Reddit data DAO allows users to upload their Reddit data exported from the platform itself and containing comments, posts, and voting history to a data treasury that can be sold or rented in a privacy-preserving way to AI companies. Token incentives allow users to earn not just as a one-time transaction for their data, but based on the value created by the AI models trained on their data.

Open Questions & Challenges

While the potential benefits of data DAOs are significant, there are several considerations and challenges.

Distortionary impact of incentives

If there’s one thing to be gleaned from the history of using token incentives in crypto, it’s that extrinsic incentives alter user behavior. That has direct implications for leveraging token incentives for data purposes: incentives could skew the participant base and the type of data being contributed.

The introduction of token incentives also introduces the potential for participants to seek to game the system, submitting low-quality or fabricated data to maximize their earnings. This matters because the revenue opportunity for these data DAOs is dependent on data quality. If contributions are skewed, it undermines the value of the dataset.

Data measurement and rewards

Core to a data DAO is the idea that contributors are rewarded for their submissions via token incentives, which over the long run converges to the revenue earned by the DAO. However, knowing exactly how much to reward various data contributions is challenging, given the subjective nature of data value. In the example above about biohacking, for instance: are some users’ data more valuable than others? If so, what are those determinants? And for mapping data: are some geographies’ mapping information worth more than others, and how would such a difference be quantified? (There is active research around measuring data value in AI by calculating its incremental contribution to model performance, but such methods can be computationally intensive.)

Moreover, establishing robust mechanisms to verify the authenticity and accuracy of data is crucial. Without such measures, the system could be susceptible to fraudulent data submissions (e.g. creation of fake accounts) or Sybil attacks. DEPIN networks attempt to resolve this by integrating at the hardware device level, but other types of data DAOs that would depend on user-driven contributions can be susceptible to manipulation.

Incrementality of new data

Most of the open web has already been utilized for training purposes, and so a data DAO operator must consider whether their data set, collected through a distributed effort, is truly incremental and additive to the existing data available on the open web—and whether researchers could license that data from platforms or procure it through other means. The ideas outlined above emphasize the importance of gathering net-new data that goes beyond what currently exists, which then leads to the next consideration: magnitude of impact and the revenue opportunity.

Sizing the revenue opportunity

Essentially, data DAOs are building a two-sided marketplace, connecting data buyers with data contributors. The success of data DAOs thus hinges on attracting a stable and diverse customer base willing to pay for data. 

Data DAOs need to identify and validate their end demand and ensure that the revenue opportunity is large enough, both on an aggregate basis and on a per-contributor basis, to incentivize the quantity and quality of data needed. For example, the idea of creating a user data DAO to pool together personal preference and browsing data for the purposes of advertising has been discussed for years, but ultimately, the revenue that such a network would be able to pass along to users is likely minimal. (As a comparison, Meta’s global ARPU at the end of 2023 was $13.12.) With AI companies planning to spend trillions of dollars on training, the revenue per user for their data could be compelling enough to induce large-scale contribution, posing an interesting “why now” for data DAOs.

Overcoming the Data Wall

Data DAOs represent one potentially promising path to generating new high-quality data sets and overcoming the data wall in AI. Exactly how that comes to fruition remains to be seen, but we’re excited to see this space develop. 

If you’re a builder working in this space, please reach out—we’d love to hear from you.  

Thanks to Matt Lim, Tom Hamer, Anastasios Angelopoulos, Nish Bhat, and Jason Zhao for their review, and to the Variant team for their conversations which contributed to these ideas!

In March 2024, Christie’s announced SOURCE [On NFTs], the auction house’s first onchain generative art collection. The sale comes exactly three years after the digital artist Beeple sold a work of digital art through the same auction house for $69 million. 

It’s a development that would have likely caught the attention of the 20th-century philosopher and cultural critic Walter Benjamin. Benjamin was deeply interested in the interplay between technology and culture, and how each shapes the other. In Benjamin’s era, the technologies in question were photography and film. Today, they’re the internet and AI. 

Benjamin’s work—epitomized in his 1935 essay “The Work of Art in the Age of Mechanical Reproduction”—raises important questions about the intersection of art, technology, and culture. Where does the value of art lie in a time when it can be reproduced at scale? What is the relationship between an original work of art and its copy? How does mass-reproduced art intersect with and impact culture—specifically, politics? 

21st-century technologies both extend and complicate Benjamin’s arguments. The very act of creation can now be digital—eroding the entire concept of “the original.” And with the advent of generative AI technologies, the line between original and copy, author and reproducer, and between reality and fiction, has grown even more amorphous. 

The blockchain brings new dimensions to the discussion on art's value, authenticity, and relevance—and a new resonance to Walter Benjamin’s work. Through ownership tracked via a blockchain, crypto returns the idea of provenance and originality to digital art, restoring Benjamin’s concept of the “aura.” At the same time, crypto renews what Benjamin calls the “cult value” of art, particularly through rituals and traditions that arise from community ownership. And in an era of increasing cultural and political atomization, tokens present new pathways for fostering community cohesion and collective action in ways that both echo and challenge Benjamin’s ideas about the relationship between art and politics. The result is a redefinition of the relationship between art, technology, and culture in the 21st century.  

I: Aura

An enduring question is: what is it about a work of art that makes it special? Why do enthusiasts flock to the Louvre to see the Mona Lisa, or spend millions of dollars on an original artwork when they could see or own physically identical reproductions?

The answer seems to have its roots in the presence of the artwork—its specific existence, the thing that makes it unique from any other work. Benjamin has a word for this quality: the “aura,” which he defines as an artwork’s “unique presence in time and space, its unique existence at the place where it happens to be.” For Benjamin, the aura is intimately tied to the authority and authenticity of the work; in the age of mechanical reproduction, he argues, both the authority and authenticity of art are under threat. 

Benjamin argues that mechanical reproduction erodes the idea of the aura. The concept of the aura is only further complicated by digital (re)production. Art critic Douglas Davis observes in his 1995 response to Benjamin, digital reproduction makes it so that “the fictions of ‘master’ and ‘copy’ are now so entwined with each other that it is impossible to say where one begins and the other ends.” 

Crypto has a unique ability to restore the concept of the aura to art, because it makes it possible again to talk about an “original.” By tracking an artwork on a distributed ledger, crypto traces the provenance and ownership of a digital asset. This ensures that each digital artwork is uniquely owned and authenticated, able to be traced back to its creator’s cryptographic signature, thereby reimbuing digital work with an aura. 

II: Value

Many think about the value of art in economic terms. But Benjamin is equally, if not more, concerned with the cultural value of art, which he separates into two distinct axes: cult value and exhibition value. 

The concept of exhibition value is relatively straightforward. It’s the value of an artwork for its ability to be displayed and viewed in public spaces, museums, galleries, and exhibitions. 

Cult value—which Benjamin refers to as the “original use value” of art—refers to something more specific and, arguably, more interesting. 

For much of human history, art was intimately connected with religion and ritual. There was something mystical and mysterious about engaging with artworks in sacred spaces. “The work of art in prehistoric times [...] was, first and foremost, an instrument of magic,” he writes. Even in a more secular sense, art has served as a conduit for expressing and embodying deeply held communal beliefs, values, and narratives, whether religious, ideological, or philosophical.

Benjamin suggests that, like the aura, the "cult value" of art has waned over time, giving way to the modern capitalist concept of "exhibition value"—that art exists in and of itself, encapsulated by the phrase “art for art’s sake.” The digital age has accelerated that process. Artworks are often evaluated and appreciated solely for their ability to be seen: the more likes or views something has, the more valuable it is. At the same time, the consumption of art has become increasingly individualistic, with consumers engaging with art in isolation, rather than through communal experiences.

Here again, crypto provides a counterbalance. Crypto has the potential to revive the idea of cult value, albeit with a distinctly online twist. Just as traditional art was once intimately connected with communal rituals and beliefs, crypto projects create a sense of belonging and shared identity among their holders. NFT projects like Bored Ape and Botto (a collectively governed AI artist) and even memecoins—which could be regarded as a form of crypto art—have their own rituals, languages, and distinct shared spaces online. That set of rituals may carry an economic valence, which is one dimension of the common interests among their communities. Crypto art is deeply participatory in nature, allowing individuals to directly engage with, contribute to, and shape the cultural significance of these projects, reinforcing their cult value.

III: Politics

It’s tempting to read Benjamin in a purely pessimistic light, as bemoaning the loss of the aura and the ritual value of art in the face of mechanical reproduction. But beneath this apparent lamentation lies a more nuanced exploration of the transformative political potential inherent in the democratization of art. 

Benjamin sees mechanical reproduction as a profoundly democratizing force. He refers to a “tremendous shattering of tradition” and a “contemporary crisis and renewal of mankind” that is “intimately connected with contemporary mass movements.” In a world where the aura of art has deteriorated and exhibition value has replaced cult value, Benjamin argues that the meaning of art becomes grounded in something else: specifically, politics. He uses the example of a photographer in Paris, photographing the streets “like the scene of a crime, stating that photographs “become standard evidence for historical occurrences, and acquire a hidden political significance.” Iconic images can be politically significant, galvanizing action.

Benjamin, a staunch socialist, points out that photography, “the first truly revolutionary means of reproduction,” arose “simultaneously with the rise of socialism,” drawing a direct line between photography’s ability to democratize art and socialism’s promise to democratize politics. For example, photography in the Great Depression drew attention to the plight of workers in ways that built momentum for projects that supported workers. The politicization of art can also be profoundly dangerous—as a Jewish man living in Fascist Germany, Benjamin was deeply concerned with the ways art could be co-opted by totalitarian movements to hijack and manipulate attention and perception for their own agendas (see: Leni Riefenstahl’s Triumph of the Will). 

The age of digital reproduction has given us some extreme examples of art’s political implications. For example, there is the proliferation of memes surrounding the campaign and presidency of Donald Trump (some issued by him directly). Meanwhile, the advent of artificial intelligence and the rise of disinformation and deep fakes undermine our shared sense of reality. 

With regards to how crypto intersects with art in the political arena, there are several vectors that intersection can take. Crypto can be profoundly liberatory in an economic sense, as it allows for more accessible ownership from a larger set of participants, and enables financial gains from that ownership. As I recently wrote about the attention economy in crypto, “The difference [between crypto] vs. web2 is that everyone in the value chain can benefit from being owners of "attention assets" -- whether they originated the meme/media or merely paid attention early.”

The censorship-resistant nature of blockchains also protects artistic expression from suppression. During the COVID lockdowns in China, netizens uploaded videos and messages onchain that had been taken down from social media platforms by censors, using NFTs as a tool of political resistance. And as I’ve mentioned, crypto is intensely participatory, incentivizing the creation of communities around shared values and enabling novel forms of capital formation that could be leveraged toward political aims. For example, in January 2023, Pussy Riot’s Nadya Tolokonnikova and artist Shepard Fairy encouraged supporters to express their “proof of protest” through an open-edition NFT collection called Putin’s Ashes, where the proceeds were donated to Ukrainian soldiers. 

Ultimately, crypto art—and crypto in general—present a tool for community coordination and capital formation, which has political implications. Just like the web2 internet leveled information access and creation, mobilizing millions of people, crypto – including crypto art – presents a tool for economic coordination and community formation. Unlike in Benjamin’s era, where audiences were largely passive consumers, they now have the opportunity to own and engage actively with these assets. 

Conclusion

The story of the intersection of art and culture is a story of evolution and adaptation. It encompasses the diverse ways in which artistic expression reflects, shapes, and responds to cultural values, societal norms, and technological advancements. As for how crypto will impact that story, that’s a chapter that’s still being written.

Benjamin observes that the “superstructure”—the realm of art, culture, politics, and society—takes time to catch up to changes in the means of production (technology). Whereas painting is an artistic tradition that stretches back over millennia, digital means of artistic production measure their age in decades, and crypto is younger still. It will take time for the cultural and political implications of crypto to fully manifest.

For Benjamin, art represented a site of resistance and transformation, capable of challenging dominant power structures and sparking social change. The integration of blockchain into the art world presents new opportunities for artists, collectors, and communities to engage in new ways. As these technologies continue to evolve, they have the potential to revolutionize not only the art market but also the broader cultural and political landscape in ways that, for now, we can only imagine.

Last week, an NFT of Achi, the original dog wearing a hat, sold for 1,210.8 ETH ($4.3 million USD) on Foundation. And just yesterday alone, over 5,000 new memecoins were launched on Pump.fun, each one an asset that encapsulates an idea that others can invest in. These are examples of how crypto translates attention value into economic value—and enables a more efficient attention economy. 

Web2 as a failed attention economy

The term “attention economy” has gained major traction over the past several years, but it traces its origins to the 1970s and social scientist and Nobel laureate Herbert A. Simon. Simon observed that "a wealth of information creates a poverty of attention.” Attention is a scarce resource, with dynamics of supply and demand surrounding it. 

People commonly refer to web2 as “the attention economy,” where platforms compete intensely for user attention and treat attention as a commodity to be monetized; but the web2 attention economy is plagued by rampant value leakage, with positive and negative externalities. 

In economics, the concept of an “incomplete market” refers to situations where certain markets are missing or inadequate, leading to inefficiencies and misallocation of resources. The web2 attention economy is one such incomplete market, where there are insufficient mechanisms to measure attention (its quality and intensity) as well as a lack of financial instruments to facilitate its value capture.

Advertising, the dominant business model of web2, is a suboptimal way to capture value from attention: attribution is imperfect, and certain types of value aren’t adequately captured by ads. Advertising favors closed loops and actions that take place on a short time horizon, whereas there are some forms of value—for example, career guidance or other forms of knowledge transfer—that are less obvious, or require longer time horizons to be realized.  

Among creators, the inability to fully capture value from their attention manifests in a host of emerging monetization mechanisms, from branded products to coaching to courses. But these all likely still leave money on the table. Think of popular creators from Mr. Beast to Charli D’Amelio—they monetize their fans’ attention through sponsorships, restaurant chains, and television shows, but also only capture a fraction of the value they create, because those products don’t fit every audience member. That’s not to mention creators who provide significant value to a small base of users, whose attention “quality” is better, but find it challenging to monetize through dominant means.

The web2 attention economy has its shortcomings for users as well. A common refrain in web2 is that “if something is free, you are the product.” (Interestingly, the phrase also has its origins in the 1970s, with artist Richard Serra saying it about television). The dominant business model for web2 platforms is to amass as much data about users as possible, such that they can be more effectively targeted for advertising. In other words, the value that users’ attention brings is being harvested by platforms, rather than flowing to users.

Crypto and attention assets

Crypto can be viewed as the next iteration of the attention economy, with a much more efficient market. Memecoins, NFTs, and tokens (as well as new asset classes) can be considered new “attention assets,” measuring and capturing the value of attention in real time. Users can invest and own attention assets as a way to express their beliefs about whether that particular meme, media, creator, or network will accrue more attention and interest in the future. When users invest in memecoins, they are implicitly making a statement that they believe that particular token and meme will grow in popularity: attention is the primary driver of value. One X user called memecoins “a way to angel invest in culture.” Platforms like Perl, Fantasy.top, and Friend.tech have created new financialized markets around attention, allowing users to profit based on whether they correctly guess which assets, creators, or content will succeed in garnering more attention.

This can also work in reverse: tokens can help to incept attention initially, forming a speculative community that can pave the way for more organic interest later on. DEGEN is an example of this. It launched in January 2024 to the Farcaster community and appears to be a community currency for rewarding quality content on the network. Outside of the memecoin world, this pattern of using tokens to bootstrap attention has precedent in decentralized physical infrastructure networks (DEPIN) like Helium and Hivemapper, as well as in the web3 creator economy. 

A more efficient market is a market that better serves the needs of stakeholders on both sides of the value exchange. I’ve written extensively about how crypto assets can restore scarcity to the digital landscape and capture users’ full willingness to pay. And for users, crypto creates the opportunity to own attention assets and become the beneficiaries of the attention that a given thing is garnering, whether that “thing” is a meme, song, community, network, or protocol. The user shifts from the product that is being sold by a platform, to the owner of a unit of attention that has value and can appreciate over time. 

The attention economy has undergone evolutions with the rise of user-generated content and digital platforms, and AI-generated content only represents a further catalyst for more demands on users’ attention. The difference from the web2 to the web3 iteration of the attention economy is that in web3, everyone in the value chain can benefit from being owners of attention assets—whether they originated the object of attention, or merely paid attention early.

The next big thing may start out by piggybacking off a popular memecoin.

One emerging go-to-market strategy is to draft off a memecoin that is gaining adoption and momentum. While traditional GTM consisted of first building a product, then building a community around it through marketing and memes, this new playbook involves identifying a vibrant community of users around a memecoin, then building a product that incorporates that token.

By launching a project that natively integrates with a popular memecoin, the new app/infra can mobilize the memecoin’s holder base, who can experience more utility from their tokens.

Here are some examples:

• BONKbot, a Telegram trading bot on Solana, originated from the $BONK token, a Solana memecoin that was airdropped to users at the end of 2022. An independent team then launched the trading bot, which utilizes part of the fees from trading to buy and burn the BONK token, thereby economically aligning itself with tokenholders. The trading bot recently crossed daily trading volume of $200 million per day (compare that to Base, which does about $200 million in daily trading volume).

• This strategy also works for infra projects. Take, for example, $SHIB launching the Ethereum Layer 2 Shibarium, which acts as a token sink for SHIB by using transaction fees to burn SHIB tokens. By incorporating the token into the L2, this strategy activates the existing community of holders to overcome the cold start of a new L2.

• Berachain, a bear-themed EVM-compatible blockchain that launched its testnet in January, also had its genesis in memes of the NFT variety. SmokeyTheBera originally started an NFT project in 2021 called Bong Bears, and over time, built a community that it has parlayed into an engaged developer and user base. 

Given the high engagement and tribalism of top memecoin communities, I think this strategy of leveraging memecoins for one’s GTM will become increasingly popular across the stack, enabling other projects to bootstrap attention. For anyone building a crypto consumer app, for example, adding utility for memecoin can activate tokenholders, who are naturally more inclined to find new ways to utilize their tokens. Drakula, a short video app, and Perl, a prediction market game, both accept $DEGEN for payment, attempting to capitalize off the momentum of that holder community (which numbers over 44K wallets as of March). The increase in token usage and, potentially, value may then drive a virtuous cycle, where user interest may increase for both the token and applications that integrate it.

We’ve also seen projects go the other direction, starting product-first and then launching (or are closely associated with) a memecoin that generates more interest for the project. For example, a contributor linked to Jupiter, a decentralized exchange aggregator on Solana, launched the $WEN memecoin in January 2024, airdropping it to over 1 million wallets that had swapped more than $5 on Jupiter. As the first token launched through Jupiter’s LFG Launchpad, it also piqued interest for that platform.

For projects that are exploring this GTM strategy, some considerations include the distribution potential of different memecoin communities; complementarity between the memecoin’s tokenholders and the project’s intended audience; and degree of existing integrations and saturation in the ecosystem (once a given memecoin is accepted in 100 apps, will the 101th garner as much attention?).

It’s also worth mentioning that all of the above have clear benefits to memecoins themselves, and it makes sense for memecoin teams to try to incentivize and partner with projects to integrate with their tokens.

Using memecoins as a GTM strategy has parallels to other web3 growth strategies involving tokens, including airdropping tokens to members of a particular community or users of a competing product. These tactics are made feasible by the open data of blockchains, which can be leveraged for granular targeting. This strategy can also be likened to tactics in the web2 world, from community-led growth, wherein brands cultivate their customer bases to increase word-of-mouth, to brand partnerships that cross-pollinate complementary user bases, like Lyft’s partnership with Delta. But whereas offchain partnerships are challenging to execute due to siloed data and systems, crypto enables permissionless integration, wherein any developer can build around a memecoin. There is also financial skin in the game among tokenholder communities to see the value of their tokens grow, potentially fostering even greater receptiveness to partner projects.

While many dismiss memecoin trading as gambling or a strange form of financial entertainment, their growing popularity and intense communities may mean that they become a viable part of GTM strategies. For users, the new development is that, as assets, memecoins allow anyone to invest in and own a piece of a GTM strategy, grassroots community, internet culture, and community currency.

What are other examples of memecoins as a GTM that come to mind? And what are your thoughts on this strategy? Comment below or reply!

Recently, we hosted a fascinating discussion about loyalty and points programs at the Variant office. The conversation covered best practices from the web2 loyalty space and how they could be cross-pollinated to crypto; the distinction between points and tokens; what kind of rewards and redemption experiences users care about; and whether to put points onchain. Attendees included a mix of crypto founders across consumer, DeFi, and infrastructure; web2 loyalty experts who have designed programs for American Express, Delta, and other companies; and our Chief Legal Officer Jake Chervinsky.

Below, I'm sharing some of the takeaways from that conversation:

Points as a tool to move users up the loyalty ladder

Loyalty programs are ubiquitous in the offline and web2 worlds. Many companies spend millions on consultants to design them. Despite that, most programs are ineffective in engendering deeper loyalty. Best practices are still developing, leaving a lot of room for creativity and improvement. 

So, then, what's the point of a point?

• Points programs are the gamified manifestation of the first layer of Maslow's hierarchy of needs: physiological and safety needs. They reward the customer for their behaviors with tangible benefits, allowing the user to experience utilitarian and financial value. (credit to Anna Brian Lee for this framework!)

• Customers will continue engaging with a brand when they feel recognized, the second layer in Maslow's hierarchy. This is when they believe they are being treated differently from the next customer based on the series of behaviors they have demonstrated to the brand.

• True loyalty occurs when an emotional relationship is formed between brand and customer. This is the top layer of Maslow's pyramid: self-actualization. A customer feels a sense of psychological ownership with the brand, whereby the brand becomes intertwined with the user's identity.

Points program design

In a world where many crypto projects have points programs, the core product will be what matters most. Nonetheless, products should still take into account several factors when designing a program.

• Should points be targeted at user acquisition or retention? Most discussion participants agreed that in the web2/offline world, points were a more effective retention tool for existing customers; users don't use products simply for the existence of a points program (e.g. I don't switch my coffee shop just to collect points). However, in web3, behavior is skewed by users’ belief, whether justified or not, that points will eventually convert into tokens. For that reason, points have been extremely effective for user acquisition in crypto.

• Should points even be redeemable, or are gamification and status enough? Most agreed that for a program to sustain user interest, users must be able to redeem points for rewards.

• What types of rewards are enticing for users? Participants agreed that there should be a mix of easily redeemable rewards, which allow users to experience value from the program, as well as more aspirational or experiential ones that create memorable moments and emotional connections.

Differences and tradeoffs between points and tokens

Points programs are well-established for traditional companies, but the onchain world often relies on tokens, which can bring particular advantages.  

• The two main characteristics that distinguish “points” from “tokens” are that the latter are (1) onchain and (2) freely transferable.

  • Point values are determined by their creator based on what those points are worth in the creator’s closed ecosystem.

  • The value of tokens is determined by a secondary market based on what purchasers are willing to pay, which may or may not reflect their actual value in a loyalty program.

• A major benefit of turning points into tokens is composability, which allows many different companies to honor points in a single ecosystem and for there to be more partnerships and collaborations (for instance, earning Delta SkyMiles through riding with Lyft). Some suggested that there is true demand for this improvement and that the main reason it has not occurred in web2 is because of tech debt, which public blockchains resolve through easier composability of various programs.

Drawbacks of onchain points

Transitioning to an onchain points program may seem at first blush to be a straightforward decision. However, they can come with unique drawbacks, depending on their implementation.   

• Loyalty tokens might be less effective in incentivizing consumer behavior because of the confounding effect of speculation interfering with a company’s goals for the loyalty program.

• By reducing switching costs and creating the ability to exit through selling tokens, companies will not be able to achieve customer lock-in, which is critical to a loyalty program.

• Onchain points open up the surface area for competition by making it more transparent who a business's customers are (e.g. Uber could poach Lyft drivers and vice versa).

• Transferrable onchain points entail significant legal/regulatory concerns (see below). 

Legal and regulatory

Web3 founders seeking to incentivize consumer behavior with tokens have run into significant legal and regulatory challenges in recent years due to hostility from regulators like the U.S. Securities and Exchange Commission (“SEC”). Points programs offer an alternative mechanism to incentivize user behavior.

• Points programs may offer a way for web3 founders to acquire and retain users with less regulatory risk than tokens. For the same reasons that web2 loyalty points generally aren’t treated as securities under U.S. law, a well-designed web3 points program shouldn’t be subject to regulation by the SEC.

• Even if points programs have less regulatory risk than tokens, there are many other laws and regulations that apply and could create trouble for founders who don’t address them. Web2 points programs may be “overlawyered” at times, but they include critical terms, conditions, restrictions, and controls that are important for web3 points programs too.

• Points programs may provide more flexibility for founders considering a potential token distribution in the future. Distributing a token is often a “one-way door” decision — once done, it can’t be changed or walked back. Points programs give founders the ability to iterate, reflect, and analyze their strategy with the help of counsel before taking a step with significant legal and regulatory ramifications.

With thanks to Anna Brian Lee, Jake Chervinsky, Graeme Boy, Will Hunter, Laura Jaramillo, and Liz Yang for their insights and feedback.

The rise of scaled social platforms like Facebook, Instagram, and TikTok has made it increasingly challenging for newcomers to compete directly.

Per network effect theory, for any innovation a startup can create, an existing network can quickly imitate and distribute to its own scaled user base. This is evident in the fact that it’s been years since a new consumer social application has scaled, even though their product innovations have propagated across existing social giants (e.g. live audio rooms and ephemeral stories). As a result, startups have shifted their focus toward more intimate formats, where their smaller user bases give them an advantage over incumbents.

Simultaneously, consumer app success has become more transient, driven by accelerated news cycles and algorithmic feeds that constantly reshape users' attention. New consumer apps may burn bright for a few weeks or months, only to be replaced by a newer “it” social app. In a sense, consumer products now resemble entertainment, with users regularly wanting to try out the latest thing and then quickly moving on. I’ve been investing in consumer startups since 2016, and in that time I’ve amassed screens filled with social apps on my iPhone—BeReal, Poparazzi, Fam, and Dispo, to name a few. All were once popular but now are mostly forgotten.

As apps predicated on smaller use cases gain traction and start to scale, they can actually erode their core value proposition of intimacy, creating an opportunity for still-newer newcomers to take their place. Furthermore, the novelty of a new, narrow social experience quickly wears off before the app can iterate and expand, making it difficult to compete against incumbents that offer many more options and formats for social interaction.

In light of this, I sense that an alternative path to success in the realm of consumer apps lies beyond the well-worn model of building a “kitchen sink” social giant. An alternative, less obvious, and likely more fun route is to create a series of smaller, transient hits. Rather than building something that can one day scale to a billion users, the goal is to launch a series of quick-hit apps that capture attention fleetingly.

This concept mirrors the venture studio model: build and launch successive products that share operational resources such as user acquisition and personnel. In the casual gaming studio model, exemplified by Zynga, Supercell, et al., developers release numerous titles that share core gameplay elements but introduce incremental innovations for differentiated experiences. In the gaming context, fast-following with similar apps and cross-promoting between them becomes essential to retaining user attention and maximizing revenue.

Crypto, through tokens, can turbocharge this formula

Crypto may not come immediately to mind with the venture studio model, but the use of tokens can help stitch together different experiences, transferring user attention between different app experiments.

Take, for example, NFT projects that employ successive drops or experiences to direct users to fresh products and generate revenue. Bored Ape Yacht Club's original 10,000 NFT collection, for instance, was followed by its Otherside metaverse, then Dookey Dash, an endless-runner game and skill-based NFT minting experience. This sequencing—as well as the attention the project captured and held from token-holders throughout—demonstrates the potential of leveraging tokens to overcome the cold-start challenge. Underlying the migration of attention is genuine interest from a user base that desires to see the ecosystem extended, as well as speculative interest in new projects, which is uniquely fueled by crypto.

Unlike the traditional gaming studio model, wherein developers must bootstrap their own user bases, tokens also enable more interoperability between different developers, allowing founders to create utility around another token and siphon off users from other applications. Vampire attacks are a canonical example of this, wherein developers use token incentives targeted at competitors’ users (via onchain data) to lure users to switch. More generally, the open data of blockchains can provide a foundation for projects to leverage tokens in creative ways to bootstrap attention, from Frame airdropping tokens to all users who paid royalties on NFTs to garner interest for a new NFT-focused L2, to Jenkins the Valet building and extending on existing IP ecosystems.

A more methodical, venture studio-esque model for crypto apps could be applied to several emerging categories:

Crypto mobile developers are increasingly deploying their applications as PWAs (progressive web apps), simple apps that work on mobile web and allow developers to bypass crypto restrictions on mobile app stores. While PWAs are easier to build and deploy, they’re clunky for users to install and discover. Tokens could help shift users between different PWAs and enable developers to capitalize on rapidly evolving trends in crypto. Rather than trying to acquire users from scratch for each PWA, developers can launch a series of PWAs united by a shared token.

This approach can also help capitalize on interest around a trending financial asset. For example, when the BONK memecoin started to gain steam in December 2023, the core team also launched BonkBot, a Telegram trading bot that rapidly grew to 70% of trading volume for the token. As memecoins (themselves a form of financial entertainment) proliferate, teams can continue to harvest and prolong that attention with new applications around that asset, like Telegram bots, gaming experiences, social apps, etc.

The benefits of building multiple app experiments

For founders, the benefit of following the venture studio strategy means more optionality than betting on one idea from the get-go. Creating a succession of apps still leaves open the option of building a big consumer app: if one of the bets takes off, the founder has the freedom to run with it. Beyond that, it’s a structure that can also offer more autonomy and creativity. Since the goal isn’t to build a monolithic giant that has mass appeal, each of the ideas can be more offbeat, interesting, and niche. 

To execute on this strategy successfully, founders should keep several considerations in mind. First, be disciplined with venture funding, acknowledging that success may come in the form of a base hit for one or several of the apps, rather than IPOing a monolithic social giant. Generating cash flow and being a self-sustaining business remains an option with this model, particularly in crypto, where there is potential for significant monetization even with smaller user bases. (For example, Friend.tech generated $53M in total fees from just 839K traders since its launch last August.) It’s also important to engage and retain users across drops—not only through a token, but also with content and community—to maximize chances of retaining users for each of the app experiments. And finally, quick execution and iteration is critical in this model, mirroring the transient attention cycle with new applications that appeal to existing users but are varied enough to keep them entertained. Of course, there are more complex considerations, too—like how much time to spend on each idea and how long to maintain each experiment—but those answers are more case-specific, informed by factors like app momentum, business considerations, and longer-term strategy.

In a landscape now dominated by scaled incumbents, a viable alternate route for consumer builders is to embrace the dynamics of fleeting attention, build for transience and niche use cases, and—uniquely enabled by crypto—deploy tokens for cross-promotion and growth.

If you’re thinking about pursuing this venture studio model for building consumer apps, I’d love to chat!

With thanks to Eugene Wei, Patrick Rivera, Willem Simons, and Variant team members Alana Levin, Mason Nystrom, and Jack Gorman for their feedback.

Seemingly overnight, points have entered the crypto zeitgeist as a new tool that app builders are leveraging to enhance user retention and engagement. 

Across the landscape, founders are adding offchain points programs to their applications, from Rainbow wallet giving users points for using Ethereum, to Friend.tech building its engagement loop around points, to NFT marketplace Blur’s new L2 Blast incentivizing users with Blast Points for bridging funds (over $800 million TVL since November). In some instances, these points allude to a future fungible token with real economic value; in other instances, users have made that leap of faith themselves. This trend comes amidst a broader search for product-market fit in crypto and ways to engage users in the middle of a bear market.

But outside of crypto, points programs have been a longtime fixture of consumer applications, from games to brand programs like Sephora Beauty Insider or Starbucks Rewards. At a high level, points programs let users earn points for completing various activities and redeem or use them in various ways, with the intention of motivating users to engage. 

Ten years ago, I worked on a web2 mobile shopping app, Shopkick, that had 3 million MAUs and partnerships with national retailers like Macy’s and Best Buy. The app rewarded users for actions like walking into physical retail stores, engaging with products in-store, and browsing in-app. We built a program where users earned in-app points for these activities, which were redeemable for gift cards at various merchants.

Some of my learnings from that experience can help guide web3 projects as they develop points programs:

1. Any sort of extrinsic motivation warps user behavior

2. Point programs change the types of users who decide to use your app

3. Maintaining ambiguity in points value gives you flexibility

Let’s drill into each.

1. Under a points program, user behavior morphs to respond to incentives.

People respond to incentives, and inorganic activity arose as a result of our points system. Behaviors sprouted up like walking in and out of the store immediately just to collect points—things people would never do without extrinsic incentives. We dealt with this by capping the number of points users could earn from certain activities and by building a fraud detection effort.

Even among users who have organic interest in your product, the presence of points will distort their activity. Think of waiting for something to go on sale at a retailer that is known to frequently discount items; these stores have trained their customers never to buy at full price. Similarly, points can train users to hunt for earnings opportunities where they wouldn’t have otherwise done so. Short-term boosts in user activity can actually come at the expense of business health in the long run. These long-term adverse impacts can take years to appear and are tricky to unwind. An example is JCPenney’s failed “Everyday low prices” strategy after years of steep discounts and coupons.

Due to the distortionary impact of incentives, Shopkick also had to manage how we monetized and tracked metrics as a startup. Since our revenue came from retailers and brands who were interested in driving engagement, understanding the value of user actions was critical. Incentives altered what a store walk-in or a product engagement was worth, and so it was important to close the loop and track the end KPI of interest: conversion and revenue uplift from our user base. Founders building a points program should be careful to define KPIs that encompass their North Star goal, not simply the actions being incentivized.

2. Having points changes the types of users who use your app.

Points don’t just change users’ behavior on the margin—they actually alter the composition of your user base. Many builders intend for points to boost retention and engagement, but more fundamentally, a points system will change who decides to use your app in the first place. While we designed Shopkick with shopping enthusiasts in mind, the presence of points attracted bargain hunters and extreme couponing types—akin to real-life “airdrop farmers.” This mirrors research from the psychology world about how financial incentives crowd out intrinsic motivation.

This kind of shift in the user base is fine if the persona you’re attracting through extrinsic incentives has a reason to stick around (continued incentives and/or underlying PMF) or if they’re still net additive for your particular business model—think credit card points or airline miles maximizers. In our case, we had a sustainable business model that could fund the continued existence of the points program. But any app that’s funding rewards unsustainably from their balance sheet should do so with caution, and be cognizant that when subsidization ends, users who are simply responding to incentives will churn, especially since they were never the target user of the core product.

3. Maintaining ambiguity in points value gives you flexibility.

If you’re going to tie points to some real economic value, a best practice is to keep the precise value ambiguous. This gives you discretion to change the value of points to manage costs and test incentives, while also preserving the fun for users. For example, the restaurant loyalty and rewards network Blackbird gives users $FLY tokens (which are offchain) but keeps the specific value vague, writing in the app: “It will be redeemable for incredible stuff, like free cocktails and premium access.” 

Elucidating that a certain action = X dollars can diminish user motivation if the amount is too small. In Shopkick’s case, users earned points that could be converted to various gift card values, but the conversions varied across rewards. When users walked into a store or did other actions to earn points, they weren’t thinking about the dollar value of their action, which was nominal, but rather in terms of points, which felt more meaningful.

Points have a point

I’m hopeful that in the crypto world, implementing points onchain can unlock interesting experiences for builders and users. While the points program I worked on at Shopkick was limited to the confines of our app, using blockchains to track points can enable an ecosystem of applications to build around them. That can give rise to fascinating new user experiences. In the shopping context, it’s easy to imagine other brands and retailers wanting to see who the most loyal shoppers were at other stores and target their offers accordingly, which has precedent in the airline world with status match programs. For users, the added value of interoperable points across multiple apps could also make it more compelling to accrue them, reducing the onus on each individual app builder to bootstrap their own utility.

While I’ve outlined some key cautions to take with points programs, it’s important to note that I’ve also seen real benefits from them. At Shopkick, we deployed points in targeted ways to motivate users to move through the funnel and change their behaviors in the real world. For a nominal amount of money, we drove dramatic impacts on long-term retention and referrals. The devil is in the details, and implementing an effective points program requires continued experimentation and iteration, modeling of economic impacts, and rigorous tracking of KPIs.

If you’re working in this area or interested in chatting more about points programs, please reach out: li@variant.fund.

We founded Variant on the thesis that the next generation of the internet would transform users into owners through tokenization. Utilizing tokens as a user incentive has worked exceptionally well for bootstrapping infrastructure networks like Bitcoin and Ethereum. However, the application layer has yet to see a proven model for using tokens to grow networks. Rather, there are many examples where distributing tokens has actually impeded sustained growth and retention by attracting more speculators and mercenaries than genuine users, obfuscating product-market fit. 

Because of these failures, many dismiss the use of tokens for applications as a category error, but we don't see it that way. Instead, we believe the answer is to keep iterating token design toward a more bottom-up and opt-in ownership distribution model that we call “progressive ownership.” This approach focuses on deepening loyalty among users of applications with product-market fit.

In this framework, we outline previous eras of token distribution mechanisms—PoW mining, ICOs, and airdrops—and their key lessons and problems. We then propose high-level steps and tactics for a new token distribution model, which we believe could sustainably grow applications with early product-market fit. By applying this playbook, apps can leverage user ownership to deepen existing user loyalty, paving the way for further growth and retention.

Three eras of token distribution

Crypto has undergone three major eras in token distribution models:

1. Proof of Work (2009-present): hardware formation

2. ICOs (2014-2018): capital formation

3. Airdrops (2020-2023): bootstrapping usage

Each model lowered the skin in the game for participants while broadening access, so each era naturally coincided with a new wave of growth and development in the space.

1. Proof of work era (2009-present)

Bitcoin pioneered the idea that a permissionless network could be operated by anyone willing to run software on their machines (“mining”) in exchange for tokens representing ownership in the network. Miners who devoted more computational power had a greater chance of earning rewards, fostering professionalization that required meaningful investment in computing resources.

The PoW era showed token incentives can be very effective at bootstrapping supply in networks where contributed value can be quantified, e.g. computing power. Critically, the capital asset (hardware) is distinct from the financial asset (BTC), which forces miners to sell the financial asset to cover their costs. As specialized hardware became a necessary cost, miners had to have more skin in the game, but this dynamic also edged out ordinary users.

2. ICO era (2014-2018)

The ICO (initial coin offering) era marked a significant departure from the proof-of-work distribution model: projects raised capital and distributed tokens by selling them directly to prospective users. This approach theoretically allowed projects to bypass intermediaries like VCs and bankers and reach a broader range of participants who could share in the upside of products and services they would use.

The promise of the model attracted entrepreneurs and investors and incentivized a wave of speculative interest. In 2014, Ethereum was partly bootstrapped through an ICO, serving as a blueprint for many projects in subsequent years, including large 2017-2018 ICOs such as EOS and Bancor. But the ICO era was rife with fraud, theft, and lack of accountability; and the failure of many ICO projects, plus intense regulatory scrutiny, brought about its quick decline. 

ICOs highlighted the capabilities of blockchains for permissionless, global capital formation. But this period also underscored the need for more thoughtful token design and distribution models that prioritize community alignment and long-term development, not just capital provision. 

3. Airdrop era (2020-2023)

In 2018, an SEC official suggested that BTC and ETH were not securities because they were “sufficiently decentralized.” In response, many projects designed tokens that incorporated governance rights and retroactively distributed them broadly to their users, with the aim of achieving sufficient decentralization.

Unlike ICOs, which distributed tokens for monetary investment, airdrops rewarded users for their historical usage. The model kicked off “DeFi Summer” in 2020, which popularized liquidity mining (supplying liquidity in a financial marketplace to earn tokens) and yield farming (selling the earned tokens as short-term gains).

While airdrops were a shift toward a more user-centric and community-driven ownership distribution model, very little skin in the game was required from users, and most airdrops resulted in users converting ownership to income by selling the majority of their tokens upon receipt. 

Many projects leveraged airdrops before establishing true product-market fit. Tokens drew in bots and short-term, mercenary users driven solely by incentives, rather than putting ownership in the hands of users who were aligned with the long-term success of the project. The rush to claim and sell tokens obfuscated signals around product-market fit and contributed to boom/busts in prices.

A number of projects that rushed out tokens also saw their founding teams step back in an attempt to comply with an ambiguous regulatory litmus test of sufficient decentralization. That left decision-making to governance referendums that most tokenholders did not have the time or context to fully understand. Before reaching product-market fit, and even afterward, projects need founders to continue to iterate quickly. Airdrops often proved to be a mismatch between growth strategy and a startup’s organizational execution.

We think the primary lesson from the airdrop era is that the pursuit of sufficient decentralization guided many projects away from product-market fit. Instead, token distributions should be more thoughtfully targeted with a heavier weighting to power users, after early product-market fit is validated.

A novel token distribution framework: Progressive ownership

Progressive ownership builds on progressive decentralization, which advised that tokens are not a substitute for product-market fit. This approach employs economic incentives in degrees to increase user loyalty and retention, step-by-step, culminating in ownership. Under this model, users are incentivized with revenue share income (e.g. ETH or stablecoins) but can decide to trade individual income for tokens representing ownership of a proportional share of the community’s revenue. 

This has advantages for users, who can move fluidly between income and ownership, with fewer steps than the previous default of converting tokens to income. It also enables them to tune their economic participation to the level of risk and engagement appropriate to their circumstances.

And there are advantages for builders, who can leverage revenue share incentives to drive growth, build loyalty, retain control, and iterate quickly without being distracted by sufficient decentralization. Further, founders can still work toward paths to realizing liquidity via tokens, while trying to mitigate the risks associated with broad, untargeted token distributions.

Progressive ownership is only an option for projects that have early product-market fit and revenue to share. While the current scale of revenue among most crypto projects is relatively small, the list of projects meeting this criteria is growing. Optimism has logged roughly $30 million in revenue year-to-date. MakerDAO accrued $16 million in fees from the protocol in October and has seen 25% compounded monthly average revenue growth in the past year. And ENS (Ethereum Name Service) has generated $1.1 million in revenue in the past month. 

Progressive ownership shifts token distributions from an opt-out to an opt-in model, which has the potential to engender stronger loyalty and network effects due to more skin in the game. As committed users level up into ownership, they are more economically aligned with the success of a network and incentivized to encourage others to join, which creates a virtuous growth loop. Users or developers who opt into ownership are more likely to skew long-term, as is the case with startup employees with stock options.

Conversely, in the airdrop model, loyalty can be eroded as most users choose to sell and convert tokens into income, creating downward price pressure. Studies have shown that experiencing losses as a shareholder can induce lower customer satisfaction and loyalty toward the company. By making ownership opt-in, networks can mitigate these boom-and-bust cycles and their ensuing erosion of user goodwill. 

The progressive ownership playbook

Progressive ownership involves 3 steps:

1. Build products that serve users' needs

2. Use onchain revenue sharing to drive growth, retention, and defensibility

3. Allow power users to level up into economic ownership (e.g. trade income for tokens)

1. Building products that serve user needs

This is the hardest step. The foundation of the progressive ownership model begins with developing products and services that serve users in novel ways. As Li recently wrote: "Successful startups offer a step-function improvement in enabling people to achieve a core need." 

By meeting these needs, which range from income to esteem, apps can find product-market fit—and even cultivate psychological ownership.

2. Using onchain revenue share for growth, retention & defensibility

Projects can employ onchain revenue share models that allow users to share in the success of a product/service, deepening their interest and commitment.

A primary example is Zora's protocol rewards, which allocate a portion of earnings to creators and developers for driving NFT mints. This approach not only encourages user retention but also bolsters defensibility.

Some projects stop here—and indeed, this is a canonical playbook of web2 companies, ranging from Substack to OnlyFans to YouTube to X/Twitter. Revenue share is a powerful draw and has obvious scaling effects.

But the reason to go further than revenue share is that economic ownership can more meaningfully align users with the long-term success of the platform rather than conditioning them for short-term gains. Users with economic ownership would be more attuned to how their contributions fuel the platform’s growth. This mirrors the age-old Silicon Valley playbook for incentivizing startup employees.

3. Allowing power users to level up into ownership

Finally, the most loyal power users can opt into ownership via tokens that comprise both economic and governance rights. This transition is not automatic and passive, but something users choose. For example, the most valuable users as measured by revenue generated could be given an option to either 1) earn revenue share in the form of ETH/stablecoins, or 2) take a proportional token distribution in the project’s native token. 

In choosing the latter, a user is trading some of their individual income for a portion of the community’s total income. If the network grows, the community’s income will grow, and the token should enable them to participate proportionally. Further, the token might offer governance over key protocol parameters, such as fee or revenue share variables, to ensure long-term alignment.

There are many more implementation details to work out. (Should users have to stake their tokens to earn platform fees? Should tokens be subject to vesting?) But without getting too deep in the weeds, a few hypothetical examples:

Coming back to Zora, about 1,008 ETH (nearly $2 million USD at the time of publishing) in protocol rewards has been distributed to date. Those rewards are revenue-share splits, mainly distributed to NFT creators who drive minting activity, but also developers and curators. In the progressive ownership model, top Zora revenue generators could choose to claim hypothetical Zora tokens instead of ETH protocol rewards. How many creators and developers would opt to do that? Probably a small percentage, but those who did would have meaningful skin in the game and potentially become even more active and incentivized to grow the network. 

Another hypothetical is Farcaster, which charges roughly $7 in annual fees to individual users to store data on the network. Imagine if the protocol shared that revenue with developers building clients that drive attention. Developers could then choose whether to pass that value on to end-users, akin to a rebate. Alternatively, developers could convert a portion of their revenue share into protocol tokens that give them exposure to growth in the ecosystem and governance over key protocol parameters.

Precedent in web2 models of loyalty

The progressive ownership model closely aligns with business researcher James Heskett's  ladder of customer loyalty (2002), which comprises four stages: “loyalty (repeat purchase), commitment (willingness to refer others to a product or service), apostle-like behavior (willingness to convince others to use a product or service), and ownership (willingness to recommend product or service improvements).” 

Progressive ownership recognizes that customer loyalty requires ever-deepening levels of psychological ownership. As users ascend the ladder from income to tokens, they might feel an increasing degree of psychological ownership, culminating in more vocal advocacy—acting like an owner of the product and taking on more responsibility for its continued success.

This emotional connection can be nurtured through financial levers (revenue share) as well as product elements (personalized experiences, interactive features, and user input), making users more inclined to become long-term stakeholders. 

Leveraging economic ownership to entrench user loyalty also aligns with research from the public equities world, which suggests that stock ownership can boost brand loyalty among existing users. As Li wrote:

A Columbia Business School study found that in a fintech app where users selected certain brands or stores to receive stock from once they shopped there, users' weekly spending jumped by 40% at those brands… Users intentionally selected their stock holdings and invested time shopping at those brands in order to receive a stock grant.

Transitioning to a new era of token distribution

The progressive ownership playbook represents a significant departure from previous eras of token distribution. Whereas ICOs and airdrops were primarily intended as bootstrapping tools, they often proved ineffective at motivating organic users. As a result, entrepreneurs were often led astray from finding product-market fit.

In the progressive ownership model, revenue sharing spurs growth and entrenches loyalty, culminating in ownership that users proactively choose, ensuring that only the most deeply committed users become stakeholders. This paves the way for a community of dedicated advocates who are invested in the long-term success of the network. While there will likely be unforeseen challenges with this model, it aligns closely with precedent examples of economic ownership enhancing loyalty.

How progressive ownership relates to the compliance framework of sufficient decentralization is the subject of another post. The industry will need novel compliance arguments that enable teams to continue building great products while leveling up power users through ownership. That is work we plan to push forward at Variant. 

Innovation in token distribution has catalyzed spurts of new growth and development in the ecosystem, and the playbook is very much still being written. We’re excited to see what future iterations on token distributions emerge. If you're thinking about creative ways to incorporate/distribute tokens into what you’re building, we'd love to hear from you.

Originally published on the Variant website.

If you’d like to work on projects building in this space, fill out our talent form.

Thank you to Nathan Schneider, Joel Monegro, Liam Horne, Jackson Dahl, Jacob Horne, Chris Dixon, Fred Wilson, Mario Laul, Ben Leventhal, Joey Santoro, Scott Moore, David Phelps, Benny Giang, Lakshman Sankar, Henri Stern, Cooper Turley and Variant team members Caleb Shough, Alana Levin, Geoff Hamilton, and Jack Gorman for feedback that strengthened this piece.

While “social” is often generalized as a single monolithic category, there’s actually a ton of variance in today’s landscape of social apps.

An axis on which I like to analyze social networks is how much they appeal to users’ desire for love vs. fame.

Years ago, Kevin Lin, the co-founder of Twitch, told me that there are three dimensions on which Twitch offers value to creators: love, fame, and money. (There’s a YouTube clip of Emmett Shear, another Twitch co-founder, outlining this framework.) For the purpose of this post, I’ll put money—or the prospect of earnings—aside, since that’s an orthogonal dimension that I’ll unpack later.

All social networking apps fall on a spectrum from love to fame.

On the love side of the spectrum are products that focus on deepening connections with others. Examples are iMessage, WhatsApp, early Facebook, and Discord. The value proposition is connecting more intentionally with others, cultivating existing relationships, and intensifying affinity. These products are often marked by bidirectional relationships, like friendships on Facebook or iMessage. When users use a product like Discord or WhatsApp, they usually do so for a particular community or person—not to discover new content. These products reinforce this value proposition by featuring a deterministic algorithm (if person A sends something to person B, the other person will always receive it).

On the fame side of the spectrum are products that help users get exactly that: fame or reach. These products are built around discovery of new content and creators. Examples of fame-centered social products include YouTube, Instagram, TikTok, and Twitch. These products feature one-directional relationships (or “followers”). Influential users professionalize, becoming creators and reaching ever-larger audiences—a dynamic that’s not present on bidirectional social networks. Products on this side of the spectrum feature probabilistic algorithms, where content gets shown depending on the likelihood of engagement, so users aren’t guaranteed to reach their followers.

The dichotomy between these two ends of the spectrum could be summed up as social networking vs. social media. 

There’s an inherent tension in building for love vs. fame, rooted in the zero-sum nature of time and attention: users only have a limited amount of time to spend on any one social app, so the apps that emphasize new content discovery from creators over engagement with content from existing connections are by definition catering to fame more than love.

An example here is TikTok’s default For You feed: it underweights the follower graph and instead defaults to showing users new creators and content that it recommends. 

The love vs. fame dichotomy is a spectrum; platforms often feature elements that cater to both love and fame. Instagram—which over time has trended toward fame as a whole—has both fame features (Explore, Reels) and love features (DMs, Stories, Close Friends). Reddit’s home page can be browsed as a fame product, surfacing content across Reddit, but users who use the platform for specific subreddits, with mutual affinity among those community members, are using it as a love product. A mix of both types of features creates higher retention because there isn’t enough inventory of engaging love content. WhatsApp, Messenger, and iMessage have remained pure love utilities because of their network effects, but other social apps have all had to add fame features to increase retention.

A broader trend toward ‘fame’ products

I often hear people say they feel that, on a broader level, social networking is moving toward social media; apps that once focused on friends now focus on entertainment, and everyone is expected to be a creator now. Instagram, once used for keeping up with friends’ lives, is now used in large part to follow creators and brands.

I think there’s truth to this, and it’s guided by business models and incentives rooted in network effects. Social networks featuring bidirectional social graphs hit a ceiling of network effects once users reach the limit of who they know. The utility of a product like iMessage or the original Facebook doesn’t scale as the total user base grows. Instead, it reaches a ceiling once users have connected with all of their friends. However, fame-based products have more uncapped network effects: users can be shown content from anyone, and utility continues to improve as more users join. Under the dominant business model of advertising, keeping more users engaged for more time is the north star goal, and the fame-driven model is more advantageous for scaling users’ attention—and revenue.

It’s interesting to note that social products on the love side of the spectrum generally don’t monetize well through ads: users understandably don’t want ads inserted in the middle of their messages to friends, or in smaller communities. Instead, the dominant business model of love products tends to be subscription-based, whether to the platform (e.g. Discord Nitro, or WhatsApp’s original $1/year fee) or to specific creators or communities (Twitch subscriptions). This is even more true with dating apps, where price points for subscriptions to Hinge, Bumble, and Tinder are even higher. People are willing to pay more for more serious relationships and connections.

Successful fame platforms also feature a core skill-based status game, as Eugene Wei described in his post on status as a service. By contrast, that status game is less prominent in love products, confined to smaller networks. Most love-based social products are more like feature-rich communication utilities, versus platforms to pursue social status. They serve a utility in users’ lives, connecting them to friends or groups, versus being the site of performance. Obviously, some products introduce a status game into love platforms—imagine up/downvotes on Reddit posts—but the status game is usually smaller in nature. 

The meaningful vibe shift on X (formerly Twitter), which many users have remarked on, is indicative of a shift from a love platform to a fame-focused one. While the default news feed previously prioritized tweets from accounts you followed, the new algorithm is full of people you don’t follow. The new default “For You” feed (a nod to TikTok) shows viral posts that the algorithm has determined—based on probability of engagement—you might enjoy. Analyses of its open-sourced algorithm have also revealed that X Premium (formerly Twitter Blue) subscribers are given a boost in the feed ranking. This design, which underweights the follower graph that users had curated over time in favor of a more engagement-oriented and recommendation-based model, has meaningfully changed the tenor of the platform; it’s shifted it from a composite of deliberately chosen creators to a much more viral, hits-driven platform.

The tendency to shift toward fame, as we’re seeing in mature social networks, creates an opening for new networks that focus on deepening connections. There’s room for love-based products to serve smaller communities and groups, particularly as incumbents beholden to an advertising-based business model seek ever-increasing user attention to grow their businesses.

Newer social media apps usually focus on an initial wedge use case for smaller groups. Apps like BeReal, Retro, and Lapse each put their own spin on fostering deeper connections with friends that fame-based social media neglect (with varying degrees of enduring success). But apps focused on smaller use cases often struggle with monetization and can become victims of their own success, eroding their value proposition of connecting deeply with smaller groups as they grow and as the novelty wears off.

Crypto social: new business models for love and fame

To date, crypto social has been largely about love (helping users form, and monetize, deeper connections) rather than fame. In contrast to web2, where the ad-based business model exerts pressure to trend towards social media and entertainment products, crypto uniquely makes it possible for love-based networks to thrive. I’ve previously written:

A crypto social network can enable smaller, high-context groups to flourish, through new business models that make their existence possible. Today, the north star goal of most web2 social platforms is to grow at all costs, which aligns with their business model of advertising. That means products focused on smaller groups, like Facebook Groups or Twitter Communities or the now-defunct Path, don’t have great business models.

Crypto could change this, by enabling those smaller communities to viably exist and flourish. That could take the form of having shared treasuries (Nouns DAO or FWB) and creating alignment toward maintaining the health of the community, or minting onchain artifacts of their community as a means of generating revenue (like Crypto, Culture & Society DAO, a learning community).

A few years ago, Facebook piloted a feature to let group admins charge an admission/membership fee to support the cost of moderating and maintaining their communities (for many, a full-time job). For some reason, that feature was sunsetted, and FB Groups remains under-monetized. I think there is user willingness to pay to support smaller, healthier communities, but limited infrastructure to enable that. With crypto, these communities can more easily choose and configure their own business models, and with that, we could see a flourishing of smaller communities.

Zooming out, the biggest outcomes in social have historically arisen from the creation of new networks: from IRL friend-based networks (Facebook) to interest-based (Reddit, TikTok) to knowledge-based ones (Quora). There’s an opportunity for crypto to take a crack at building a new type of ownership-based network that leverages onchain assets as the basis for new communities. We refer to this idea as a socioeconomic network (versus a purely social network).

These communities could deepen connections between users based on shared ownership, helping them find their tribe. In the real world, shared ownership often serves as the foundation for connection, from neighbors to coworkers at a startup. DAOs and NFTs are early examples of communities wherein shared onchain ownership forms the basis for high-affinity communities. In October 2023 alone, over 17 million NFTs were minted across Ethereum and L2s; as the volume of user activity grows, you can imagine inferring users’ interests based on onchain actions and exposing connections based on rich activity history. 

Fame and reach is a tricky value proposition in crypto since there are only about 400,000 daily active wallets on Ethereum. At the same time, that number is growing steadily—and is now substantial enough that discovery-focused platforms, especially those that monetize through a model other than advertising, can be built. To build a sticky social product that appeals to fame, tapping into user psychology—and the desire for social status—is critical. That means introducing a new skill-based game.

Skill-based games in crypto often focus on the highest earners, spenders, or something financial in nature. For instance, Friend.tech’s leaderboard could be seen as a status game in which the ranking is based on the highest key price, i.e. the number of holders one has. I think money-based status games are inherently exclusionary—they advantage those with more capital and are intimidating for newcomers. Consider that a new user to TikTok likely feels like they can win at the app’s core status game of creative videos, but a newcomer to a financialized social network may feel like the odds are stacked against them.

A new type of status game that crypto could offer, with lower barriers to entry, is “proof-of-first”: who first did something, discovered someone, or minted something first, based on on-chain activities. 

An example of this is Sound.xyz’s “Earliest” view on every user’s profile, which showcases the artists they were earliest to back. This type of behavior has precedent in web2, where users like to comment “first” or “early” or “investing at [#] likes” on a piece of content to signal that they were early to discover it. On a crypto social app where user actions are timestamped onchain, such “proof of first” could be not just user-generated, but surfaced in a more automated way, with gamification mechanics around it. 

As mature social networks trend more towards fame, there's room for new networks to focus on deepening connections among communities. Crypto's unique characteristics create opportunities for new networks along the entire love-fame spectrum to flourish as users connect on shared ownership and interests. I believe new business models will emerge to support different and smaller networks than what can viably exist under ad-based models, fulfilling humans’ need for social status and connection in novel ways.

Thank you to Eugene Wei, Ravi Mehta, Willem Simons, Tom Verrilli, Si Jia Wen, and thecap.eth for their feedback on this post.

For more on this topic, I also recently discussed love vs. fame on the Bankless podcast:

To commemorate the newsletter launch, we’ve commissioned a special art piece by generative artist Giorgio Balbi for those who subscribe on Mirror, which you can mint for free (+gas) through June 11.

Assets vs. ideology in web3 social networks

by Li Jin

I see two main approaches to building in web3 social: asset-first or ideology-first. 

The asset-first approach focuses on users' desire for profit, unlocked through digital ownership, which places money at the forefront of the platform. Financialized features allow users to spend, collect, and earn within the network. 

BitClout fit squarely in the asset-first approach and enabled users to bet on the trajectory of prominent profiles through trading creator coins, creating a speculative social game at the center of the network. Lens is another example of an asset-first web3 social network, where users’ posts are instantiated as NFTs that can be collected and purchased, with the top creators earning upwards of $90,000 from collectible posts. PFP NFT communities can also be thought of as asset-first social networks: interest groups that are incepted through collecting assets. In all of these instances, users’ motivations for participating aren’t purely intrinsic, but involve, at least to some degree, the potential for financial gain. It’s like collecting stamps or baseball cards: it’s fun and enjoyable, but also, what if they could be worth something someday? 

In contrast, the ideology-first approach toward building in web3 social entails appealing to users’ values and ideals. That means emphasizing characteristics enabled by blockchains, including censorship-resistance, data privacy, and portability of social graphs and content. The actual user experience may closely resemble a web2 social product, but the underlying architecture involves some portion of data being stored on-chain, and all the benefits that come with it.

My view is that web3 social networks will succeed by taking the asset-first approach, i.e. creating opportunities for profit that will appeal to users. In other words, these networks are not purely social networks, but socioeconomic networks. This approach also creates a more clearly differentiated user experience that should in theory resonate more broadly. (Income is a universal need, whereas ideals can feel abstract to many.) This also mirrors the path for wider adoption elsewhere in crypto, including in NFTs, DeFi, and even L1s: desire for financial gain bootstrapped new networks and apps and played a pivotal role in their adoption.

To be clear, leaning into an asset-first approach doesn’t mean catering only to speculators and creating a financialized game that’s easily manipulated. Social networks can be easily polluted with spam and bad actors who detract from the network, creating a negative network effect. Unlike a DeFi lending protocol where all liquidity is valuable even if it comes from users with financial motivations, in social networks the quality of content and users matters. Simply rewarding all content creation, reach, or usage is too blunt of a financial incentive, risking an environment that’s full of spam or useless content, or is downright toxic. 

A successful financial game at the heart of a web3 social network should combine both intrinsic and extrinsic motivations. Stealcam, a content-sharing platform where fans earn a cut of the sale when NFTs they own are subsequently purchased for a higher price, attracted both profit-motivated traders who engaged in the hot potato game of trading images back and forth, but also appealed to true fans who wanted to keep the content their favorite creators had made as collectibles.

Taking an asset-first approach will also allow networks to construct novel social graphs. Social networks are constructed around distinct social graphs, which form the basis of their network effects: Facebook got its start by leveraging your real-world friend / college graph; LinkedIn mapped out your professional connections; and TikTok’s social graph is based on your interests, inferred from your behaviors on the app. An asset-based social network can pioneer and popularize an ownership graph, wherein users connect based on shared onchain ownership. This goes beyond simply clustering users into PFP communities, which is the primitive version of this idea that we’ve already seen. As the density of users’ ownership history grows onchain, over time, this ownership graph can richly reflect users’ interests, supplementing users’ self-professed interests or real-world contacts. 

In sum, there is a unique window of opportunity right now to build web3 social networks. Existing web2 social companies like Twitter and TikTok are facing upheaval, and users are hungry for something new. 

Our vision for web3 social networks is rooted in leveraging the distinct capabilities of crypto to offer a differentiated user experience that rewards continued usage.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

Each year, in early December, social media comes alive with the annual flood of Spotify Wrapped. One of the more ingenious pieces of viral marketing, it requires no paid advertising on Spotify’s end. Instead, users organically share their listening habits, compiled by Spotify, out of amusement, pride, or other emotions. 

Spotify Wrapped taps into a behavioral concept known as “psychological ownership” — the feeling of possession or “mineness” over a product or service. In the last decade, psychological ownership has become a core part of how we engage with digital products. Despite the lack of tangible or legal ownership, digital goods and applications have fostered psychological ownership and loyalty from users through personal investment, control, mastery, and alignment with how they see themselves. Users were more likely to stick around, stay engaged, and contribute to tech products that successfully cultivated that sense of “mineness.”

For crypto and web3 projects, it might seem that psychological ownership would go hand-in-hand with actual digital asset ownership. But in practice, crypto projects often experience the opposite: user interest is often transactional, mercenary, and short-lived.

As the next era of the internet progresses with products that give users ownership through crypto tokens, builders can learn a lot about psychological ownership from other categories of products/services. By applying this lens, crypto projects can foster a greater sense of psychological ownership that accompanies ownership of actual crypto assets, leading to healthier user retention and  sustainable ecosystems.

Why psychological ownership is important for companies and products

Think of all the products or apps you use on a daily basis and the emotions they conjure. Some material and digital products feel utilitarian and unmemorable: the car you rode in during an Uber trip or a one-time conference app may not stir any real emotion. Others inspire loyalty or affinity because of personal investment: think music playlists you curated or your Twitter profile.

This psychological state of feeling like an owner is distinct from legal ownership: individuals can feel ownership without actually being a legal owner of a product or service, and vice versa. For instance, my social media profile or my sports team reflect a feeling of ownership without formal ownership. Conversely, individuals can legally own things without having a sense of psychological ownership: consider stocks or ETFs which rarely engender that sentiment toward companies.

Over the last decade, new digital products, services, and business models have disrupted the traditional relationship consumers have had with goods/services — shifting from purchasing and owning a product outright to more access and subscription-based models. This shifting relationship introduces new levers and opens up additional design space for cultivating psychological ownership.

Psychological ownership is important because it changes behavior. Research has shown that it can increase customer loyalty, word-of-mouth referral, and willingness to pay. In the public realm, high psychological ownership increases people’s sense of responsibility and stewardship, encouraging behaviors like removing trash from a public lake or donating money to a cause. In digital communities, psychological ownership leads to “increases in satisfaction, self-esteem, and contribution quality.”

A study on music streaming is particularly illuminating here. The shift from physical ownership of music (CDs, vinyl records, cassette tapes) to digital ownership (buying individual songs or albums) to digital access (streaming platforms) has been characterized as a move towards a “post-ownership economy.” In theory, it’s easier than ever for users to leave one app and go to a competitor, since switching costs are minimal. However, the study found that once users had invested time getting to know an app and personalizing their experience — e.g., making public profiles, curating playlists, customizing recommendations — they were reluctant to switch to a competitor, even when potentially superior (including lower-priced) alternatives were offered.  

Notably, a corollary implication is that users are developing stronger psychological ownership to a specific platform or app, but their sense of emotional closeness with a specific artist or album is eroded in the streaming era as there is less investment and intentionality in forging a direct connection.

How is psychological ownership created?

Product builders can actively cultivate psychological ownership among users. Consumer research has illuminated a few drivers of users feeling ownership, with implications for product design:

Investment of the self

People have a greater sense of psychological ownership in a product when they’ve invested time, energy, effort, or money into it. “The more effort people put into some pursuit, the more they come to value it,” write the authors of a study on the so-called “IKEA effect” — named after the Swedish retailer that sells self-assembled furniture kits.

In the digital realm, people put effort into a product in many ways: customizing one’s avatar or profile picture, creating content on a social media platform, giving feedback to the company. For example, on TikTok, users deliberately interact with videos in the hopes of tailoring their feed (e.g. “commenting to stay on this side of TikTok”). When users spend years building up a corpus of content on an app, like tweets and blog posts, their sense of personal ownership increases. Just look at the uproar on Twitter in the wake of Elon Musk's purchase.

Control

Offering a sense of agency over a product/service can also create a sense of connection. That often means providing features that let users shape their experiences through creation, customization, and expressing preferences. Interestingly, these strong feelings of ownership can also backfire for companies. When Apple automatically added a U2 album to all users’ iTunes libraries in 2014, it incited a backlash because it undermined users’ sense of control. Slate deemed it “extremely unsettling, possibly indicating a terrifying new future where taste and culture are even more explicitly chosen directly for us by our corporate overlords.”

Intimate knowledge

Familiarity often inspires feelings of ownership. A local restaurant may feel like my breakfast spot because I have the menu memorized and have a favorite table. Software products can exhibit this characteristic as well: users can develop familiarity with all of the extensive power user features of a particular application. For example, mastery of all of the shortcuts and UI of an email client can increase feelings of ownership and loyalty to that app, despite low switching costs (in theory) due to the backbone of email being open protocols. This is closely related to investment of the self: by investing one’s time, one also gains intimate knowledge. 

Self-object congruity

Finally, the alignment between the product’s attributes and the user’s self-concept — called self-object congruity — can build psychological ownership. Users gravitate to brands that most closely match their self-image, aspirational or realized; people are more likely to use apps that match their self-concept. When older generations took over Facebook, millennials fled to Instagram and Snap. When Gen Z came of age, they carved out their own space on TikTok.

Crypto ownership: a digitally-native form of ownership

Crypto ownership can be thought of as an internet-native property rights system, analogous to how legal ownership is enforced through legal contracts. In the crypto context, ownership is enforced cryptographically on a blockchain. By virtue of being dictated by decentralized protocols, crypto ownership is internet native: default global and independent of any legal jurisdiction or central authority.

Crypto and blockchain offer the potential to build a user-owned internet, with networks and products that turn users into owners through native tokens. But simply giving users tokens isn’t enough; users need to feel like owners in order to be aligned with the success of those networks, contribute to their growth, and stay engaged long-term. 

Blockchains introduce new dynamics to the question of psychological ownership. First, blockchains make it easier to leave any given interface or platform — like NFT marketplaces or wallets — because you can take your assets with you. While web2 platforms were able to foster strong psychological ownership among their users through investment of time and effort into creating content or customizing their experiences, web3 may shift users’ feelings of ownership to be more closely tied to underlying crypto assets and creators, rather than with platforms. On the other hand, products can turn their users into owners through a distribution of tokens, amplifying a sense of psychological ownership because users become actual shareholders with potential governance or economic rights.

And second, psychological ownership can produce different effects in the crypto context. High degrees of psychological ownership correlate with behaviors like actively participating or contributing to those communities, long-term retention, and evangelism. Conversely, low psychological ownership can manifest in mercenary, short-termist behaviors like flipping assets, using products only to farm an airdrop, and low participation rates in governance. 

The challenge — and opportunity — for builders in crypto is to explore how to design products that support a greater experience of ownership and feeling of “mineness.”

Crypto and psychological ownership: drivers and hurdles

In the traditional gaming world, skins — cosmetic items that can be used to customize a player's appearance inside the game — are estimated to be a $50 billion market. In contrast, NFT fashion — an emerging category that has seen major players like Dolce & Gabbana and Karl Lagerfeld launching collections — is merely a $245 million market, or less than 1 percent of the size of video game skins. Why this discrepancy, when crypto ownership of NFTs is arguably a “stronger” form of ownership, independent of a single gaming company’s database?

Psychological ownership is one explanation. Intense feelings of ownership over in-game characters and experiences lead users make users willing to pay for skins at scale. Conversely, today, fashion NFTs have only limited opportunity for self-investment beyond financial spend, little ability for users to exert control, and few places where other users can see the NFT and accord its characteristics to the owner. (Projects like fashion NFT marketplace and digital closet DRAUP are notable exceptions here.)

Let’s examine some drivers of psychological ownership, and dissect where various crypto projects do well (or fall short) in strengthening users’ feelings of ownership:

Personal investment

Crypto projects are often good at getting an investment of users’ time, energy, and money, but that doesn’t necessarily translate into a sense of ownership. Consider the practice of rewarding users with tokens for performing certain actions — known as liquidity mining — which has been applied widely by play-to-earn games, NFT marketplaces, and DeFi protocols. However, while they have often succeeded in driving an initial surge of usage, it has rarely translated into long-term success. For instance, a Nansen analysis of yield farming activity among DeFi users showed that “42% of yield farmers that enter a farm on the day it launches exit within 24 hours [...] by the third day, 70% of these users would have withdrawn from the contract.” 

Why do these programs — which are quite literally about creating buy-in — so often fail in fostering long-term user retention?

One explanation is that most token distribution mechanisms attract mercenary users who are performing a simple profit calculation rather than users with an intrinsic interest in using the product. That means high user churn when other opportunities appeared that offered higher ROI for their capital and time.

If that’s the case, then reframing the problem might present an opportunity. Historically, most tokens have been utilized to juice growth with little consideration for facilitating long-term sustainability: they lure users to a new network/product through the promise of a future airdrop or ongoing token rewards, which in turn promise financial rewards. This is a weak strategy for creating feelings of attachment. But what if the order were reversed: the attachment comes first and the token ownership second? By identifying key drivers of psychological ownership and making token rewards contingent on users taking those actions, tokens can be used to reward psychological ownership, reinforcing attachment and building engagement habits. This is what successful incentive programs in web2 do — the Uber or Doordash guaranteed earnings programs for new drivers deepen drivers’ intimate knowledge of how those apps work, fostering psychological ownership that then translates into stronger network effects for their apps. The Blur token airdrop has parallels to that model, in making tokens contingent on users taking behaviors like utilizing new features and contributing to liquidity on the NFT marketplace.

Intimate knowledge

If creators can engender a sense of psychological ownership among their tokenholders, it could mean turning a speculative user base that sees the creator as a potential path to profit into an engaged community that is long-term oriented and places disproportionate value on their relationship to the creator. For an idea of how this works, consider Bonfire, a platform for web3 creators to build custom experiences for their tokenholders, including exclusive content, contests, and airdrops. By enabling fans to invest time into creator communities and develop intimate knowledge of the creator’s work, Bonfire facilitates feelings of ownership above and beyond simply owning a token. 

Control

Various web3 communities are tying creative and engaging experiences of control to token ownership. For example, Shibuya’s White Rabbit animated film allows users to stake their NFT Producer Passes in order to vote on the next chapter, with more than 80% of tokenholders participating. Mad Realities, an interactive content platform, allowed NFT holders to control different elements of a dating show it launched, such as voting on the winning couple and influencing the set design. Creating a richer experience of control around users’ crypto tokens can engender greater psychological ownership and loyalty. 

The trick here is that users have to care about the particular type of control and feel a sense of agency in order to value their asset ownership. One reason most protocol governance sees low participation, with less than 20% participation in proposals among DeFi protocols, is that the average user may feel that their level of influence is insignificant, which reduces their sense of control. 

Self-object congruity

Certain crypto communities have extremely high degrees of association between token ownership and identity: users purchase and display NFTs or even change their usernames or bios to indicate networks that they want to publicly associate with, signaling their identity and beliefs (e.g., Bitcoin and laser eyes). This kind of emotional attachment and alignment with self-identity can lead to extremely high retention among holders, causing them to disproportionately value the thing they own.

Crypto projects can foster greater user retention and loyalty by standing for a clear set of values that resonate with their owners. The opportunity is for builders to hone their positioning and storytelling to make it clear what they stand for, attract those users who resonate with that mission, and activate them as further evangelists of the narrative.

A case study: NFTs vs. social tokens

Another interesting example of the power of self-object congruity comes from the web3 creator economy. In early 2021, social tokens were widely predicted to be a new type of asset that would gain rapid adoption in enabling creators to monetize and audiences to invest in their success. However, NFTs have eclipsed social tokens as the type of asset that accomplishes those goals. One explanation is that NFTs have been much more successful in creating psychological ownership among users. In particular, visual NFTs lend themselves easily to self-expression and social signaling, and provoke greater emotional connection with the asset that users own. Whereas social tokens are abstract and challenging to wrap one’s head around due to a lack of a real-world counterpart, NFTs initially gained steam as digital art or collectibles, which have high degrees of psychological ownership in the offline world. Going further, the categories of NFTs which have seen the greatest growth and adoption are those that lend themselves to showcasing certain beliefs about oneself, versus other emerging categories of NFTs (writing, podcasting, music) are more challenging as a mechanism for signaling one’s identity due to lack of venues for display and consumption.

Building Psychological Ownership Through Better Relationships

Given all of this, how can builders in crypto put these ideas into practice? Putting the idea of psychological ownership to work requires building a different kind of relationship with users, changing their sense of their own role in a project, and leaning into co-creating alongside users. Here’s what that can look like.

Interoperability and user control

A hypothesis I have is that users’ feelings of ownership was stronger in web2 with platforms, whereas in web3, ownership is more strongly felt in relation to underlying crypto assets, communities, and creators. That’s because crypto enables interoperability and data portability: by being built atop open, decentralized ledgers, users have stronger feelings of control and “mineness” with their assets. They can access their tokens from any crypto wallet, buy and sell NFTs from any marketplace, and engage with tokenized communities across social apps. In contrast, in web2 applications, users’ data, content, points, etc. are stored in centralized databases, wherein users had control in the context of a particular app, leading to feelings of ownership with the platform.

For example, in decentralized social networking protocols like Lens Protocol, user profiles, follower relationships, and content are represented as NFTs. This means that any client can build on top of Lens Protocol and access the data. When users download an app that builds on top of Lens Protocol, their existing social connections and content are populated from the get-go. For users, that can enhance feelings of control and ownership over one’s content and relationships, but can erode feelings of loyalty with any given application. 

In web3, cultivating psychological ownership and defensibility as a product relies on other drivers. Those include investment of self through customization or distribution of a token; intimate knowledge that is built through user habit; self-object congruity with a clear brand identity; or proprietary product elements like better discovery algorithms and off-chain data. Crypto app builders can learn from the email or podcasting worlds, where significant market share is commanded by certain products despite those products being built on open data (Spotify represents 27% of podcast listening; Gmail represents 30% of the email market). 

User co-creation: building in public and governance

Studies have shown that companies that involve customers in the creation process and give them a sense of decision-making power enhances positive word-of-mouth, enjoyment of a product, willingness to defend it in public, and willingness to pay. That’s because empowering customers as co-creators builds a sense of control, intimate knowledge of a product, and allows them to invest time and effort into the product. 

This maps to a growing trend among startups of “building in public,” or openly sharing progress and soliciting feedback from the public, as a means to foster a community of early adopters. In crypto, user co-creation also takes the form of governance, wherein stakeholders are able to vote on the direction of a project or protocol, typically through their token holdings. In crypto, user governance is often a benefit accorded to token owners, rather than a prerequisite. Given the power that fostering user involvement holds in generating psychological ownership, it may be worthwhile to explore making collaboration and co-creation a prerequisite for becoming an owner or receiving an airdrop. 

Psychological ownership and asset ownership are the foundation for a user-owned internet

Psychological ownership is the key ingredient for many successful products, especially in the internet era when countless alternatives are just a click away. The products we all feel a strong sense of “mineness” over have shored up their stickiness through the cultivation of our effort, control, intimate knowledge, and alignment with our values and self-identity. 

In crypto, the new technological innovation is an internet-native system for tracking ownership, enabling any product to make their users into owners through tokens. That has led to projects that can grow meteorically because of user ownership — but it’s also led to notable flameouts and rampant speculation. I argue that those adverse effects have happened because psychological ownership has been relatively missing and underexplored, with the result being tokens attracting mercenary users and ultimately undermining projects’ long-term success.

Instead, tokens — or the promise thereof — can be deployed strategically to encourage users to invest their time, effort, and energy; exert control and agency; and signal their identity and beliefs about themselves, which are antecedents of feeling like owners. Research from the traditional financial world highlights the potency of combining actual asset ownership with psychological ownership. A Columbia Business School study found that in a fintech app where users selected certain brands or stores to receive stock from once they shopped there, users’ weekly spending jumped by 40% at those brands. The researchers concluded that stock ownership increases feelings of brand loyalty. Critically, users intentionally selected their stock holdings and invested time shopping at those brands in order to receive a stock grant — a meaningfully different path to ownership than buying into an ETF or mutual fund, where little personal investment beyond capital is required. Analyzed through the lens of psychological ownership, this experiment cultivated a sense of “mineness” with the brand, through giving users a feeling of control over the company, triggering deeper knowledge of those brands, and causing users to invest time and money.

This is the potential for crypto builders: when asset ownership is distributed more broadly and programmatically — and, critically, coupled with psychological ownership — it is a new, powerful tool to enable products to grow faster, drive retention, unseat incumbents, and build long-term sustainable networks. 

With thanks to Jesse Walden, Alana Levin, Mason Nystrom, Jad Esber, Joey DeBruin, Cyrus Younessi, Sacha Saint-Léger, Vivek Singh, Eugene Wei, and Anne Favre-Willis for their feedback. Thanks to Carmel DeAmicis and Tom Stackpole for their editing.

Today, we’re excited to announce the inaugural Variant Founder Fellowship: a new three-month cohort-based program for web3 founders at the earliest stages of their journey. 

The Variant team has backed dozens of the top projects which now comprise our Variant Network, a professional community of founders and leaders in our portfolio who build and learn together. We’ve found that a network-based, peer learning model is the most effective way to elucidate playbooks and best practices for building in web3. That’s because in an industry as nascent and fast-evolving as crypto, the domain experts are the builders who are on the front lines of innovation. So far, the Variant Network has catalyzed learnings across our portfolio on topics like product design, token strategy, regulatory issues, and much more. 

Now, the Variant Founder Fellowship builds upon this network learning model and aims to foster more innovation in crypto by inviting a cohort of emerging founders to build and learn alongside Variant’s portfolio founders. While there are many startup accelerator programs, few are tailored to the distinct needs of founders in crypto, which have very different strategies for success. In web3, topics like go-to-market, community building, business models, defensibility, and token distribution require specialized knowledge that don’t follow web2 precedents. These types of resources and cutting-edge playbooks are what we’ll provide with the Variant Founder Fellowship.

Fellows will get access to Variant’s peer network of founders, builders, and experts operating at the bleeding edge of crypto, and learn from functional experts in web3 and build alongside teams in the Variant portfolio that are further along in their journeys. As part of the inaugural cohort, fellows will become part of a tight-knit group of peers and, in the future, a vibrant alumni network and community. Throughout the program, founders will receive hands-on mentorship and support from the Variant team.

Applications are now open until April 17th, 2023; to learn more and apply, click below!

Apply here

One of the most significant trends in web3 is the rise of community-generated media. Fans are becoming co-creators in developing media or applications on top of a character universe, or influencing the direction of content creation. Various examples are playing out across creative verticals, ranging from fans influencing the plot progression of animated films in the case of Shibuya; to NFT holders submitting storylines for their characters for inclusion in a novel. On the extreme end of decentralized co-creation, these models can be entirely open-ended; for instance Loot, a collection of NFTs representing adventure gear items, was left entirely to community interpretation and development post-launch, with a resulting ecosystem of guilds, tools, games, and other applications.

A hypothesis I have is that progressive decentralization is not only an effective playbook for building crypto applications, but also for this kind of community-driven content creation. In other words, building a creative community ought to start with great content made by a small team, before relinquishing control and layering in community ownership.

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The playbook mirrors that of progressive decentralization for crypto apps, which my partner Jesse Walden originally wrote about, which consists first in finding product-market fit for an application, then fostering the community of users, then distributing ownership to users in the form of tokens. In the media world, the counterpart is:

1. Content-market fit, i.e. making something that people want

2. Community participation, i.e. fostering engagement and participation by an audience

3. Community ownership, i.e. ceding ownership and control to a community

This step-by-step sequencing creates a path for creating content that is resonant with an engaged community, before relinquishing greater control and ownership to fans.

Initial content is created by a core creator/team, who kickstarts a cohesive, compelling piece of media that finds content-market fit. That's hard to do by committee/community given creative work is so often led by the vision of a single creator or a small team — so this initial phase parallels the traditional media creation model.

That initial work serves as a lightning rod for a community to form, who become emotionally attached to that cast of characters/storyline and intrinsically motivated to participate. Over time, they can increasingly engage in decision-making for additional IP creation. Eventually, tokens and fan ownership can turbo-charge this community participation — for instance incentivizing fans to create derivative works and stories.

This “progressive decentralization for media” has its parallel in the fanfic world, where thriving communities create derivatives inspired by original creations that served as Schelling points for audience participation. E.g. Harry Potter or Twilight fanfiction arose only after an original creator made something around which a community rallied. Flipping this ordering and expecting a community to generate those initial stories & characters would be tremendously challenging.

What are examples of this progressive decentralization in the web3 world? Forgotten Runes, Tally Labs, Shibuya, Bored Ape, and Mad Realities are creating content under the guidance of core creative teams, and have scoped parameters for fan participation, with an eye towards greater fan ownership over time.

The contrast to this model is decentralized creation from the beginning, e.g. Loot Project. That path is also possible — but perhaps more challenging given the need for communities to start from a blank slate. As outlined in Jesse’s original piece, that path runs the risk of creating a community of speculators without sufficient intrinsic interest to participate, rather than real fans. What we’ve seen in many NFT communities is exactly that: without a foundation of intrinsic motivation among members to build upon and extend a core narrative, these communities of token holders can be fragile and speculative, with people churning out in search of the next thing to bet on before a longer-term roadmap is realized.

By Li Jin and Jesse Walden

Recent events surrounding FTX’s dramatic collapse have dealt a blow to the perception and trust of the crypto industry. We are heartbroken for those who suffered financial losses due to the reckless and fraudulent behavior of others, and are angry at the collateral damage this has done to the credibility of the industry. At the same time, overly negative media coverage — including proclamations that this is the end of crypto and that the industry should burn down — overshadows crypto’s potential as a tool for world-positive impact and demonstrates that outside sentiment is often out of touch with actual progress and fundamentals in web3.

Reflecting on these events, we turned to our founding thesis for grounding. Variant was started in 2020 with the belief that crypto would be the foundation of a user-owned web, where products and services would turn their users into owners. This idea has tremendous potential for how we can build new networks that better serve user needs, as well as broader implications on economic equity.

How do recent events affect our thesis about user ownership? It’s important to understand that FTX was the failure of a traditional financial institution and a reminder of why we need to move web3, and DeFi in particular, forward. We remain confident in the potential for crypto to build a fairer and more meritocratic internet, but as an industry, we need to refocus on the core principles of web3. 

Starting from first principles, the foundation of web3 is open-source software running transparently on autonomous blockchains, like Ethereum, which minimizes the need for trusted third-parties. At the application layer, automated smart contracts obviate the need for human-run companies and institutions, whose opacity in decision-making can lead to systemic failures, as we’ve seen most recently with FTX.

Open, automated code is an unlock for a new way of building internet platforms that are credibly neutral and, critically, owned by users. User ownership is made possible by tokens — akin to packets of value that are encoded on blockchains. To be clear, when we say “tokens” we don’t mean speculative meme coins — we are talking about a radical innovation in ownership on the internet. Tokens are an internet-native property rights system: a way to own a piece of the internet itself, and they can represent any type of digital property, from artwork to music, to virtual land, to a piece of the internet products and services one uses. Like packets, tokens can be distributed instantly and programmatically to anyone, anywhere. One application of tokens is rewarding users for their participation in projects, incentivizing them to contribute to growth. This mirrors Silicon Valley’s decades-old playbook of granting stock options to incentivize and reward employees. In early crypto networks like Ethereum and Bitcoin, developers and technologists were rewarded with tokens for their contributions. And as with most technologies, what developers and technologists do first, the rest of the internet soon follows. 

Today, we are still far from realizing the ideal of an internet dominated by token-driven, user-owned networks. Most token designs currently fail to align incentives sufficiently to unlock faster and more sustained growth than centralized companies. And in some cases, bad actors have leveraged tokens to propagate outright scams. But many experiments have made incredible progress, and to gauge the current status, we’ve found it helpful to explain tokens in the market today along a spectrum: from those that are critical to the functioning of a product or protocol, to those that offer a legitimate and compelling promise of utility, to extreme economic experiments, and finally, outright fraud and scams.

On one side are tokens that are indispensable to the user experience, including the operations of a product or protocol. For instance, ETH, Ethereum’s native token, is staked to secure the network and used for transaction fees, and more broadly, as a form of internet money in applications native to the ecosystem. In the middle of the spectrum are projects attempting progressive decentralization, aiming to give users ownership and control of products and protocols they use (e.g. Uniswap). There are also economic experiments in utilizing ownership as a bootstrapping or hyperscaling mechanism (e.g. DIMO), and tokens that function as quasi-equity, for fundraising or profit sharing, but without any investor rights (e.g. Constitution DAO). On the extreme end of the spectrum, some token design is so centralized that it can easily be exploited by issuers — a design flaw that introduces a single point of failure. FTX’s FTT token falls into the last category — but it wasn’t token design that brought FTX and Alameda Research down, it was the unsavory actions of those in charge. Just as in previous waves of new technologies, innovation hype cycles are marked by radical experiments, breakthroughs, and unfortunately, the presence of opportunists and charlatans that take advantage of users’ lack of information, until the former ultimately succeed and the industry matures.

As long-term investors, we spend our time with teams who are deliberate in leveraging tokens to distribute novel forms of ownership and control and to enable new product experiences. While many of these projects are iterating towards community-owned and operated networks, the playbook for optimally incentivizing behavior from users that can lead to long-term sustainability and competitive advantage is still being written. 

The road to the user-owned web was never going to be easy or straightforward, but in the aftermath of the FTX collapse there are a number of clarifying lessons.

For users, the lesson that resurfaces is the adage “invest in what you know.” The world of user ownership is still very young, and there is no comprehensive guide on evaluating tokens from a user perspective, so being familiar with what one owns can be challenging. But whereas investing in the internet was previously limited to the world of professional VCs, web3 makes investing available to all consumers through tokens. While that comes with risks and necessitates research and responsibility, user ownership is a new type of internet-native job that dovetails with the broader trend of new opportunities for earning and wealth creation online.

For builders, we hope that this moment sparks greater first-principles design around tokens as products, with a focus on ownership experience. Tokens can be designed to unlock new product experiences for end users, where that product solves a key problem for the end user. Our philosophy is that ownership is a vast design space that should be rooted in user needs, whether that’s a desire for status, economic alignment, community, or something else. When tokens are launched without consideration of users’ needs, projects run the risk of confusing users about what the token is good for. And in parallel, token design needs to be coupled with accessible education to make it clearer to users what they actually own.

There is a lot of work to do to fully realize the potential of web3 as the next iteration of the internet that turns users into owners. Building decentralized systems that empower users is challenging, and the playbook is still being illuminated. But it’s clearer than ever that user ownership is a powerful new tool that warrants this effort to harness. Our commitment to true user ownership is what is why Variant was founded, and what we remain steadfast in researching, funding, and promoting.

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

When musician Daniel Allan set out to make his album Overstimulated in 2021, he could have done what a lot of internet creators do: spend months or even years creating and releasing his content, in the hopes of eventually building a big enough fanbase to fund his work full-time. Or, he could have gone an even more traditional route: shopped his work around to traditional music labels, hoping one of them would bestow on him that rarest of prizes—a record deal.

Instead, Daniel chose a different path: he crowdfunded his new album through a token sale on Mirror and raised 50 ETH (about $142K USD at the time) from 87 backers to fund the creation of his music. In return for their investment, token holders got a 50% stake in the artist share of the profits—and a direct line to Daniel himself. “For the first time, I owned all of the music that I was putting out and people were assigning an actual value to my art,” he wrote on his Mirror page about the impact crypto has had on his work.

Web3-native creators like Daniel represent the vanguard of a new model for the creator economy. We’ve written extensively about how networks and platforms can distribute user ownership through tokens in order to grow bigger and faster. Similarly, tokens also represent a powerful new tool for creators to bootstrap audiences and capital. Instead of creating content for free with the hopes of gradually growing an audience and one day being able to monetize it, creators are now able to monetize and build an audience upfront through tokens—and then use that money and that following to produce their content and grow their business. 

In other words: web3 has inverted the traditional online content creation model. It’s a paradigm shift that will have significant implications for how creator work gets done, how followers relate to the work of creators, and how the broader creator ecosystem functions as a whole.

The evolution of the creator playbook 

This isn’t the first time the creator playbook has seen an update. Pre-internet, creators conceived of their content, then pitched that content to institutions such as record labels, book publishers, TV studios, etc. who had the power to decide what got made. Creators then gave up significant creative control and a substantive chunk of future earnings in exchange for upfront funding and distribution of their work. 

With the rise of web2 user-generated content platforms, a new pathway to creative work emerged. Creators were able to publish their work online to platforms like Instagram and TikTok and reach audiences directly. As their audience grew, various monetization paths became available including advertising, brand sponsorships, subscriptions, and merchandise.

Under the web2 model, creators are able to retain creative ownership of their work, yet face a long road to financial viability. Creators invest significant amounts of time and effort upfront into creating content—without knowing when or if they will see a return on that effort. That dynamic has contributed to creator burnout and poses a barrier to entry for less well-off creators.

In other words, creators working under the web2 model face a cold-start challenge: in order to make money, they need to have an audience, but in order to grow their audience, they need to have the resources to fund content creation. The web3 creator playbook is a new way to overcome that cold-start problem.

The web3 creator playbook: tokens bootstrap audience & capital

The web3 model takes the web2 creator playbook and inverts it. Instead of starting with creating free content in an effort to build a large fanbase that can later be monetized, web3 creators start by monetizing through the creation of a token (NFT or fungible). This attracts an initial audience of fan-owners interested in the potential upside that stems from ownership of an asset. The creator can then use the initial funding and stakeholders from the token sale to bootstrap their creative work. The fan-owners then have skin in the game to see that creator succeed and are incentivized to act as evangelists for the creator and their work. That helps to kickstart the virtuous cycle of content creation, audience growth, and monetization.

The key to this playbook is digital scarcity: as the creator becomes more well-known or successful, the token becomes more sought-after and valuable. The significance of digital scarcity through tokenization is unpacked in my blog post about the implications of web3 on the creator economy:

In tokenizing their work as an NFT, creators create a verifiable on-chain record of a piece of media’s ownership and provenance. The end result is a unique digital asset that traces back to the artist. Fans who are passionate about the creator’s work are willing to pay more for this canonical piece of media, enabling creators to better capture fans’ full willingness to pay.

This web3 creator model mirrors what Chris Dixon has outlined for bootstrapping networks with token incentives. In a traditional network, the utility to users of a new network is limited to the utility of the application—or, in the case of creators, their creative product. Tokens introduce an additional source of utility: financial utility. In the early days of a network—or of a creator’s journey—the token provides an supplemental source of utility for their audience. 

There are numerous examples of this already happening across various creative verticals. In the film world, Shibuya raised 400 ETH ($1.2M) for the production of an animated series called White Rabbit through a sale of NFT Producer Passes, which allow holders to decide the outcome of each chapter and become owners of the finished film. Similarly, animator/filmmaker Robbie Shilstone raised over 324 SOL through NFTs on the platform Formfunction, enabling dozens of backers to be involved in the film’s production process. In reality TV, Mad Realities crowdfunded 172 ETH through an NFT sale for its dating show, wherein NFT owners have various governance powers including ability to vote on the cast each week, sending gifts to contestants while filming, and voting on the winning couple. In the publishing world, Tally Labs’ upcoming novel Bored & Dangerous incorporated 2,800 Writers Room NFT holders into the writing process, with NFT holders able to license characters to the book and vote on the direction of the story. In music, many web3 artists have done similar experiments to Daniel Allan, airdropping tokens to backers and providing benefits like listening parties and access to token-gated content. 

In these examples, not only are tokens helping creators to fund their work upfront, but in many instances, tokens served as shelling points for an audience to even form in the first place. With the incentive alignment afforded by a token, those audiences became active co-creators and stakeholders with an incentive to guide and shape the work and evangelize it.

What this means for the creator economy

While the use of tokens by creators is still nascent, there are three areas, in particular, where the new creator playbook is likely to impact the creator economy: the accessibility of creative work, the nature of fandom, and the role of creators themselves. 

1. Creative paths become more accessible

Under the web2 creator model, creators typically spend a long time creating free content before seeing any return on investment. Because this token playbook accelerates access to capital and audience, it lowers this financial barrier, allowing a wider range of aspiring creators to pursue a creative career. 

There are still obstacles to be reckoned with, of course. While this playbook jumpstarts capital and audience growth, it doesn’t remove the upfront effort needed to cultivate a small, passionate following so that the creator’s tokens are well-received. While Daniel Allan only had about 200 Twitter followers at the time of his crowdfund—an audience size that would have been nonviable for traditional monetization models like advertising—he did have to spend considerable time cultivating relationships with collectors in advance. A Billboard article describes: “In the months leading up to the Overstimulated release, Allan spent eight hours a day on Twitter and Discord. He sent out messages to everyone in the Web3 music space. He dropped into dozens of Discord servers to say “gm” (good morning) and make connections with music NFT collectors. [...] By the end of the campaign, the Overstimulated EP had 87 backers—at least 50 of whom Allan had made personal connections with beforehand.” The web3 creator playbook reduces the total size of the audience needed to monetize, but actually makes it more important to build deeper relationships with fewer, truer fans.

Another major hurdle is education and access: in order for creators to take advantage of the new creator playbook, they have to be aware that the pathway even exists and have access to the tools that make it possible. This is why it is crucial for the web3 ecosystem to continue to invest in developing resources and tools that are accessible to users of all backgrounds. Educational programs like Seed Club’s accelerator, Forefront’s Web3 Creator Residency, HIFI Labs’ Web3 Artist Cohort Program, and the Music NFT Launchpad are examples of initiatives serving an important need in onboarding more creators to web3.

2. The nature of fandom evolves

In the web2 creator economy, the relationship between creators and audiences is largely unidirectional. The web3 creator playbook incentivizes and opens a path for a significantly more active role for fans, along two main vectors: 

From fans to investors 

Under the web2 creator model, fans are attracted to creators for intrinsic reasons—because they love the creator’s work. The web3 model introduces an additional motivation: ownership. Some supporters will be attracted for speculative reasons because they see ownership as a requisite to profiting from resale.

This has the potential to change the dynamic between creators and their community as token ownership shifts incentives. How does it change the relationship between creators and audiences when fans experience a financial loss? Will fans withdraw their support if their tokens decrease in value? These are questions that the creator ecosystem will have to navigate as the new creator playbook matures. 

From passive spectators to active stakeholders

Traditionally, content creation has been a one-directional process: creators create the work, and audiences consume it. The new creator playbook turns creative work into a participatory process, where token holders want to have a direct impact on the work itself because they are financially exposed to its success. An example of this is Jenkins the Valet, a single Bored Ape NFT whose entire existence and persona was crafted by its owner, and which is now signed to CAA and serves as the basis of entirely new creative projects. All of these derivative projects serve to accrue value back to the Bored Ape ecosystem by raising the prominence of the collection. It’s hard to imagine a fan in traditional contexts going to such lengths to help a creator succeed, but web3 offers alignment of financial interests such that community participants are incentivized go the extra mile.

There are unknown impacts associated with this shift. Does audience participation in the co-creation process enhance or restrict creative potential? How will creators balance their own creative vision with the visions of their backers?

3. The creator persona changes

Fans aren’t the only ones that stand to evolve with the adoption of the web3 playbook—creators themselves will see their roles change. That’s because the web3 creator playbook changes the composition of skills needed for creators to be successful.

Rather than focusing on simply creating content themselves, creators have to become skilled at marketing, cultivating relationships, and community management from the outset (or deputize community members who possess these skills). They must function a lot like startup founders: raising capital, evangelizing their vision, and balancing stakeholder interests along the way. This is taken to the extreme under the increasingly popular CC0 model (“no copyright reserved”), wherein creators allow others to use their work in any way, including for commercial purposes. The role of a CC0 creator becomes more about community management and stewardship, rather than first-party content creation.

Again, the broader ramifications of this shift remain to be seen. Could input and expectations from fan-investors create disjointed output, stymy creative potential, and induce more creator anxiety and burnout? Or will it help creative projects, as a larger community rallies around their work?

More options for creators means a more vibrant creator economy 

The story of the creator economy over the past few decades and centuries has been one of an unleashing of potential, through greater access, business models, and lower barriers to entry through new technologies. Token incentives represent an exciting new tool for the creator economy, allowing creators to bootstrap supporters, harness new monetization and value capture mechanisms, and co-create with their audiences. 

Just as the web2 playbook didn’t supplant traditional publishing, the web3 playbook doesn’t completely replace the web2 creator economy playbook. Rather, it opens up new potential roads for creators to take, which will result in a stronger and more vibrant creator economy.

If you’re a founder building in this space or creator experimenting with new models, I’d love to chat: li@variant.fund.

With thanks to Katie Parrott.

Additional reading:

• The Ownership Economy 2022 by the Variant team

• The Web3 Playbook: Using Token Incentives to Bootstrap New Networks by Chris Dixon

• The Web3 Renaissance by Li Jin and Katie Parrott

• Tweetstorm about the new creator playbook by Li Jin

One of the most significant trends in web3 is the re-imagining of fandom: the blurring of lines between fan and creator, between canon and “fanon,” and how fan labor is funded and rewarded. 

This trend is best encapsulated by two major shifts: 

• The divide between fans and creators is disappearing. Fans are exerting significant influence or even co-creating the original work (casting into question what “original” even means)

• Fans are employing new business models & funding sources to create derivative projects, where previously these had been nonexistent

The end result is an expansion of what creativity on the internet can look like, with greater access, financial upside, collaboration, and fulfillment. 

From canon to “fanon”

The distinction between fan and creator is fading in relevance in web3. Fans are creating derivative works that become just as widely recognized as the original, or even creating work that becomes officially recognized as part of the canon. Inextricably tied to this, creators are recognizing that fans have value to add to the creative process, and making their works more permissive for derivative usage from the start (often opting for the CC0 or “no rights reserved” license). This aligns with one of my earlier threads on how the future of the creator economy is the community economy, wherein co-creation is driven and rewarded through shared ownership.  

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Some examples of this happening now:

Shibuya is an animated film that was funded through a sale of NFT Producer Passes. NFT holders get to vote on and influence the plot of each subsequent chapter of the film, earning tokens that represent a share in the final film. That tight coupling of fan feedback into the creative process erodes the distinction between fan vs. creator.

Another example is Jenkins the Valet, a Bored Ape NFT that was named and conceived of by its owner, Tally Labs. Jenkins’ entire persona can be thought of as an extended fanfic — but one that has become so prominent that it has been signed to CAA and is now the basis of entirely new worlds and roadmaps. Shared IP ownership has resulted in a single derivative work of BAYC sparking a new creative universe.

BAYC holders’ unlimited commercial rights to the NFTs they own was pivotal to the character being able — and having incentive — to create derivative works & achieve outsized success. It’s a significant shift from the legacy fanfic world, in which there was clear delineation between fanwork vs. original creator’s work, and where fan creations are largely viewed as unsanctioned (and sometimes unwelcome) splinters off the original.

Now, Tally Labs is working on a longer novel starring the extended Bored Ape universe, wherein Apes/Mutant Ape holders can submit the stories of their characters and influence the plot, receiving 50% of net profits from the book. A key to unlocking profit sharing is that NFT holders license their IP to Tally in order to appear in the book, literally binding the fan to the work. 

Also on their roadmap is a metaverse project called Azurbala that will spawn an even broader set of characters. Even before the launch, community members are forging lore and characters inside of Azurbala, influencing the project’s official roadmap and story — an instance of fractalized fanfiction that collapses what it means to be the original creator vs. fan.

New business models for fan creation

Fanworks have historically been in a legal gray area with respect to monetization due to copyright law. Since they’re using content and characters from copyrighted works, most fanfic creators have been relegated to hobbyists creating without a business model. Various initiatives have attempted to address this — like Amazon’s Kindle Worlds — but come with their own limitations.

In web3 creative projects, underlying ownership of tokens gives fans a built-in business model and incentivizes derivative creation. In contrast to web2 fans doing work for free, in web3, fan-owners have exposure to the success of their labor through tokens: as the digitally scarce thing they hold becomes more well-known, its value increases. By propagating Jenkins the Valet through additional media projects, the price of the Jenkins NFT (and other NFTs in the BAYC universe) grows, allowing both fans and original creators to capture value. 

We’re also seeing this play out in the broader social token space & other NFT categories like music, where ownership of tokens incentivizes fans to go from passive consumers to active participants and evangelists because they have skin in the game for the work to succeed.

Cultivating shared upside 

On the fan funding side, projects with treasuries can fund fanworks to further catalyze growth of its IP. Nouns’ 27K ETH treasury (over $45m), built up through the sale of 400+ NFTs in a little over a year, is essentially a Nouns-focused fund, dedicated to projects that propagate the universe of Nouns-related IP. 

This is akin to if J. K. Rowling were to take some of her earnings to fund fanfiction authors that were using her characters — unheard of in the traditional media world. The theory is that underlying scarcity of the original collection of NFTs can allow it to capture value with growing recognition and popularity of their character universe.

In summary, new web3 creative projects are inverting the media creation model: communities of owners are forming around nascent creations, writing their own stories into existence with skin in the game, and distributing them to communities with shared upside, then to broader audiences. Fans become creators, and their own fans become creators, too, resulting in a prismatic assemblage of creation, all powered by a native business model and new funding mechanisms. The end result, hopefully, being the democratization of storytelling and creativity for everyone.

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About the author: Michael Mignano is a tech executive and entrepreneur, most recently serving as Head of Talk for Spotify, where he was responsible for leading the podcast, live, and video strategies for the world’s leading audio streaming platform. He co-founded Anchor in 2015, which is now the world’s largest podcasting platform. Michael is also an active angel investor and advisor to 50+ early-stage tech companies.

Standards, like RSS for podcasts, have enabled emerging technologies to spread far and wide in the information age by making it easy for them to plug into existing ecosystems. But the blessing of standardization eventually comes at a cost, and innovation suffers as a result. As an example, this is why the podcast format has remained mostly stagnant over its 20 year history.

Technical standards are awesome. Standards help teams save time and money by giving them a common language for how their products can interact with other products, eliminating the need to build each component within a market or re-define how systems communicate with each other. For example, a team building a new email client doesn’t need to reinvent the format for how email is transmitted between sender and recipient; instead they can just adopt SMTP (Simple Mail Transfer Protocol, the standard that defines how email transmission works) and focus on crafting a great experience for their users. This means the wheel doesn’t get reinvented when someone wants to do something that’s been done before — they can just adopt the standard and accelerate their product development, reaching their audience — and oftentimes, product market fit — much faster than by building completely proprietary products.

Despite the benefit of standards-based products being able to reach an audience faster, the tradeoff is that a lower barrier to entry means more products get created in a category, causing market fragmentation and ultimately, a slow pace of innovation. I call this tradeoff the Standards Innovation Paradox, and I’ll explain it in more detail below.

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But first…what exactly is a standard?

Simply put, a standard is a specification for how a technology (hardware or software) should talk to other technologies. Standards are generally developed by the community, but approved and maintained through consensus by committees which are typically open to anyone who wants to contribute. Some classic examples of standards in modern technology are HTTP (for web browsing), SMTP (for email transmission), RSS (for syndication of content, such as in blogs or podcasts), or SMS (for sending and receiving text messages).

Benefits of standardization

To understand the full scope of benefits that standards provide to product teams, it’s helpful to unpack an example, such as RSS (Really Simple Syndication) in podcasts. RSS has long been the backbone of podcasts, providing a powerful distribution mechanism that enables creators to publish their audio from a single endpoint and immediately syndicate their content to any consumption platform that wants to ingest it. RSS has enabled podcasts to flourish on the open internet over the past two decades by defining a language for how a vast network of podcasters and podcast listening apps communicate with each other. To publish audio via RSS, a creator (or podcasting platform, on the creator’s behalf) must publish the podcast in a specific format and include only the parameters defined within the standard, such as a URL pointing to the podcast’s cover art, a list of episodes, and so on.

I spent a lot of time working with RSS, having co-founded Anchor, a podcast creation platform that was acquired by Spotify in 2019. Anchor makes it easy for anyone, anywhere, to publish a podcast from iOS, Android, or their web browser without any prior experience or technical knowledge. One of the things that makes Anchor magical for creators is that it publishes podcasts via RSS to all podcast listening platforms with the tap of a button. This powerful distribution capability is one of the things that enabled Anchor to grow extremely quickly, and eventually become the world’s largest podcasting platform.

While RSS was a huge help for us building Anchor on the creation side of podcasting, RSS has also been instrumental to enabling the consumption side of podcasting. Virtually all of the world’s podcast listening apps that exist in the world of podcasts (such as Apple Podcasts, Spotify, Overcast, and many others) support the ingestion of RSS-powered podcasts. The benefit of doing so is huge: if a podcast listening app adopts this standard, it can automatically surface all of the world’s podcasts to its users, right away. Similar to the email example I used above, this means these listening apps can focus on a great user experience, but not have to worry about building out the content side of their business; the content already exists on the open internet, and can be easily pulled into the listening experience for users to enjoy.

Trade-offs

Since adopting RSS saves podcast listening apps an enormous amount of time and money by not forcing them to reinvent the way content flows through the podcasting ecosystem, it means the barriers to finding an audience for these apps is lower. As a result, many of these apps exist, and thus a tremendous amount of market fragmentation has emerged within the podcasting ecosystem since its inception roughly 20 years ago. If you’ve ever searched the App Store or the Google Play store for a podcast app, you’ve likely come across a tidal wave of search results. In some ways, this fragmentation is great for users, because it means they have a ton of choice and flexibility in what product to use for their podcast listening. But at the same time, this fragmentation is bad for innovation, and makes it nearly impossible to innovate on experiences that are based on RSS, meaning the podcast listening experience has remained stale and largely unchanged for almost the entirety of podcasting. Why? As mentioned above, standards are consensus driven, meaning changes to the underlying language powering these podcast apps don’t come easily. To better understand this dynamic, consider the following analogy to planning a vacation.

The family vacation

Imagine you and your significant other are alone together on a vacation for two weeks in a country you’ve never visited before. Because it’s just the two of you, you can do anything you want on that trip without putting much thought into it. Want to cancel tonight’s dinner reservation and go to a concert instead? You can. Want to skip tomorrow’s museum visit and instead rent a car to go to a different city? You can.

Now, imagine that same trip, but instead of it just being the two of you, your kids, your parents, your in-laws, three friends, your brother, his partner, and their four kids all tag along, too. It’s a completely different trip, right? In this version of the trip, everything has to be planned meticulously. And if you decide you want to make changes to the itinerary, you have to get everyone to agree, which is nearly impossible. What you end up with is a great time spent with family and friends you haven’t seen in a while, but a consensus-driven trip that is far less interesting and unique.

That’s what it’s like building products based on standards that have achieved scale and widespread adoption. Anytime a team wants to do something exciting and new that exceeds the limitations of the standard, they have to get every stakeholder (or at least enough to reach a critical mass of adoption) who has adopted that standard to also adopt the change, otherwise the change is useless. And if you plow ahead with the change anyway and break the standard, then you lose the benefits of the standard. This is hard enough with a bunch of friends and family on a vacation, but just imagine trying to do it with a variety of companies, big and small, all with different and potentially competing interests and priorities. This is the paradox of building with standards.

The Standards Innovation Paradox

The Standards Innovation Paradox is the trade-off teams face when building a new product based on standards; reaching product market fit can happen much faster because finding an audience for the product is easier, but the pace of innovation ultimately flatlines due to market inertia and consensus driven standards development. If and when a team decides to break the standard for the benefit of innovation without gaining buy-in from all other stakeholders, the benefits of the standard are lost. The more stakeholders in an ecosystem, the more people who need to agree (and thus, the harder it is to change).

Now, think about this in comparison to building in closed, proprietary systems which are not based on standards. When building everything from scratch, teams are free to implement and change technology however they see fit without having to worry about getting buy-in from misaligned stakeholders. The downside to this scenario is of course that development will be more expensive, and finding product market fit may be much more challenging. However, once a product finds product market fit, there’s no ceiling of the standard to prevent a team from accelerating their level of innovation.

The Standards Innovation Paradox forces teams to make a choice when building new products that could be accelerated through standards: adopt a standard and get the immediate benefit of distribution/interoperability with a vast ecosystem of existing products (at the expense of long term innovation), or build everything from scratch to enable ultimate flexibility and innovation potential (at the expense of plugging into an existing audience)?

The Paradox in Podcasts

We faced this paradox with RSS when building Anchor in the early days, before we were acquired by Spotify. It was nearly impossible to make innovative changes to the podcasting format, because it was based on a virtually unchangeable RSS standard.

For example, let’s say we wanted to enable a comments section for podcast episodes and have these comments be available within a show’s RSS feed. Unless we were able to get hundreds of podcast listening apps out there to adopt the change, the comments wouldn’t be supported on the listening side of podcasting. Without this support, there would be no incentive for creators to adopt and engage with comments either, and the feature would immediately fail.

As another example, let’s say we wanted to build a richer, more dynamic system for podcast analytics that enabled creators to better understand the performance of their shows, thus increasing their earnings potential through modern forms of internet advertising. Unless we were able to get hundreds of podcast listening apps out there to adopt the proposed change, getting the richer data from the listening apps back to the publishing platform wouldn’t be possible, and the innovation would fail.

This RSS-variety of the paradox has spawned a graveyard of podcast listening apps over the past two decades, many having tried to unsuccessfully build a differentiated podcast app on top of an entire ecosystem that’s based on a fully entrenched standard.

The Paradox in Messaging

Here’s another example that highlights the limitations of building with standards: SMS, the text messaging standard. The invention of the SMS standard took place in the 1980s. After almost a decade, after getting all of the necessary stakeholders on board, it finally launched to the first mobile phone and cellular carrier in 1992, and eventually, reached scale in 1999 (remember: getting standards adopted requires an enormous amount of consensus). Once it did, anyone anywhere in the world could send a text message to any other person with a mobile phone that supported SMS, regardless of which provider or device anyone used.

Then, someone had a brilliant idea to add a new feature to text messaging: pictures! How amazing would it be if you could send pictures via text message on your cell phone? But because SMS was an open standard, pictures couldn’t just be coded up into the latest software update. The standard itself had to change, and every device manufacturer and carrier had to agree to this change and adopt this change, via a new standard: MMS. And so it took almost another decade before MMS finally reached scale.

Now take iMessage, Apple’s proprietary messaging service, which is not at all a standard. iMessage is able to work because a critical mass of people quickly adopted an amazing — albeit proprietary — product: the iPhone. To use iMessage, you must own an Apple device, like an iPhone, which is certainly a drawback. And if you message someone else on an Apple device, you get the benefits of the service itself improving at an extremely rapid pace. By building in their own proprietary ecosystem, Apple has been able to innovate quickly on the messaging experience, and it now looks nothing like SMS ever could.

Just think about how much iMessage has changed over the years. In the early days, it was indistinguishable from SMS. But now, it’s extremely rich with features like read receipts, photo galleries, face filters and Memojis, an App Store, voice memos, and the list goes on. And the same can be said about Snapchat, Messenger, WhatsApp, and many other proprietary messaging platforms. The only way these platforms were able to reach this level — and pace — of innovation was by building outside of the SMS standard (though, importantly, this came at the expense of being able to interact with other systems, thus limiting the potential audience).

The Paradox in Newsletters

Here’s another more recent example. You’ve likely heard of the amazing newsletter product, Substack. It’s a platform that enables creators to build, host, and scale their own newsletter businesses. The smart thing about Substack is that it uses an open standard — in this case, SMTP, the standard that powers email — to easily distribute newsletters to anyone who has an email inbox.

In contrast to the podcast example above, where any platform that adopted RSS could instantly have the supply side of the chicken and egg problem solved, Substack did the opposite: it solved the demand side by ensuring all of its consumers already had a way to read newsletter content. This is a really smart strategy, and so as a platform, it has taken off quickly, attracting tons of high profile writers and plenty of paying subscribers.

But despite the amazing ability to tap into SMTP for instant distribution to readers, there’s a tradeoff with this approach: email is static, and as long as email clients are powered by the standard of SMTP, it will remain static. This means Substack cannot use email to do anything dynamic, like personalize the discovery experience of the reader in real time in the email client. Or include a dynamic comments section that updates in real time. Or implement any other sort of feature that would enhance the creator or reader experience but would require some sort of dynamic interface inside of an email client. Like in the podcasting example, doing so would require getting most major email clients on the internet to adopt Substack’s innovations.

And so they did something recently that was very smart, but perhaps not surprising given the limitations of standards: they launched an app that enables them to build out their own rich experience for email newsletters. This makes a lot of sense, in my opinion. If Substack is able to scale its app successfully, it can rapidly innovate on the newsletter experience, and not be beholden to the standard of SMTP. But by doing so, they are sacrificing the benefits of the open standard which initially they used to kick start the demand side of their business.

It seems to me that Substack was faced with the Standards Innovation Paradox: keep building on top of SMTP to get the benefits of widespread email adoption? Or build a proprietary solution to accelerate the pace of innovation? With the release of its app, it’s clear to me that Substack has chosen to begin moving away from standards.

Breaking the Curse

While the curse of the Standards Innovation Paradox can doom any fast moving company that wants to reinvent their category, it can be broken. In fact, there is a way for teams to have their cake and eat it, too, whereby they can both get the benefits of the standard, while also innovating past its limitations.

Leverage distribution from proprietary systems

After enough time, all of the products that adopt standards at scale will end up offering roughly the same experience. This is because there is a ceiling of what they can offer because of the entrenched nature of the standard. The more products that adopt the standard, the more market inertia, and the harder it is to change. This means competition is fierce, and it is unlikely that any one product will break out because of some differentiated experience. So how does one of these products break through and find a critical mass of adoption? To find distribution, these products need to piggy-back off of some other product that is not competing in a standards-driven market.

Think about Spotify’s podcast business as an example. A few years ago, the streaming audio giant evolved from being only a music service to being one for other categories of audio, such as podcasts. Given the content and experience differences between music and podcasts, many hoped the company would launch a dedicated podcast listening app to offer users a clean separation between the two content types. However, if they had done so, they’d have to contend with the aforementioned ocean of podcast listening apps which were all offering users roughly the same features that were limited by the standard. It would be just as challenging to breakthrough for a Spotify podcast app as it has been for every other podcast listening app. So instead, Spotify used their existing music user base inside of the existing Spotify app to distribute podcasts to hundreds of millions of users. By doing so, Spotify was able to break the curse of the paradox.

Deliver backwards compatibility

It’s important to remember that customers like using products based on standards because doing so offers them choice and data portability. If a standards-based product happens to break through market fragmentation, it’s important to maintain the benefits users got from the standard in the first place, otherwise you risk alienating your users and losing product market fit. The best way to do this is to ensure backwards compatibility with the standard. Take Apple’s iMessage as an example. If you’ve ever used iMessage, you’ve almost certainly messaged someone on an Android device. Notice how the bubble turns green? That’s iMessage falling back to the standard of SMS to interact with the recipient. This is the best of both worlds. For you and your friends on Apple devices, you can get all the benefits of an innovative, proprietary platform. But these benefits don’t come at the expense of the core messaging functionality which is based on the open standard, because you’re still able to message people on Android devices through SMS.

To Standard or Not to Standard?

Despite the Standards Innovation Paradox, it’s impossible to ignore the massive benefits standardization has had on the success of technology over the past several decades. However, when building a new product that conforms to a standard, it’s always important to consider the trade-offs and weigh the future potential of being hindered by the paradox after a team finds product market fit.

Have you noticed other examples of the Standards Innovation Paradox out in the wild? If so, I’d love to hear about them! Leave a comment below, or reach out on Twitter or LinkedIn.

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In February 2022, Magic Eden faced a crisis. After launching a fast-growing Solana NFT marketplace months earlier, it was dealing with a trial-by-fire: the first major rug pull on its platform. Balloonsville, a 5,000-item NFT collection, had successfully minted through Launchpad, the marketplace’s curated minting service, and made more than ​​17,890 SOL (worth $2 million at the time), before announcing that it had all been an elaborate scam.

Soon enough, Magic Eden was being dragged through the mud on social media and criticized by its community of collectors and creators for allowing this to happen. In a tweet sent shortly before deleting its account, Balloonsville mocked Magic Eden’s lack of controls in verifying the collection’s authenticity and accused the platform of being lax in its processes in order to boost revenue through Launchpad. 

The episode was a wake-up call, and the founders had to decide whether to take the easy road or take a financial hit in order to align their decisions with their values. “We were embarrassed, to say the least,” reflected Zhuoxun Yin, Magic Eden’s COO. “And we had two options: tell users that this was on them—essentially, DYOR—or issue refunds. It was painful, but we chose the latter.”

The team spent hours on Twitter Spaces with thousands of community members fielding questions and soliciting feedback, and refunded minters who sold below the floor price. They then rallied community members to take the Balloonsville project forward and seeded the treasury with 5,000 SOL, effectively de-rugging the project. Today, “Balloonsville 2.0” is a thriving community-driven NFT project featuring a gamified ecosystem in which users can stake their NFTs to earn the project’s native token and explore its metaverse.

Still, this episode had massive consequences. The business took a considerable nosedive as the platform overhauled its processes. Magic Eden put the brakes on its Launchpad program for nearly one month, foregoing revenue from upcoming mints, and even went so far as to introduce upcoming creators to competitor NFT platforms so they could continue with their launches. “Our Launchpad business shrunk about 70% in a month,” Zhuoxun told me. “But we needed that time to totally revamp our trust and safety processes.” 

Many startups describe themselves as "customer-obsessed"—but only insofar as that obsession leads to growth. Magic Eden demonstrates a dedication to its customers runs much deeper. “We tell everyone at the company, ‘If you have to choose between Magic Eden and users, then pick what’s best for our users,’” said CEO Jack Lu. 

An emerging playbook for web3

Today, four months after the Balloonsville rug, Magic Eden has more than recovered. Despite being less than a year old, the platform’s annualized secondary GMV sits at over $3 billion, with over 1.5M monthly transactions, 20 million monthly uniques, and 250k users trading on the platform each month. The average user transacts 8.4 times per day on the secondary market, showcasing the differentiated nature of Solana NFTs with its lower barriers to entry for transacting. It’s a level of growth and scale that often provokes incredulity from people who haven’t been closely watching the Solana NFT ecosystem.

Despite all this success, the story of Magic Eden hasn’t really been told. The company is, for a few reasons, a unique creature in today’s Silicon Valley. Its founders have been able to navigate some of the key tensions that web3 startups face: decentralization vs. being accountable to users, rapid scale vs. prioritizing community input and ownership, and making bold product decisions in an industry where the rules of the game are still being defined. While Magic Eden faces its fair share of challenges in light of broader market conditions and concerns about the reliability of Solana, its success so far outlines what I think is an emerging playbook for web3 startups.

Magic Eden has been able to navigate some of the key tensions that web3 startups face: decentralization vs. being accountable to users, rapid scale vs. prioritizing community input and ownership, and making bold product decisions in an industry where the rules of the game are still being defined.

To understand their journey so far—and how they became the go-to platform for Solana NFTs—let’s dive into the story of Magic Eden. 

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Early beginnings

The story starts in Melbourne, Australia, 16 years ago: Jack Lu and Sidney Zhang, Magic Eden’s CEO and CTO, met at age 16 at a bus stop on their way to math tutoring class. The two became fast friends, both of them immigrant kids from families driven to give them the best life possible in Australia. Years later, while working at cryptocurrency exchange FTX, Jack got a front-row seat to Solana’s growth, and an itch to start something new in the ecosystem. He contacted Sidney, by then working at Meta’s AI research group, about starting an NFT marketplace on Solana. They saw NFTs as the future of culture, community, and gaming on the internet, and were drawn to Solana’s fast transaction speeds and low costs as a promising foundation for consumer-friendly experiences. 

They then roped in Zhuoxun, another Australian expat friend who had been the second employee at dYdX and was working as a senior PM at Coinbase, and Zhuojie Zhou, who Sidney knew from his engineering days at Uber in San Francisco. The four co-founders—who brought a mix of marketplace, consumer product, engineering, and crypto-native expertise—quickly assembled and began building. At first, they worked under pseudonyms because they still had day jobs. Every minute of their nights and weekends were devoted to Magic Eden: scraping contract addresses, onboarding collections, and hacking together a minimum viable product using an off-the-shelf Wordpress theme. 

After two weeks of laying the foundations, Magic Eden went live on September 17, 2021, doing $50,000 in volume on its first day. The feedback was instant—and it was overwhelmingly positive. “We knew we had something,” Zhuoxun recalled. “All of us had been at companies where there’d been a lack of product-market fit. We knew instinctively that this was different.”

How Magic Eden Captured the Solana NFT Market

Magic Eden filled a major gap in the market: in a crowded field of NFT marketplaces, it was focused exclusively on Solana, with an emphasis on user experience and lowering the barriers to entry for NFT creators. By the end of their first month, Magic Eden had 200 collections listed, and the team decided to quit their full-time jobs and go all-in. “We knew we could create a huge generational opportunity for NFTs. Everything felt right,” recalled Jack.

The immediate challenge was building liquidity as quickly as possible—in other words, overcoming the perennial “cold start problem” of jumpstarting a new marketplace. In the fall of 2021, many NFT collections took weeks to reach secondary marketplaces, and in the meantime, users had no way of telling if the listings they came across were reliable or authentic. Magic Eden cut that down significantly: just minutes after a collection’s primary mint, NFTs became available for secondary trading on the platform.

Another key tactic that helped drive growth was migrating liquidity for existing collections. “We found that we couldn’t migrate liquidity for existing collections that were already on other marketplaces,” Zhuoxun said. They also recognized that many top existing collections wanted their own white-labeled marketplace, so they offered to build them for prominent collections like Thugbirdz. These marketplaces shared a backend with Magic Eden and helped siphon liquidity from competitors.

The last unlock was Launchpad, its full-service NFT minting platform. At the time, it was a challenge for creators to launch NFT projects on Solana. They needed to scour the internet for smart contract developers and pay them to build custom minting sites. In December 2021, Magic Eden started to ramp up its Launchpad operations, onboarding creators to launch their collections on Magic Eden and featuring them to its user base. “The learning was that if primary mints happen on the platform, then secondary often stays on the marketplace as well,” Zhuoxun explained. Today, Launchpad is a critical component of Magic Eden’s flywheel, attracting top NFT creators who want exposure to the platform’s broad user base. Over 200 projects have minted through Launchpad, earning over $10 million through their primary mints since inception. “Everyone checks Magic Eden,” said Dallas, the founder of anime-based NFT collection Suteki, explaining his decision to launch through Launchpad in early June. “That’s where everyone goes to look up Solana NFT projects.”

Magic Eden today

Today, Magic Eden attracts over 20 million monthly unique visitors. In addition to the core marketplace and Launchpad, their integrated game discovery platform Eden Games has over 430K monthly active users and 35 games launched so far. The platform retains the vast majority of market share and is typically responsible for over 95% of daily Solana NFT volume. This all despite the fact that Opensea, the market incumbent, launched support for Solana NFTs in April—an event widely predicted to be a “Magic Eden killer.” And there is room yet to keep building: after its most recent Series B fundraise, Magic Eden enters the bear market with a war chest of $130 million and a valuation of $1.6 billion—capital it intends to deploy into growing the team, executing on an ambitious roadmap, and shoring up its defensibility. 

Beyond product execution, their growth has also been driven by a community-centric approach, which was referenced by multiple creators and collectors. “They have a reputation for listening to the community,” said Suby, the founder of Okay Bears, a Solana NFT collection that minted through Launchpad in April and quickly topped NFT leaderboards. “They haven’t necessarily done everything right, but they are always adapting and reacting to what the community needs.” The company even has its own term for this building philosophy: “Twitter-Driven Development.”

Building culture with intention

They say that startups are mirrors of their founders, from the cultural values they codify to the expectations they set through example. From my own conversations and interactions with the Magic Eden team, their culture comes into focus through their actions. In a landscape dotted with scams, Magic Eden is deliberate in putting in place measures to prevent bad actors and manipulation. While other companies often make product changes in a hush-hush manner, afraid to upset their users, Magic Eden makes it a point to explain changes to its community—even when they may be disappointed. And the team is relentless and always on, responding to requests around the clock: one gets the sense that keeping Magic Eden running is like tending to the boilers of a steamship, where constant effort is necessary to keep the business propelling forward. 

The Magic Eden team would frame its culture slightly differently. When asked what makes Magic Eden unique from other startups, the team cited a focus on performance (“we play to win”); being authentically web3 over web2 (prioritizing community input over centralized decision-making), and unity and ownership (“your teammate’s problem is your problem”). 

Immigrant journeys

To more deeply understand the company’s culture, it’s helpful to start at the beginning, tracing the founders’ stories back to their roots. All four co-founders are immigrants to the US (Jack, Zhuoxun, and Sid are Asian-Australian; Zhuojie lived in China until coming to the US for graduate school). Zhuoxun’s early childhood was spent in Malaysia, until his mother moved the family to Australia when he was five. “She ran an advertising agency for eight years and sold it so that we could have a better education in Australia. She made shit happen. Her sense of hustle and sacrifice is my reference point.” Likewise, Jack says that his drive and ambition echo what he witnessed from his parents, who immigrated to Australia in their 40s despite having successful careers in China. “They didn’t want a life where they could just see the next ten, twenty years play out in front of them,” he said. “That willingness to take a leap of faith and explore the unknown is something I’m really inspired by.”

Each of the founders has their own story of deviating from the path of least resistance to arrive at their current positions. For Zhuojie, that meant diving into a new programming language and learning blockchain development from scratch when he took on the role of Chief Engineer. “I was curious about Rust (the programming language of the Solana blockchain), web3, NFTs, crypto, and running a startup,” says Zhuojie, recalling his reactions after getting the call from Sidney to help start Magic Eden.

Setting the bar

Magic Eden views itself as a steward of the ecosystem—one that is a standard-bearer in the NFT space, carrying a higher degree of responsibility to its users. In a world in which web3 apps are notoriously challenging for newcomers to use, Jack takes the opposite stance, arguing that Magic Eden ought to feel similar to using a web2 app while remaining web3 at its core: “The user experience can’t suffer. It needs to be fast, crisp, with low fees.” That sense of responsibility to the ecosystem also extends to the platform’s approach towards trust and safety, as illustrated by the Balloonsville episode: “Trust and safety is an issue that’s endemic to the crypto industry at large. I’m supportive of greater user protection and creating more safety and reliability over a ‘caveat emptor’ approach.”

To ensure that level of accountability, Magic Eden has a comprehensive screening process for new hires. Before every new person joins, they do a one-week work trial at the company, during which they’re onboarded and work alongside the rest of the team. This approach has been successful—the team is now over 100 people. “The pitch is pretty simple,” Zhuoxun explains. “If you look at the market for fungible tokens, there’s been slow and steady growth, and now the market is huge. The same will be even more true for NFTs because there are way more applications for NFTs than for fungible tokens. If you believe in NFTs as a category, then we are at the forefront of that category.”

Mapping a future for—and with—the Magic Eden community 

Today, Magic Eden enjoys a considerable lead in the Solana NFT market. It also got here in just nine months—demonstrating both its effective strategy but also how dramatically the landscape can change in a short time. “They’re in the best position to win, but nothing is a given,” said Okay Bears founder Suby on the future of Magic Eden. 

One of the challenges Magic Eden faces is scaling as a fast-growing, remote-first startup while maintaining strong company cohesion. The team is globally distributed, and building culture while remote is something that the founders spend a lot of time thinking about. “We’ve had success hiring from our own networks, but we need to cast the net wider and search for talent in different places,” Sidney said.

Another issue that looms large is Magic Eden’s current platform dependency on the Solana network. During Solana’s recent outage in June—the fifth time the network has gone down in 2022—the network stopped producing blocks for roughly four and half hours. With just 1,000-some validators compared to the more than 300,000 that secure the Ethereum network, Solana is often criticized for its lack of decentralization. And as Ethereum scaling solutions enter the market and gain adoption, Solana’s wedge of fast, low-fee transactions could be eroded by a similar experience on Ethereum that also offers better security. It remains to be seen whether the ecosystem will continue to see strong NFT volume and user growth—especially in light of the bear market.

In order to grow, scale, and de-risk itself, cross-chain expansion is likely necessary. Yet, as I see it, the source of Magic Eden’s defensibility against other marketplace entrants into the Solana ecosystem—its community that is distinct from Ethereum NFT creators and collectors—is also a double-edged sword that could hamper its growth into new ecosystems. Witnessing Magic Eden’s continued hold on its market share unfold in real-time has been a lesson in how network effects aren't global but community-specific. Expanding to other chains in the future will mean a reset on its network effects, and requires gaining a toehold and rebuilding Magic Eden’s usage among entirely new communities. 

Avenues for growth

Despite these headwinds and challenges, there is a lot to be hopeful about for Magic Eden as it charts its course. In speaking with the team, there are three major growth vectors and opportunities that the company is keen to explore:

• Creating a verticalized strategy around gaming

• Embedding more social experiences into Magic Eden

• Community ownership

One of the team’s strategies for expansion is evident in their clear intention to lean into a verticalized strategy around gaming. As more games launch with NFT elements, and Solana’s low fees and high speed naturally lend itself to gaming use cases, Magic Eden wants to play a bigger role in this ecosystem. “We want to engage game creators and provide SDKs and other tools so they can build their own marketplace as easily as possible,” said Zhuojie. The team also plans to leverage Magic Eden’s wide distribution—over 400,000 unique wallets per month—to promote games to its user base and convert NFT collectors into players.

Another area of opportunity is social, and owning more community interaction around NFTs. Today, most NFT marketplaces focus on the transaction itself, while the initial stages of creating purchase intent or sparking inspiration happen on other platforms like Discord and Twitter. The user experience is clunky and disjointed: users have to check multiple platforms to discover, communicate, transact, and connect, leaving an opportunity to build a more cohesive commerce experience that reflects the social activity happening around NFT purchases and ownership. The innately social nature of NFTs was on display during the Trippin’ Apes Tribe NFT mint, when a live chat feature was activated inside of Magic Eden’s Launchpad and drew in over 9,000 concurrent participants. Capturing more of each user’s end-to-end purchasing journey—especially on mobile, where Magic Eden has achieved over 200k downloads with almost no marketing—is a key way for Magic Eden to bolster its network effects.

And lastly, community ownership. While the team hasn’t announced any plans for a token, the team’s crypto-native DNA and web3 ethos of heightening community participation has already been made apparent. In February, the company air dropped several thousand Magic Ticket NFTs to active wallets, which served as entry tickets and governance tokens into MagicDAO, whose mission is to “work together with our community to create a stronger Solana NFT ecosystem.” Magic Eden seeded the DAO with 1,000 SOL. Perks and rewards for DAO members include getting whitelist spots for Launchpad, access to IRL events, and dedicated AMAs and feedback sessions.

In March, Magic Eden sponsored the opening party for NFT LA, with Magic Ticket holders gaining access to a VIP experience to meet rapper Waka Flocka Flame. “We expect our DAO’s purpose and decisions to evolve over time, and we want to co-create the experience with the community,” the team wrote in the announcement blog. 

Supporting a new generation of creators

On a recent evening in June, the team hosted a meetup with the Okay Bears team in San Francisco, attended by a diverse array of people in the NFT ecosystem. Guests included prominent collectors, social media creators, the Head of Metaverse for the electronic dance music festival Tomorrowland, NFT leads for the Solana Foundation, and other web3 founders. The goal was to help the Okay Bears team—who had flown in from Australia—meet collectors, fans, and others who could help the project achieve its roadmap.

Jack observed: “Although crypto has existed for many years, for a long time, it was hard to relate to. NFTs have given people a reason to come together.” He cited the example of Belugies, a beluga whale-inspired NFT collection created by a 14-year-old artist from Puerto Rico. Launched on Magic Eden’s Launchpad, the collection raised $1 million, a portion of which was distributed to various causes, including wildlife conservation organizations. 

“Success for Magic Eden is more stories like that,” Jack reflected. “We want to empower grassroots creators and innovators, who may have not been supported by the old system, to shape the world around them and inspire their communities in entirely new ways.” 

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Special thanks to Adam Delehanty, Derek Walkush, Anna Pendergrast, and Kelly Pendergrast for their ideas and support on this piece.

Disclosure: Variant Fund is an investor in Magic Eden.

About the author: Li Jin is a General Partner and cofounder at Variant, an early-stage venture firm investing in web3. Prior to Variant, Li was the founder and Managing Partner at Atelier, a venture firm investing in the creator economy and the future of work. Atelier and Variant merged in the fall of 2021 to invest in software that is owned and operated by users. You can also follow Li on Twitter and subscribe to her podcast, Means of Creation.

Earlier today, this essay was published on Harvard Business Review evaluating both web2 and web3 through the lens of Rawls’ theory of justice, and offering a set of principles to guide web3’s development towards creating a fairer, better internet. I hope it provokes conversation on the “why” of web3 and a greater degree of intentionality around the impact that we have as builders and participants in the ecosystem. I hope you enjoy it, and join the discussion on Twitter.

By Li Jin and Katie Parrott

One of the most powerful narratives surrounding web3 is that it is a movement toward a better, fairer internet. Specifically, web3 proponents envision an internet in which users can wrest back power from a small number of extractive, centralized institutions, and in which everyone with an internet connection can participate on a level playing field.

But web2 started with a similar promise of empowering individual creators and removing intermediaries — a promise left unfulfilled. Now, standing at the precipice of a new era of the internet, we should ask ourselves: Is web3 actually democratizing opportunity? And if not, how can we better design platforms and governance systems to promote fairness?

The social and political philosopher John Rawls’ thought experiment known as the “veil of ignorance,” proposed in his influential 1971 work A Theory of Justice, provides a useful framework for these questions. When creating the foundations for an ideal society, Rawls contends, we should imagine that we do not know where we ourselves would fall within it — that is, we should adopt a veil of ignorance. A just society is one “that if you knew everything about it, you’d be willing to enter it in a random place.” Rawls adds:

Among the essential features of this situation is that no one knows his place in society, his class position or social status, nor does anyone know his fortune in the distribution of natural assets and abilities, his intelligence, strength, and the like. I shall even assume that the parties do not know their conceptions of the good or their special psychological propensities.

Rawls’ thought experiment is particularly relevant now because we are standing at precisely the kind of inflection point that the veil of ignorance imagines. Web3 presents the opportunity to build an entirely new internet — indeed, entire new economies — from scratch. The question then becomes: What kind of internet should we be creating?

Some might say that web3 is young, and these issues will simply work themselves out over time. But questions about impacts and externalities were left too late in the design of web2, with consequences ranging from election manipulation to widespread vaccine misinformation. Some indicators show that early design choices in web3 are replicating or compounding the inequalities of web2 and the real world.

If we want web3 to make good on the promise that it can materially improve the situations of everyone within the ecosystem, and not just a handful of people at the top, we need to design it according to principles that will make that happen.

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How Do We Decide What’s Fair?

Philosophers and thinkers have been debating for centuries how best to allocate resources among participants in a society. The body of thought devoted to answering these questions is known as “distributive justice,” and there are varying schools of thought within the discipline:

• Strict egalitarians argue that the only just system is one in which resources are distributed absolutely equally — in other words, everyone should have the same amount of material goods. The principle is rooted in the belief that everyone is morally equal, and thus deserves to have equal access to materials and services.

• Luck egalitarians argue that what’s important is equality of starting position, and that any inequalities that emerge after that point are justified by differences in merit.

• Libertarians argue that individual freedom should be the sole consideration, and that any effort to redistribute resources infringes on that freedom.

• Utilitarians argue that the most just system is the one that maximizes the sum of total happiness and well-being of all participants. Under utilitarianism, redistribution of wealth would be desirable because each marginal dollar would do more to raise the well-being of a poor person than a wealthy person.

Common among these theories of justice is a tension between two equally important yet often opposing values: freedom and equality. A society in which all actors are completely free is likely to result in a significant amount of inequality, since individuals differ in their motivation to pursue wealth and will behave in ways that advance their own interests. Conversely, a society that is completely equal inhibits freedom, since individuals cannot behave in any way that causes them to be unequal to others — even if that unequal outcome is “earned” through hard work or skill.

Using veil-of-ignorance reasoning, Rawls introduced his own theory of distributive justice, known as “justice as fairness.” It has two parts: the greatest equal liberty principle and the difference principle. The greatest equal liberty principle affords all citizens equal rights and liberties to the fullest extent that’s compatible with others also having those liberties. Justice requires equal rights for every person.

The difference principle says that any social or economic inequalities that do exist in society should meet two conditions. First, they must be “attached to offices and positions open to all under conditions of fair equality and opportunity.” Social positions, such as jobs, should be open to everyone and allocated by merit. In other words, a person’s prospects for success should reflect their level of talent and willingness to use it, not their social class or background. And second, any inequality that does exist should maximize the benefit of the least well off. This is a profound principle. Under this principle, it’s acceptable that doctors earn more than janitors, because that compensation differential incentivizes doctors to pursue their careers and ensures that janitors (and everyone else) will receive quality care if they fall ill.

Rawls’ theory is nuanced, but in short, it’s unique in how it resolves the central tension between the competing demands of freedom and equality. By requiring that inequalities benefit the least advantaged, Rawls builds in a natural corrective to the rampant inequality that would otherwise emerge in a system that privileges freedom above all else.

This balance between freedom and equality makes Rawls’ theory compelling as a philosophical framework for the internet. It leaves space for builders to be rewarded for their contributions, which is necessary to foster incentives for smart, ambitious people to build in the ecosystem. At the same time, it places a burden on those builders — and the ecosystem as a whole — to build in a way that creates opportunity for less-advantaged participants.

Evaluating the Current Internet Against Justice as Fairness

How well does the current internet abide by Rawls’ principles? In many ways, the web2 internet has expanded and enhanced opportunity for a broad set of people and exists in closer accordance to Rawls’ difference principle than the pre-internet world. Before the internet, access to participation in various industries was limited by a handful of gatekeepers, ranging from movie studios to music labels. The internet and social media platforms made it possible for anyone to participate in content creation and distribution, and therefore enabled more creators to succeed.

But you don’t have to look far for evidence that the web2 internet falls short of the mark in other ways. Consider just a few examples of how web2 platforms have inhibited equality and violate the difference principle: Gig economy platforms bring in billions of dollars in revenue, while the frontline workers who deliver their services earn poverty wages and are shut out of decisions that impact their lives. Social media companies and media platforms earn billions of dollars in ad revenue from algorithmic feeds that elevate misinformation and damage vulnerable communities. Platforms’ creator funds typically reward creators with the most views and engagement, leading to the concentration of income among those who already have ample sources of revenue while failing to broaden access for less-well-off aspiring creators. And we’ve written before about how the internet’s original sin of not enabling payments led to the extractive, advertising-based business models that define the web2 economy today.

But it’s not just web2 platforms that fail to reach Rawls’ standard of justice. Web3 in its current form is also exacerbating inequalities. Web3 projects commonly issue crypto tokens as digital representations of value. Early versions of token distributions have led to unsustainable dynamics wherein speculators are rewarded instead of those who are adding consistent value to networks through actual usage. Some play-to-earn games have implemented dual-token systems in which users earn income but not governance power, creating the risk of replicating the dynamics of the current economy in which workers earn salary but not equity, compounding wealth inequality. Business writer Evan Armstrong points to strong parallels between some current NFT projects and multi-level marketing schemes, in which later arrivals to the ecosystem are structurally unable to achieve the same level of success as early adopters due to system design.

How to Ensure Justice as Fairness in Web3

We’ve seen how both the web2 internet and early iterations of web3 fall short of ensuring a free, fair playing field that benefits the least advantaged. So what would an internet that meets Rawls’ standards look like? Some general anti-principles start to come into focus:

• Don’t build a system that only benefits the wealthy, because what if you’re poor?

• Don’t build a system that disproportionately favors early adopters, because what if you’re not embedded in networks that give you early access to knowledge?

• Don’t build a system that demands extreme technological savvy to succeed, because what if you don’t have the aptitude or resources to learn those skills?

Using these anti-principles as guides, builders and participants of the web3 ecosystem can do three things to ensure it aligns with Rawls’ ideals of liberty, equality, and the difference principle: First, promote self-determination and agency. Second, reward participation, not just capital. And third, incorporate initiatives that benefit the disadvantaged.

Promote self-determination and agency.

One of the flagship principles of web3 is the idea of self-determination: Unlike in web2 platforms, with a cadre of founders, executives, and shareholders holding all the power, web3 communities will be controlled by their members. This would be consistent with economist Albert O. Hirschman’s “Exit-Voice-Loyalty” model, which describes the choices individuals have when confronted with dissatisfactory situations in organizations and states. Ideally, on web3 platforms, users can voice concerns to try to change their situation; exit to new platforms; or wait, out of loyalty, for the situation to resolve.

But the reality today is more complex. Early governance structures have largely instituted token-weighted voting, with the result being plutocracies that are not all that different from the boardrooms they’re meant to be a corrective to. And the problem with plutocracy, whether it happens in a boardroom or a DAO Discord channel, is that the people holding the power are likely to look out for their own interests.

As a first step in aligning web3’s future with Rawls’ principles of justice, participants and builders of the web3 ecosystem need to push for democratic systems of governance that give a voice to all its members, not just a select few. Everyone should be equally enfranchised in the systems in which they participate.

There are additional systems of governance that can combat plutocracy, such as:

• Reputation-based governance: According greater governance power to those with higher reputational value.

• Delegation: Enabling community members to nominate others to vote on their behalf.

• Pods/subDAOs: Smaller groups within an organization whose scope of governance can be constrained to their missions.

An example of a project purposefully diversifying its member base is Mirror’s airdrop of the $WRITE token, which is needed to register a custom subdomain on the platform — and, in the future, to participate in governance. To broaden the base of users who would be able to influence governance, tokens were distributed according to an algorithm designed to maximize diverse social clusters. According to Mirror, this airdrop “further democratizes the selection process and broadens the criteria for entry…the expansion of the Mirror community will be determined by those who have been most integral in shaping it thus far.”

Beyond the importance of voice — the ability for people to change a system from within through governance — participants also need a viable path to exit. Web2 platforms coerce user loyalty through network effects and closed data, and exiting a platform leaves creators without access to their audiences or content. Web3 affords the opportunity to build systems that foster user agency and self-determination through true digital ownership, open data, and networks that are built atop open-source software.

Reward participation, not just capital.

A core philosophical tenet of web3 is that there are more ways to provide value to an ecosystem than through capital — and furthermore, that value should be able to be earned, not just purchased. This is a radical departure from the existing structure, where those with capital earn more through investments than people can earn through work — resulting in a widening wealth gap over time.

Distribution of ownership to participants is also a major shift away from how incumbent platforms are built, wherein meaningful ownership accrues to employees and investors but excludes users whose content and contributions make those platforms valuable.

An important step in aligning web3 with the principles of justice as fairness is to ensure that everyone is on an equal footing and can attain positions of power or compensation through their own merit and contributions. The reality so far has been that those in the right knowledge networks can compound their wealth through strategies like sybil farming (creating multiple accounts) to receive additional token airdrops. And while early distributions of tokens often perversely incentivized short-term mercenary behavior — like participating in yield farms then exiting them days later in search of higher yields — there is an opportunity to iterate and improve the process to support networks’ long-term retention and sustainability. One way is by making it possible to earn ownership through ongoing participation in networks, not just capital investment. Projects that are working to expand access to ownership through active contribution include RabbitHole, Layer3, Gitcoin, BanklessDAO, and FWB.

Incorporate initiatives that benefit the disadvantaged.

The difference principle is grounded in the idea that inequality, per se, is not a bad thing. With fair equality of opportunity as a prerequisite, inequality remains an inevitable outcome of people’s natural abilities and level of desire and effort to earn money. But when inequalities do arise, do those arrangements benefit those less privileged in society?

This is a challenging principle to apply in the context of technology. But consider this thought exercise: Do the current social networking feed algorithms promote content that maximizes the benefit to the least well off? For platform creator funds that give payments to content creators, predicated on views and engagement: Do such inequalities in payouts maximize the benefit to the least well off among their users? The answer is likely no. While top creators have a plethora of ways to monetize and can sustain their output regardless of creator fund payouts, the least well off may not even participate in content creation due to financial constraints.

The difference principle will be particularly important to the democratization of web3, since participants will enter the ecosystem at different times with a wide variety of backgrounds, incomes, and technological fluency and access. There are already many examples of projects leveraging crypto to maximize the well-being of the least well off. For example, SuperHi, a for-profit creative education platform that is planning to decentralize ownership to its members and instructors, tested a basic income program with the goal of broadening access to creative careers. Projects like Proof of Humanity and ImpactMarket seek to use blockchain technology as a foundation to provide basic income to those in need. Communities like LaborDAO are leveraging building blocks to build worker power, while others like she256, We3, and Komorebi Collective are focused on increasing diversity in the blockchain space.

Besides projects that have social good as an explicit mission, all web3 networks should be incentivized to adhere to the difference principle and maximize benefit to the least well off, since that approach maximizes attractiveness to new participants, propelling further network effects. A just network is one in which participants would be willing to enter at any time, at any position, with any level of tokens.

A Fair, Just Internet Is Possible

Web3 offers the opportunity for a meaningful course correction — a chance to reimagine the internet and build new platforms from first principles. But in order to do that, we need to agree on what those principles should be, and why. Rawls’ principles of justice provide a useful starting point. Without full knowledge of where our positions will be, our aim should be to design new systems rooted in fairness and consideration for all.

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Li Jin is a cofounder and General Partner of Variant, a venture capital firm focused on investing in web3 and the ownership economy.

Katie Parrott is a writer and editor at Every, a media company publishing essays and analysis focusing on business.

By Li Jin, Geoff Hamilton, Jesse Walden, Spencer Noon, Derek Walkush and Medha Kothari

Thirty years into the development of the world wide web, a handful of companies control most user attention and advertising revenue, with closed ecosystems that hold back innovation by independent developers. The economic interests of the biggest internet platforms are poorly aligned with their most valuable contributors: their users. 

Ownership has long been embraced by Silicon Valley startups to align incentives among employees through option grants. Still, the vast majority of internet users own exactly 0% of the services they contribute to. Creators don’t own their content, developers can’t control their code, and consumers can’t influence the policies or decisions of the platforms they use. This scenario, which once went unquestioned, looks increasingly archaic. 

This is starting to change via the ownership economy—often referred to as web3—with products and services that turn users into owners.

What started with Bitcoin and Ethereum—both of which reward participants who secure the network with their native tokens—is becoming prevalent across all categories of software, from developer infrastructure and new financial markets in DeFi to consumer products, marketplaces and social. 

A new internet owned by users

If the last generation of software was built upon a foundation of user-generated content, the next generation of software will be user-owned, with digital ownership leveraged as a building block to enable novel user experiences. At its core, the ownership economy not only offers a powerful new tool for builders to leverage market incentives to jumpstart new networks—it also holds the potential to create positive social change through the wider distribution of wealth-building assets.

In the two years since Jesse Walden published the initial vision for a user-owned internet, the landscape has dramatically shifted and expanded. There are now more than 15,000 projects in the ownership economy, from user-owned financial markets to user-owned social networks, investment clubs, and digital assets. While the ownership economy still represents a small portion of all internet platforms, it’s a fast-growing segment. Ethereum, one of the more mature networks that supports the ownership economy, grew 46% in monthly average accounts in 2021.

Amidst all this growth, we wanted to take a step back and re-introduce this ecosystem through some fundamental questions: what is the ownership economy? How big is it, and where is it headed? What trends are defining its current state, and possible future? To answer all of these, we’ll turn to data and case studies that illustrate how the ownership economy is playing out in real time. 

This report is meant as a primer for new entrants to web3 who are looking to go one level deeper. We’ll also be using it as a jumping-off point for more in-depth pieces that we’re planning to publish this year on topics like token distribution strategy, regulatory issues and more. 

Without further ado, let’s jump in.

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What is the ownership economy?

Simply put: the products and services that will define web3—and the next generation of the internet—are those that transform users into owners. We call this the ownership economy.

Still, identifying this phenomenon isn’t always simple, or obvious. That’s because ownership manifests across a spectrum of experiences that range in user effort, responsibility and degree of collectivity. One user might own a single digital media asset, like an NFT. Another might influence a network’s operation via a governance token. The experience of being an owner encompasses both passive (i.e., hodling) and active participation.

Note that for this report, we focus on crypto tokens—rather than equity—as the basis of the ownership economy. Tokens have a richer and more frictionless design space. They can be distributed programmatically, with the potential to reward participants versus those who buy in; they are effectively free to deploy, and they can transfer value in the same way we transfer information—instantly, to anyone, anywhere in the world.

The ownership economy is big—and growing

As of April 26th, 2022, the market capitalization of the over 19,000 tokens tracked by data aggregator CoinMarketCap is $1.76 trillion. For comparison, the market capitalization of global stock markets is over $100 trillion. 

The largest cryptonetworks by market capitalization are established layer 1 blockchains: Bitcoin ($725 billion), which was launched in 2009, and Ethereum ($337 billion), which was launched in 2015. Other layer 1s in the top 20 tokens by market capitalization include Solana, Polkadot, Terra, and Avalanche. 

We can also think about the scale of the ownership economy in terms of people—the users who become owners in the networks they build. 

The Financial Times and Chainalysis estimated that there were 360,000 owners of NFTs as of 2021. Beyond that, there are tens of millions of users of cryptonetworks. Metamask, a wallet that is used to connect to decentralized applications, recently announced that it had 32 million monthly active users as of February 2022, and Phantom (a wallet currently focused on Solana) announced monthly active users of 2 million in January 2022. In the fourth quarter of 2021, Ethereum had monthly average transactional users of about 6 million and daily active transactional users of about 400,000. From a multi-chain perspective, there were approximately 2.5 million average daily active users interacting with the smart contracts tracked by DappRadar. As a rough approximation, if we extrapolate these 2.5 million daily users to calculate monthly users using Ethereum’s DAU/MAU ratio of 0.06, we could estimate MAU of 39 million across the 29 networks covered by DappRadar’s data.

DAOs, decentralized autonomous organizations, are online communities owned and governed by their members. They can be thought of as the organizational building blocks that make up web3’s economic, social, and cultural landscape. New DAOs are forming at such a rapid pace that it’s difficult to count them, but it seems safe to say there are over 1,000. DeepDAO, a data source, tracks detailed information about around 180 DAOs. In these DAOs alone, there are 1.7 million holders of governance tokens, and about 500,000 of these holders actively participate in DAO governance. And some of these DAOs are quite large: 69 of the 180 have more than 1,000 members.

State of the ownership economy in 2022

Today, user ownership is transforming how people transact, invest, create, build, play, learn, communicate, and socialize.

Walden’s original essay “The Ownership Economy” posited that user ownership could result in “platforms that can be larger, more resilient, and more innovative.” As we discuss throughout this report, many of these aspirations are not yet realized, or have mixed results, owing to nascent playbooks on how to best effectuate user ownership. Still, we remain confident in the power of user ownership to build bigger, more defensible networks and to catalyze positive social change. Realizing that potential requires additional research on best practices regarding ownership distribution and education geared towards developers and users. As a step towards that, we wanted to share a few key insights on the state of the ownership economy today.

1. User ownership can jumpstart growth, but sustaining it is more challenging

Giving users ownership in the form of tokens can be a powerful alternative to paid marketing, helping to bootstrap networks and overcome the cold-start problem.

But before we dive into that, let’s consider how much it costs for non-crypto services and products to bring users on board. In 2015, Facebook's mobile app install advertising business reached $2.9 billion in revenue, comprising 17% of Facebook's total ad revenue. That’s a huge sum of money going into the pockets of an intermediary platform—Facebook—rather than flowing to app developers to invest in R&D and product improvements, or reaching the end users in the form of lower prices or greater rewards. The hefty upfront fees for user acquisition also means that consumer apps that are unable to raise outside capital are hard-pressed to get off the ground: the average cost to acquire an app user was $3.52 in 2019.

In contrast, for crypto projects, giving users ownership can function as marketing, drawing in new users through the promise of ownership and increasing engagement as a result of having skin in the game. A case study is Coinbase and Uniswap, two cryptocurrency exchanges that enable users to swap various tokens. 

While Coinbase is a centralized exchange that custodies users’ wallets and funds and matches trades using its order book, Uniswap is decentralized and facilitates automated transactions entirely through smart contracts. Coinbase was founded in 2012, and employs 3,730 people as of 2021. In contrast, Uniswap was founded in 2018, and has less than 100 employees. With just 3% of the headcount of Coinbase, Uniswap does 73% of its trading volume. How is this possible? Importantly, Uniswap makes its users owners via governance tokens and LP shares, giving it leverage to grow bigger, faster. In addition, because Uniswap is decentralized, anyone can add any asset. If all the world’s value will be tokenized in the same way all information was packetized on the internet, then we should expect decentralized exchange growth to outpace their centralized counterparts.

Tokens aren’t a replacement for product-market fit

However, in our analysis, it is clear that simply giving users ownership is not sufficient to ensure that a product wins out over its competitors. Tokens can be useful in capturing user attention and bootstrapping initial adoption, but they need to be coupled with strong product-market fit—solving a widespread need for users—in order to sustain usage.

The NFT landscape is a prime example of the insufficiency of ownership to drive consistent, ongoing engagement. The dominant NFT marketplace, OpenSea, has over 90% market share of transactions despite not having a token, whereas multiple competitors do (e.g. LooksRare, SuperRare, Rarible). Notably, after Rarible launched liquidity mining—token airdrops to users who buy and sell NFTs on the Rarible marketplace—in summer 2020, its volume briefly surpassed that of Opensea, but Opensea’s deeper liquidity, stronger product, and better search features helped it to win out over time. For users of marketplaces, liquidity—the presence of a counterparty for one’s desired transaction—is still the strongest motivator to choose any marketplace over another. The existence of a token that incentivizes transactions in alternative smaller marketplaces is insufficient to overcome OpenSea’s advantage in meeting the core user need of transacting.  

Another example is layer 1 blockchain ecosystems. Despite L1 blockchains all offering their own native token representing network ownership, Ethereum is still the fastest growing platform because of the network effects of users and developers, more mature developer tooling landscape, and ability to compose with other existing applications. Those factors indicate that even the lower fees of alternative blockchains are not sufficient to overcome Ethereum’s network effects (though whether it’ll maintain its advantage is unknown).

There is also the question of whether ownership actually crowds out intrinsic incentives to use a product, causing users to engage with products in a more mercenary, transactional (and likely temporary) way. There has been an abundance of research on the interplay of extrinsic motivations—behavior undertaken for some external reward like financial benefits—on intrinsic motivation. According to some studies, extrinsic motivations can undermine intrinsic motivation, especially when users previously found that behavior intrinsically rewarding. The implication is that token incentives should be optimized in terms of timing (via progressive decentralization), magnitude, eligibility, and other factors so as to preserve users’ intrinsic motivation.

2. New token distributions designs are boosting user loyalty

In theory, when users become owners and are (literally) invested, they should become more highly engaged and retained. Today, the reality is mixed.

One powerful illustration of ownership engendering loyalty is the success of play-to-earn games like Axie Infinity. Axie Infinity is a blockchain-based game in which users collect, breed, and battle digital creatures called Axies, which are NFTs. The ownership of in-game assets is a key difference between blockchain games like Axie Infinity and non-blockchain games: in the latter, “owned” assets generally cannot be exchanged for money or transferred outside of the game.

Ownership of in-game assets can engender more player loyalty.

Powered by a play-to-earn mechanism in which players earn tokens in the game that can be exchanged for their local currency, Axie Infinity has achieved significant scale, with over $1 billion in cumulative revenue and nearly 3 million daily active users. And the game’s player retention is dramatically higher than that of traditional mobile games. Axie Infinity’s player retention has remained strong and consistent over time, suggesting that engagement is not simply a function of the game’s novelty.

Axie Infinity’s retention has remained strong over time compared to traditional mobile games, highlighting the importance of digital ownership.

But there are counterexamples of token incentives’ mixed impact on user engagement. The entire field of tokenomics is in its infancy, with best practices around ownership distribution still unknown. To date, users have raised important questions and made critiques around token incentives and the efficacy of ownership to translate into user loyalty or desirable societal outcomes.

While liquidity mining programs (rewarding users with ownership via tokens for providing liquidity) have become pervasive and driven short-term participation in new products, they have not historically contributed to long-term sustainability. According to research from Nansen, "A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours. Around 16% leave within 48 hours, and by the third day, 70% of these users would have withdrawn from the contract." The extrinsic nature of token incentives means that many liquidity providers are financially motivated by the highest rewards, leading to churn.

Furthermore, while almost impossibly high token incentives became a defining feature of the “DeFi 2.0” wave, their sustainability is now in question. Changing market sentiment led to dramatic price crashes for many of these projects, and their tokenemonic models became the subject of serious debate. These downturns most acutely impacted contributors paid in a project’s native token—often subject to vesting schedules—and the project’s most passionate supporters. 

Innovations in token distribution

As a result, many projects are rethinking token incentive mechanisms, and a wave of new models is beginning to emerge. For example, Curve’s voting escrow (“ve”) contracts use lockup periods to increase token rewards; Gro also introduced a vesting mechanism to encourage long-term engagement. As scholarship about token engineering and cryptoeconomics proliferates, these models are increasingly tested and scrutinized, suggesting the next generation of tokens will more effectively engage users and incentivize long-term contributions.

At a high level, the opportunity is to make token distribution more granular and targeted in rewarding behaviors that actually contribute to a network’s retention and sustainability, versus simply rewarding users whose tech-savvy networks translate into early knowledge of new products or who engage in mercenary behavior. Such distribution would result in more accessibility than first-generation projects that priced out later users, and be orders of magnitude better than compounding returns to capital that exist in the real world, where capital needs to be bought rather than earned. As an example, the token-gated social community Friends with Benefits (FWB) requires 75 FWB tokens to join, which at one point was equivalent to over $12,000. But beyond buying the tokens, there are ways to join the community through earning ownership, including writing, designing, creating artwork through FWB’s studio, or contributing to various work streams. 

Beyond direct contributor rewards, some DAOs began implementing bounty programs to attract users and delegate work. These one-off tasks range from short-term developer assistance and business development to simple community participation, with payouts in the project’s native token. Platforms such as Rabbithole and Layer3 aggregate these bounties for multiple DAOs, giving potential users the opportunity to search for both projects and tasks that fit their interests. A new generation of token incentives seems to be placing greater emphasis on contributor growth compared to solely deepening liquidity—an imperative transition to grow the ownership economy’s user base. 

3. User ownership can foster richer ecosystems of projects and contributors

When they combine distribution of ownership with permissionless access, user-owned projects can foster rich ecosystems. Deployed in this way, distributed ownership can be a catalyst for projects to become platforms that third-parties build on.

Ethereum is one of the most powerful illustrations of this. The distributed ownership of the network has fostered a community of developers and users with an interest in the continued success of Ethereum: the value of their stake in Ethereum—their Ether—supplies ample incentive to continue building on and using the network, engendering an ecosystem of applications across social, marketplaces, DeFi, and more. Shared ownership reinforces network effects and creates a disincentive to switching to other blockchains. Of course, Ethereum’s success is not only a consequence of distributed ownership; it has also benefited from capable leadership and from embedding values that have helped align and motivate its community. 

In the NFT space, another manifestation of decentralized ownership is emerging in the form of CC0 (or “no copyright reserved”) projects—those that relinquish all copyright and turn over their work to the public domain. Nouns, Cryptoadz, Chain Runners, and Loot have placed their assets in the public domain, allowing their intellectual property (IP) to be freely used, remixed, and commercialized.

As a result of their permissionless nature, users, creators, and developers have been attracted to these projects and have begun building around and on top of them. Loot is a CC0 NFT collection that exploded in popularity in September 2021, with each NFT containing a simple list of fantasy adventure gear. There are now more than 53 Loot derivatives and at least nine guilds—groups for owners of specific items in the Loot universe.

CC0 NFT projects create the potential for their IP to be used in novel and generative ways—increasing the reach, relevance, and, ultimately, the value, of that IP. 4156, a contributor to Nouns DAO, said: “In the same way that academic citations make the original paper more important, citation of Nouns in whatever form … will make the originals more important and more valuable.” Nouns is putting this theory into practice by catalyzing the proliferation of its IP and pursuing collaborations with other brands (like Bud Light, which incorporated the iconic Nouns glasses in a Super Bowl commercial) and traditional media companies. 

Similarly, the team behind Cryptoadz collaborated with Arcade NFT, an art and gaming studio, to produce Toad Runnerz, an NFT collection in which each NFT is a playable arcade-style game that incorporates Cryptoadz as in-game assets. Arcade NFT hosts exclusive tournaments for Toad Runnerz NFT holders, further extending the reach and content of the underlying Cryptoadz IP into the gaming space.

By enabling free use of their assets, CC0 NFT projects extend the definition and possibilities of ownership. This approach has the capacity to stimulate building, creation, and collaboration—and we’ve only just begun to see its potential.

4. The ownership economy allows users to become owners earlier and participate in value creation

A key theme of the ownership economy is that users become owners faster than in their centralized counterparts, allowing them to contribute to and benefit from value creation. 

In our analysis, we found that on average, web3 companies that launched a token did so 2.7 years after founding; in 2020, VC-backed companies went public approximately 5.3 years after securing their first VC investment. The timeline of IPOs, compared to token launches, serves to eliminate a significant amount of upside potential for retail investors.

This phenomenon comes into sharp focus when comparing Coinbase and Uniswap. Coinbase went public in April 2021, nearly nine years after the company was founded. The stock ended its first day of trading with a market capitalization of $85.7 billion, an incredible outcome for private investors such as Y Combinator, which seeded the company in 2012 at a valuation of roughly $2 million.

However, Coinbase’s public listing did not represent a great outcome for retail investors, whose opportunity to invest only came after the company’s valuation had multiplied 40,809x from its first private investment round. In fact, every retail investor who purchased and held Coinbase stock since its public listing has lost money on their investment, as of April 2022.

In the ownership economy, by contrast, projects exit to their communities much earlier in their lifecycles, allowing users to contribute to and benefit from greater value creation. Uniswap launched its UNI governance token in September 2020, less than two years after the protocol was originally deployed onto the Ethereum mainnet. Unlike Coinbase, whose direct listing meant no new shares were issued when it went public, 60% of the UNI genesis supply was allocated to Uniswap users. This profile is commonly seen with projects in the ownership economy.

The future of the ownership economy

The playbook is still being written, but one thing is certain: ownership is becoming a keystone of new experiences across all categories of software products. Web3 started as a developer phenomenon with layer 1 blockchains, and most innovation has historically been developer-facing initially. But Chris Dixon predicted with his adage—“what the smartest people do on weekends is what everyone else will do during the week in ten years”—ownership is now extending to all kinds of products and networks. 

We are eager to work with builders who are applying new models of ownership to design a more meritocratic internet. If you are working on a project in this space, please reach out.

To learn more about some of the projects that comprise the ownership economy and Variant’s growing portfolio, see below. 

This report is the result of input and contributions from many people. Variant would especially like to thank Chuxin Huang, Kate Lee and Caleb Halter. In addition, many others contributed both data and advice: Mohammed Nasirifar from Chaincrunch, Rob Hoogendoorn from DappRadar, Adam Whitaker-Wilson from Covalent, @ruvaag, Adam Delehanty and Mason Nystrom.

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