In 1848, San Francisco was a city of 14,000 hard-working citizens fighting to make a living from cow hides, ranching and animal fat. Less than a year later, a whole 1% of America’s population at the time migrated to San Francisco upon news of a gold rush, bumping up the population to 200,000.
Whether they knew it or not when they made the trek southwest, the majority of these migrants would never see a glint of gold. But the city still became extremely wealthy, because more profitable than the appearance of gold was the appearance of the thousands of new faces whose earthly needs & desires went far beyond the animal blubber that was previously on offer.
The response to these new demands was met by a plethora of both local entrepreneurs who were tired of trying and immigrants who were tired of long days looking for gold that they had realised might be harder to find than they first anticipated.
One such entrepreneur was a man by the name of Sam Brannan.
Many historical reports cite Brannan as being the first man to declare the gold rush. In May 1848, he reportedly ran down San Francisco’s Market Street with gold dust in his hat shouting “Gold! Gold down by the American River!”.
Whether by luck or by design, Brannan had an incentive for the performance on Market St. A man of many trades throughout his life, he had recently set up a general store in the obscure outpost of Sutter’s Mill - so obscure, in fact, that it was the only general store between Market St. and the American River where the gold dust was found.
Having previously been a provider of tools & clothing to the workmen that lived around the mill, Brannan made the shrewd decision to pivot to a new kind of service. On his way back from Market St, he bought every pick and shovel he could find in town.
He bought them at 20 cents a piece and sold them by the river for $15. In 9 weeks, his pivot had made him $36,000 - today, adjusting for inflation, this amounts to $1.3m.
When Mark Twain famously quipped “When everybody is digging for gold, it's good to be in the pick and shovel business”, it’s hard not to have Brannan in mind.
Twain’s quote has been applied ad nauseam to virtually every novel economic trend since. Whilst it has become canonical in crypto discussion forums, the foremost modern example is the internet gold rush of the late 90’s.
A lot of learning has been distilled in the wake of the dot-com blowup, with one commonly instilled adage being “make something people want”. As good as having what someone wants is great, wants can be cyclical. Sure, I might want 10-minute grocery delivery now (kinda, not really), but will I want it that much if I lose my job and have to bargain hunt at grocery stores a 20-minute drive away? Definitely not.
The B2B equivalent of this is most apparent in startups. When you’re a young, cash-strapped business looking for quick growth hacks there are things you need and things you want. You’d mostly likely need a CRM of some shape or form, definitely need marketing tools to reach your audience and also need some financial or accounting software.
B2B ‘wants’ are harder to define and depend on the sector, but may include things like culture gauges, professional gamification or timekeeping software. Certain teams and businesses might find utility in such software, but they will rarely ever need it enough to subscribe from Day 1.
Like Sam Brannan before them, enduring ‘needs-based’ B2B business models like Google Ads, Salesforce CRM and Intuit make their cash whether their customers succeeded or not because without them, said customers don’t stand a chance.
In a world where most software businesses clamour for users, it makes sense that 40% of venture funding then goes to user acquisition aids via Google, Facebook or Amazon ads.
Crypto is in such a nascent state that the wants and needs of the market have yet to really be defined. First of all, the game has changed. Hallmark web2 metrics like user churn, monthly active users and new user acquisition have passed the baton to new ones like total value locked, token value and trade volume in keeping with the ‘ownership economy’ elements of Web3.
So, just as Google & Facebook ads were able to measure, diagnose and optimise these metrics for failed and successful web2 businesses alike, what kind of service will do the same for crypto?
TL;DR
A Rush of Capital Into Crypto Capital Stands to Create Second-Hand Beneficiaries. 2021 more than tripled the previous record for venture dollars coming into crypto with US$32.8bn. While the lack of reporting requirements and inherent removal of transparency for crypto companies makes it difficult to identify cost centres, this capital is likely to be dedicated to outsourcing non-core functions. This could produce dominant second-hand beneficiaries of crypto capital who are better at performing or bundling these non-core functions.
At their peak, Google & Facebook captured an estimated 40% of VC dollars. They got to this position by creating market-leading platforms for search and social respectively, which were both able to transform eyeballs to marketing dollars. In Web2, this makes a lot of sense as user acquisition was the king of all metrics. In Web3, this might not be the same as user acquisition (while still important) gives way to financial metrics like total value locked, transaction volume and market capitalization. This begs the question - will Google & Facebook’s user acquisition tools be replicated, imitated, replaced or eliminated altogether in web3?
Remains to be seen whether web3 projects will cease relying on centralised platforms for user acquisition. At the time of writing, most crypto projects still market themselves and develop community traction on old-fashioned web2 networks like Reddit, Discord and Twitter. Twitter’s substantial investment in developing a decentralised social media network could be a beacon for crypto projects to market themselves and dedicate outside capital towards. Reddit’s r/cryptocurrency subreddit has also adopted crypto elements through its MOON token, which is airdropped to valued contributors and used for rewarding other community members. Perhaps the biggest argument for the sustainability of the centralised platform is the dominance of NFT marketplaces - OpenSea reached up to as high as 96% market share just by being the best directory for facilitating NFT discovery and transactions.
The State of Crypto VC Funding
The numbers for VC funding in crypto in 2021 are staggering:
Total volume of $32.8bn
47 newly minted unicorns
Doubling of average crypto fund size (~$150mn → ~$300mn)
>2,000 deals conducted
Median ‘web3’ sector valuation of $70mn versus global median of $29mn
And that’s just for regular venture capital funding outside of ICOs, where an additional amount exceeding $2bn was raised. In short, institutional and degenerate investors both really liked crypto last year.
Something of note was where the money got spent. Given crypto’s rise to the mainstream last year, it isn’t that surprising that a lot of the funding in the first-half of the year went to later-stage name brand companies like FTX, BlockFi and Sky Mavis (Axie Infinity). This trend got bucked in the latter stage of the year as more research went into earlier-stage companies with greater growth potential, a possible indication of either higher risk tolerance or enhanced attention among investors in the sector.
One interesting point that might harm the argument that there even will be a Facebook/Google Ads equivalent for crypto (i.e. major beneficiaries from VC money) is that 43% of all venture capital funding last year went to some variation of exchange.
Where Google & Facebook buttered their bread with businesses keen to get eyeballs on content, emails on subscription lists and items in carts, crypto exchanges will probably be more keen to chase down big money. This might make their user acquisition methods more analogous to Bloomberg or Workday than Etsy or BuzzFeed, landing them on the elephant side of the scale below.
What this means is that instead of using ads tools to attract as many users as possible to visit their sites, it would be more effective to adopt top-down, more customised sales processes to enlighten institutional elephants who’ll bring the big bucks to their platform.
There remains an argument that in DeFi, less power will accrue to the hands of the whales as more people make more money, limiting their influence over the market. That being said, financial institutions won’t go away anytime soon and whales do still influence crypto markets. Hence, it remains efficient for these exchanges to use the 43% of total crypto VC funding that they receive to tailor their platforms for big traders and invest proportionally less in mass-adoption marketing.
What about the other 57%?
These can be split into two classes: user-focussed dApps and infrastructure (including DeFi). Like exchanges, infrastructure builders are unlikely to have to use Google-like tools to reach the masses in the same way that tollways, electrical grids and railroads don’t advertise themselves in newspapers.
This leaves us with the 17% of funding directed towards user-based applications. This is used as an umbrella term that covers NFTs & marketplaces, DAOs, metaverse projects and web3 protocols. Relative to the proportion of money flowing to exchanges, 17% looks small - but it still adds up to almost $6.5bn in a fundraising environment that only looks set to expand.
Where Does Crypto Capital Get Spent?
Identifying cost centres for crypto businesses is difficult for two main reasons:
The lack of publicly available financials. Coinbase is the only public company subject to reporting standards whilst ICOs often offer limited information beyond their tokenomics.
The diversity of projects. This problem isn’t unique to crypto. In Web2, there was a litany of profitable new business models that opened up, namely in e-commerce and social media.
Where these might differ from web3 is the platform dynamics. In an un-anonymised setting where new entrants to platforms benefit from platform size more than anything else, exponential network effects come into play which allowed Facebook, Shopify and Amazon to become the behemoths that they are now.
In Web3, platform size is likely to be less of a factor in coercing new entrants, giving way instead to factors including user experience, project economics and mission.
While it is hard to pinpoint exactly where cost centres are, there are some functions that are common across crypto firms that could be (and in some cases, are already) hot spaces for crypto SaaS competition.
Hiring.
Tech Stack, Hosting & Outsourced Solutions.
Security & KYC/AML.
Network Fees.
Marketing & PR.
Customer Support.
Extra Legal.
In keeping with the Facebook & Google analogy, I’ll stick to the Marketing part of this equation given that this is the area where these firms built the majority of their advantage. That being said, if user acquisition turns out to be less of a precursor for market dominance in Web3 than in the platform dominated dynamics of Web2, any one of these other functions could prove to be a greater magnet for venture dollars.
What Might Service Winners Look Like?
Platforms & Tooling
It is worth noting that Facebook & Google both built their ads businesses once they had established platform dominance in social media & search respectively. In Web3, a similar ‘hub’ style platform for projects to connect users, collaborators and projects would logically be the best place for a firm to pivot to a similarly successful ads business.
Whilst centralised platforms are the antithesis of Web3’s decentralised value proposition, there are some early candidates who could play the role of aggregator. In crypto, this aggregation will likely act less as a project directory (i.e. Google) or open social network (i.e. Facebook), but rather operate as aggregators of information and discovery.
The early exception to this prediction are NFT marketplaces, where larger platforms help creators reach a larger audience and command more competitive prices for their work. This is the kind of dynamic that allowed OpenSea to facilitate as much as 97% of NFT sales at one point last November, a figure that is still only very slowly being eroded by another high-powered competitor in LooksRare.
To say social networks won’t play an important role as web3 platforms is also not entirely true. After all, the secondary function of a ‘social’ network is to spread information. As such, information-first networks like Reddit and Twitter already have a head start.
Reddit’s head start as an aggregator for crypto information begins with the anonymous nature of the social network. Whilst it has been long credited as a limitation to the network’s earning potential, the anonymity it offers is a boon to the freedom with which people share information due to the fact that users don’t have to put social capital on the line every time they share an opinion, leading to more honest and open takes.
At the time of writing r/Cryptocurrency (the most popular of Reddit’s litany of crypto forums) has 4.5mn members. The catch here, and part of what makes the community so successful, is that there are barriers on who can and can’t post. Not only does this feature filter low-quality content from discourse on the forum, but it also serves as a potential revenue pipeline.
To earn the right to share posts on r/Cryptocurrency, members can pick one of two options:
Earn comment karma from sharing opinions valued by the community whilst being a member for over 30 days; or
Buy a special membership for either $5/mo or 100 MOON per month (MOON being the forum specific rewards token that can be paid forward to others for sharing valuable contributions or used to access new rewards in the community
Of these, the special membership reflects the classic subscription based access systems prevalent across exclusive web2 communities. MOONS, on the other hand, represent an opportunity for Reddit to introduce a new form of creator economy for light contributions (at least within the forum).
At the moment, MOONs are for use within the forum, primarily for acknowledging helpful comments or posts. The token functions like many other project tokens - at genesis, users were allocated a share of the initial MOON supply of 50 million based on the karma (comment and post engagement score) that they have accrued prior to the token’s release. Every month, more MOONs are allocated based on contributions within the period.
Once they have been allocated, MOONs are stored in vaults that are only accessible through Reddit’s platform with a private key for users to access their private vault, check their balance and find opportunities to spend the token on new offerings.
As a variation of RCP token (a type of token run on the Ethereum blockchain that allows for decentralised payments), MOONs are interoperable across the Ethereum blockchain. This could provide a lot of utility going forward and promote Reddit’s standing as a cornerstone of the access layer within the web3 stack as shown above.
Where Reddit might be able to find its niche is as a facilitator for less wordy ‘creators’. Where writers on Mirror can be rewarded for high-quality content, it is often a lot more effort than some of the concise, but still helpful, comments and posts on Reddit.
How this works for venture-backed crypto startups is less clear but still feasible. By being active participants in these types of communities, businesses can get free marketing whilst also earning tokens for their troubles. Whilst these token rewards are unlikely to be major revenue generators for firms, the incentive it provides to users to be in these communities means that they will have an engaged audience for the content they put out, making it a robust line of subtle marketing communications.
Twitter & Bluesky
Unlike Reddit, Twitter requires that users put their social capital on the line in exchange for sharing their opinions. It has become a popular port-of-call for those both wanting to shill useless crypto projects and for those looking to build a reputation as thought leaders in the space. Oddly, Twitter has enabled both of these user subcategories a chance at vastly expanding their reach and prospects.
Twitter has often been lambasted in the past for its inability to convert its massive user base (currently sitting at 300mn monthly active users) into cash flows (ARPU of ~$15 versus ~$32 for Facebook). The blockchain-centric Bluesky initiative could serve to flip this on its head with Twitter as a major investor.
At its heart, Bluesky is Twitter’s attempt to create a decentralised social media network. What this means is that Bluesky will act as a protocol which connects social media platforms and allows them to interoperate. The project takes inspiration from the early days of email - where email users (everyone) can now send emails from their server to users using different servers (i.e. Hotmail to Gmail), this isn’t possible for social media networks. Bluesky’s mission is to remedy that.
Whilst the structure of the protocol hasn’t been made clear yet, the principles that underlie Bluesky’s mission include fostering the creation of more social media sites to be built within the protocol and establishing user control over the network.
Monetisation is the key question here. Some principles might be easier to pick than others. For instance, it is likely that transactions on the protocol will be conducted through a project token that accrues value through speculation and the volume of use cases as new sites are built on the platform.
The tougher issue is what new business models will look like. An Ecosystem Review crafted by Bluesky developer Jay Graber introduces how many of the current social media monetisation models (e.g. in-app purchases, premium content and advertising) will be replicated but with crypto tokens.
One interesting concept that Graber refers back to is that of the Basic Attention Token (BAT) - a concept whereby advertisers (in this case, crypto projects looking to extend their reach) pay to place ads. The BAT paid by the advertiser is then distributed to users who view the ad, giving a user-based incentive to allow advertising on decentralised platforms with only a small percentage being raked by the protocol.
In the case of a decentralised social media network, this could vastly improve both the efficiency and virality of marketing campaigns. Under the current ‘Google-Facebook’ status quo, marketing teams have to have expertise on both of these platforms and often publish different campaigns to optimise for the mutually exclusive algorithms of these platforms.
If a DAO, for example, was looking to promote their mission under this new decentralised standard they could simply operate their campaigns through the protocol’s singular ads platform (improving efficiency) whilst a blowup in the popularity of the campaign would spread across multiple social media apps (improving virality) at the same cost.
Diamond App
For those who are unaware of Diamond App, the best way to explain it is simply as a tokenized version of Twitter. The UI/UX, content standards and memes are all remarkably similar. The biggest difference is that, given its nascence and mission, most of the content therein is extremely crypto-centric.
Like r/cryptocurrency’s MOON token, Diamond’s differentiator is in the possibility it offers users to earn from short, sharp pieces of valuable content.
Upon signup, users are granted the option of establishing their own creator coin that other creators can purchase as an investment in the success of the account. Like most things in crypto, this is a balance of speculation and investment in the informational value created by the account over time. As an example of this speculation, Elon Musk’s creator coin is worth $12,428 - even though he has yet to create an account.
Accounts can accrue value as users post new content that is liked and donated towards by readers. For instance, when Balaji Srinivasan posts one of his thoughts as above, users have the standard options of commenting, liking and reposting in addition to the novel concept of donating towards the account (in this case, 42 diamonds). This places a tangible value on the informational utility of the post (which in this case doesn’t seem like much) and serves to grow the value of Balaji’s creator coin, enriching him and the investors in his account.
Because of its relative youth as a social media platform, it is harder to see in the short-term how crypto projects could leverage Diamond as a means of increasing their user bases in the same way that Facebook and Google’s does. However, should the user base expand and more high-value accounts migrate to the platform, the expected returns from promoting useful projects will increase with it as low-value projects are filtered out by the earning mechanism due to other users not engaging with the posts enough to donate.
With the novelty of the application also comes a first-mover advantage for projects promoting themselves on Diamond in front of a largely domain-specific audience that is likely keen to learn about new projects. Low spend, less competition, high upside.
Other Honourable Mentions: Discord, Rabbit Hole, Sablier, Govrn
Sales & Marketing
This section began with platforms & tooling because that is where Facebook & Google built the grounding for their duopolistic ads businesses. But in a decentralised world that is trending away from platform dominance, it’s highly probable that this won’t be a necessary precondition for building a user acquisition engine. Cue interoperable marketing & sales models and strategies.
This section is more difficult because, unlike platforms & tooling, a lot of the infrastructure isn’t in place yet. At the time of writing, most crypto projects still rely on Google/Facebook/Twitter/Reddit ads to promote their projects the old-fashioned way whilst employing a range of novel strategies including airdrops, early adopter incentives and bounties to drive initial surges in their user base.
Given the innovation present in some of the ways in which these projects are marketed, it’s a surprise that there isn’t more innovation in tools for enabling these strategies to reach a wider, more specific audience outside of the mainstream web2 social media platforms.
Here’s a few ideas (warning: these are definitely under informed and questionably feasible).
Directories
Like the early-mid days of the internet, the realm of crypto projects has become so expansive that it has gotten to the point where finding quality projects has become difficult as there are so many to weed through. Just as Google’s Ads platform was able to help businesses stick their heads out of these weeds and get noticed, well-designed crypto directories could make the discovery process easier for consumers and help projects promote themselves in the best light possible.
Back to the Yellow Pages
This concept is so boring it just might work. Useful for both neophytes exploring the ecosystem and seasoned vets looking for the next big thing, a well-categorised, searchable & sortable (by TVL, volume etc.) directory of crypto projects could well be a beneficiary of venture dollars as projects seek to get their name out there. The integration of classic advertising & promotional models into such a directory would serve to be a ladder for projects to climb to stick out from the rest of the crowd in front of a crypto-curious audience.
While I’m not really touching on NFTs throughout this article, the searchability of NFT marketplaces makes it a good proxy for what broader directories might look like.
Where OpenSea’s Explore page allows NFT collectors to search by art, collectibles, photography etc.,a project directory would allow users to customise their searches within categories like DAOs, web3, DeFi and so on. Projects that are both verified by the directory as being well-qualified and have paid for premium access will be able to access the prime real estate at the top of curated search (where the ‘Trending’ section is here on OpenSea).
As discussed with the dynamics of OpenSea-like platforms above, it does bring a degree of platform control into play. Whilst the directory itself isn’t claiming to be decentralised and rather simply aims to redirect users towards interesting projects, the potential for first-mover advantage and network effects makes it somewhat ironic in the web3 context even if it serves a useful purpose for the community. But that’s just nitpicking.
Airdrops & Calendars
Show me someone who doesn’t like free stuff and I’ll show you a liar or a fool. Airdrops might simultaneously be the most simple and advanced innovation crypto has created in terms of driving early adoption.
Having an airdrop calendar that operates as a directory for crypto users to get in on the ground level of new projects dropping new tokens or items everyday seems a logical way in which to aggregate early adoption, foster better methods of discovery for new projects and allow less advanced projects to market themselves without having to spam social media and Discord.
An interesting way of looking at this kind of idea is as a mix of Google’s search and Calendar capabilities. Users who sign up to the calendar are offered categories of projects from which they’d be interested in receiving airdrops (e.g. DeFi, P2E) or which kind of airdrops they’d like to receive (e.g. NFTs/items or tokens) and receive a short curated feed every day/week/fortnight so that they can participate in the ones of interest.
It’s easy to see how such a calendar directory could be both engaging and overwhelming. Subscription fatigue is real, and having a service that feeds you new stimuli everyday can get over-the-top if it is not front of mind for casual users. However, for those who are serious about building up a diverse portfolio of crypto investments, the opportunity to find the next big thing on a daily basis would be exciting.
Wallet Affiliations
As it stands in the wallet ecosystem, providers differentiate themselves primarily based on which tokens that they are able to hold and integrate with other services. By borrowing a ubiquitous marketing strategy from TradFi, projects could stand to benefit from being an affiliate partner of wallet providers.
Just as retail banks partner with brands to offer cashback and discounts to their customers, nascent & established crypto projects alike could receive the same kind of marketing exposure by being affiliated with wallets in mutually beneficial partnerships.
Say someone were to create a new play-to-earn game on Solana. They are still a small, underfunded team so are struggling to fully run a community or get the word out. By partnering with a Solana wallet provider like Phantom, this project can immediately expose themselves to anyone with a Phantom wallet. In exchange, Phantom can optimise the experience for their users by providing them discounts and limited offerings from their affiliated projects. The more successful said project gets, the more utility the partnership has to Phantom and vice versa.
Closing Thoughts
Like always, it’s difficult to imagine what the future looks like unless you are building it. That’s why these predictions for potentially market-leading crypto marketing engines are largely based on transformations of existing platforms like Reddit and Twitter or replications of Google’s calendar, search & mail bundle.
That being said, the surprising mixture of decentralised applications and centralised directories/platforms in crypto (e.g. OpenSea) means that there is every chance that originality will give way to the proven models of growth assistance seen in web2. Directories, affiliated advertising and platform marketing through more innovative models like the Basic Attention Token are all viable business models for those looking to prop up the marketing operations of up-and-coming projects.
Regardless of what your thoughts are on Google and Facebook’s martech duopoly, one thing is certain: the tools that they built have helped thousands upon thousands of businesses give themselves a chance to find customers all over the world and build a livelihood for their owners.
Any project that manages to do this for crypto will obviously be a highly attractive spending target for projects trying to get their name out there, but more importantly they might be a compass for freely discovering cool new stuff in web3. That can only be good.