Which New Business Models Will Be Unleashed By Web 3.0?
Taking context from the history of business models native to Web 2.0 and to Web 3.0
Written in collaboration with Richard Muirhead, Anastasiya Belyaeva & Julien Thévenard.
The forthcoming wave of Web 3.0 goes far beyond the initial use case of cryptocurrencies. Through the richness of interactions now possible and the global scope of counter-parties available, Web 3.0 will cryptographically connect data from individuals, corporations and machines, with efficient machine learning algorithms, leading to the rise of fundamentally new markets and associated business models.
The future impact of Web 3.0 makes undeniable sense, but the question remains, which business models will crack the code to provide lasting and sustainable value in today’s economy?
We will dive into native business models that have been and will be enabled by Web 3.0, while first briefly touching upon the quick-forgotten but often arduous journeys leading to the unexpected & unpredictable successful business models that emerged in Web 2.0.
To set the scene anecdotally for Web 2.0’s business model discovery process, let us not forget the journey that Google went through from their launch in 1998 to 2002 before going public in 2004:
- In 1999, while enjoying good traffic, they were clearly struggling with their business model. Their lead investor Mike Moritz (Sequoia Capital) openly stated “we really couldn’t figure out the business model, there was a period where things were looking pretty bleak”.
- In 2001, Google was making $85m in revenue while their rival Overture was making $288m in revenue, as CPM based online advertising was falling away post dot-com crash.
- In 2002, adopting Overture’s ad model, Google went on to launch AdWords Select: its own pay-per-click, auction-based search-advertising product.
- Two years later, in 2004, Google hits 84.7% of all internet searches and goes public with a valuation of $23.2 billion with annualised revenues of $2.7 billion.
After struggling for 4 years, a single small modification to their business model launched Google into orbit to become one of the worlds most valuable companies.
Looking back at the wave of Web 2.0 Business Models
The earliest iterations of online content merely involved the digitisation of existing newspapers and phone books … and yet, we’ve now seen Roma (Alfonso Cuarón) receive 10 Academy Awards Nominations for a movie distributed via the subscription streaming giant Netflix.
Amazon started as an online bookstore that nobody believed could become profitable … and yet, it is now the behemoth of marketplaces covering anything from gardening equipment to healthy food to cloud infrastructure.
Open Source Software
Open source software development started off with hobbyists and an idealist view that software should be a freely-accessible common good … and yet, the entire internet runs on open source software today, creating $400b of economic value a year and Github was acquired by Microsoft for $7.5b while Red Hat makes $3.4b in yearly revenues providing services for Linux.
In the early days of Web 2.0, it might have been inconceivable that after massively spending on proprietary infrastructure one could deliver business software via a browser and become economically viable … and yet, today the large majority of B2B businesses run on SaaS models.
It was hard to believe that anyone would be willing to climb into a stranger’s car or rent out their couch to travellers … and yet, Uber and AirBnB have become the largest taxi operator and accommodation providers in the world, without owning any cars or properties.
While Google and Facebook might have gone into hyper-growth early on, they didn’t have a clear plan for revenue generation for the first half of their existence … and yet, the advertising model turned out to fit them almost too well, and they now generate 58% of the global digital advertising revenues ($111B in 2018) which has become the dominant business model of Web 2.0.
Emerging Web 3.0 Business Models
Taking a look at Web 3.0 over the past 10 years, initial business models tend not to be repeatable or scalable, or simply try to replicate Web 2.0 models. We are convinced that while there is some scepticism about their viability, the continuous experimentation by some of the smartest builders will lead to incredibly valuable models being built over the coming years.
By exploring both the more established and the more experimental Web 3.0 business models, we aim to understand how some of them will accrue value over the coming years.
- Issuing a native asset
- Holding the native asset, building the network:
- Taxation on speculation (exchanges)
- Payment tokens
- Burn tokens
- Work Tokens
- Other models
Issuing a native asset:
Bitcoin came first. Proof of Work coupled with Nakamoto Consensus created the first Byzantine Fault Tolerant & fully open peer to peer network. Its intrinsic business model relies on its native asset: BTC — a provable scarce digital token paid out to miners as block rewards. Others, including Ethereum, Monero and ZCash, have followed down this path, issuing ETH, XMR and ZEC.
These native assets are necessary for the functioning of the network and derive their value from the security they provide: by providing a high enough incentive for honest miners to provide hashing power, the cost for malicious actors to perform an attack grows alongside the price of the native asset, and in turn, the added security drives further demand for the currency, further increasing its price and value. The value accrued in these native assets has been analysed & quantified at length.
Holding the native asset, building the network:
Some of the earliest companies that formed around crypto networks had a single mission: make their respective networks more successful & valuable. Their resultant business model can be condensed to “increase their native asset treasury; build the ecosystem”. Blockstream, acting as one of the largest maintainers of Bitcoin Core, relies on creating value from its balance sheet of BTC. Equally, ConsenSys has grown to a thousand employees building critical infrastructure for the Ethereum ecosystem, with the purpose of increasing the value of the ETH it holds.
While this perfectly aligns the companies with the networks, the model is hard to replicate beyond the first handful of companies: amassing a meaningful enough balance of native assets becomes impossible after a while … and the blood, toil, tears and sweat of launching & sustaining a company cannot be justified without a large enough stake for exponential returns. As an illustration, it wouldn’t be rational for any business other than a central bank — i.e. a US remittance provider — to base their business purely on holding large sums of USD while working on making the US economy more successful.
Taxing the Speculative Nature of these Native Assets:
The subsequent generation of business models focused on building the financial infrastructure for these native assets: exchanges, custodians & derivatives providers. They were all built with a simple business objective — providing services for users interested in speculating on these volatile assets. While the likes of Coinbase, Bitstamp & Bitmex have grown into billion-dollar companies, they do not have a fully monopolistic nature: they provide convenience & enhance the value of their underlying networks. The open & permissionless nature of the underlying networks makes it impossible for companies to lock in a monopolistic position by virtue of providing “exclusive access”, but their liquidity and brands provide defensible moats over time.
With The Rise of the Token Sale, a new wave of projects in the blockchain space based their business models on payment tokens within networks: often creating two sided marketplaces, and enforcing the use of a native token for any payments made. The assumptions are that as the network’s economy would grow, the demand for the limited native payment token would increase, which would lead to an increase in value of the token. While the value accrual of such a token model is debated, the increased friction for the user is clear — what could have been paid in ETH or DAI, now requires additional exchanges on both sides of a transaction. While this model was widely used during the 2017 token mania, its friction-inducing characteristics have rapidly removed it from the forefront of development over the past 9 months.
Revenue generating communities, companies and projects with a token might not always be able to pass the profits on to the token holders in a direct manner. A model that garnered a lot of interest as one of the characteristics of the Binance (BNB) and MakerDAO (MKR) tokens was the idea of buybacks / token burns. As revenues flow into the project (from trading fees for Binance and from stability fees for MakerDAO), native tokens are bought back from the public market and burned, resulting in a decrease of the supply of tokens, which should lead to an increase in price. It’s worth exploring Arjun Balaji’s evaluation (The Block), in which he argues the Binance token burning mechanism doesn’t actually result in the equivalent of an equity buyback: as there are no dividends paid out at all, the “earning per token” remains at $0.
One of the business models for crypto-networks that we are seeing ‘hold water’ is the work token: a model that focuses exclusively on the revenue generating supply side of a network in order to reduce friction for users. Some good examples include Augur’s REP and Keep Network’s KEEP tokens. A work token model operates similarly to classic taxi medallions, as it requires service providers to stake / bond a certain amount of native tokens in exchange for the right to provide profitable work to the network. One of the most powerful aspects of the work token model is the ability to incentivise actors with both carrot (rewards for the work) & stick (stake that can be slashed). Beyond providing security to the network by incentivising the service providers to execute honest work (as they have locked skin in the game denominated in the work token), they can also be evaluated by predictable future cash-flows to the collective of service providers (we have previously explored the benefits and valuation methods for such tokens in this blog). In brief, such tokens should be valued based of the future expected cash flows attributable to all the service providers in the network, which can be modelled out based on assumptions on pricing and usage of the network.
A wide array of other models are being explored and worth touching upon:
- Dual token model such as MKR/DAI & SPANK/BOOTY where one asset absorbs the volatile up- & down-side of usage and the other asset is kept stable for optimal transacting.
- Governance tokens which provide the ability to influence parameters such as fees and development prioritisation and can be valued from the perspective of an insurance against a fork.
- Tokenised securities as digital representations of existing assets (shares, commodities, invoices or real estate) which are valued based on the underlying asset with a potential premium for divisibility & borderless liquidity.
- Transaction fees for features such as the models BloXroute & Aztec Protocol have been exploring with a treasury that takes a small transaction fee in exchange for its enhancements (e.g. scalability & privacy respectively).
- Tech 4 Tokens as proposed by the Starkware team who wish to provide their technology as an investment in exchange for tokens — effectively building a treasury of all the projects they work with.
- Providing UX/UI for protocols, such as Veil & Guesser are doing for Augur and Balance is doing for the MakerDAO ecosystem, relying on small fees or referrals & commissions.
- Network specific services which currently include staking providers (e.g. Staked.us), CDP managers (e.g. topping off MakerDAO CDPs before they become undercollateralised) or marketplace management services such as OB1 on OpenBazaar which can charge traditional fees (subscription or as a % of revenues)
- Liquidity providers operating in applications that don’t have revenue generating business models. For example, Uniswap is an automated market maker, in which the only route to generating revenues is providing liquidity pairs.
With this wealth of new business models arising and being explored, it becomes clear that while there is still room for traditional venture capital, the role of the investor and of capital itself is evolving. The capital itself morphs into a native asset within the network which has a specific role to fulfil. From passive network participation to bootstrap networks post financial investment (e.g. computational work or liquidity provision) to direct injections of subjective work into the networks (e.g. governance or CDP risk evaluation), investors will have to reposition themselves for this new organisational mode driven by trust minimised decentralised networks.
When looking back, we realise Web 1.0 & Web 2.0 took exhaustive experimentation to find the appropriate business models, which have created the tech titans of today. We are not ignoring the fact that Web 3.0 will have to go on an equally arduous journey of iterations, but once we find adequate business models, they will be incredibly powerful: in trust minimised settings, both individuals and enterprises will be enabled to interact on a whole new scale without relying on rent-seeking intermediaries.
Today we see 1000s of incredibly talented teams pushing forward implementations of some of these models or discovering completely new viable business models. As the models might not fit the traditional frameworks, investors might have to adapt by taking on new roles and provide work and capital (a journey we have already started at Fabric Ventures), but as long as we can see predictable and rational value accrual, it makes sense to double down, as every day the execution risk is getting smaller and smaller.