Author:
Li Jin
Translated article: Blockchain in Plain Language
Some of the largest companies on earth are built on network effects. Companies like Amazon (worth $1.9 trillion), Meta (worth $1.2 trillion), Tencent (worth $4.59 trillion), and others have harnessed market supply and demand, and the more control they have over supply and demand, the higher their network value.
The cryptocurrency space operates in a similar manner. High-value networks like Bitcoin (worth $1.4 trillion), Solana (worth $790 billion), and Ethereum (worth $460 billion) are composed of developers, users, and network operators, creating a valuable multilateral network that grows as it scales.
However, when I look at the landscape of Web2 and Web3 markets, I not only see existing markets but also see markets that do not yet exist.
Through my years of market entrepreneurship and investment, I have realized that there are markets that should exist to help connect supply and demand, providing essential utility for both parties. Unfortunately, due to limitations in the systems they have built, these markets currently do not exist. I have also witnessed firsthand how new technologies provide opportunities for new markets to emerge and thrive.
Markets present one of the most exciting opportunities in the cryptocurrency space. By leveraging the killer capabilities of cryptocurrencies, such as token-incentivized scaling and on-chain composability, entrepreneurs can create new markets to serve previously unmet demand groups. This is an opportunity for disruptive innovation, not just incremental innovation.
1. Systemic barriers to market innovation in Web2
I have previously written about the era of service markets, where the internet market evolved from the listing era of the 1990s (represented by Craigslist) to the on-demand app era of “Uber for X” (2009-2015), and then to the managed market era in the mid-2010s.
Each era’s development responds to new technologies or emerging market demands. The internet enabled individuals to post and find listings online in the listing era. The “Uber for X” era provided instant access to various services, leveraging users’ real-time location information. The managed market era emerged to meet the higher trust requirements in complex markets as market opportunities dwindled.
However, each era also brought challenges that limited innovation. The lack of trust and standardization hindered growth in the listing era. The on-demand era required massive capital investment to scale the market before providing near-real-time services. Managed markets faced high operational costs related to establishing transaction trust, impacting the feasibility of these markets.
Many of these challenges still exist in Web2 markets, impeding innovation. Particularly, issues of scalability and trust hinder progress, where cryptocurrencies have unique advantages in addressing these problems.
2. Scalability issue
Traditional Web2 markets may require significant capital to establish and expand, especially at a large scale before the market becomes practical. The capital requirements create entry barriers for new participants. This also means that due to high costs to achieve the necessary scale, entire market categories may not be established, thus failing to provide utility.
For example, consider a dating app. In a dating network, a significant number of users on both sides are needed to facilitate good matches. Historically, this meant platforms had to spend a significant amount of capital attracting a large user base before the app became useful to any individual user. Dating apps also face the challenge of low user retention rates, as users leave once successful, further hindering scale expansion. Thus, there are few breakthrough winners in the dating category.
3. Trust issue
The second persistent challenge in Web2 markets is trust. Certain industry verticals require a high level of trust between market participants to conduct transactions. For example, in some categories, matching with suitable providers/services carries high risk (such as child care or elderly care). Other areas have high order values (such as luxury goods, art, real estate).
To establish the required trust, managed markets have built additional service and operational layers. For instance, the child care market extensively screens providers before they can transact on the market, including real-life interviews, background checks, and building software tools for real-time visibility and location. In real estate, some managed markets take on the entire end-to-end process, from repairs to acting as home market traders (“iBuyers”). These additional operations incur significant costs. Moreover, other markets wishing to list suppliers/providers on the market must replicate these efforts, leading to inefficiencies in the market.
4. Solution: The killer capabilities of cryptocurrencies
From the perspective of these challenges, cryptocurrencies have three killer capabilities that open up new potential directions for market innovation: scalability, on-chain reputation, and payments.
1) Scalability
If there’s one thing cryptocurrencies excel at, it’s scalability. Token incentives (in the form of tokens) have been proven to be a powerful tool for driving growth.
Compared to Web2 markets, cryptocurrencies enable markets to grow sequentially through token-based financial incentives, starting with the supply side and then expanding to demand. For example, decentralized physical infrastructure networks (DePINs) like Helium and Hivemapper kick-started their supply side by providing token incentives to participants, with revenues from the underlying network catching up later.
You can apply token incentives to many types of markets that do not exist due to high launch costs. Imagine a hyper-local social network that requires a large number of users to interact intensively (similar to Citizen but more widely applicable to information or real-time events), or a new dating application. In the field of artificial intelligence, developers have applied token incentives to create new markets unprecedented in the Web2 world. Networks like Vana and Rainfall allow users to contribute data for AI training and receive token rewards. Aggregating long-tail, private, and hard-to-access datasets is nearly impossible without intelligent incentives driving massive user contributions.
2) On-chain reputation and history records
One challenge mentioned in Web2 markets is trust-building, where isolated markets need to repeat efforts. For example, Uber conducts background checks on all new drivers, but when the same driver downloads the Lyft app, that app also conducts a background check because these platforms are isolated.
One application of cryptocurrencies is as a portable reputation system. Instead of each app conducting separate background checks, what if this information is stored on the chain and moves with the driver as they join any market? Furthermore, other information about a provider’s history, such as reliability and quality, can be represented in on-chain form, enabling markets to combine and leverage a global trust repository. Such a system can eliminate the need for different managed markets to implement their capital-intensive processes. In Web2, many managed markets offer excellent user experiences, but due to high operational costs, they eventually prove impractical as a business model. Global on-chain reputation can fundamentally change their cost structure.
You can find a microcosm of this idea in the Farcaster ecosystem. This social media protocol stores posts, likes, follows, and profiles in a decentralized central network. When users install different applications built on this protocol, their social data moves with them. We already see borderless markets emerging on Farcaster. An example is Bountycaster, where users can post and discover bounties on any Farcaster client, utilizing the rich reputation data on the Farcaster network. With this portable social data, you can imagine various new markets emerging in the Farcaster ecosystem, from smart contract audit markets to expert markets utilizing Farcaster’s connection graph and reputation.
3) Payments
Facilitating payments is a core component of modern markets, but in Web2, supporting cross-border payments requires internationalization between local systems. This is particularly crucial for digital markets as customers and suppliers are often far apart. For instance, over 80% of YouTube users are located outside the US. To support local currency payments in each geographical region, platforms must integrate with international payment gateways. Typically, this leaves some underserved regions, especially for resource-constrained, nascent markets, or platforms that cannot be internationalized.
Cryptocurrencies can operate internationally from the start, allowing anyone with a crypto wallet to transact globally. This enables resource-constrained markets to have a global impact from the outset. For example, I recently purchased an NFT in an on-chain data community called bytexplorers, which allowed me to pose data-related questions to an analyst community. Analysts who answer correctly receive token rewards, achieving seamless payments and global participation.
5. Opportunities for the next generation of markets
If there’s one thing I’ve learned from years of market entrepreneurship and investment, it’s that the best opportunities arise when builders use new technologies to create significant improvements for end-users. Each generation of market builders leverages new technologies to unlock new markets that could not exist before.
Cryptocurrencies represent the next stage of this evolution. By leveraging token incentives for expansion, new markets can grow in a more capital-efficient manner. On-chain reputation and history can reduce expenses for any given market operator. Payment methods based on cryptocurrencies enable markets to operate seamlessly across borders from the beginning. All of these not only improve existing markets but also spawn new markets that can only exist under new cost structures and expansion strategies.
