Tokenomics: Gatekeeping Web3's Ring-Road
Tokenomics: Gatekeeping Web3's Ring-Road
Thoughts on Web 2, Web 3, NFTs, and Tokenomics
Tokenomics, NFTs, and Web3 are big topics at the moment within crypto circles.
For people in the regular, non-crypto world who are still wondering when Bitcoin will go to zero, the potential for continued NFT media longevity and the prospect of even more retail blockchain enabled commercial activity all seems like a scammy joke that should have ended last year sometime.
But in spite of the nay-sayers’s misgivings and all the “right-click save as” memes, it seems that NFTs, Web3, and Tokenomics are finding enduring value within the broader Internet, functioning not simply as Internet flair pins, but by gaining utility as gatekeeping tokens that provide access to various parts of a new Web3 Internet - construction underway.
The questions for us all are ‘where is it all going?’ and ‘will it amount to anything?’.
What the hell is Web3?
To put Web 3 in context for you dear reader, you are -regardless of your tech-savviness- already familiar with Web 2.
Successful companies from Web 2 are the current incumbents and dominant players of the Internet. Google, Amazon, Apple, Facebook, and their Chinese equivalents are the moguls of Web 2 Internet Real Estate world, and the territory is already spoken for.
‘Web3’ by contrast denotes a network of websites, platforms, social media, and coder/development accounts that combine to authenticate and credential a user in various ways -even in physical space- all backstopped by crypto wallets that a given user keeps on their phone(s), and personal computer(s).
Those wallets store and display in various ways the digital tokens, certificates, and credentials that the Web3 Internet offers to it users. It’s all a bit circular, and all a bit clubby, and very tech forward, there’s crypto running in the background of everything, and most parts of it are still open to play for.
If you thought the challenge of getting a blue checkmark on Twitter was fun, then you’re going to love Web3.
(For more: Web 2 vs. Web 3: What’s the Difference and Why It Matters.)
No seriously, how the hell should I think about Web3?
For a deeper understanding, we might construct a mental image. Imagine a tower where each floor is different layer of commerce. On top are the various blockchains of crypto. Below that is the Internet. As we go down we eventually get to the bedrock of physical land and property along the laws that govern that land and property. Imagining this tower we would be accurate in thinking that most of Web 3 lives towards the top of the stack, while most of Web 2 lives underneath Web 3, and with Physical and Legal bedrock layer below Web 2.
Moreover, our intuition from this image would be that Web 2 companies will likely always be able to tap into the physical and legal layer of the stack better than Web3 - as Web 2 still underpins much of the Web3 landscape (AWS servers house Ethereum nodes, etc.).
Web 3 needs the Web 2 layer. Web 2 needs the physical layer. Web 3 aspires to not need Web 2, but so far that hasn’t really happened, though attempts are being made.
Ok, so what happens in Web3?
The challenge then for Web3 token projects is a double-edged one.
First, -as with much of crypto world- the challenge is identifying a use case that makes sense and hopefully does something better than traditional Web 2 companies do it already.
Second, is identifying why that specific use case needs a specific token and not some other generic token like Ethereum.
To answer the first question: for Web3, the best economic driver it has is the higher perceived trust levels that are woven through the crypto digital experience. Unfortunately for Web2, the erosion of user’s trust by legacy Web 2 platforms seems to be at a level that surpasses the numerous great economic advantages that Web 2 has in their favor, (economies of scale, etc.). So for the moment this works as an answer.
The second question is trickier to answer. Consider this:
In the real world, gift card reselling marketplaces have existed for years (https://www.cardcash.com/, https://www.raise.com/sell-gift-cards). But interestingly not all gift cards are treated as equal by those marketplaces. Amazon and Walmart gift cards sell near par value - trading at mere basis points off of their face value…
…while other brands see heavy discounts on their gift cards, sometimes trading 25% below the sticker price of the card.
If you were keeping a sizable chunk of your discretionary spending in gift cards, then wouldn’t the optimal strategy be to keep most of your card-value in Walmart and Amazon cards, and then only transfer to Dunkin’ Donuts cards when you were boarding the plane to Boston?
Now go back and replace ‘gift card’ with ‘crypto’ and ‘Walmart’ with ‘Bitcoin’.
If a token somewhere in Web 3 has 1) a clear use case at some point, 2) but is only used on a sporadic basis, and 3) is tradable in a semi-liquid market, then wouldn’t a given token owner trade their tokens to some other base layer coin like Ethereum instead of holding the token itself?
How then to get users to keep their tokens? How then to have the tokens hold value? Can the tokens solve a real world problem, with a clear utility proposition, with alignment of the usage, value accrual, and potential rewards, all while making the token ecosystem long term viable?
These are ongoing challenges that plague Tokenomics consultants. And, yes, that is a real job.
The challenges are hard to solve for simultaneously, and in my view this is why we are seeing some of the features/bugs of Web 3 that we are seeing, where the answer is usually to throw out one of the ideals so that the others can flourish:
Many tokens, like NFTs, are designed to be scarce or unique and NOT be liquid (or at least they aspire to illiquidity), doing so means a token holder perceives that a sale event will not be recoverable.
Some tokens hold special utility and are used as gatekeeping keys to specific parts of the internet (think gated chatrooms).
Other tokens, like POAPs (a proof of attendance protocol), aren’t designed to trade at all.
Event Tickets as NFTs are a great fit, as they are demanded at entry but can trade like memorabilia after the event is over.
Airline (and other) customer points systems are another potential, and might benefit from a tradable secondary market … yeah, and let’s just all hope that the Federal Trade Commission still wants to go to bat for the private selling of the modern incumbent of S&H Green Stamps (wiki).
Nevertheless, the best ideas all seem to reach from Web 3 back down through our imaginary stack of networks to touch something real in physical space.
A real world example:
ETHDenver 2023, which just finished up two weeks ago, was an interesting place to see a real life example of some of this.
For awareness, ETHDenver is “the world’s largest and longest-running Ethereum #BUIDLathon event” (link), and is put on annually by an independent amalgamation of entities referred to as SporkDAO.
Tickets to the event were up around $500 dollars, but were free if you joined SporkDAO.
ETHDenver attendance came with its preferred Web 3 Wallet, MewWallet (link), and separate Social App, the SporkDAO invested WeLook. Tickets were distributed through email by WeLook which were QR codes. The WeLook app could link to your Web3 wallet, and at checkin you received a physical space card that you could link to WeLook (and to your Web 3 Wallet) in order to demonstrate your Web 3 swag with just the tap of your card. Having a special ticket/NFT allowed you special access to special lounges.
See! Frictionless technology at work! Just do ALL the things, remember ALL the passwords, and NEVER lose your phone.
If all of this makes you feel like a Naval Officer trapped in a landlocked country, I can sympathize.
The old is new again
For me the NFT gated world reminds me of my first deployment to Afghanistan and the brilliantly festooned trucks that drive local commerce in that part of the world.
A causal observer of an Afghanistan driver’s truck might be forgiven for believing that truck drivers in that part of the world are simply excited about what they do, and want to adorn their rides with as much road drip as possible. Not so.
Many of the handkerchiefs and adornments are purchased as signalizing elements used to convey which local warlords the driver has purchased safe passage from. (*at least in 2010 this was the case.)
Want to visit a certain part of Afghanistan’s Ring-Road National Highway 01 controlled by this specific local strong man? Well, in order to see that part of the country, you’ll need to buy this specific color handkerchief as a toll. Sound familiar?
At the moment, the logistical friction of joining the Web3 world is still a significant hurdle that many in the older generations of the Internet will find overly cumbersome. Even juxtaposed with the technological ease of navigating within the Web3 world, with its enjoyable, cyber-club, in-the-know atmosphere, that hurdle will overmatch the seamless ease of traversing Web3’s interior.
The handkerchief wasn’t the problem in Afghanistan … as with many landlocked countries it’s the need to fly everything in that eats through your supply budget.
Endgame
The distant drumbeat behind all of this is breakneck rollout of CBDCs.
In spite of the ongoing regulatory crackdown on cryptos in the US and elsewhere, the rollout of CBDCs has been dramatic and points towards a future where crypto wallets are with in some form us even if cryptos aren’t.
So while NFT Wallets might seem like an odd toy for the tech minded today, the potential that we will all end up with token wallet apps on our phones instead of apps that link to our checking accounts is a real one.
(And yes, yes, I can hear you saying that FedNow won’t be for retail customers, I’ll believe you when the number of commercial banks in the US start to increase again. (link))
Downloading your ETH Wallet to your phone, and connecting that Wallet to a Bluetooth card that then lets you enter a VIP area of an event is fun in the same way that having access to a Centurion or Business class lounge at an Airport is fun.
A cynic might ask why then - if we are going to have CBDCs anyways - why not just start having fun with all the NFTs now? Don’t you know the Ethereum gas fee burn rates to mint your personal POAP drop once you connect your Web 3 Wallet to your smart card?
Yeah… the POAP isn’t the problem.
Until next time.
-Jack