Manifold Ventures: Web3 Consumer App Thesis

Special thanks to Henri Stern for feedback and review.

Introduction

As we gear up to invest from Manifold Ventures Fund I, we have high conviction that the blockchain-enabled consumer application stack will be the new paradigm in the next bull cycle. Blockchain technology has reached its adolescence; DeFi primitives such as profit-sharing and bonding curves have paved a way for the formation of complex consumer apps that allow creators and fans to generate value in symbiotic relationships. Meanwhile, innovations at the infrastructure layer provide better UI/UX, enabling users to manage assets in embedded wallets and transact in low-gas environments. By taking a top-down approach to investing in consumer apps and their underlying infrastructure layer, we hope to generate meaningful returns for our investors.

Consumer Apps: The New Frontier

Businesses are now able to launch more complex consumer apps by leveraging innovative DeFi primitives such as token-enabled profit-sharing and bonding curves at the forefront. These innovative mechanisms open up new avenues for both businesses and their users:

• Value Creation: Businesses can tailor marketing strategies using on-chain analytics, enhancing fan engagement and offering early adoption incentives.
• User Sovereignty: Users not only earn from the protocol’s revenue, but they also enjoy rewards that are composable across various platforms. The combination of self custody and interoperability introduces new use cases centered around self sovereignty.

The current loyalty landscape isn’t without its challenges. Traditional models often misdirect user loyalty towards intermediary platforms, sidelining the actual creators or businesses providing the services. This approach not only complicates the dynamic — with businesses shouldering the cost of these rewards systems without gaining any real influence — but also operates in silos. As a result, there’s a fractured understanding of a customer’s overall worth, often narrowing it down to isolated interactions.

As we move forward, we believe that the essence of modern consumer apps lies in empowering users to actively participate in and derive value from the platforms they engage with. Blockchain technology offers a plethora of mechanisms to realize this. Whether by staking native tokens for unique benefits or creators directly rewarding their audience with assets that can be transferred and utilized beyond the original ecosystem, the possibilities for true user ownership are immense. The challenge, then, is for apps to transition from models anchored in pure speculation to those that offer tangible, real-world utility. The success of this transition could very well dictate the long-term viability and growth of these applications.

Friend.tech: An Illustrative Example

Friend.tech is a prime example of a consumer app that has designed an incentive structure that empowers users to directly contribute to and benefit from the app’s growth. Users can buy and sell “keys” associated with Twitter accounts. Holding keys grants access to a chatroom with the Twitter account owner and unlocks additional perks set by the owner. The platform has experienced explosive growth since its launch, showcasing the potential of blockchain-powered consumer apps when leveraged effectively.

Since its launch on August 10th, Friend.tech has demonstrated exponential growth and robust user engagement. Key highlights as of September 27 include:

• Rapid User Adoption: The platform has garnered almost 280K users in just over a month and a half. From this user base, the protocol has amassed over $40M in TVL, generating about $30M in fees.¹ This revenue underscores the platform’s ability to monetize its services effectively.

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• High User Engagement: Over 186K ETH, which is equivalent to approximately $305M, has flowed through the protocol. With over 8.1M cumulative transactions, this translates to an average of roughly 30 transactions per user since launch, indicating high user activity and engagement.²

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• Active Market Participants: The platform has almost 280K buyers over 155K sellers.³ This nearly 2:1 buyer-to-seller ratio reveals that a majority of users are net purchasers of keys, suggesting they see intrinsic value in holding them.

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Since the number of buyers may appear inflated due to users being encouraged to buy their own keys upon account creation, a truer measure of key turnover can be gauged by examining defection rates relative to total key sales. As illustrated in the following chart, defection rates have consistently been 10% or less since FriendTech’s inception. This minimal rate of defection underscores users’ confidence in the value of retaining keys and their optimism about the platform’s potential for future growth.

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• Significant Creator Earnings: The platform diverts half of all this revenue to creators, distributing $15M of the $30M it generated in fees directly to creators.⁴ In fact, as shown in the chart below, the top five creators on Friend.tech have collectively earned over 700 ETH (around $1.2M) since its inception. This indicates the platform’s potential to financially benefit content creators significantly, reinforcing its attractiveness to potential new creators.

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• Valuation Perspective: Friend.tech’s valuation, when compared to that of top NFT collections, suggests room for growth. BAYC NFTs have a 10K supply at a floor price of almost 24 ETH, giving it a market cap of 240K ETH. Meanwhile, the leading FriendTech account, “Racer”, only has 223 key holders at 6.44 ETH per key, giving it a market cap of about 1.4K ETH. If our thesis is correct and Racer’s key holders increase to mirror BAYC NFT’s 10K supply due to the high level of utility that Friend.tech offers, its market cap could see a substantial rise, emphasizing the potential undervaluation of assets on Friend.tech.⁵

Friend.tech has established itself as a hub of user activity and value creation in a remarkably short time. The impressive metrics surrounding user engagement and the clear financial incentives for creators showcase Friend.tech as a prime example of the consumer apps we’re enthusiastic about.

The Vital Role of Infrastructure

Moving down the tech stack, we expect to find value in a versatile infrastructure layer that underpins a diverse ecosystem of apps. Developers can now leverage a wide range of tools to create apps that enhance the user experience. One of the main advancements we are focusing on is ERC-4337, which offers a refined approach to account abstraction without changing Ethereum’s consensus layer protocol. Account abstraction brings along several advantages, which include:

• Streamlined transactions: Apps can bundle multiple user actions into one transaction and execute the transaction in a dedicated mempool before posting it into an Ethereum block. This removes the hassle for a user to sign and pay gas for multiple transactions.
• Cost-effective UX: Paymasters allow for the abstraction of gas payments, which means businesses can pay gas fees for in-app transactions on behalf of their users. Paymasters can also allow users to pay gas fees using other ERC-20 tokens such as USDC.

With account abstraction, apps are equipped with tools to continuously improve the end user experience without sacrificing self custody. Other advancements we are excited about include scalable L2s, appchains, and protocols that improve data management and smart contract operations. These developments, particularly those decentralizing identity authentication and enhancing user-controlled data interactions in Web3 settings, are paving the way for a growing ecosystem of consumer apps with an optimized and cost-effective UX.

Case Study: Highlighting Privy

Privy is a toolkit that allows developers to build user-centric web3 interfaces for both crypto natives and newcomers. Among its myriad features, the most notable feature is the embedded wallet, which offers:

• Authentication Options: Allows quick login via email, SMS, or social accounts without seed phrases, and offers intuitive action confirmations with cross-device compatibility.
• Security & Ownership: Fully self-custodial without third-party access and can be exported across various web3 platforms.
• Flexibility & Integration: Highly customizable UI, seamless integration with the broader Privy SDK, and compatibility with various wallet types via an EIP-1193 compatible provider.

Though there are many protocols that leverage account abstraction to create superior UI/UX for end users, Privy stands out due to a variety of reasons:

1. Variety of Clientele: The most notable project that Privy currently supports is Friend.tech. As power users of Friend.tech, we’re able to open accounts, transact keys, and monitor our portfolio value all without the typical wallet-related complexities. For instance, Privy also facilitates Courtyard, a two-sided marketplace that allows users to tokenize and mint their physical collectibles (e.g. trading cards or sneakers) as NFTs. Other intriguing apps currently building with Privy span sectors like SocialFi, e-commerce, and gaming.
2. Stickiness: Once an app integrates Privy, it’s difficult for the app to ever leave. For instance, in order for Friend.tech to stop using Privy, not only would Friend.tech need to completely replace its wallet backend, but every single user would need to export their keys and authenticate a new wallet infrastructure.
3. Addressable Market: We can base our estimate of Privy’s serviceable addressable market off of Metamask’s usage. Given that Metamask has around 30M Monthly Active Users (MAUs), and we expect Privy to capture a part of that user base, we can to segment this user base according to Privy’s pricing model.

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For simplicity, let’s assume:

• 80% of apps have up to 2.5K MAUs (Developer Pack)
• 15% of apps have between 2.5K to 10K MAUs (Pro Pack)
• 5% of apps have over 10K MAUs (Custom Pack)

To estimate Privy’s total MAUs, we multiply the proportion of apps per segment by Metamasks MAUs:

• Developer Pack: 0.80 x 30,000,000 Metamask MAUs = 24,000,000 MAUs
• Pro Pack: 0.15 x 30,000,000 Metamask MAUs = 4,500,000 MAUs
• Custom Pack: 0.05 x 30,000,000 Metamask MAUs = 1,500,000 MAUs

To find the potential number of clients, we divide MAU figures by their respective MAU caps for each segment:

• Developer Pack: 24,000,000 / 2,500 = 9,600 clients
• Pro Pack: 4,500,000 / 10,000 = 450 clients
• Custom Pack: This is a bit trickier as it depends on the size of each app, and the average revenue per app might vary. As an assumption, let’s say FriendTech, with around 200K users, is representative of the typical Custom Pack client. Privy would thus have an average of 20K MAUs, so 1,500,000 / 20,000 = 75 Custom Pack clients.

To find the total monthly revenue per segment:

• Developer Pack: 9,600 clients x $99 fee per month = $950,400
• Pro Pack: 450 clients x $299 fee per month = $134,550

For the Custom Pack, we’ll use FriendTech as a reference, knowing that it might be an overestimation for most clients:

• Custom Pack: Since we don’t have exact figures, we can assume Privy charges $0.02 per wallet for clients with over 10K MAUs. As such, the monthly charge for all Custom Pack clients would be 200,000 wallets x $0.02 fee per wallet x 75 clients = $300,000.
• By adding up the expected annual monthly revenue per segment, we get a total of $1,384,950, which is already a third of Metamask’s average monthly revenue in 2023 of $4,589,789.

This is only a conservative estimate; in reality, Privy’s total addressable market not only includes every Web3 app, but all traditional consumer apps that may integrate Web3 components due to Privy’s retail user-friendly tooling. Privy’s addressable market, even when conservatively estimated, showcases a promising outlook, especially if it can leverage its unique features to attract a slice of MetaMask’s considerable user base.

Looking Forward

Our investment perspective is twofold: Recognizing the potential in emerging consumer apps and acknowledging the indispensable role of the infrastructure that underpins them. Our analysis illustrates the immense potential of consumer apps in offering users an unprecedented level of ownership, engagement, and value derivation. Cases like FriendTech exemplify the powerful synergy between users and platforms, driving growth and fostering deep-rooted loyalty. On the other hand, tools like Privy pave the way for seamless, user-centric web3 experiences, enabling traditional consumer apps to harness the power of blockchain technology effortlessly.

As we strategize for Manifold Ventures Fund I, our conviction in the promise of the blockchain-enabled consumer application stack is unwavering. By adopting a top-down approach, we will not merely invest in consumer applications, but also in the crucial underlying infrastructure layer that supports them. This layered investment strategy ensures we capture value across the entire tech stack, thereby magnifying potential returns for our investors. As the frontier of consumer apps expands, our commitment is to be at the vanguard, championing innovations and empowering the new wave of digital interactions.

1. @21co / Friend.Tech Analysis (MEV, Volume, Revenue, Impact on BASE)
2. @cryptokoryo / Friend.Tech
3. @cryptokoryo
4. @21co
5. Stats as of September 27, 2023.