FTX's head of venture capital: The next scale of crypto applications will occur on mobile

Original Title: 《On building mobile first.》

Original Author: Joel John, Head of Venture Capital at LedgerPrime, a fund under FTX

Original Compilation: Kxp, BlockBeats

Work in the crypto industry is always around the clock, consuming a significant amount of our resources and energy. The arrival of this bear market gives us an opportunity to reflect and weigh the pros and cons. Unlike traditional markets, many so-called "successful" founders in the blockchain ecosystem leverage tokens for speculation, earning large sums of money without any products, users, or business models.

In crypto, you can build a billion-dollar protocol even without loyal users or revenue. Many of the highlights we take pride in within this industry have little substantial impact on those outside of it, and whenever regulators seek to establish legal norms for technologies in emerging markets, they always take this into account. Therefore, even with our enthusiasm, it is still difficult to step onto a larger stage.

Founders plagued by Peter Pan syndrome

In our industry, the symptoms of Peter Pan syndrome are particularly evident, where a person, despite being an adult, remains immersed in childhood and refuses to grow up. To outsiders, we, as founders, investors, or technology users in the crypto industry, seem to be playing childish games. But as long as there are people who can make money from it, this game will continue indefinitely.

Nevertheless, to achieve the scale of companies like Coinbase, FTX, and Binance, years of accumulation are still required. Over the past five years, consumer-facing mobile applications have been the biggest driving force behind the growth of the crypto industry, which also partly explains the high valuations of Wyre and Moonpay at $1.5 billion and $3.4 billion, respectively. The commonality between these two companies is that they are key infrastructures for applications to acquire users through microtransactions on mobile devices.

If crypto wants to break free from Peter Pan syndrome, it must reach out to ordinary people who do not care about private keys and protocol maximization. In other words, for crypto to step into the next order of magnitude, it must understand what people outside the crypto circle want. In this article, I would like to provide a preliminary analysis of the motivations, trends, and opportunities in the crypto industry, hoping to assist founders looking to develop in this field.

Adopting Computer Interfaces

Most Web3 applications today are hosted on computer interfaces because most people in the crypto industry entered the market between 2017 and 2019. At that time, the crypto industry was at its peak, with around $25 billion flowing into over 8,000 ICO projects, and anyone could trade and quickly make money. However, as with most trades, the speed of information acquisition is the key factor, with various charts, communication, and news constantly updating every day.

During that era, ordinary people entered the field to obtain sufficient ICO funds, hoping it would list at a large scale, exemplifying the theory of fooling the masses. Once a token was listed, you would start looking for the next ICO project to deploy funds. This was a significant departure from before 2017 when you could only receive or trade digital assets. During the same period, digital wallets like Myetherwallet and Metamask began to capture market share from Jaxx.

As the DeFi ecosystem has evolved, computer-based interfaces have become the standard for users to interact with the industry. In my view, there are two main reasons for this: first, large institutions that can achieve high TVL typically require secure infrastructure to deploy funds into DeFi protocols, and only browser-based wallets like Metamask can provide such functionality; second, interfaces on personal computers are more convenient for interacting with smart contracts and adding tokens.

Value destruction cycle diagram

As shown in the figure above, developers today prefer to serve a small number of users with significant capital. Products can be designed without much consideration for user experience, focusing instead on acquiring TVL. However, this also means that most ordinary users entering the ecosystem were unable to use these new DeFi primitives for most of 2020.

Shifting to Mobile Devices

Report from Bondcap 2019

The reason mobile devices can host Web3 applications ultimately lies in their ability to capture people's attention. Today, smartphones have become our primary means of learning, dating, entertainment, shopping, payment, and thinking. Therefore, excluding mobile devices means giving up a significant portion of the Web3 market. After all, by 2013, the time spent online on mobile devices had already surpassed that on laptops or desktops.

Moreover, mobile devices also facilitate people's access to various forms of ownership and create opportunities for those who previously had no access to such functionalities. Applications primarily based on mobile devices can not only accelerate the digitization process but also reduce operating costs, allowing more people to enjoy convenience and services at a low price.

Previously, complex financial products and products that realized ownership were generally high-cost but low-profit, which explains why providing banking services to the unbanked has historically been a huge challenge—bank staff could not cope with an exponentially growing customer base. In an era when digital systems were not well-developed, bank personnel had to spend a considerable amount of time on each user, but these users often deposited only small amounts (less than $100), making it difficult for banks to generate profits from these accounts.

Digital entities can often achieve growth while controlling costs

Before the emergence of digital banks, if a lender wanted to issue loans to ten thousand users, they would need to hire credit assessors at a ratio of at least 1:100. With the rise of digital banks, AML/KYC and distribution functions have seen exponential growth, reducing the time lenders spend on credit assessments and streamlining their team size. Furthermore, the larger the user base, the lower the cost incurred by the team to serve each new user.

For platforms like Compound and Aave that run their smart contracts on Ethereum, their costs are even lower. These DAOs do not operate their underlying blockchain and have no credit assessment mechanisms or AML/KYC costs.

The emergence of digital banks has removed their original geographical limitations. Banks no longer need to establish offices in remote areas. Instead, they can directly reach their users through mobile devices and provide corresponding banking and customer services. This change is most evident in India, where a state-owned payment network called UPI expanded from a monthly transaction volume of $4 billion to over $120 billion in four years. Moreover, Indian internet users complete up to 72 billion transactions annually in a digital manner.

Parents of our generation are afraid to use online payments

The emergence of DeFi has enabled everyone to purchase investment banking-level financial products, meaning that anyone can invest in early venture capital projects. However, what people really want are those products that can be set up and then not require real-time monitoring. An application in India called JarHQ proves this point, as its UPI transaction volume consistently ranks in the top 20 in the region, with many users making transactions to purchase gold for as low as $0.05.

Previously, it was difficult for Indians to buy gold because they not only needed to save a considerable amount but also had to pay fees to intermediaries. In the end, they could only buy a small amount of gold and worry about where to store it. Therefore, Jar took a different approach by digitizing gold custody, effectively reducing the cost of purchasing gold. Focusing on the Indian market, they are achieving faster growth than other traditional stores.

Users who over-subscribe this round will only receive calls from Tier 1 venture capital firms

How does all this transform into DeFi? In my view, most founders have begun to build products for institutions. This way, they do not have to go to great lengths on user experience; they can focus on a few clients while claiming to have billions in TVL. Since your clients are experienced financial managers, you do not need to spend time introducing the products they purchase, and most of them are desktop users. In contrast, 90% of trading platform users use mobile devices. Therefore, the struggle between capital and users is the decisive factor for the final adaptation of products to devices.

When observing TVL and predicting market activities, we often forget that DeFi can be used to provide financial products, as these products often did not have investment value in the past.

Understanding User Psychology

I wanted to learn more about the behavioral motivations and patterns of users in emerging markets, so I reached out to Ravindra from Frontier wallet. Frontier wallet is one of the earliest smart contract-based wallets in the market, allowing users to view their portfolios across multiple blockchains without opening the browsing interface for each chain.

Ravindra observed that Frontier users save an average of $1,000 to $10,000, and they are more knowledgeable about crypto than ordinary users who deposit assets on trading platforms. The wallet balances of users on Indian trading platforms are around $150 to $200, and they directly interact with multiple smart contracts, showing more interest in earning in dollars. In inflationary regions like Turkey (one of Frontier's larger markets), dollar earnings are also significant for users.

He found that a portion of the market has begun to shift towards the Web3 space, buying and selling music or game-related NFTs on-chain. In his view, the next wave of users participating in digital asset trading is not for speculation but for fun. In 2021, when I first wrote about NFTs, I mentioned that tools like NFTs would have great potential in emerging markets. Just a year later, celebrities like Justin Bieber and Jay Z entered this market.

The last ice age only passed 11,000 years ago

In my opinion, the user growth curve for digital assets will follow a pattern very similar to India's digital consumption. The above figure shows the time Indian internet users spent on various categories of applications in a given year. Since social media and entertainment applications are passive applications, they have the most users.

Generally speaking, this pattern roughly aligns with Maslow's hierarchy of needs, except that here the basic need is to consume attention, followed by financial services online, and a portion of people choosing to receive education or learn skills. I used the above data to create a version of Maslow's hierarchy of needs diagram.

Technically, all applications can be dating apps

In Web3, this structure is inverted—most of us spend our time on Telegram, Discord, and Twitter, and many Web3 applications focus solely on finance or speculation. To expand the influence of Web3, we must look to a larger market and develop applications that provide entertainment and communication for people.

In recent years, many teams have been working in this direction. The Axie Infinity team spent two years building one of the largest mobile user bases in Web3 and experienced rapid growth in 2021. Recently, Sweatcoin, a Web2 application with 3-4 million DAU, has also built a token economy within its app.

Applications like Mirror, Coinvise, and OpenSea allow creators to establish closer commercial ties with their users, but this is all based on the premise that users will actively participate in transactions. What we should really achieve is passive participation, where users can benefit without actively trading or posting information. In my view, a category of applications may lead this shift.

These applications are games—they often have rich digital assets, a large and diverse user base, and the lowest barriers to entry. Unlike most crypto applications today, games can provide users with a sense of belonging and experience.

Since most users participating in crypto trading are also enthusiastic about gaming, these applications can fully allow users to learn how to use wallets, trade, or interact with NFTs while playing games. Over the past six months, I have been collaborating with one of India's largest gaming studios to effectively combine gaming with education, and we will soon release related information.

Exploring Future Directions

Today's Web3 is still a community composed of tech enthusiasts, but if we want Web3 to truly integrate into society, we must start thinking about how ordinary people interact with technology and build corresponding tools to reshape people's perceptions of the importance of technology. In the words of Steve Jobs, what we really need to do is change the world.

Currently, several companies are working towards this goal: Bluejay is developing a stablecoin for emerging markets, and Goldfinch has issued over $100 million in loans to small and medium-sized enterprises globally. According to data from Crypto-art, NFT speculation has enabled nearly 900 artists to earn over $100,000 in the past year, with more than 10,000 artists earning over $2,000. Therefore, we have already achieved some valuable changes in the current market, but to extend this change to everyone, we must leverage mobile interfaces.

We should focus on transforming the previously chaotic and complex Web3 into an ecosystem that combines regulation and practicality while retaining the decentralization and high inclusivity of crypto.