On the Web3 Economics of Ownership: Four Key Insights

The Web3 Economics of Ownership: Four Key Insights

During the 30 years of the World Wide Web, a handful of companies controlled the majority of user attention and advertising revenue, and a closed ecosystem hindered innovation by independent developers. The economic interests of the largest internet platforms are at odds with their most valuable contributors — their users.

Ownership has long been embraced by Silicon Valley startups, granting options to adjust employee incentives. Still, the vast majority of Internet users own exactly 0% of the services they contribute. Creators don’t own their content, developers don’t control their code, and consumers don’t have any power to interfere with the policies and decisions of the platforms they use. This scenario was once unchallenged, but is now looking increasingly outdated.

This begins to change through the economy of ownership (often referred to as web3), where products and services turn users into owners.

Beginning with Bitcoin and Ethereum — both of which reward participants using native tokens to secure the network — became common in all categories of software, from developer infrastructure and new financial markets in DeFi to consumer products, marketplaces and social. 

The new internet owned by users

If the previous generation of software was built on user-generated content, the next generation of software will be owned by the user, with digital ownership as the building blocks to enable novel user experiences. At its core, the ownership economy not only provides a powerful new tool for builders to use market incentives to launch new networks, it also has the potential to create positive social change by distributing wealth creation assets more broadly.

In the two years since Jesse Walden published his original vision for a user-owned internet , the landscape has changed and expanded dramatically. There are now over 15,000 projects in the ownership economy, ranging from user-owned financial markets to user-owned social networks, investment clubs, and digital assets. While the ownership economy is still only a small part of all internet platforms, it is a rapidly growing segment. Ethereum is one of the most mature networks supporting the ownership economy, with a 46% increase in average monthly accounts in 2021.

The Web3 Economics of Ownership: Four Key Insights

Amid all this growth, we wanted to take a step back and reintroduce this ecosystem with some fundamental questions: What is an economy of ownership? How big is it and where is it going? Which trends are defining its current state and possible future? To answer all of these questions, we’ll turn to data and case studies to illustrate how the economy of ownership works in real time. 

This report is intended as a primer for new entrants looking to gain a deeper understanding of web3. We will also use it as a starting point for more in-depth articles we plan to publish this year on topics such as token distribution strategy, regulatory issues, and more. 

What is an ownership economy?

In short: to define the products and services of web3 and the next generation of the Internet, users will be transformed into owners of products and services, which we call the economy of ownership.

Still, identifying this phenomenon is not always simple or obvious. This is because ownership is embodied in a range of experiences such as user effort, responsibility, and collective level. A user may own a single digital media asset, such as an NFT. Another could influence the operation of the network through governance tokens. The experience of being an owner includes passive (ie, hodling) and active participation.

Note that in this report, we focus on crypto tokens — not equity — as the basis for the economy of ownership. Tokens have a richer, more frictionless design space. They can be distributed programmatically, potentially rewarding participants rather than buyers; they are practically free to deploy and can deliver value the same way we deliver messages – instantly to anyone, anywhere in the world.

The economy of ownership is large and growing

As of April 26, 2022, the market cap of more than 19,000 tokens tracked by data aggregator CoinMarketCap is $1.76 trillion. By comparison, the global stock market is worth more than $100 trillion. 

The largest crypto networks by market cap are established layer 1 blockchains: Bitcoin ($725 billion) launched in 2009 and Ethereum ($337 billion) launched in 2015. Other Tier 1s in the top 20 coins by market cap include Solana, Polkadot, Terra, and Avalanche. 

The Web3 Economics of Ownership: Four Key Insights

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

The Financial Times and Chainalysis estimate that there are 360,000 NFT owners as of 2021. On top of that, there are tens of millions of encrypted web users. Metamask, a wallet for connecting decentralized applications, recently announced that it had 32 million monthly active users as of February 2022, while Phantom (the wallet currently focused on Solana) announced its monthly active user count for January 2022 to 2 million. In the fourth quarter of 2021, the average monthly transaction user of Ethereum is about 6 million, and the daily active transaction user is about 400,000. From a multi-chain perspective, there are approximately 2.5 million daily active users interacting with smart contracts tracked by DappRadar. As a rough estimate, if we extrapolate these 2.5 million daily users to calculate monthly users using Ethereum’s DAU/MAU ratio of 0.06, we can estimate that the MAU for the 29 networks covered by DappRadar’s data is 39 million.

DAO, Decentralized Autonomous Organization, is an online community owned and managed by its members. They can be seen as the organizational building blocks that make up the web3 economic, social and cultural landscape. New DAOs are being formed at such a rapid rate that it is difficult to count them, but it is safe to say there are more than 1,000. DeepDAO is a data source that tracks the details of about 180 DAOs. In these DAOs alone, there are 1.7 million governance token holders, of which about 500,000 are actively involved in DAO governance. Some of these DAOs are very large: 69 out of 180 have more than 1,000 members.

Economics of Ownership in 2022

Today, user ownership is changing the way people trade, invest, create, develop, entertain, learn, communicate and socialize.

The Web3 Economics of Ownership: Four Key Insights

A non-exhaustive list of items

Walden’s original article, The Economy of Ownership, argues that user ownership could lead to “platforms getting bigger, more resilient, and more innovative.” As we discuss in this report, many of these aspirations have yet to materialize, or have had mixed results, due to an emerging playbook on how best to implement user ownership. Nonetheless, we remain confident in the power of user ownership to build larger, more defensive networks and catalyze positive social change. Realizing this potential requires more research on best practices for ownership assignment and education for developers and users. As a step toward this goal, we would like to share some key insights about the state of the ownership economy today.

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

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

Before we dive in, let’s consider how much non-crypto services and products cost to attract users. In 2015, Facebook’s mobile app install advertising business generated $2.9 billion, or 17% of Facebook’s total advertising revenue. Instead of app developers investing in R&D and product improvements, or reaching end users in the form of lower prices or higher incentives, the huge sums go into the pockets of the middle platform — Facebook. High user acquisition upfront fees also mean that consumer apps that can’t raise outside funding can struggle to get off the ground: the average cost of acquiring app users in 2019 was $3.52.

In contrast, for crypto projects, giving users ownership can serve as marketing, attracting new users through the promise of ownership, and increasing engagement through participation in the game. A case study is Coinbase and Uniswap, two cryptocurrency exchanges that enable users to exchange various tokens. 

The Web3 Economics of Ownership: Four Key Insights

While Coinbase is a centralized exchange that hosts users’ wallets and funds and uses its order book to match transactions, Uniswap is decentralized and facilitates automated transactions entirely through smart contracts. Coinbase was founded in 2012 and has 3,730 employees as of 2021. By contrast, Uniswap, which was founded in 2018, employs fewer than 100 people. Uniswap only accounts for 3% of Coinbase’s workforce and accounts for 73% of its trading volume. How is this possible? Importantly, Uniswap makes its users owners through governance tokens and LP (liquidity) stakes, allowing it to grow bigger and faster. Also, since Uniswap is decentralized, anyone can add any asset. If all the value in the world is tokenized the way all information is packaged on the internet, then we should expect decentralized exchanges to grow faster than centralized exchanges.

Tokens are not a substitute for product-market fit

However, in our analysis, it became clear that simply giving users ownership is not enough to ensure a product outperforms the competition. Tokens are useful in capturing user attention and leading initial adoption, but they need to be combined with strong product-market fit—addressing a wide range of user needs—to sustain usage.

The NFT landscape is a prime example of where ownership is not enough to drive sustained, ongoing participation. Despite having no tokens, the dominant NFT marketplace OpenSea has over 90% of the trading market share, while multiple competitors do (e.g. LooksRare, SuperRare, Rarible). It is worth noting that after Rarible launched liquidity mining in the summer of 2020 (airdrop tokens to users who buy and sell NFTs on the Rarible market), its transaction volume once exceeded that of Opensea, but Opensea’s deeper liquidity, more A strong product and better search features helped it win over time. For users of markets, liquidity — the presence of counterparties — remains the most powerful motivator for choosing any market over another. The existence of tokens that incentivize alternatives to smaller market transactions is not enough to overcome OpenSea’s advantage in meeting the transaction needs of core users.  

Another example is the layer 1 blockchain ecosystem. While L1 blockchains all offer their own native tokens that represent network ownership, Ethereum remains the fastest growing due to user and developer network effects, a more mature developer tooling environment, and the ability to combine with other existing applications. fast platform. These factors suggest that even the lower fees of alternative blockchains will not be enough to overcome Ethereum’s network effects (though whether it will maintain its advantage is unclear).

There is also the question of whether ownership actually crowds out the intrinsic motivation to use the product, leading users to interact with the product in a more mercenary, transactional (and possibly temporary) way. There has been a great deal of research on the interaction between extrinsic motivation (behavior taken for some extrinsic reward (such as financial gain)) and intrinsic motivation. According to some research, extrinsic motivation can undermine intrinsic motivation, especially when users have previously found the behavior to be intrinsically rewarding. This means that token incentives should be optimized in terms of time (through progressive decentralization), scale, eligibility, and other factors to keep users intrinsically motivated.

2. New token distribution design is increasing user loyalty

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

A powerful example of ownership generating loyalty is the success of gaming money-making games like Axie Infinity. Axie Infinity is a blockchain-based game where users can collect, breed and fight digital creatures called Axies, which are NFTs. Ownership of in-game assets is a key difference between blockchain games such as Axie Infinity and non-blockchain games: in the latter, “own” assets typically cannot be exchanged for currency or transferred outside the game.

The Web3 Economics of Ownership: Four Key Insights

Axie Infinity, powered by a “play-to-earn” mechanism where players earn in-game tokens that can be exchanged for local currency, has achieved considerable scale, with cumulative revenue exceeding $1 billion and nearly 3 million daily active users. And the player retention rate of the game is much higher than that of traditional mobile games. Axie Infinity’s player retention rates have remained strong and stable over time, showing that engagement is not just a function of the game’s novelty.

The Web3 Economics of Ownership: Four Key Insights

Axie Infinity’s retention rates have remained strong compared to traditional mobile games, underscoring the importance of digital ownership.

But there are also counter-examples of the mixed effects of token incentives on user engagement. The entire field of token economics is in its infancy, and best practices around ownership distribution are still unknown. To date, users have asked important questions and criticized the efficacy of token incentives and ownership to translate into user loyalty or desirable social outcomes.

While liquidity mining programs (providing ownership of liquidity by rewarding users with tokens) have become common and drive short-term participation in new products, they have not historically contributed to long-term sustainability. According to Nansen’s research, “A whopping 42% of yield farmers enter the farm on the day it starts up and withdraw within 24 hours. About 16% leave within 48 hours, and by day three, 70% of these users are withdrawn from the contract .” The extrinsic nature of token incentives means that many liquidity providers are financially incentivized by the highest rewards, leading to customer churn.

Furthermore, while the impossibly high token incentives became a defining feature of the “DeFi 2.0” wave, their sustainability is now in question. Changing market sentiment has caused prices for many of these projects to plummet, and their symbolic models have been the subject of intense debate. These downturns have the greatest impact on contributors paid in the project’s native tokens (often bounded by vesting schedules) and the project’s most ardent supporters. 

Innovation in Token Distribution

Therefore, many projects are rethinking the token incentive mechanism, and a new wave of new models has begun to emerge. For example, Curve’s Voting Escrow (“ve”) contract uses a lock-up period to increase token rewards; Gro also introduces a vesting mechanism to encourage long-term participation. These models are increasingly tested and scrutinized as academic research on token engineering and cryptoeconomics proliferates, suggesting that next-generation tokens will be more effective at attracting users and incentivizing long-term contributions.

At a high level, the opportunity is to make token distribution more granular and to target rewards for actions that actually contribute to network retention and sustainability, rather than simply rewarding tech-savvy networks for turning into new products User behavior with early knowledge or engaging in mercenary. This allocation will result in higher accessibility than first-generation projects, and compound returns on capital that are orders of magnitude better than those that exist in the real world, where capital is purchased rather than earned. For example, the token-gated social community Friends with Benefits (FWB) requires 75 FWB tokens to join, which at one point equates to over $12,000. But aside from buying tokens, there are multiple ways to join the community by taking ownership, including writing, designing, creating artwork through FWB’s studio, or contributing to various workflows. 

In addition to direct contributor rewards, some DAOs have started implementing bounty programs to attract users and delegate work. These one-time tasks range from short-term developer assistance and business development to simple community engagement, and are paid in the project’s native token. Platforms like Rabbithole and Layer3 aggregate these bounties for multiple DAOs, giving potential users the opportunity to search for projects and tasks that match their interests. New-generation token incentives appear to place a greater emphasis on contributor growth than simply deepening liquidity—a necessary transition for expanding the ownership economy user base. 

3. User ownership fosters a richer ecosystem of projects and contributors

When they combine ownership distribution with permissionless access, user-owned projects can foster a rich ecosystem. Deployed in this way, distributed ownership can be the catalyst for a project to become a third-party build platform.

Ethereum is one of the strongest examples of this. The distributed ownership of the network fosters a community of developers and users interested in Ethereum’s continued success: the value of their stake in Ethereum – their ether – provides enough incentive to continue building and using the network , resulting in an ecosystem of applications across social, marketplace, DeFi, and more. Shared ownership strengthens network effects and dampens the drive to switch to other blockchains. Of course, Ethereum’s success is not just the result of distributed ownership. It also benefits from competent leadership and embedding values ​​that help align and inspire its communities. 

In the NFT space, another form of decentralized ownership is emerging in the form of CC0 (or “copyright-free”) projects—those that give up all copyright and transfer 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.

Due to their permissionless nature, users, creators, and developers have been drawn to these projects and started building around them. Loot is a collection of CC0 NFTs that will be hugely popular in September 2021, and each NFT contains a simple list of fantasy adventure gear. There are now over 53 Loot derivatives and at least 9 guilds – groups of owners of specific items in the world of Loot.

The CC0 NFT project creates the potential for its IP to be used in novel and generative ways – increasing the scope, relevance and ultimately value of that IP. Nouns DAO contributor 4156 said: “Just as academic citations make the original paper more important, citing a noun in any form… makes the original paper more important and valuable.” Brands (like Bud Light, which incorporated the iconic Nouns glasses into a Super Bowl ad) and traditional media companies have partnered to put this theory into practice. 

Likewise, the team behind Cryptoadz partnered with art and game studio Arcade NFT to create Toad Runnerz, a collection of NFTs where each NFT is a playable arcade-style game featuring Cryptoadz as an in-game asset. Arcade NFT hosts exclusive tournaments for Toad Runnerz NFT holders, further extending the scope and content of the underlying Cryptoadz IP into the gaming arena.

By using its assets for free, the CC0 NFT project expands the definition and possibilities of ownership. This approach inspires construction, creativity, and collaboration—and we’re only just beginning to see its potential.

4. 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 their centralized counterparts, allowing them to contribute to and benefit from value creation. 

In our analysis, we found that, on average, web3 companies launching tokens do so 2.7 years after being founded; in 2020, VC-backed companies went public about 5.3 years after their first VC investment. Compared to coin offerings, the timetable for IPOs helps remove a lot of upside potential for retail investors.

This phenomenon comes into focus when comparing Coinbase and Uniswap. Coinbase went public in April 2021, nearly nine years after the company was founded. The stock closed its first day of trading with a market cap of $85.7 billion, an incredible result for private investors like Y Combinator, which infused the company in 2012 at a roughly $2 million valuation seed round.

The Web3 Economics of Ownership: Four Key Insights

However, Coinbase’s public listing wasn’t a great outcome for retail investors, whose investment opportunity came after the company’s valuation doubled 40,809 times from its first private round. In fact, as of April 2022, every retail investor who has bought and held Coinbase stock since Coinbase went public has lost money on their investment.

In an ownership economy, by contrast, projects exit their communities early in their life cycle, 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 initially deployed on the Ethereum mainnet. Unlike Coinbase’s direct listing, which means that no new shares are issued at the time of listing, 60% of the UNI genesis supply is allocated to Uniswap users, a situation that is common in projects in an ownership economy.

The Web3 Economics of Ownership: Four Key Insights

The future of the ownership economy

The playbook is still being written, but one thing is certain: Ownership is becoming the cornerstone of new experiences across all categories of software products. Web3 started out as a developer phenomenon for layer 1 blockchains, and most innovations in history were originally developer-oriented. But Chris Dixon used his dictum to predict that ” what the smartest people do on the weekend is what everyone else will do in a week ten years from now” — ownership now extends to a variety of products and networks. 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/on-the-web3-economics-of-ownership-four-key-insights/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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