Why do almost all Web3 social applications fail?

Original title: The Social App Thesis: Why every winning onchain app will be social

Original author: David Phelps

Original translation: Ismay, BlockBeats

Editor's note: We live in a capitalist world where money is everything, but true cultural power is not always proportional to wealth. Being rich not only brings a certain kind of political and cultural influence, but can also lead to a lack of another kind of cultural power. This article delves into the relationship between the merchant class and cultural tastemakers, revealing the difficulty of converting between money and status. Although there are many ways to convert financial capital into social capital in theory, it is challenging in practice. We explore the reasons behind this phenomenon and use the cases of Web2 and Web3 to explain the difference between financial incentives and social incentives and their impact on community building.

一

Once you see it, you can’t unsee it. The influencer who lives on Prada gift bags in a rat-infested studio on the Lower East Side; the street musician whose beats no longer move the heart after becoming an over-packaged superstar; the wealthy husband in a shrunken, wrinkled shirt standing next to his couture-model-dressed wife. It’s everywhere.

I’m referring to the inverse correlation between financial capital and social capital—the relationship between the merchant class (financiers) and the religious class (cultural tastemakers) in contemporary society. In a world where capitalism has taught its adherents and opponents alike that money can buy everything, this seems like a taboo topic.

Yet we find that being rich means not only gaining a certain kind of cultural power in terms of political influence, but also losing another kind of cultural power in the blindness of privilege. The price of controlling society is becoming a certain kind of social loser within its norms.

If you are one of those poor people stuck with billions of dollars in savings, I know you might be worried when you hear this. Don't worry, in theory, you still have three classic ways to convert financial capital into social capital.

You can build a relationship with someone cool (get married), you can invest in something cool (buy art), or you can do both (become a consumer venture capitalist).

In theory, this old playbook still works for you today as it did in the late 19th century. All you need to do—you button-down financier—is find a cool guy with taste in linens and jewelry to help you hang a George Condo or a Vik Muniz on your wall. All you need to do is invest in the latest disposable audio app that every kid in America will be using for the next 7-12 days, and then, sure enough, you’re cool, right?

Right?

The only problem is, in practice…

When investors, known for their money, collude with tastemakers, known for their status, it’s the tastemakers who remain with their reputation intact. The tastemakers may get the investors’ money, but the investors will never get the tastemakers’ status.

I’m trying to touch on an uncomfortable truth that the past two years of building social finance products have taught me time and again. It’s easy to trade social capital for financial capital, but it’s extremely difficult to trade financial capital for social capital, no matter how much you like to wear a blue-chip designer coat to please your financial peers.

You’ve seen this phenomenon with every washed-up celebrity you know: when the coolest people get rich, even they can’t stay cool.

Two

I’d say that Web2 has long taught us one thing: for most people, social incentives always trump financial incentives. Most people are willing to let companies sell their data to the highest bidder if it gives them even the slightest chance of looking ambitious online.

Privacy and civil rights advocates can complain, but most people are happy to incur huge financial opportunity costs for the social connections that show their status.

Those of us working in crypto often forget the fact that most people are just regular people who would rather have someone who listens to them than a million dollars.

And — pardon my dark thoughts — they know that accumulating social capital is one of the few viable paths to accumulating financial capital in the attention economy. Web2 figured this out a long time ago.

If you want to know why almost all Web3 social apps have failed, here’s the answer: because Web3 catastrophically assumed that Web2 was wrong, that financial incentives were enough to build stickiness, that people could buy status to earn identity.

Of course, Web3 has good reason to believe that financial incentives are all it takes to kick-start a fervent user base. After all, the original blockchain communities — miners and validators — were driven entirely by financial incentives, and the same is true for the DeFi community.

I mean, financial incentives were the initial unlocking of blockchain’s permissionless financial rails! Financial incentives seemed to work extremely well during speculative bull cycles when buyers frantically piled into soaring prices to fuel their further surge.

But as crypto apps, DAOs, and NFTs emerged, it began to become clear that financial incentives are often fatal to building meaningful social communities. It’s a mistake to believe that blockchains are merely financial tools and that financial incentives are enough to kick-start social communities.

First, it’s a mistake to believe that financial incentives build user stickiness. In fact, the reason why financial incentives work so well for user acquisition is precisely because they work so badly for user stickiness — because a mercenary who uses an app for profit will leave as soon as a better opportunity presents itself. Those who came because the price went up will leave because the price went down. Their loyalty means nothing unless you can keep paying them.

Most importantly, it’s a mistake to think that people can convert financial capital into social capital, that they can buy coolness, as many of the elite coworking spaces of the 2010s promised. This is certainly not to say that the few who want to buy coolness won’t exist. But they will quickly self-destruct their investment, because no truly cool person wants to be part of a club where membership can be bought. These clubs not only exclude the true builders and marginalized voices who have built the culture for thousands of years; they also include (sorry) anyone who has ever decided to sell out.

If you want to know why crypto social apps keep failing, here’s why: you can’t buy status. In fact, trying to do so will only achieve the opposite effect, and it will make you look a little ridiculous.

Three

However, this doesn’t mean that financial incentives don’t play a key role in unlocking on-chain social apps. Just as there is a popular argument that financializing social activity is enough to produce a killer app, there is an equally popular argument against the depravity of so-called mercenaries and degen culture.

The latter argument is a reasonable response to the former, but it smacks of arrogance toward a global underclass that might actually want to earn money to support their families, and more importantly, it’s wrong.

Blockchains have financial properties, and the most radical value proposition they offer for social apps is also the most boring: they allow you to make microtransactions per click, they let you eliminate the intermediary of credit card and app store fees, and they provide an open on-chain metadata API for anyone to develop on.

Ideologically, all this is far less exciting than the revolutionary visions of collective ownership, artist royalties, and decentralized work that inspired and consumed us in 2021. Financially, it all sounds far more prosaic than pure and simple speculation. Maybe it all sounds like technicalities.

But think about what this means, blockchains change how social apps are built and the types of social apps that can be built, for a very simple reason: they allow users to profit directly from other users. Look at the entire history of Web2 social apps, and you won’t find a major app that meets this criteria, except for games.

The financial sustainability of users alone is already a huge achievement. In fact, it has never really been achieved.

Four

Because the real problem with Web2 is this: it successfully monetizes social behavior, but its users do not.

Friends, fake friends, bosses, coworkers, lovers—and perhaps most importantly, networks of potential friends, fake friends, bosses, coworkers, lovers—are so powerful that not only are users surrendering their data, but companies themselves are giving up the moat they gain by hosting newsletters, forums, and job opportunities on their sites.

This is the power of social networks: social incentives win, and they win at the expense of financial and reputational incentives.

You don’t make money from your valuable content; the social networks do. You can’t programmatically own, access, or share the reputation you build while being a celebrity creator on a platform; only the social networks can leverage it to attract new users and advertising.

I think another way to put it is that Web2 is the age of applications, which is to say, the age of closed data. An individual’s data exists in the silos of a specific application, and this model allows the application to profit by selling this data to advertisers. In short: in the age of closed data, ads and apps win, and everyone needs to come together on their platforms to be able to share data with each other.

Then cryptocurrencies came along, and we entered the on-chain era.

Cryptocurrencies marked the beginning of the protocol era, or the era of open data. Now, an individual’s data can be freely transferred between apps, and there is no proprietary data to sell in open source on-chain networks. Instead, a new model emerged: tokenization.

Essentially, tokens provide a somewhat clunky solution to the very real problems posed by permissionless technology where anyone can input any data into the system.

Tokens are essentially legitimacy technology, allowing large numbers of users to provide financial guarantees that one transaction is legitimate and another is not. Instead of making money by selling your data to advertisers, you make money by providing financial guarantees that your data is true.

In other words, the reason to participate in cryptocurrencies is financial incentives.

This blessing has never been realized in Web2, and it is also a curse. By now, you know the problem: in every bull market (including this one), quick profits attract large numbers of mercenaries to spam transactions, farm protocols, buy tokens, promote tokens, and launch new tokens, chains, and platforms. But in a bear market, the financial frenzy that drives individuals turns to financial apathy. Just as the prospect of profit can quickly attract people, the prospect of loss can quickly drive them away.

Although less discussed, there is another problem here. Financial incentives themselves tend to be zero-sum, where one person’s gain is another person’s loss, and in the realm of pure speculation, the more you make in a bull market, the more you’re likely to lose in a bear market.

That’s why prediction markets — perhaps the most touted use case for crypto apps over the past seven years — only had about 10,000 total users during their most popular period (election cycles), and many of those were probably bots.

The expected return is zero, so users have to be extremely confident that they know the future better than everyone else who is equally confident. Having deep insights doesn’t necessarily help you when you’re competing against others who have equally deep insights.

So how do prediction markets attract users? By attracting not rational bets, but irrational bets of a tribal nature: namely, elections and sports games. People will bet on their team’s victory because it’s important to them.

You get my point: for financial products to actually make money, they have to tap into social incentives.

Of course, we know this. Web2 had extraordinary social incentives, but terrible financial and reputational incentives. Web3 has extraordinary financial and reputational incentives, but terrible social incentives. Financial incentives are good for making a quick buck, but social incentives are necessary for building lasting businesses. Crypto can only win when it can deliver on both.

Five

You may not believe me — I know too many people in the space think I’m wrong.

So let’s talk about a specific case study: Uniswap.

The Uniswap protocol has clearly won: not only is Uniswap using it, but so are Cowswap, 1inch, and others, and that’s exactly the problem. Because it’s a completely open protocol that can be exploited by competitors. Uniswap presents a unique crypto-native problem that we haven’t really seen in tech: you can lose to your own product.

The problem is that on-chain applications cannot charge fees through their protocols, partly because of legal issues, but a protocol with fees would also incentivize competitors to fork it, thus fragmenting liquidity for all participants.

Uniswap, like every other on-chain application, makes money through the frontend, and the frontend is where it needs to win. Only the frontend, not the protocol, is unique to crypto companies. If projects can't ultimately attract users to their site, they can't monetize effectively.

So what drives users to the frontend? Brand, features, UI/UX are all important of course, but a key lesson of Web2 is that the most important frontend driver is the user network. You go to a site because there are other users there, and other users can find you. Just as financial liquidity is important to launching a protocol, user liquidity is important to launching a frontend.

Today, you can see this reflected in every decision Uniswap makes. Wallets, domain names, acquisition of Crypto: The Game, these are all ways to keep users loyal to their frontend, these are all ways to make Uniswap gradually become social.

I don't know what Uniswap has planned, but I imagine we'll see a lot of features like this in the next year or two - want to issue your own token? Uniswap can be a place for any LP to gather, join the chat, and start events for others.

What I'm saying is: to win on the frontend, you need to win socially. To build a financially sustainable model in crypto, you need to win socially.

Six

I mentioned earlier that this is a lesson I've been learning personally over the past year.

On Jokerace, we allow anyone to create on-chain contests for people to submit and vote on. Broadly speaking, contest participants may win in three ways: winning money, winning status, and winning friends. Money is a financial incentive; status is a reputational incentive; friends are a social incentive. These are really all the incentives there are.

As an example, let’s say someone runs a sort of on-chain Shark Tank contest. The top winner wins a prize (financial incentive), all contestants earn status with each vote (reputation incentive), and voters can form teams around contestants, creating an organic community of support for them from the start — creating tribes and making friends (social incentive).

When I describe it like this, it should be clear that financial incentives are the least attractive incentives, only winners make money, and that’s far from guaranteed. But everyone can gain status by winning even a single vote, and everyone can make friends by creating teams.

Furthermore, the act of building a reputation and social profile can bring all sorts of financial benefits, like job opportunities, community, and airdrops, but financial rewards only offer money.

You can see why the idea of a money motive might seem shallow: because it is. Your reputation and friends represent your fundamental value as a missionary for a cause, but your money often represents your ability to sell those values as a mercenary for the highest bidder.

If this sounds a little surprising, cryptocurrencies have proven it time and again. A key lesson of Web2 is that social incentives work like a marriage: slow-burning, lasting, deepening over years and months, activating relationships for an hour or two a day.

The lesson of Web3 is that financial incentives work more like a love affair: all-consuming, short-lived, and burning out in the ashes of its own passion until a new opportunity is found to chase, and the gamblers will float in the wind of the highest yield.

Of course, in a world where we all have to pay for food and shelter, we are all mercenaries to some extent, with our attention open to the highest bidder. So I'm not trying to disparage financial incentives, I'm just saying that passion is a powerful acquisition tool - but it only works when it leads to marriage-like fidelity.

Recognizing this means recognizing that blockchains are not just tools for globally interoperable finance, but also globally interoperable coordination and globally interoperable reputation tools. In fact, they are the solution to their own problems and the real social tools needed to solve the top problems in this space around moats and monetization - loyalty.

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