Why do almost all Web3 social applications fail?

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Original title: The Social App Thesis: Why every winning onchain app will be social

Original author: David Phelps

Original translation: Ismay, BlockBeats

Editors note: We live in a capitalist world that believes that money is omnipotent. However, true cultural power is not always proportional to wealth. Being rich not only brings a certain kind of political and cultural influence, but it can also lead to a lack of another kind of cultural power. This article delves into the relationship between the merchant class and cultural tastemakers, revealing the difficulty of converting between money and status. Although there are theoretically many ways to convert financial capital into social capital, it is challenging in practice. We explore the reasons behind this phenomenon and use the cases of Web2 and Web3 to explain the difference between financial incentives and social incentives and their impact on community building.

one

Once you see it, you can’t unsee it. The influencer living on Prada gift bags in a rat-infested studio on the Lower East Side; the street musician whose beats no longer move people after becoming an overpackaged superstar; the wealthy husband in a shrunken, wrinkled shirt standing next to his couture-model-style wife. It’s everywhere.

I am referring to the inverse relationship between financial capital and social capital – the relationship between the merchant class (financiers) and the religious class (cultural tastemakers) in contemporary society. This seems to be a taboo subject in a world where capitalism has taught its adherents and opponents alike that money can buy everything.

Yet we find that being wealthy means not only gaining a certain kind of cultural power in terms of political influence, but also losing another kind of cultural power in the blindness of privilege. The price of controlling society is becoming a kind of social loser within its norms.

If you are one of those poor people who is stuck with billions of dollars in savings, I know you may feel worried when you hear this. Please don’t worry, in theory, you still have three classic ways to convert financial capital into social capital.

You can get into a relationship with someone cool (get married), you can invest in something cool (buy art), or you can do both (become a consumer venture capitalist).

In theory, this ancient playbook should serve you just as well today as it did in the late 19th century. All you need to do—you button-down financier—is find a cool guy with taste in linens and jewelry to help you hang a George Condo or a Vik Muniz on your wall. All you need to do is invest in the latest disposable audio app that every kid in America will be using for the next 7 to 12 days, and then, sure enough, you’ll be cool, right?

Is it right?

The only problem is that in practice…

When an investor, known for money, colludes with a tastemaker, known for status, it is the tastemaker who remains with an intact reputation. The tastemaker may get the investors money, but the investor will never get the tastemakers status.

I’m trying to touch upon an uncomfortable truth that the past two years of building social finance products have taught me time and again: It’s easy to trade social capital for financial capital, but no matter how much you like to put on the mantle of a blue-chip designer to please your financial peers, it’s extremely difficult to trade financial capital for social capital.

Youve seen this phenomenon with every washed-up celebrity you know: When the coolest people get rich, even they cant stay cool.

two

I would say that Web2 has already taught us one thing: for most people, social incentives always trump financial incentives. Most people are willing to let companies sell their data to the highest bidder, as long as it gives them even the slightest chance of looking ambitious online.

Privacy and civil rights advocates can complain, but most people are happy to incur huge financial opportunity costs for the social connections that signal their status.

Those of us working in crypto often forget the fact that most people are regular people who would rather have someone who listens to them than a million dollars.

And — pardon my dark thoughts — they know that accumulating social capital is one of the few viable paths to accumulating financial capital in the attention economy. Web2 figured this out a long time ago.

If you’ve ever wondered why almost all Web3 social apps have failed, here’s the answer: because Web3 catastrophically assumed that Web2 was wrong, that financial incentives were enough to build user stickiness, and that people could buy status to gain identity.

Of course, Web3 has good reason to believe that financial incentives are all it takes to kick-start a passionate user base. After all, the original blockchain community — miners and validators — was driven entirely by financial incentives, and the same is true for the DeFi community.

I mean, financial incentives are the original unlocking of blockchain’s permissionless financial rails! Financial incentives seem to work really well during speculative bull cycles when buyers frantically pile into soaring prices to fuel their further surge.

But with the emergence of crypto applications, DAOs, and NFTs, it is beginning to become clear that financial incentives are often fatal to building meaningful social communities. It is a mistake to believe that blockchains are merely financial tools and that financial incentives are enough to kick-start social communities.

First, it’s a mistake to think that financial incentives build stickiness. In fact, the reason financial incentives work so well for user acquisition is precisely why they work so poorly for stickiness — because a mercenary using your app for profit will leave as soon as a better opportunity presents itself. Those who came because of a price increase will leave because of a price drop. Their loyalty means nothing unless you can continue to pay them.

Most importantly, it’s a mistake to think that one can convert financial capital into social capital, that one can buy coolness, as many of the elite coworking spaces of the 2010s promised. This is not to say that the few who want to buy coolness won’t exist. But they will quickly self-destruct their investment, because no truly cool person wants to be part of a club where membership can be bought. These clubs not only exclude the true builders and marginalized voices who have built the culture for thousands of years; they also exclude (sorry) anyone who has ever decided to sell out.

If you’ve ever wondered why crypto social apps keep failing, here’s why: You can’t buy status. In fact, trying to do so will only have the opposite effect and make you look a little ridiculous.

three

However, this does not mean that financial incentives do not play a key role in unlocking on-chain social applications. Just as the popular view is that financialized social activities are enough to produce a killer application, the popular view is against the depravity of so-called mercenaries and degen culture.

The latter view is a reasonable response to the former, but it smacks of arrogance toward a global underclass that might actually want to earn money to support their families, and more importantly, it’s wrong.

Blockchains have financial properties, and the most radical value proposition they offer for social apps is also the most boring: they allow you to make microtransactions with every click, they let you eliminate the intermediaries of credit card and app store fees, and they provide an open on-chain metadata API for anyone to develop on.

Conceptually, all this is far less exciting than the revolutionary visions of collective ownership, artist royalties, and decentralized work that inspired and consumed us in 2021. Financially, it all sounds far more prosaic than pure and simple speculation. Maybe it all sounds like technicalities.

But think about what this means, blockchains change the way social applications are built and the types of social applications that can be built, for a very simple reason: they allow users to profit directly from other users. Looking back at the entire history of Web2 social applications, you wont find a major application that meets this requirement except for games.

Just the financial sustainability of the users is a huge achievement. In reality, it has never really been achieved.

Four

Because the real problem with Web2 is this: it successfully monetizes social behavior, but its users don’t.

Friends, fake friends, bosses, co-workers, lovers — and perhaps most importantly, the network of potential friends, fake friends, bosses, co-workers, lovers is so powerful that not only are users surrendering their data, but companies themselves are giving up the moat they gained by hosting newsletters, forums, and job opportunities on their sites.

This is the power of social networks: social incentives win out, and they win out at the expense of financial and reputational incentives.

You don’t make money from your valuable content; the social network does. You can’t programmatically own, access, or share the reputation you build while being a star creator on a platform; only the social network can leverage it to attract new users and advertising.

I think another way to put it is that Web2 is an era of applications, which means it is an era of closed data. A persons data exists in the silos of a specific application, and this model allows applications to profit by selling this data to advertisers. In short: in the era of closed data, advertising and applications will win, and everyone needs to gather on their platforms to be able to share data with each other.

Then cryptocurrencies came along and we entered the on-chain era.

Cryptocurrency marks the beginning of the protocol era, or the era of open data. Now, personal data can be freely transferred between applications, and there is no proprietary data to sell in the open source chain network. Instead, a new model is replaced: tokenization.

Essentially, tokens offer a somewhat clunky solution to the very real problems posed by permissionless technology where anyone can input any data into the system.

Tokens are essentially legitimacy technology that allows a large number of users to provide financial guarantees that one transaction is legitimate and another is not. Instead of making money by selling data to advertisers, you make money by providing financial guarantees to prove the authenticity of the data.

In other words, the reason to participate in cryptocurrencies is financial incentives.

This blessing has never been realized in Web2, and it is a curse. By now, you know the problem: in every bull market (including this one), quick profits attract a large number of mercenaries to spam transactions, farm protocols, buy tokens, promote tokens, and launch new tokens, chains, and platforms. But in a bear market, the financial frenzy that drives individuals turns to financial apathy. Just as the prospect of profit can quickly attract people, the prospect of loss can quickly drive them away.

There is another problem here, though it is less discussed. Financial incentives themselves tend to be zero-sum, where one person’s gain is another person’s loss, and in the realm of pure speculation, the more you make in a bull market, the more you are likely to lose in a bear market.

This is why prediction markets — perhaps the most touted use case for crypto apps over the past seven years — only had about 10,000 total users during their most popular period (election cycles), many of whom were likely bots.

The expected return is zero, so users have to be extremely confident that they know the future better than others who are equally confident. Having deep insights doesn’t necessarily help you when you’re competing against others who also have deep insights.

So how do prediction markets attract users? By attracting not rational bets, but irrational bets of a tribal nature: elections and sports games. People bet on their team’s victory because it’s important to them.

You see what I mean: for financial products to actually make money, they have to tap into social incentives.

We know this, of course. Web2 has extraordinary social incentives, but poor financial and reputational incentives. Web3 has extraordinary financial and reputational incentives, but poor social incentives. Financial incentives are good for making a quick buck, but social incentives are necessary to build a lasting business. Crypto will only win if it can achieve both.

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You may not believe me – and I know too many people in this field think I’m wrong.

So let’s talk about a specific case study: Uniswap.

Uniswap’s protocol has clearly won: not only is Uniswap using it, but Cowswap, 1inch, etc. are also using it, and this is exactly the problem. Because it is a completely open protocol that can be exploited by competitors. Uniswap presents a unique crypto-native problem that we have never really seen in the technology field: you can lose to your own product.

The problem is that on-chain applications cannot charge fees through their protocols, partly due to legal issues, but a protocol with fees would also incentivize competitors to fork it, thereby fragmenting liquidity for all participants.

Uniswap, like every other on-chain application, makes money through the frontend, and the frontend is where it needs to win. Only the frontend, not the protocol, is unique to crypto companies. If projects can’t ultimately attract users to their sites, they can’t monetize effectively.

So what drives users to the frontend? Brand, features, UI/UX are all important of course, but a key lesson from Web2 is that the most important driver of the frontend is the user network. You go to a site because there are other users there, and other users can find you. Just like financial liquidity is important for launching a protocol, user liquidity is also important for launching a frontend.

Today, you can see this reflected in every decision Uniswap makes. Wallets, domain names, acquisition of Crypto: The Game, these are all ways to keep users loyal to its front end, these are all ways to make Uniswap gradually become social.

I don’t know what Uniswap has planned, but I imagine we’ll see a lot of similar features in the next year or two — want to issue your own token? Uniswap can be a place for any LP to gather, join the chat, and initiate campaigns for others.

What I’m saying is this: To win on the front end, you need to win on the social side. To build a financially sustainable model in crypto, you need to win on the social side.

six

I mentioned earlier that this is a lesson I’ve been learning personally over the year.

On Jokerace, we allow anyone to create on-chain contests for people to submit and vote on. Broadly speaking, contest participants may win in three ways: winning money, winning status, and winning friends. Money is a financial incentive; status is a reputational incentive; friends are a social incentive. These are really all the incentives.

For example, let’s say someone runs a kind of on-chain Shark Tank contest. The top winner wins a prize (financial incentive), all contestants earn status with each vote (reputation incentive), and voters can form teams around contestants, creating an organic community to support them from the start — creating tribes and making friends (social incentive).

When I describe it like this, it should be clear that financial incentives are the least attractive incentives, only winners make money, and that is far from guaranteed. But everyone can gain status by winning even a single vote, and everyone can make friends by creating a team.

Additionally, the act of building a reputation and social profile can lead to various financial benefits such as job opportunities, community, and airdrops, but financial rewards only provide money.

You can understand why thinking of money as a motive might seem shallow: because it is. Your reputation and friends represent your fundamental value as a missionary to a cause, but your money usually represents your ability to sell those values as a mercenary for the highest bidder.

If this sounds a little surprising, cryptocurrencies have proven it time and again. A key lesson of Web2 is that social incentives work like marriages: slow-burning, long-lasting, deepening over the years, activating relationships for an hour or two a day.

The lesson of Web3 is that financial incentives are more like a love affair: full of attention, short-lived, burning out in the ashes of one’s own passion until a new opportunity is found to pursue, and the money-grabbers will drift in the direction of the highest yield.

Of course, in a world where we all have to pay for food and shelter, we are all mercenaries to some extent, with our attention open to the highest bidder. So Im not disparaging financial incentives, Im just saying that passion is a powerful acquisition tool – but only if it leads to marriage-like fidelity.

Recognizing this means recognizing that blockchains are not just tools for globally interoperable finance, they are also globally interoperable coordination and globally interoperable reputation tools. In fact, they are the solution to their own problems and are the true social tools needed to solve the top problem in this space around moats and monetization – loyalty.

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