Web3 vs Everybody

We could all use a break from Twitter couldn’t we? (Source)

We should stop talking about Web3 and focus on building it. As the number of thought leaders evangelizing Web3 grows unabated, I am more convinced than ever that this discourse is counterproductive. Trying to jam Web3 down the throats of consumers is bound to fail.

The industry’s arrogance has seemed to increase alongside prices as the crypto bull market has continued (largely) unabated over the last eighteen months. These days anyone who questions Web3 is immediately cast aside or told they’re ‘NGMI’. Highly successful internet entrepreneurs are no exception to the rule. That crypto thought leaders mock people for extolling the virtues of the internet shows how insular the industry has become.

Web3 — just as every paradigm shift before it — will succeed by building products that solve customer problems. Beating consumers over the head with academic arguments hasn’t worked before and there is no reason to believe that this time is different. Framing Web3 as an alternative to a failed internet is deeply ingrained in the industry. Coinbase Ventures frames their investment thesis by asking ‘What’s wrong with the web today?’ This view actively holds the industry back as it should be pretty obvious that most people love the internet (and large tech giants!)

The Web3 products that have found product-market fit at meaningful scale have done so because they require no explanation. Silk Road was such an obvious application of censorship resistant payment rails that users immediately got it. Silk Road leveraged blockchain technology to solve a clear pain point for a large swath of consumers and as a result was one of fastest growing online marketplaces in history. Uniswap and Helium are two more recent examples of crypto products that work so well that they’re self-evident, and it’s no surprise that they have seen tremendous success as a result.

If we want to move the industry forward, we should study what has worked and build more of those products. Below I dive into the three aforementioned products and highlight how they uniquely leveraged components of Web3 to deliver products that a large audience clearly wanted. I conclude by highlighting a few sectors that I think could see similar breakout successes.

Silk Road

The good old days when an MJ record only cost 2.5BTC…

Silk Road launched in early 2011 and began to see massive growth a few months later after Gawker covered the site. Silk Road exploded because it entered a massive market with a radically better product. American consumers spend $150B annually on illicit drugs (primarily cocaine, meth, and heroin). Silk Road took transactions that were inconvenient (done in person with cash) and dangerous (zero reputation system) and leveraged the internet to make them better.

Silk Road was growing faster than Silicon Valley darlings like Uber

Silk Road is one of only a handful of Web 3.0 company to reach the scale of its Web 2.0 counterparts. In its heyday, the site was growing at a similar trajectory to Uber and Airbnb, two of the fastest growing marketplaces to come out of Silicon Valley over the past decade.

Silk Road didn’t emerge until fifteen years after eBay and Amazon because a crucial part of its technology stack hadn’t been invented yet. It was only in late 2009 that Satoshi Nakamoto introduced un-censorable, natively digital money to the world. Silk Road built a multi-billion dollar business by leveraging un-censorable financial rails to radically improve an existing product.

Uniswap

Speculators trading South Sea Company Shares in 1720 (Edward Matthew Ward, Tate Gallery)

Uniswap is a decentralized exchange that launched on Ethereum mainnet in November 2018 and quickly started seeing meaningful volume. Uniswap replaces the traditional order-book model with an ‘automated market maker.’ This innovation helped solve the problem of high spreads for illiquid assets and has more or less eliminated liquidity issues for most ERC20 assets.

Most financial markets throughout history (and today) are based on order books. This execution model matches orders from buyers and sellers, generally based on price and size. This generally works well but it breaks down in less liquid markets where the spread between the highest bid and lowest ask can be quite high.

While automated market makers had been studied in academia, Uniswap’s implementation of a constant function market maker was a truly zero to one innovation that dramatically expanded the number of liquid markets. It is now fairly trivial to spin up relatively liquid markets for any on-chain asset. I believe we are in the early innings of just how foundational this is.

Uniswap is doing similar volume to Coinbase with a fraction of the employees

Uniswap is superior to its centralized predecessors in two important ways:

  • Due to its permissionless nature, Uniswap can always spin up trading pools faster than any centralized exchange. The protocol doesn’t need to run a regulatory analysis or figure out custody.
  • Since there are zero fixed costs in adding new pools, Uniswap by definition will always support more trading pairs than a centralized exchange. Centralized exchanges have to invest in custody and market making support for any new asset.

New users entering crypto and wanting to trade tokens don’t need to understand how Uniswap works — they simply know that it supports the widest range of tokens.

Helium

Helium is a decentralized communication network that uses LoRaWAN technology to bring devices (generally IoT ones) online. The Helium team has been innovating on wireless protocols since 2013 and wanted to build their own IOT-focused wireless network by getting people to install Helium Hotspots in their homes (the hotspots run on existing WiFi networks). Helium succeeded where many others had failed by leveraging their native token (HNT) in order to incentivize early adopters. Telecommunications has historically been incredibly capital intensive — Helium’s figured out an incentivize mechanism that got early adopters to buy the necessary hardware ($500 price point) in order to bootstrap early network growth.

Helium has covered a large chunk of the US in under 2 years (Source)

Helium started rolling out its hotspots in June 2019 and currently has nearly half a million hotspots globally. Helium hotspots act as network nodes and allow users to mine Helium’s Network Token (HNT) by providing bandwidth to the network. A portion of network revenues go to burning HNT, which means that HNT holders directly benefit from network growth.

HNT is up 20–30x since 2020

Early adopters who bought Helium hotspots in 2019 or 2020 were rewarded with HNT priced in the ballpark of $1 (it currently trades at $32). Subsidizing supply-side growth in a marketplace is nothing new (see the billions Uber and Lyft have burned), but doing so with a native token and thereby distributing ownership of a network/company to early users is. Distributing a native token (analogous to programmable equity) to early adopters rather than cash subsidies is a game changer.

Helium is one of the most tangible examples of user-owned networks and the benefits that come from being an early adopter of one. It didn’t need to convince users why they should care about owning a network, but rather abstracted it away and made the equation very simple (buy a hotspot, earn crypto). I believe that this model will work in many other verticals and influence many billion dollar businesses.

Web3’s Path Forward

Last summer Mike and myself launched Lattice to invest in products that we believed could expand Web3’s market size. We recently came out of stealth and have already backed 25 exceptional early-stage teams.

I believe that we’re at an inflection point where we’re starting to see products (like the ones mentioned above) cross the chasm and I believe many more are on their way. The largest opportunities in Web3 will be applications that solve such an obvious pain point — or introduce a radically new product — that users don’t need to know what Web3 is. A few areas that I think are ripe for breakout products:

  • Helium for X — there are likely dozens of verticals where marketplaces have struggled to take off, but where token-incentives could help bootstrap growth. DIMO (Lattice portfolio company) is doing this in automotive data.
  • DeFi enabled fintech products — getting the average person onboarded into Ethereum and accessing 5–7% USD-denominated yields in DeFi still sucks. Donut has built a mobile-first gateway to DeFi yields and is growing quickly. I think we’ve just scratched the surface in making DeFi more accessible and think multiple billion dollar companies will be built here
  • Seamless DAO experiences — DAO’s have hit a cultural inflection point as ConstitutionDAO attracted the most attention the sector has ever seen. DAO’s fundamentally make it easier for people to pool attention and money online and products that make this easier are a huge opportunity.

If you’re building something that you think could get a new audience excited about Web3, reach out: regan[at]latticecap.co

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