Interpreting the mainstream paradigms, opportunities, and challenges of Web3 consumer applications

Original author: @Web3 Mario

Recently, the market sentiment has been relatively low, as the potential policy dividends are gradually being realized less than expected, and after celebrities like Trump and a series of Memecoins have drained the liquidity of the crypto speculative market, the two-year speculative wave driven by macro bullishness seems to have come to an end. In response, more and more investors and believers have begun to ponder the next value narrative of the Web3 industry, with the Web3 consumer application track becoming a focus of discussion. Only with the Mass Adoption of more consumer-level applications can the ecosystem of excessive infrastructure construction truly bring user adoption and sustainable commercial value. Therefore, during this period, I have been thinking about issues related to Web3 consumer applications. Here are some insights and reflections, hoping to share with you all. In this article, I will give an overview of the mainstream paradigms of current Web3 consumer applications and explore their respective opportunities and challenges. In future articles, I will continue to share some specific market insights and ideas, and I welcome discussions with my peers.

What is a Web3 Consumer Application

The so-called Consumer Application, also known as To C applications in the Chinese context, means that your target users are mostly ordinary consumers, not enterprise users. Open your App Store, all the apps inside belong to this category. Web3 Consumer Application refers to consumer-oriented software applications with Web3 features.

In general, according to the classification in most App Stores, we can roughly divide the entire Consumer Application track into the following 10 categories, each of which will have different subcategories. Of course, as the market matures, many new products will combine multiple features to find their own unique selling points to a certain extent. However, we can still classify them simply according to their core selling points.

What are the Web3 Consumer Application paradigms and their respective opportunities and challenges

As of now, I believe there are three common paradigms for Web3 Consumer Applications:

1. By leveraging the technical characteristics of Web3 infrastructure, optimize the issues existing in certain traditional Consumer Applications:

This is a fairly common paradigm, and we know that a large amount of investment in the Web3 industry revolves around infrastructure construction, while application creators using this paradigm hope to leverage the technical characteristics of Web3 infrastructure to enhance the competitive advantage of their own products or provide new services. Typically, we can categorize the benefits brought by these technological innovations into the following two types:

• Ultimate privacy protection and data sovereignty:

• Opportunity point: Privacy has always been the main theme of Web3 infrastructure innovation. From the initial asymmetric encryption algorithm identity confirmation system to the gradual integration of many software and hardware technologies such as ZK, FHE, and TEE. The technical giants in Web3 seem to uphold an extreme form of sexual evil theory, aiming to create a network environment that does not rely on third-party trust at all, and provide users with the ability to interact with information or value. The most direct benefit of this technological feature is to bring data sovereignty to users. Personal privacy information can be directly hosted on locally trusted software and hardware devices, avoiding the leakage of privacy information. There are many Web3 Consumer Applications optimized for this technological feature, and any project that claims to be a decentralized XX belongs to this category, such as decentralized social media platforms, decentralized AI large models, decentralized video websites, and so on.
• Difficulty: After years of market verification, it can be said that there is no obvious advantage in the market competition as the core selling point, for two reasons, one is that consumer users' attention to privacy is based on the occurrence of large-scale privacy leakage and infringement incidents, but in most cases, through the formulation of better laws and regulations, it can effectively alleviate this problem, so if the protection of privacy is based on a more complex product experience or more expensive use cost, its competitiveness will be obviously insufficient. Second, we know that most of the current business models of consumer applications are based on the extraction of value from big data, such as precision marketing. Overemphasizing privacy can destabilize mainstream business models, as user data will be scattered in silos, which makes it difficult to design a sustainable business model, and if you end up relying on so-called "tokenomics", you will have to introduce unnecessary speculative attributes to the product, which will distract the team's resources and energy from dealing with the impact of this attribute on the product, and on the other hand, it will be detrimental to the search for PMF, which will be analyzed in detail below.

• Low-cost global 24/7 trusted execution environment:

• Opportunity point: The emergence of many L1 and L2 provides application developers with a new, global, and round-the-clock multi-party trusted program execution environment. In general, traditional software service providers independently maintain their programs, such as running on their own server clusters or in the cloud. This naturally brings trust costs in business involving multi-party collaboration, especially when the strength or scale between multiple parties is balanced, or when the data involved is particularly sensitive and critical. And these trust costs usually translate into high development costs and user usage costs, such as cross-border payments and other scenarios. By using the execution environment brought by Web3, it can effectively reduce the relevant costs of providing such services. Stablecoins are a good example of such applications.
• Difficulty: From the perspective of reducing costs and increasing efficiency, this is indeed a competitive advantage, but it is quite difficult to explore the corresponding application scenarios. As mentioned above, only in a service involving multi-party collaboration, with each relevant entity acting independently, at a balanced scale, and involving particularly sensitive data, the use of this execution environment brings benefits. This is a rather demanding condition. At present, most of these application scenarios seem to be concentrated in the financial services sector.

2. Design new marketing strategies, customer loyalty programs, or business models using encrypted assets:

Similar to the first point, application developers using this paradigm also hope to introduce Web3 attributes to enhance the competitive advantage of their products in a relatively mature and market-validated scenario. However, these developers focus more on introducing encrypted assets and utilizing the high financial attributes of encrypted assets to design better marketing strategies, user loyalty programs, and business models.

We know that any investment target has two kinds of value, commodity attributes and financial attributes, the former is related to the use value of the target in a specific real scenario, such as the habitable property of real estate assets, while the latter is related to its trading value in the financial market, which is usually derived from the speculative scenarios brought by liquidity and high volatility in the field of encrypted assets. Encrypted assets are a category of assets with financial attributes far exceeding commodity attributes.

And in the eyes of most developers of such applications, the introduction of encrypted assets typically brings three main benefits:

• By reducing customer acquisition costs through Token-based marketing activities such as Airdrops.

• Opportunity point: For most consumer applications, how to acquire customers at a low cost in the early stages of the project is a key issue. Tokens, with their high financial attributes and being assets created out of thin air, can significantly reduce the risk of early-stage projects. After all, compared to directly buying traffic with real money, gaining exposure, using tokens created at zero cost for user acquisition is a more cost-effective choice. From a certain perspective, these types of tokens are similar to advertising tokens. There are many projects that adopt this paradigm, such as most TON ecosystem projects and small games.
• Difficulty: This customer acquisition method mainly faces two problems. Firstly, the conversion cost of the seed users obtained through this method is extremely high. We know that most of the users attracted by this solution are cryptocurrency speculators, so these users are not particularly focused on the project itself, but more on participating for the potential financial rewards. Moreover, there are currently a large number of professional airdrop hunters or airdrop studios, which brings great difficulties to converting them into real product users in the later stage. It may also lead to a misjudgment of the project's Product-Market Fit (PMF), resulting in excessive investment in the wrong direction. Secondly, with the widespread application of this type of model, the marginal benefits of acquiring customers through Airdrops are diminishing, which means that in order to establish sufficient attractiveness among cryptocurrency speculators, the cost will gradually increase.

• User loyalty program based on X to Earn:

• Opportunity point: Retention and activation are another issue that consumer applications pay attention to. How to ensure that users continue to use your product requires a lot of effort and cost. Similar to marketing, using the financial attributes of Tokens can reduce the cost of retention and activation, which is also the choice of most such projects. A more representative model is X to Earn, which rewards key user behaviors based on Tokens predetermined in advance, thus establishing a user loyalty program.
• Difficulty: Relying on user motivation to earn profits can activate users, shifting their focus from product functionality to profitability. Therefore, if the potential profit decreases, user attention will quickly diminish. This is a significant harm to consumer applications, especially those relying on a large amount of UGC. If the profit is based on the price of issuing their own Token, it puts pressure on the project party for market value management, especially in bear market phases, they have to bear high maintenance costs.

• Directly cashing out the financial attributes of the Token:

• Opportunity Point: For traditional consumer applications, the most common business models are two. One is free to use, leveraging the value of platform traffic after large-scale adoption, and the other is paid use. If you want to use some Pro services in the product, you need to pay a certain fee. However, the former has a longer cycle, and the latter is more difficult. Therefore, Token brings a new business model, that is, directly cashing out by using the financial attributes of Token, which means the project directly sells coins.
• Difficulty: It can be clearly stated that this is an unsustainable business model. The reason is that after the project goes through the early high-growth stage, due to the lack of incremental funds flowing in, this zero-sum game model will inevitably put the interests of the project party at odds with the interests of users, accelerating user loss. If not actively cashed out, due to the lack of a robust cash flow revenue, the project party can only rely on financing to obtain funds to maintain the team or expand the business, which will once again fall into the dilemma of relying on the market environment.

3. Fully serving the native Web3 users, addressing the unique pain points of this user group:

The last paradigm refers to consumer applications that serve Web3 native users completely. According to the direction of innovation, they can be roughly divided into two categories:

• Construct a new narrative around certain untapped value elements of Web3 native users, design monetization, and create a new asset category:

• Opportunity point: By providing new speculative targets for Web3 native users (such as the SocialFi track), the benefit is to have the pricing power over a certain asset at the initial stage of the project, thus obtaining monopoly profits, which in traditional industries requires intense market competition and the establishment of strong competitive barriers to achieve.
• Difficulty: Frankly speaking, this paradigm relies heavily on team resources, that is, whether it can gain recognition and support from individuals or institutions in the Web3 native user base with strong appeal or possessing the 'pricing right' of encrypted assets. This brings about two difficulties: firstly, with the development of the market, the pricing right of encrypted assets dynamically shifts among different groups, for example, from the original Crypto OG to encrypted VC, then to CEX, then to encrypted KOL, and finally to traditional politicians, entrepreneurs, or celebrities. In this process, the ability to identify trends at each rights transition, establish partnerships with the emerging power, and the high demand for team resources and market sensitivity. Secondly, in order to establish a cooperative relationship with the 'pricing party', it usually requires significant costs and sacrifices, because in this market, you are not competing for a larger market share in a certain application track against other competitors, but competing with all other encrypted asset creators to compete for the 'pricing party's preferences, which is a very competitive game.

• By providing new toolized products, serving the unmet needs of Web3 native users in the market participation process. Or from a user experience perspective, provide better and more convenient products for this user segment:

• Opportunity point: I believe this is a paradigm with the most potential in the future. With the gradual popularization of cryptocurrencies, the overall user base of this part will gradually expand, bringing possibilities for user segmentation. And because of focusing on the real needs of a certain user group, such products are often easier to achieve PMF, thus establishing a more robust business model, such as some trading-related data analysis platforms, Trading Bot, information platforms, etc.
• Difficulty: Due to the return to real user needs, the product's development path is more robust, but the construction period is longer than other paradigm projects. Since such projects are not narrative-driven but driven by specific needs, the product's PMF is relatively easy to validate. In the early stages of the project, it is usually difficult to obtain large amounts of financing. Therefore, it is very difficult to maintain patience and adhere to the original intention in the complex and chaotic 'coin issuance' or wealth myths brought by overvalued financing.

Of course, these three paradigms are not completely independent. You can see their shadows in many projects at the same time. It's just for the convenience of analysis that we classify them. Therefore, for buddies who hope to start a business in the Web3 Consumer Application track, it is crucial to comprehensively assess their own strengths and needs, and choose the most suitable paradigm for themselves.