Web3 Trends in 2023: Part 2 — Consumers (11–17)

We have entered 2023 as talk of recession looms, and there is a case that we would buidl through it. With this dichotomy of the volatile markets and the growth in building, discussed in Part 1, the crypto industry continues looking for product-market fit to deliver customer utility. Below are some of the consumer-related trends that we anticipate will shape Web3 throughout the year:

TREND #11: Emphasis on UX

We are likely to see more activity among consumer applications. Web3 has previously been focused on more technical and niche applications; there remains the potential for it to become more accessible to a wider audience. The builders are creating new use cases and infrastructure to bring DeFi and NFTs closer to mainstream adoption — wallets, privacy and security solutions, fiat on- and off-ramps, and projects around tokenized goods.

Another trend we may see in 2023 is the disappearance of legacy Web3 onboarding. Currently, many Web3 applications require users to have a certain level of technical knowledge and familiarity with blockchain technology. However, as crypto becomes more mainstream and user-friendly, this requirement will recede. We may shift towards an “invisible” Web3, where the underlying technology is seamlessly integrated, and users do not need to be aware of it to use an application.

UX has been the focus of consumer-facing web in the last 15 years. Users have gotten accustomed to a certain level of experience — intuitive navigation, protection, clarity, and simplicity. Web3 has been building in the “move fast and break things” mode, up until now. While busy building out the infrastructure and laying down the foundations of a new ecosystem, developers simply didn’t have the time to finesse the UX. Now that the industry is moving closer to the mainstream, UX has become a big priority.

TREND #12: Social Web3 is building up momentum.

Major existing social media platforms have discredited themselves in multiple ways over the last few years, including misusing user data, creating echo chambers, failing to reward creators for their contributions, and more. There is a lot of interest in solutions that Web3 can offer to challenge the existing social layer of the web. Web3 social networks aim to give users control over their data, identity, and content, and establish a censorship-resistant space that allows creatives to build in a permissionless and composable way. This enables a new era of the creative economy.

One of the core social web3 innovative approaches is separating the underlying protocols from the apps themselves. Web2 platforms have created captive systems where users’ content and followers are locked within a centralized platform. This gives the platforms the freedom to extract as much value and execute as much power as they wish (i.e. shadowbanning, banning, changing algorithms). Web3 social’s promise is to create a structure where assets exist independently of the platform. This breaks up vertical integration and allows users to choose which platform serves them best without fear of losing their followers or content.

Lens Protocol saw more than 110,000 new profiles and 99,000 NFT holders since its 2022 launch. Other notable projects in the Web3 social space include Farcaster, DeSo, and Lenster. As the interest of marketers in the Web3 space grows, social Web3 is looking at a big boost in the next 12–24 months.

TREND #13: NFTs are growing up.

Most of the energy in the NFT space during the 2021–2022 NFT bull run was supplied by hyped-up memes and speculation. This phase served its purpose; it attracted a lot of attention.

In the current bear market, the NFT space is starting to grow past its “wild degening” stage, and the projects that are going to stick around have to prove that they can give value to their holders beyond simple access to a Discord server. There are several aspects of this maturation process.

Most notably, NFTs are not dead. They are here to stay. Projects are working hard to deliver real value. Some go the way of content creation (Jenkins The Valet is creating a podcast, Doodles bought an animation studio), while others are venturing into the physical worlds (Azuki selling skateboards, VeeFriends) and event space (ApeFest, Proof of Conference, VeeCon).

The infrastructure and tooling around the NFT space are growing. There are more tools for creation, curation, and trading, as well as lending NFTs. There are more marketplaces (Kraken, Uniswap, Blur) alongside the lending and fractionalizing platforms. It is likely that we will see increased competition among various platforms. This could lead to greater choices for consumers and potentially lower fees (see how LooksRare and Blur disrupted the monopoly of OpenSea). However, it could also lead to a situation where it becomes difficult for smaller players to compete.

With Amazon now confirmed to launch its NFT program in April 2023, mainstream adoption is at the doorstep. Many have entered the space in 2022, and their ripples continue to be felt- Instagram NFT integration is well underway, Starbucks is building out its loyalty program, and other large brands keep experimenting with varying degrees of success (recently Porsche).

Other important NFT growth avenues include ticketing (Ticketmaster is going Web3 and partnering with Dapper Labs), music NFTs (Warner Music partnered with OpenSea in 2022), and the growth of gaming NFTs (see below).

There are other categories of tokens that are related to NFTs that have a lot of potential this year: non-transferable tokens (also known as “soulbound NFTs”) and phygitals (objects that combine a physical object and a token — for more, see Trend #9).

TREND #14: Soulbound Tokens

Soulbound Tokens (SBTs) are a kind of NFT that cannot be transferred. They are intrinsically connected with a person’s online identity and can represent commitments, credentials, and affiliations. Some of the most discussed use cases involve applications in academics, credit verification, criminal history, medical history, and awards. All of these use cases will be supercharged by zero knowledge tech (zk) that will allow revealing and obscuring elements of identity similar to how one would in real life but with the security of blockchain. The soulbound nature of these applications opens a path to the consumer adoption of blockchain-based technology that is not inherently financialized and volatile.

TREND #15: Worlds Collide

The “real world” and the digital world are rapidly getting more interconnected. While our time, attention, and labor move into the digital realm, the real world is absorbing the elements of digital into it.

This melding of physical and digital created the awkward portmanteau “phygital”. The use case of an on-chain “certificate of authenticity” is one of the clearest for the fields of fashion, jewelry, collectibles, and art. NFC chips are one of the ways the connection between physical objects and digital tokens can get established and verified. There were some notable experiments in 2022 (Azuki NFT project sold $2.5 million USD worth of collectible skateboards, and famous anon Gmoney is launching a whole new brand aiming to redefine luxury goods). We expect to see more this year.

On the DeFi side, real-world assets (RWA) are making a comeback. MakerDAO has passed proposals to invest in US Treasuries and corporate bonds while partnering with traditional banks to provide loans using RWAs as collateral. JPMorgan Chase, DBS Bank, and SBI Digital Asset Holdings have already traded tokenized currencies and sovereign bonds on the Polygon network. The industry views RWAs as a prime opportunity to marry traditional institutions with DeFi liquidity, which opens up a path for broader partnerships with financial companies.

TREND #16: Gaming Grows

Gaming remains the blockchain application with one of the highest potential for growth. The Web3 gaming market is expected to reach $104.5 billion within 5 years.

While the gaming industry is not immune to market ebbs and flows, gaming as an activity only continues to grow in popularity. And, it presents some of the clearest use cases for blockchain, such as on-chain in-game digital assets, record keeping, composable metaverse building, and more.

Despite the market downturn, there were still around 1 million daily blockchain gamers for most of 2022. And while there are still many obstacles to overcome, including the gaming community’s resistance to crypto and lack of possible applications of blockchain tech, the opportunity is clear.

A common complaint amongst traditional gamers is that blockchain titles are too focused on trading, and provide a subpar experience, specifically lacking the high-quality visuals that have become industry standard. The new Unreal Engine plugin by Game7 will hit the market in 2023, allowing developers to seamlessly use blockchain features in Unreal Engine games. It will allow for enhanced visuals and immersive environments at scale. Game7 has also announced a $100M grant program to accelerate Web3 game development.

Digital property verified on blockchain opens up opportunities for virtual land ownership inside games, which is one of the more popular types of digital assets, which especially provides value in games that allow building in-game experiences (e.g., The Sandbox, Upland).

The current P2E (play-to-earn) model is flawed. To evolve, Web3 games need to start developing more sustainable and composable economies based on digital assets.

The gaming segment of the crypto market continues to attract large investments. The investors appear focused on projects that have strong game-industry talent behind them. PLAI Labs, founded by veteran tech entrepreneurs Chris DeWolfe and Aber Whitcomb (who previously co-founded Myspace), has recently raised a $32 million seed round. Ruckus Games, a game studio started by former Gearbox and Riot Games developers, raised $5.5 million in seed funding. Animoca Brands has announced a new $2 billion metaverse-focused fund that will no doubt have gaming components.

The battle for the gamers between L1 and L2 blockchains will only intensify. Polygon has been disrupting the order among the top players, surpassing BNB in the last few months, according to DappRadar’s report.

Arbitrum and Optimism kept gaining traction and adoption, which was immediately reflected in the token price action.

This growth comes out of a record fundraising year. The Web3 gaming vertical accounts for 62.5% ($4.49 billion) of the total funding secured by Web3 overall in 2022. Immutable X games collected the largest Web3 funding of 2022, over $900M.

TREND #17: Metaverse Not Dead

The concept of metaverse got a lot of attention in the 2021–22 bull run. That level of hype was not sustainable, and naturally, it is ebbing. Yet, there are various metaverse-related use cases that maintain momentum. For example, the enthusiasm of marketing professionals to employ VR and AR tech, the potential of gaming to attract both users and builders, and the multiple developments in the NFT space that reflect on the metaverse. For example, soulbound tokens can usher in metaverse applications related to education and various administrative functions, or NFC tech adoption can help connect real-life items to their “digital twins” in the metaverse.

There are still many challenges on the path to a fully realized digital world, such as access to the technology for experiencing the metaverse, privacy questions, regulatory uncertainty, etc. Even the definition of the metaverse is still debated.

Various versions of the metaverse are being pushed by different players. Meta is building an extension of its walled garden, although there are reports that after record losses and layoffs, Meta is moving on from the metaverse and refocusing its efforts on AI.

Brands are interested in their own private metaverses, which brought legacy players like Deloitte and McKinsey to the space. Accenture created a metaverse environment called The Nth Floor, a “digital twin” of its real-world offices that lets employees conduct a number of HR-related functions. BMW uses augmented reality labs to design and prototype new products.

The prevailing Web3 narrative maintains that the essence of the metaverse is an open, decentralized, and interoperable space. Yuga Labs’s Otherside, Decentraland, and The Sandbox continue on their respective paths. While the price in the metaverse land segment is not showing much action, all continue developing. The Sandbox is actively growing relationships with businesses, with 300+ agencies and studios that are onboarding brands (x4 in 2022).

Many experts see the professional and educational fields as the most realistic areas for metaverse application in the near future. Elements of VR will be added to various products (collaboration tools like Zoom, Slack, etc.), bringing new users to the metaverse.

THE FUTURE IS BRIGHT, AND IT’S HERE

This year, expect significant developments in the Web3 space with a particular focus on user experience, social networks, and NFTs. With Web3 moving closer to the mainstream, developers are emphasizing the importance of UX in consumer-facing applications, where the underlying technology is seamlessly integrated. The social Web3 space is also gaining momentum, focusing on giving users control over their data, identity, and content. Amazon soon launching its NFT program will bring in more of the mainstream. Ticketing, music, and gaming NFTs, along with soulbound tokens and phygitals, promise more growth for the NFT space and metaverse applications.

Despite macroeconomic headwinds, all these consumer trends combined with the trends in the builder space, discussed in Part 1 of the series, are setting the stage for a lot of new opportunities for everyone to participate in Web3.