How to create a blockbuster Web3 product?

Author: Chainlink

The Web3 world is witnessing a new wave of DeFi innovation and infrastructure development, rapidly advancing forward. Attention and funding are scarce resources, and projects that fail to meet market demands face the risk of being eliminated.

Compared to Web2 startups, Web3 startups are in a much more intense competition and rapidly changing landscape. The main difference is that various projects are competing for liquidity, which is also a necessary condition for market expansion. Another difference is that open-source projects can essentially "fork," allowing any developer to use the project's source code to develop a new product that competes with the original.

This creates immense pressure on startup teams, as they may spend months and valuable resources developing what they believe to be a perfect product, only to find that it fails to make a splash or attract traffic. To avoid investing too much energy and resources into products with no market prospects and to create a core value proposition that stands out from the competition, startups must conduct due diligence early on and carefully build their product development framework. This is crucial for all startup teams. However, due to the fast-paced and somewhat unique nature of Web3 development, additional conditions must also be met.

Key Takeaways

• Adopt a lean software development model to avoid falling into the product development traps of Web3 startups.
• Before starting development work, identify target customer groups and early users, and build a strong community to encourage active participation and educate community members.
• Conduct research on the Web3 community and track metrics to clarify problems and solutions.
• Analyze competitors while clarifying problems and solutions to formulate a core value proposition.
• After identifying problems and solutions, develop an MVP and use a "develop-evaluate results-summarize experience" feedback loop for rapid iteration.

Understanding the Product Development Process of Tech Startups

Tech startups typically require much less capital investment than traditional companies. For example, automotive companies may spend millions or even billions to produce prototypes and final products. In contrast, the sunk costs of software development are much lower.

Additionally, making changes to tech products is relatively easy; adding or modifying code is usually much simpler than adding or changing physical production lines. Tech products are entirely developed based on computers and deployed through backend services. There is no need to invest in hardware or goods, nor to worry about supply chains and manufacturing issues.

In other words, tech startups have unique conditions that allow them to adopt a lean software development process in their operations. This approach emphasizes short product cycles, focuses on user feedback, metrics, and experience summaries, and iterates based on these. The concept of lean software development originated in manufacturing but has now been widely adopted by tech startups.

Why Adopt Lean Software Development?

Adopting a lean development model can minimize waste, with the principle of "creating value for customers immediately." Startups should develop quickly, fail quickly, and learn from their experiences to ultimately create products and features that truly meet customer needs.

Most startups are clear from the beginning about what kind of product they want to build. While this is entirely normal and reasonable, startups that adopt a lean development model need to first prove that their product concept has strong support and justification before investing significant time or money into building product services.

According to CB Insights, the top two reasons startups fail are often a lack of funding and a lack of market demand.

"There's no market demand" is one of the main reasons startups fail, making product validation a key factor in determining success or failure.

For software startups, lean development means allocating resources to the most critical areas and validating market demand before developing products to minimize risk as much as possible. In short: spend money wisely, clarify customer needs before investing time and funds.

To achieve this, teams need to divide the product development cycle into three parts: development, evaluation of results, and summarizing experiences. First, develop a simplified version of the product or feature. Then, track and evaluate various KPI metrics to assess how the product or feature performs. Finally, summarize the evaluation results into experiences and apply them to the next iteration of the product. This sounds simple, but Web3 startups need to flexibly adjust their application of the lean development model based on the unique challenges and characteristics of Web3.

Before implementation, startups must prepare in advance by planning for the first iteration of the product. Whether it's lean development or the "four-step entrepreneurship method," these mainstream entrepreneurial methodologies emphasize the importance of being customer-centric.

Defining the Target Market for Web3

To create truly valuable and sustainable products, we must first clearly define the target market. Any startup aiming to create a successful product must start from this step. Startups must validate their product concepts within a defined customer group and ask themselves, "Who can my solution help solve problems for?" To create a successful product, this key question must be answered first.

Targeting the Web3 Community as the Market

Web3 is characterized by decentralized governance, stakeholder-based business models, and permissionless access. Web3 projects can build communities from the ground up, giving them many advantages over traditional businesses. Members of these Web3 communities are often the target customers that Web3 founding teams seek—early users who need to use Web3 products to solve problems.

For Web3 startup teams, the community is an invaluable resource, providing valuable insights from identifying problems and solutions (which will be elaborated on later) to the product's mainnet launch. Web3 projects should establish a minimum viable community (MVC) that accurately covers the target market and aligns with the ultimate vision.

Therefore, building a good community is crucial for Web3 startups. The community established at the outset should cover their "beachhead market," which consists of a small group of users with similar pain points that closely align with the company's solutions. With a strong community and ongoing effective communication, Web3 projects can test their product concepts through their user base. These active community members are the starting point for product design, testing, and iteration.

How to Build a Good Web3 Community

Web3 startups should think dialectically about the key elements that drive user demand and build a high-quality community by recruiting active community members with shared needs.

To establish a good community, the first step is to clearly articulate goals and vision. Typically, project teams convey their vision in the form of a white paper and build a community around interested users. In practice, this means creating a website and publishing a white paper that details the problems and proposed solutions. Additionally, a Discord channel should be created to establish a community of early active users.

Here are some suggestions for creating a minimum viable community (MVC):

• Leverage existing networks—successful startup teams often have deep roots in their industry. Potential customer groups can be found within existing connections or by expanding through networking.
• Join existing Web3 communities—many Web3 communities provide related services to each other, so startups can utilize established Web3 communities to find potential community members.
• Emphasize community management—ensure that community discussions focus on objective topics and enhance education and awareness among community members. The healthier the community, the more valuable feedback it will provide.

Matching Problems with Solutions

Generally speaking, products exist to solve specific problems. Matching problems with solutions means that startup teams validate that the problems they are trying to solve are real and that the proposed solutions can effectively address those problems.

Take stablecoins as an example. A stablecoin is a blockchain digital token pegged to a stable asset, most commonly the US dollar. Stablecoins emerged because users could not access stable assets, which is a significant issue in volatile markets. In this "problem and solution matching" example, we can see that stablecoins like DAI, USDT, USDC, TUSD, and UST currently have a combined market capitalization of over $180 billion in the entire blockchain ecosystem.

Stablecoins are a perfect example of problem and solution matching because the market tends to choose a specific solution. While there is a clear demand for stable assets, the solution the market needs is not just any stable asset, but stablecoins pegged to the US dollar.

When Web3 startups validate the matching of problems and solutions, they must deeply research whether the problem is genuinely worth solving. A clear target customer group (note: the target customer group is often the native community of Web3 startups) can provide value here. Web3 startups can conduct customer interviews and surveys within their community to verify whether the problem exists, delve into the issue, and prepare for the first iteration of the product based on this.

Here are some methods and resources for the execution process:

• Conduct qualitative research—start by asking open-ended questions to gain a deeper understanding of the root causes of the problems. For example, instead of asking users if they need stable assets, ask what problems they encounter when they lack stable assets or why they need stable assets.
• Simplify participation processes—use mainstream software like SurveyMonkey or Typeform to streamline the research process. These solutions are widely used, easy to operate, and most users are familiar with them.
• Maintain a small scale—qualitative research typically requires deep responses. Too many participants may lead to analysis paralysis or vague results, especially if participants are not entirely from the target customer group.

The second step is to validate the proposed solutions. This can be done in various ways, but the key is to quantitatively and efficiently assess user reactions to the solutions.

• Start with testable hypotheses—the goal of validating solutions is to prove or disprove whether there is demand for the solutions proposed by the startup. For example, "We believe that most users prefer decentralized stable assets priced in USD over fiat-based stable assets."
• Create quantitative surveys—ask targeted questions in a multiple-choice or rating format to allow respondents to provide definitive answers about the solutions. For instance, present respondents with several different solutions and ask them to choose the one they prefer most.
• Track native metrics—be sure to track the project's native metrics, such as the number of Discord group members, email subscriptions, and beta test sign-ups, to better assess the robustness of the solution in its early stages.
• Sample size should be large—use quantitative surveys instead of qualitative ones to obtain clear answers to prove or disprove hypotheses. A large sample size can provide more accurate results for the startup.

Identifying Competitors and Other Solutions

For many Web3 startups, matching problems and solutions requires analyzing competitors and assessing other solutions in the market. The presence of other similar solutions in the market can indicate whether the problem is worth solving.

For example, Uniswap introduced the x*y=k formula and income-generating liquidity pools, addressing liquidity and pricing issues for on-chain decentralized trading platforms. Subsequently, several competitors and solutions emerged, such as Bancor, Curve Finance, PancakeSwap, and Trader Joe, all successfully entering the decentralized trading platform market and attracting significant user traffic.

Analyzing competitors also helps verify whether the Web3 startup's solution can meet specific market needs. To enter a market, Web3 startups must establish a core value proposition that attracts users from other platforms. This is particularly important for open-source DeFi protocols, as the functionalities of open-source protocols can easily be replicated in other applications.

Creating a Core Value Proposition

To match problems and solutions, it is essential to understand how competitors are solving problems and to create better and more specific solutions for the target market. A typical case is Curve Finance, a decentralized trading platform focused on stablecoins deployed on the Ethereum blockchain.

At first glance, it seems to be a direct competitor to Uniswap and Curve, as both applications are decentralized trading platforms targeting Ethereum users. However, Curve Finance's rapid growth is attributed to its linear enhancement of the x*y=k formula, which reduces slippage in certain price ranges, particularly valuable for reducing slippage in stablecoin-to-stablecoin exchanges. Additionally, it helps community members guide and weigh liquidity rewards through liquidity gauges.

Curve focuses on the stablecoin model and has built a complex system around liquidity gauges, making its target market smaller than Uniswap's, but its users are also more educated and active. Curve provides advanced features for sophisticated users, while Uniswap offers generic features for all users. This again underscores the importance of perfectly matching problems and solutions by locking in the target market.

Curve Finance has developed an innovative formula specifically for stablecoin-to-stablecoin exchanges, thereby creating a strong value proposition for DeFi users.

If Web3 startups want to discover their product's key competitive advantages, they must abstract the specific problems they need to solve and find the most suitable solutions based on that. Early users are the core source of revenue for startups. Web3 startup teams should focus on a small and refined user group when developing solutions, rather than spreading themselves too thin.

Here are some suggestions for conducting competitive analysis:

• Differentiate by blockchain—although there are various multi-chain Web3 solutions in the market, the underlying blockchain ecosystems remain quite fragmented. Be aware of similar solutions on other chains, but primarily focus on competitors on the same chain.
• Use competitors' products—it's impossible to understand competitors well without using their products. By using competing products, Web3 startups can identify gaps and issues that affect product design.
• Join community platforms—platforms like Telegram and Discord are excellent for discovering shortcomings in competitors' features, as community members often ask questions or voice complaints there.

Switching Costs

It's worth noting that sometimes simply identifying one's competitive advantages and creating a unique value proposition is not enough.

This is because there are switching costs (note: switching costs refer to the costs incurred by users when switching products). Switching costs can take many forms, such as direct economic costs (e.g., on-chain gas fees required to transfer funds) or various hidden costs (e.g., due diligence on the project) related to the time and effort spent on switching. The value proposition of Web3 startups must be compelling enough to encourage users to bear the switching costs. Having a unique competitive advantage alone is insufficient; startups must establish a core competitive advantage.

Developing a Minimum Viable Product

Identifying problems, defining the target market, and validating the matching of products and solutions through various research and competitor analysis are key steps in developing a minimum viable product (MVP). By finalizing these details before starting product development, startup teams can save a significant amount of time and money, allowing for timely iterations if mismatches between problems and solutions are discovered.

Once a startup can match problems and solutions, it can begin building the MVP. The MVP is a stripped-down version of the product that can attract early users to validate the product concept. In the Web3 industry, the MVP typically refers to a beta version or testnet launch. The concept of MVP was proposed by Frank Robinson in 2001, helping startups further validate concepts while minimizing costs.

The logic behind the MVP is that startup teams should act and iterate quickly. By releasing the minimum viable product to early users, startup teams can gain valuable feedback in the early stages of product development and rapidly iterate and adjust based on user feedback.

MVP Development Process

To develop an MVP, startups need to think deeply about the product and its features and quickly launch the most critical product functions to early users. The essence of Web3 companies launching an MVP is not to blindly cut product features but to focus on a small number of the most critical functions and validate them.

This is the starting point of the "develop-evaluate results-summarize experience" feedback loop mentioned earlier. Web3 companies should create the features they believe early users need in the most streamlined way. Then, they should evaluate performance by collecting various key metrics such as UI interactions, transactions, and user feedback. Finally, they summarize experiences and iterate quickly to ultimately solve the problems. This iterative process will continue until the team finally creates a minimum marketable product (MMP), which refers to the first version of the product that the startup brings to market. In the Web3 world, MMP typically refers to the project's mainnet launch.

Rapid and Robust Iteration

One unique challenge that Web3 startups face in adopting this product development process is the need to ensure software security while also iterating quickly.

In short, how can one meet the high security demands of Web3 while rapidly advancing development? The solution is to incorporate security considerations directly into the MVP development process. Using the MVP formula for iteration allows Web3 startup teams to conduct security checks on small functional modules. This is much easier than auditing a large codebase at the end of the process; testing one functional module at a time during development and identifying vulnerabilities is far more manageable. However, we still recommend that Web3 startups engage third-party code audit firms to further check the security of smart contract code and identify potential attack vectors after development is complete.

When initiating the MVP development process, our recommendations are as follows:

• Test thoroughly and question—the MVP is essentially more of a process than a product, and the core value of this process is to test hypotheses in the smallest units. Question every new feature and only develop necessary functions.
• Categorize potential features—classify features into "necessary," "nice to have," and "additional." This categorization helps clarify which features to develop and test first.
• Set KPIs—when testing features and clarifying improvement plans, establish KPIs that can directly assess results and conduct evaluations carefully.

Matching Product and Market

The term "product-market fit" was first introduced by investor and entrepreneur Marc Andreessen, referring to a new product's ability to perfectly meet market demand. Every highly successful startup achieves a perfect match between product and market. For Web3 startups, the ultimate goal is to achieve this perfect match. Doing so can lead to a surge in liquidity and user numbers, as well as improved user retention and reputation.

Once a product matches the market, demand will explode immediately. Therefore, startups that meet this condition often face the biggest challenge of managing the surging market demand. Timing is crucial, but it is often unpredictable. For example, OpenSea and Uniswap are the largest Web3 projects in their respective verticals. Although these two projects launched back in 2018, their user numbers only began to surge in the past two years. They both created highly usable products for users but had to wait for the market to catch up with them.

A well-designed product that meets market demand will naturally see a significant increase in user numbers.

Timing is crucial, but it is also unpredictable. Although OpenSea and Uniswap launched around the same time, OpenSea only achieved product-market fit after NFTs became popular.

It is easy to determine whether a startup has achieved product-market fit, but there is no "one-size-fits-all formula." Entrepreneurs and researchers continuously attempt to create a standard model, but achieving product-market fit is more of an art than a science.

However, startups can adopt the methodologies mentioned in this article to develop a robust product development plan that covers every aspect from problem validation to product mainnet launch. Entrepreneurship is a challenging endeavor, so effective allocation of time and resources is essential. These proven methodologies can help startups efficiently develop high-quality products and solve real problems.