The next Bull Market driver: An overview of the mainstream paradigm, opportunities, and challenges of Web3 Consumer Applications

Author: @Web3Mario

Summary: Recently, the market sentiment has been relatively low. With the gradual realization of potential policy dividends falling short of expectations, and a series of celebrities such as Trump harvesting the liquidity of the speculative crypto market, the two-year speculative frenzy driven by macro bullishness seems to have come to an end. In response to this, more and more investors and believers have begun to contemplate the next value narrative in the Web3 industry. The Web3 consumer application track has become a focus of many discussions. Only with the mass adoption of more consumer-level applications will this ecosystem of excessive infrastructure development bring true user adoption and sustainable business value. Therefore, during this period, the author has been thinking about issues related to Web3 consumer applications. Some insights and experiences are shared in the hope of exchanging ideas with everyone. In this article, a summary of the mainstream paradigms of current Web3 consumer applications is provided, exploring their respective opportunities and challenges. In future articles, the author will continue to share specific market insights and ideas, and welcomes exchanges with fellow enthusiasts.

What is called 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.

Usually, 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 subdivisions. Of course, as the market matures, many new products will combine multiple features to find their own different selling points to a certain extent. However, we can still make a simple classification based on their core selling points.

What are the current 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. Optimize the technical characteristics of using Web3 infrastructure to address certain issues in 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 adopting this paradigm hope to leverage the technical characteristics of Web3 infrastructure to enhance their product's competitive advantage or provide new services. Generally, we can categorize the benefits brought by these technological innovations into the following two categories:

• Ultimate privacy protection and data sovereignty:
• • Opportunity Point: The privacy track has always been the main theme of Web3 infrastructure innovation, from the initial asymmetric encryption algorithm identity confirmation system, gradually integrating many software and hardware technologies, such as ZK, FHE, to TEE, etc. A group of technical experts in Web3 seem to uphold an extreme view, aiming to create a network environment that does not rely on third-party trust completely 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 in 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 paradigm, such as decentralized social media platforms, decentralized AI large models, decentralized video websites, and so on.
    • Difficulties: After many years of market validation, it can be said that using this as the core selling point has not been observed to have obvious advantages in market competition. There are two reasons for this. First, the emphasis of consumer users on privacy is based on large-scale privacy leaks and infringement events. However, in most cases, this issue can be effectively alleviated through the formulation of more perfect laws and regulations. Therefore, if the protection of privacy is based on a more complex product experience or higher usage costs, its competitiveness will be significantly insufficient. Second, as we know, the business model of most current consumer applications is built on the extraction value of big data, such as precision marketing. Overemphasis on privacy protection will shake the mainstream business model because user data will be scattered in a batch of data islands, which brings difficulty to designing a sustainable business model. If in the end, it can only rely on the so-called "Tokenomics," it will have to introduce unnecessary speculative attributes to the product. On one hand, this will disperse the team's resources and energy to deal with the impact of this attribute on the product; on the other hand, it is not conducive to finding PMF, as will be specifically analyzed in the following section.
• 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. Traditionally, software service providers independently maintain their own programs, such as running on their own server clusters or in the cloud. Naturally, this brings trust costs in businesses involving multi-party collaboration, especially when the strength or scale between parties is balanced, or when the data involved is particularly sensitive and critical, such as in cross-border payment scenarios. The trust cost typically translates into significant development and user usage costs. However, using the execution environment brought by Web3 can effectively reduce the associated costs of such services. Stablecoins are a good example of such applications.
  • Difficulties: 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 certain service, involving multi-party collaboration, and the relevant parties are independent, the scale is in equilibrium, and the involved data is particularly sensitive, the use of this execution environment brings benefits, which is a relatively demanding condition. At present, most of these application scenarios are 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 their products' competitive advantages in a relatively mature and market-validated scenario. However, these developers focus more on introducing encrypted assets, leveraging 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 types of value, commodity attributes and financial attributes, the former is related to the use value of the target in a specific real-world scenario, such as the livable attributes of real estate assets, while the latter is related to its trading value in the financial market, this trading value in the field of encrypted assets usually comes from the speculative scenarios brought by liquidity and high volatility. And encrypted assets are a category of assets where financial attributes far exceed commodity attributes.

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

• Reduce 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 using real money to buy traffic, exposure, using Tokens created at zero cost for user acquisition is indeed a more cost-effective choice. From a certain perspective, such Tokens are similar to advertising Tokens. There are many projects adopting this paradigm, such as most of the TON ecosystem projects and small games.
  • Difficulty: This customer acquisition method mainly faces two issues. Firstly, the conversion cost of seed users obtained in this way is extremely high. We know that most of the users attracted by this solution are cryptocurrency speculators. Therefore, these users are not very focused on the project itself, but are more attracted by the potential financial rewards. Moreover, there are currently a large number of professional airdrop hunters or 'laboratories,' which brings great difficulties in converting them into real product users later on. It may also lead to a misjudgment of PMF by the project, resulting in excessive investment in the wrong direction. Secondly, with the widespread application of such models, the marginal returns of acquiring customers through Airdrops are diminishing. This 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 Points: Retention and activation are another focus of consumer applications, ensuring 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 representative model is X to Earn, rewarding key user behaviors based on Tokens set in advance, on which to build a loyalty program.
  • Difficulty: Relying on users to earn profits can motivate user activity, shifting their focus from the product's features to the profit margin. Therefore, if the potential profit margin decreases, user attention will quickly dissipate. This is extremely damaging to consumer applications, especially those relying heavily on user-generated content (UGC). If the profit margin is based on the price of their own issued Token, it puts pressure on the project party in terms of market value management, especially in bear market phases, having to bear high maintenance costs.
• Directly monetize the financial attributes of Token:
  • Opportunity Point: For traditional consumer applications, the most common business models are twofold. One is free usage, leveraging the value of platform traffic after large-scale adoption, and the other is paid usage, requiring payment for certain Pro services in the product. However, the former has a longer cycle, and the latter is more difficult. Therefore, tokens bring a new business model, namely directly cashing out the financial attributes of tokens, which means the project directly sells coins for cash.
  • Difficulty: It can be clearly stated that this is an unsustainable business model, because when the project develops beyond the early high-growth stage, due to a lack of incremental capital inflow, this zero-sum game mode will inevitably put the interests of the project party in opposition to the interests of the users, accelerating user loss. If not actively cashed out, due to a lack of robust cash flow revenue, the project party can only rely on financing to obtain funds to maintain the team or business expansion, which will then fall into the dilemma of relying on the market environment.

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

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

• Construct a new narrative, monetize the unexplored value elements around Web3 native users, and create new asset categories:
  • Opportunity Point: By providing new speculative targets for Web3 native users (such as the SocialFi track), the benefit is to have the pricing right of certain assets at the initial stage of the project, thus gaining a monopoly profit, 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 attract strong appeal among Web3 native users, or gain recognition and support from individuals or institutions with the 'pricing power' of encrypted assets. This brings about two difficulties: Firstly, with the development of the market, the pricing power of encrypted assets is dynamically transferred between different groups, for example, from the initial Crypto OGs, transferred to encrypted VCs, then to CEX, then to encrypted KOLs, and finally to traditional politicians, entrepreneurs, or celebrities. In this process, the ability to identify trends during each transition of rights, establish partnerships with the nouveau riche, and the sensitivity to team resources and market trends are greatly demanded. Secondly, in order to establish cooperation with the 'pricer', it usually requires a huge cost and price to be paid, because in this market, you are not competing with other opponents for a larger market share in a certain application track, but competing with all other creators of encrypted assets for the 'pricer's' preferences, and this is a highly competitive game.
• By providing new toolized products, serving the unmet needs of Web3 native users in the process of participating in the market. Or from a user experience perspective, provide better and more convenient products for this group of users:
  • Opportunity Point: I believe this is a paradigm with the most potential in the future. With the gradual popularization of cryptocurrencies, the overall base of this user group will gradually expand, bringing possibilities for user segmentation. Focusing on the real needs of a certain user group, such products often achieve PMF relatively easily, thus establishing a more robust business model, such as some trading-related data analysis platforms, Trading Bots, information platforms, etc.
  • Challenges: Due to the return to real user needs, although the development path of the product is more robust, 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 verify. 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 stick to your original intention amidst the complex and chaotic wealth myths brought by the frenzy of "issuing coins" or high valuation 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 partners who want to start a business in the Web3 Consumer Application track, it is crucial to comprehensively evaluate their own strengths and demands, and choose the most suitable paradigm for themselves.