Matchpool: Community-owned social matchmaking, aimed at online dating and beyond
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The blockchain is home to repositories of value-laced recordkeeping, but are we on the verge of witnessing technologists, cypherpunks and hackers swapping tokens for dates? Matchpool, a new decentralized social network has a novel approach to modernizing the age-old ritual of courtship. Adding a high touch approach to a digital environment is made possible by motivating the sharing economy to curate and facilitate matches between peers for use cases such as dating and other social or interest groups.
Matchpool eliminates the traditional network owner and as a substitute participants create “Pools” where the incentive structure is a direct economic relationship between “Users” and “Matchmakers”, facilitated by blockchain technology. In short, users buy in and matchmakers are rewarded for proposing meetups and supplying ice breakers. By comparison, traditional dating applications (both paid and free) provide only access and algorithms to users who are required to summon their personal ambition in order to network. Matchpool has a vision that open systems can nurture collaborative matchmaking and turn communities into vibrant marketplaces for networking.
Matchpool’s protocol will balance more controlled access to sensitive user data, while also enabling pool operators to build geolocal versions of Millionaire Matchmaker, The League, Meetup, Craigslist and more. Users choose which pools to join. The dating use case is just a beachhead market; and for practical purposes, owners can customize and operate pools tied to virtually any interest. Owner-operated pools provide a number of competitive advantages, including unique marketing messages and the opportunity to adhere to the complex location-based nuances and cultural norms for dating and networking.
Dating is hard work
The value of love and happiness is quite high although theorists generally fail to bridge the worlds of monetary value and love. The reason: it is all relative. Everyone has different means and different values. It is hard to slot love into the economic principle of the Big Mac Index, where costs are factually comparable. Similarly, the cost of Match.com does not equal a users expected value, it is just a cost for the Company to monetize its services. In fact, many traditional online dating companies mathematically formulate a flat monthly or per message cost and participants choose to opt in or not.
Two of the largest investments an individual will make in seeking love are time and money. While relationships and dating are expensive, the money singles spend on expanding their ‘dating funnel’ is shockingly low. Global estimates are hard to come by, but in the U.S. only 1.6% of 18 to 26 year-olds who use dating apps pay for the premium services. Tinder converts just 0.85% of its 35MM users. That is a tiny fraction of a huge market opportunity. For instance, China’s singles population has swelled to over 200MM in 2015, or 14.6% of the country (up from just 6% in 1990). In the U.S. and England ~50% of adults are single.
The explanation may not be a monetary one but a psychological one. Prospecting relationships is a lot of work. The reasons people turn to online dating include “too busy” or “hard to meet people”. So, why pay for dating services unless you are motivated to get to work? Premium services need a better marketing message and value proposition to break into users’ wallets. Matchpool seeks to create more effective introductions by providing monetary incentives to passionate matchmakers for getting to know members and facilitating connections. The idea promotes a message of cooperation and solves pain points within the industry.
The Economic mechanisms
Matchpool’s concept seeks to merge the digital and physical worlds with pools structured by geographies and interests. The system utilizes the blockchain for four main purposes 1) to decentralize ownership and responsibility for operating local communities, 2) to structure ownership and reward schemes on a pool-by-pool basis, 3) to validate and settle transactions and 4) to log historical events. An owner stakes tokens to set up a pool (starting at 120 or ~$8.40 at Token Sale price) and then structures the incentives and parameters for participants to earn rewards. For example, a pool with group of attractive women may include a large monthly fee (for men only), a large reward for matchmakers (to recruit the best) and a ratio of women to men of 2:1 (a favorable ratio for the women). Matchmaking proposals flow as follows:
The location-based concentration of users will be important to the early growth story. Since the online dating market is competitive, a critical mass of users in close proximity is necessary to solve the chicken and the egg problem. If new users enter into a vibrant ecosystem, it will maximize user retention and engagement. According to the Wall Street Journal, there are more than 500 dating apps with a critical mass of users.
Blockchain based systems attract user-investors during token sales to generate early network effects and reduce marketing costs but in the long run the product dictates success. Matchpool’s mobile-first strategy seeks to capitalize on the growth in smartphone adoption and includes a native iOS app that’s touch and feel is familiar to everyday users.
The token, guppies (“GUP”), is designed to service all the incentives required within the ecosystem and not just to denominate transaction fees. The chart below shows the value flow through the Matchpool economy and defines the roles of its participants: users, owners and helpers. On one hand, owners can use GUP to form novel and potentially rewarding pools. On the other hand, users spend GUP to join pools early; for example, to get in before the male-to-female ratio disallows them. Additionally, speculators may believe in the vision and purchase GUP to help bridge development and deployment, recruit builders or evangelize the services in a more strategic capacity to earn returns. Matchpool’s corporate entity earns a 2.5% fee on network transactions.
Key value drivers
As a decentralized application, value hinges on the sum of what each user stands to gain (in their own terms) from the network. Matchpool will allow the market to find natural price equilibrium from the tension between what users are comfortable paying into the system and what owners, hosts and helpers expect to earn for their services. Since pools are customizable (entrance fees, subscription fees and payouts to workers), the exact economic balance will be derived by market forces on each pool over time. If someone is unhappy with the structure of an existing pool, they can open a new pool and revise the economics. But in aggregate, Matchpool’s market capitalization will be highly correlated to the total fees paid by end-users in exchange for matchmaking services. Therefore, the annual Gross Marketplace Volume (“GMV”) (what users spend and hosts receive) will be the key underlying driver of the networks value in relative fiat terms.
In the chart below, the economic participants in Matchpool (users and owners/hosts/helpers) are compared to miners in a traditional currency focused blockchain network, for example, Bitcoin.
The purpose of the chart is to show a more direct correlation between money spent annually in Matchpool’s ecosystem and the value of the network to its participants. With a currency focused protocol, like Bitcoin, miners are less sensitive to price (as long as Price is greater than Cost to Acquire). In fact, incentives between users and miners can be misaligned as fees paid may not represent service quality. For example, the fee to transfer Bitcoin is higher when the service is slower. The issue currently at the center of the scaling debate is that some miners prefer smaller block sizes (less efficiency to end users) because they generate higher fees. In Matchpool’s system, the Gross Marketplace Volume is Money Spent = Wages Paid. The more utility the service provides, the more users may pay for it. In the chart below, we apply stress to one part of the economic engine (user growth) and project the reaction.
A hypothetical bullish cycle is not limited to user growth, but it’s an example of the expected reaction to changing one variable. Similarly, negative events can cause a bearish cycle. The theory is not complex, but the framework is important when analyzing cryptoeconomic business models. The price of a well-designed protocol token should closely track the economic activity of the underlying ecosystem.
Token rewards in Matchpool’s protocol are active, not passive. And the price of services is not denominated in a USD equivalent, so GUP drives the economy (see Alex Bulkin’s Cryptoeconomics is hard part one and two). Nonetheless, participants may utilize the USD exchange rate as a benchmark when acquiring tokens and services. Matchpool’s incentive system is similar to other projects like Steemit, which attempt to correlate payouts with quality of content. However, Matchpool is simpler in that value is transferred directly from buyer to service provider instead of generating rewards by issuing new tokens.
It is important to note, that as an open source software service charging a 2.5% fee on transactions, the network could be forked and operated without a fee. Matchpool will have to focus on creating a valuable user experience and network effects around the product. In fact, they may choose to keep certain components of the technology proprietary.
Market opportunity
In diving into the Matchpool product, these five key points will help guide the financial analysis:
- The GUP economy requires users to spend money on matchmaking services
- Only a fraction of users spend money on premium dating services but matchmaking is a large market opportunity
- Competitive differentiation is novel; a curated and work-based approach
- The valuation construct is simple: Gross Marketplace Volume (Money Spent = Wages Paid)
- In the long term, the token price should directionally track the success of the network, defined as users, engagement and spend
Our valuation exercise will focus on Matchpool’s dating use case and apply a multiplier for other market opportunities. End user spend, not advertising, drives the Matchpool business model. Therefore, “Global Annual Revenue Paid by Users” is an important dating industry metric.
- Match Group’s portfolio controls 21.8% of the global market for online dating sites, operating a conglomerate of 45 dating sites including Match.com, OkCupid, Tinder and PlentyOfFish across 190 countries and 38 languages
- Match Group’s public SEC filings breaks out annualized revenue recognized from end users of $1.1 billion
- The revenue divided by the market share gives us an estimate for the total Global end user spend of $4.8 billion
In order to confirm the directional accuracy of this projection, Statista estimates that dating services are set to earn $4.9 billion in 2017, which is consistent with our projection (but may or may not include advertising revenue).
The industry
Only a fraction of users spend money on premium dating services. However, the number is expected to grow. As a proxy, Pew Research Center, notes that participating in online dating in the U.S. is booming with young adults, nearly tripling from 10% to 27% over the past three years for the 18–24 year-old category. The competitive differentiator for Matchpool is that owners can customize pools and matchmakers provide a personalized, high-touch approach and work on the behalf of users. According to Match Group’s filing, Average Revenue Per Paid User (“ARPPU”) is $197 annually.
Matchpool token sale structure
Matchpool will offer 60% of the total token supply to participants in exchange for a maximum of $4.2MM. An 18% preallocation of the token supply will be reserved for new customer acquisition. A few highlights that help to align interests of founders and participants include (1) a low 8% allocation to the founding team, (2) a one year vesting schedule for founders, (3) a $4.2MM cap on the capital to be raised and (4) unsold tokens will be burned. The total market capitalization assuming a full raise is $7.0MM.
Valuation framework
Note that models are only attempts at approximating reality and in cryptoasset markets where speculation abounds, no one can truly predict the outcome. But models can also give a mathematical clarity to real world processes which can provide a useful framework for thinking about new networks.
Drawing on some statistics from my cryptoasset market analysis, an average of 2,947 investor participants commit $3,675 per person to token sales. Taking the midpoints for a $4.2MM raise, that equates to 2,045 participants or $2,550 per participant (see the calculation here). We’ll assume that 50% of participants are speculators and 50% are motivated to build markets and work as economic participants. Matchpool could draw a higher percentage of participants interested in creating value since tokens do not offer an opportunity for passive income.
List of Important User Assumptions:
- 1,023 owners/hosts and 2,045 initial user signups represent the user base at launch
- Over the first 6 months, Matchpool uses its ~$1.26MM (18% of Token Sale Allocation) to acquire ~250K new users at a rate of ~$5 in GUP each (as outlined in the whitepaper)
- In the first six months, monthly churn of 20% (~50% on a total basis) is applied to discount for users that fall away immediately
- User growth rates are benchmarked to the median for software service startups by Compass: 10% month-over-month on a net churn basis in Year 2 and Year 3; drops to 9.1% (because the user base exceeds 1MM) in year 4; and drops to 4.7% in year 5.
Next, we incorporate the statistics discussed earlier on ARPPU and that 1.6% of users pay for premium dating services. Since Matchpool isn’t solely focused on dating and by default all users will pay a nominal (or higher) GUP fee for pools, we apply a 2x multiplier to adjust for other market opportunities. Hypothetically, to generate $7MM in GMV at $6.31/user, Matchpool needs 1.1MM users (that is, $7MM / $6.31 = 1.1MM users).
The following model projects the user statistics based on the above assumptions. The value of the network may not be linear or even exponential based on the number of users alone. Matchpool should focus on achieving critical mass within popular geographies and expanding horizontally.
At the bottom, there are three statistics:
- “Annualized Spend Per User to Equal Token Sale Price” at the level of projected users. In Year 3, the metric yields $3.65, which is below the projected spend per user of $6.31
- “Gross Marketplace Volume” is computed by multiplying the $6.31 spend by the total projected users. In Year 3, the metric is estimated to be $12.1MM. Matchpool as a Company may value the network based on a multiple of earnings (derived from the 2.5% fee) but the value of GUP is what you can buy, so GMV is more important
- “Average Wages Paid to Owners & Matchmakers” shows the wages earned per Host. The metric helps conceptualize on average how much hosts are earning from each user
The growth years
The long-term outlook is also hypothetical, but we will walk through a framework for how investors may seek to value GUP. Investors and speculators will play a role in financing the longer-term vision. But in the near term, it is hard to predict how they may react until concrete statistics are readily available. Nonetheless, the network KPIs will be (1) consistent user growth, (2) daily active user engagement and (3) meaningful throughput of GUP spent on services. Based on the assumptions, the model yields the following user statistics (actual growth may be higher or lower than projected). The headline 9.5MM user projection in Year 3 may feel large in the context of current users paying for premium services. However, Matchpool’s opportunity to bring micropayments, gamification and value-added services to the marketplace could more easily convert freemium users.
Drafting off the model, below is a sensitized table of USD value of GUP spent annually (GMV) in the network based on multiple ARPU inputs. Our baseline of $6.31 is highlighted.
Below are the theoretical projections of the token return multiple (vs. Token Sale cost basis) based on the network GMV shown above. The first chart uses a 1x GMV valuation and the second is 2x. In two examples from Version One and Fred Wilson, traditional venture investors value marketplaces in the range of 1x GMV range. This is apples-and-oranges because these valuations are for centralized companies that earn fees off marketplaces, nonetheless, it supports the expectation that Marketplace Revenue is a good proxy for network value.
The token price may vary from the 1x valuation metric based on future growth expectations. For example, if in Year 3, forward looking growth consensus for Year 4 was 100% then the probability weighted outcome of 75% could imply a 1.75x multiple.
Lastly, a Discounted Cash Flow (“DCF”) analysis, calculates the discounted present value of potential future outcomes and the resulting Internal Rate of Return (“IRR”). Below is an example, based on the charts above and assuming a cost of capital discount rate of 20% to compensate for risk of both principal loss and uncertainty.
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Disclaimer: I wrote this article myself and it expresses my own opinions. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on as investment advice. I do not provide tax, legal or investment advice.
Disclosure: I received a verbal commitment for future GUP tokens in exchange for auditing their services. The work was completed independently and no changes to my opinions were made as considerations to the team’s comments, other than factual inaccuracies
