Title:
Novel Crypto and Internet Marketplaces
Author:
Li Jin, Co-Founder of Variant Fund
Translated by:
Yangz, Techub News
The world’s largest enterprises are built on marketplaces with network effects. Whether it’s Amazon (worth $1.9 trillion), Meta (worth $1.2 trillion), or Tencent (worth $459 billion), all these companies aggregate supply and demand. The more supply and demand relationships they control, the greater the value of their networks.
The same applies to the crypto space. The highest-valued networks like Bitcoin, Ethereum, and Solana are multi-sided networks composed of developers, users, and network operators. As they scale, their value increases.
However, in observing the market structure of Web2 and Web3, I not only see existing markets but also envision new ones that are yet to emerge.
Over the years of investing in early-stage markets, I have realized that there are certain markets that should exist. They can help match supply and demand, providing significant utility to both sides. However, due to limitations within the systems they operate on, these markets have not materialized. Additionally, I have witnessed firsthand how new technologies bring opportunities for the emergence and flourishing of new markets.
Markets present the most exciting opportunities in the crypto space. By leveraging the killer capabilities of cryptocurrencies (token incentives and on-chain composability), builders can create new markets to serve unmet needs. This is an opportunity for iterative innovation, not just incremental innovation.
Systemic barriers to market innovation in Web2
I previously wrote an article on the service marketplace era, explaining how internet market categories evolved from the listing era represented by Craigslist in the 90s to the “Uber for X” era of on-demand apps (2009-2015), and later the managed marketplace era (mid-2010s).
Each era developed based on new technologies or emerging market needs. In the listing era, individuals could post and find services on the internet. The “Uber for X” era emerged alongside smartphones, making it convenient for people to access various services instantly and utilize real-time location data. As opportunities readily available in the market became exhausted, the managed marketplace era emerged to meet the need for more trust in complex markets.
However, each era also brought challenges that hindered innovation. In the listing era, a lack of trust and standardization constrained growth. In the “Uber for X” era, expanding market platforms to provide near real-time services required significant funding. In the managed marketplace era, high operational costs related to establishing transaction trust impacted the survival of these markets.
Many of these challenges still exist in Web2 markets and inhibit innovation. Expansion and trust are two prominent issues, and cryptocurrencies have unique advantages in addressing these challenges.
Expansion Issue
The construction and expansion costs of traditional Web2 markets are extremely high, especially when significant expansion is required before the market can prove its utility. This demand for funds sets a high barrier of entry for new participants. It also means that entire market categories may not establish themselves due to the high costs preventing them from reaching the necessary scale to be practical.
Take dating apps, for example. In the dating network, both sides need a considerable user base to facilitate good matches. Traditionally, this meant platforms had to spend a significant amount to attract users before the app could be useful to any individual user. Additionally, dating apps struggle with retention rates because if users successfully find a match, the app loses that pair of users, creating more obstacles to expansion. Therefore, there are few standout winners in dating app categories.
Trust Issue
Another long-term challenge faced by Web2 markets is the issue of trust. Some vertical industries require a high level of trust between market participants to conduct transactions. For example, in some categories, matching with the right service provider is high-risk (such as babysitting or elderly care). Other categories have high value (such as luxury goods, art, real estate).
To establish the necessary trust, managed markets have built additional service and operational layers. For example, in the childcare services market, babysitters undergo extensive screening before transactions, including in-person interviews, background checks, and the development of software tools to provide real-time location information. In the real estate field, some market management platforms (such as Opendoor Technologies, an online residential real estate buying and selling company) are responsible for the entire end-to-end process, including home repairs to acting as market makers for homes (“iBuyers”). These additional services generate significant management costs, and if other markets want to list this service/provider, they must replicate this work, leading to overall market inefficiency.
Solution: Cryptocurrency’s Killer Capabilities
In response to these challenges, cryptocurrencies have three killer capabilities—token incentives, on-chain reputation, and global payments—that can pave the way for market innovation.
Token Incentives
If you were to ask what advantages cryptocurrencies offer, token incentives are definitely one of them. Cryptocurrency incentive mechanisms (in token form) have proven to be powerful tools for driving growth.
Compared to Web2 markets where supply and demand must grow simultaneously, markets can grow in sequence with the financial incentives provided by tokens. For example, decentralized physical infrastructure networks like Helium and Hivemapper guide supply by offering token incentives to participants before revenue is realized at the network’s base layer.
We can apply token incentives to many markets that do not exist due to high onboarding costs, such as hyperlocal social networks that require a high density of users to operate (like Citizen, an app that sends users real-time location-based safety alerts) or new dating apps. In the field of artificial intelligence, we have seen builders using token incentives to create new markets that did not exist in Web2. For example, networks like Vana and Rainfall allow users to earn token rewards while providing data for AI training. Without the contributions of a large user base and the drive of intelligent incentive mechanisms, aggregating long-tail, private, hard-to-access datasets is nearly impossible.
On-Chain Reputation and History
One challenge faced by Web2 markets mentioned earlier is the redundant effort in building trust within isolated markets. For example, Uber conducts background checks on all new drivers, but when the same driver signs up for Lyft, the app also conducts a background check because these platforms are isolated.
One application of cryptocurrencies is as a portable reputation system. Instead of each application conducting separate background checks, this information can be stored on the blockchain so that it accompanies the user no matter which market they join. Furthermore, if a service provider’s historical information, such as reliability and service quality, can be reflected on-chain, it can form markets and leverage a globalized trust storage system. Such a system can spare different managed markets from implementing their capital-intensive processes. In the Web2 era, many managed markets offer excellent user experiences, but due to high operational costs, they ultimately cannot survive as businesses. A global on-chain reputation system will fundamentally alter their cost structure.
We can find a distilled version of this concept in the Farcaster ecosystem. This social media protocol stores posts, likes, follows, and profiles in a decentralized network, and when users install different applications based on this protocol, their social data moves with them. We have already seen the emergence of Headless markets on Farcaster (markets where users operate based on their globalized on-chain identity, funds, and data in the location of their wallet). For example, Bountycaster allows users to leverage the rich reputation data on the Farcaster network to post and discover bounty information on any Farcaster client. With this portable social data, various new markets can emerge in the Farcaster ecosystem, including markets ranging from smart contract audit markets to expert markets utilizing Farcaster connections charts and reputations.
Global Payments
Facilitating payments is a core component of modern markets, but in Web2, supporting cross-border payments requires navigating various local currency systems for international operations, especially crucial for digital markets where customers and providers are far apart. For example, over 80% of YouTube users live outside the United States. To support local currency payments in different regions, platforms must integrate with international payment gateways. Typically, this leaves some underserved regions, especially newer markets or platforms without internationalization resources.
Cryptocurrencies have had a global presence from the start, allowing transactions between users with cryptocurrency wallets. Therefore, even resource-constrained market platforms can cover global markets from day one. For instance, in the on-chain data community Bytexplorers, I recently purchased an NFT that allows me to ask a data-related question to an analyst in the community, and the analyst who answers correctly receives a corresponding token reward, achieving seamless payments and global participation from day one.
Next-Generation Markets
If you were to ask what my years of experience investing in early-stage markets have taught me, the answer is that the best opportunities arise when market builders use new technologies to create significant improvements for end-users. Each generation of market creators leverages new technologies to unlock new markets that were previously inconceivable.
Cryptocurrencies represent the next stage of this evolution. By using token incentives to scale, new market platforms can develop in a more capital-efficient manner. On-chain reputation and history can reduce the expenses of any specific market operator, and cryptocurrency-based payments can enable markets to operate seamlessly on a global scale from day one. All of this will not only enhance existing market platforms but also give rise to new markets that can only exist by adopting new cost structures and expansion strategies.
