Multicoin Capital: Exploring the Design Space of Web3 Growth Tool Stacks
Original Title: “The Web3 Growth Stack”
Authors: Shayon Sengupta & john Robert Reed, Multicoin Capital
Compiled by: Biscuit, ChainCatcher
We are increasingly interested in the innovative topic internally referred to as the "Web3 Growth Stack"—that is, the tools that product managers and marketers use Web3 technology to build for acquiring, engaging, and retaining customers.
In Web2, the growth stack consists of a multitude of tools, platforms, and analytics systems designed to assist product and growth marketing. These tools support processes around user acquisition, measuring retention and engagement, and monitoring conversion rates and monetization, which are foundational to consumer internet businesses. Many of these tools have become indispensable in modern software development, allowing this direction to produce extremely durable businesses.
However, most of these tools were built over the past decade and are no longer suitable for serving Web3 products and applications for various reasons. For example, the world's large advertising networks (AdSense, AdRoll) have no interest in the crypto ecosystem and even completely ban crypto advertisers. Additionally, some user engagement and retention tools (Segment, Iterable, and Mixpanel) overlook the rich data available on-chain (similar to the in-app data interoperability of Web2 products). Worse still, no one has combined in-app user activity with payment systems, which is one of the biggest opportunities. This means that most Web3 builders are operating in the dark, often remaining silent in the battle for internet users' attention.
However, all of this is beginning to change, and the Web3 Growth Stack will emerge in 2023.
This article will explore the framework of crypto-native growth infrastructure, aiming to provide a straightforward overview for founders looking to build crypto-native growth tools and offer a logical reasoning for growth teams at Web3 companies on how to build internal processes.
Accelerating Growth with Web3 Primitives
The main feature of building Web3 Growth Stack infrastructure is the deep integration of two core crypto primitives into growth tools, which we will explore one by one.
On-chain Attributes and Identity
Third-party data, cookies, and fingerprinting are the foundational building blocks of group segmentation in Web2 advertising, performing two core functions: attribution and identity. Attribution refers to granular events around user interactions with links, pages, and applications (touchpoint tracking, HTTP request headers, cached data). Identity refers to the aggregated information of user activities used to build target profiles (session cookies, location tags, on-chain data, etc.).
Web2 attribution and identity infrastructure can be used to build rich profiles that can target users and queue them alongside other activities like advertising. These technologies can also be applied to Web3 products, but Web3 products have their own tools to identify users and their behaviors. Specifically, public keys, Web3 domain names (e.g., .eth and .sol), on-chain credentials, NFTs, and other on-chain activities represent a new dataset that can be used to build user profiles and segment queues.
Compared to passive browsing data, ownership and activity data of on-chain assets can provide more signals, as on-chain data is essentially financial data. Minting NFTs, participating in governance votes, or staking tokens are all meaningful behaviors indicating user engagement on a given topic. For decades, advertisers have dreamed of distinguishing window shoppers from actual buyers. On-chain data makes this possible.
Identity and attribution are key factors for growth, and linking crypto-native states (wallet addresses and behaviors) with Web2 states (application and browser interactions) can provide a clearer understanding of user psychology. For example, Multicoin recently invested in Spindl, a protocol building a Web3-native attribution platform, and they are actively launching solutions that combine Web2 and Web3.
Web3 Native Bidirectional Value Flow
The second is the Web3 native bidirectional value flow. In “Multicoin Capital: The 9 Most Interesting Crypto Areas Right Now,” Kyle explains how crypto payments allow businesses to easily send arbitrary units of value to consumers accessing their applications/websites; the ability to move arbitrary amounts of assets between users drives activity and can improve the step function of user allocation rewards and incentives.
As mentioned, a significant advantage of the Web3 Growth Stack is the ability to tightly couple in-app events with on-chain payments. Web2 products cannot send value to users in real-time, but Web3 products can. This is a powerful Web3 primitive and one of the main reasons large companies like Nike, Starbucks, and Tiffany are incorporating Web3 principles into their loyalty programs. We are also investing in this space with Passes, Blackbird, and Mercury, making payments and value flows first-class objects in the user experience.
Once these Web3 primitives are built into new tools and products, the design space for growth tools can be fundamentally expanded.
Exploring the Design Space of the Web3 Growth Stack
Most product and marketing organizations adopt a funnel model for user growth. In practice, they organize activities, launch products, and provide user-specific experiences to minimize user drop-off in the funnel as much as possible. The ultimate goal is to create a repeatable growth strategy for a specific user group that compounds over time.
Let’s explore how Web3 will impact each part of the growth funnel, starting from user acquisition at the top down to user retention at the bottom.
User Acquisition
User acquisition refers to how products discover, acquire, and activate new users. Typically, the first step is primarily achieved through advertising to generate demand. Roughly speaking, to run ads, projects must have:
- Advertising materials (creative)
- Ad targeting (audience)
- Ad placements (inventory)
- Advertising platforms (sales)
To run ads in real-time on publishers' websites, there exists a two-sided market between publishers and advertisers, requiring a trading platform to mediate transactions (advertisers' placements as bids, publishers' inventory as asks).
Advertisers aim to meet specific users with higher conversion rates; when the ads users see are relevant to them, they may have a better experience with the publisher. The Web3 Growth Stack can develop more comprehensive target user profiles using on-chain data bundled with off-chain or third-party data, achieving higher quality segmentation and queuing. For example, for advertisers, understanding whether their target audience covered by their ad spend is active on StepN, holds more than 150 SOL in their wallets, or participates in any virtual world that can showcase badges is crucial.
There are already crypto-native advertising trading platforms like Slise, demand-side platforms like Hypelab, and ad networks like Myosin. As the fidelity around user on-chain data increases, we expect more follow-up actions and higher quality experiences for end users. Advertising infrastructure can leverage the inherent network effects gained through communication between intermediary advertisers and publishers, potentially capturing immense value.
However, this is just the tip of the iceberg. Since on-chain identity and attribution data can be combined with in-app event data, we hope to see improvements in the advertising model itself. For example, when presenting banner ads to users, they can view or click on them and access the website. Web3 ad units might enable target users to receive rewards immediately or make purchases directly on the ad without leaving the page they are on. This could have downstream effects on core advertising metrics such as cost-per-click, cost-per-impression, and cost-per-transaction. Imagine:
- Ads showcasing NFT collectibles that allow users to mint directly from the publisher's page instead of redirecting to another page, rewarding users with tokens (or enabling the publishers facilitating these transactions). This alone could reduce at least one user click in the process. This concept is similar to Facebook's innovative lead ads, which shorten the experience flow and keep users within the ad rather than sending them away.
- Once websites become Web3 wallet-aware (Shopify is already working on "token-gated commerce"), they can respond and dynamically rebuild based on user preferences and their value to advertisers. As part of this "Web3-responsive" innovative site, affiliate links could dynamically change based on consumer roles and values. If advertisers can prove that this model increases repeat visits, retention, or LTV, they would be willing to pay more for repeat visitors.
- Ads that automatically airdrop tokens or send messages to users, regardless of whether the audience interacts with the ad itself. This allows advertisers to target users directly based on intent.
In addition to innovations in advertising, we believe the design space for direct outbound marketing is also maturing and can develop in cryptocurrency. Notably, the design space as a line of frequent communication with end users is a powerful user acquisition tool. Crypto messaging protocols are in their early stages, with protocols like Dialect, XMTP, and Nansen Connect establishing standards for messaging and notifications. These tools are key elements of Web3, much like Twilio, Iterable, and Intercom were in the past decade.
Today's advertising model is that advertisers send a large volume of information to users in hopes of capturing attention at the right moment. In the future, advertisers could price the cost of a message and convey an inherent economic incentive for users to read it. We can envision a future with dynamic inboxes where value can be attached to messages, and mail/message applications can automatically push valuable messages to the top of the inbox. The inbox itself could profit from these rules, allowing users to flexibly choose effective filters or configurations while allowing advertisers to target high-value users.
Maintaining communication is crucial for activating and retaining new users.
User Stickiness
Once users start using a product, understanding how they interact with it is important work. Who decides to participate, and what drives them to interact? Where do they spend most of their time in the product, and where should they spend more time? Which users return to the product once a month? At which point in the process do most users drop off?
The answers to these questions will provide insights into the future direction of the product and how to ensure users feel satisfied at their first touchpoint.
Web2 tools like Segment and Fullstory provide product teams with detailed data on how users interact within their applications. Every check-in, button click, scroll, tap, and purchase is a recorded event, timestamped to help product teams understand how users engage with the product.
Mode, Looker, and Heap depict overall retention by showing group performance in user acquisition activities and product improvements. Tuning products based on engagement data from highly active users versus high churn groups helps inform key decisions.
Crypto-native teams like Raleon, Merlin, and Garden are experimenting within the design space at the intersection of Web2 tools and on-chain attribution and identity. If product and growth teams can establish causal relationships between granular operations in their applications and users' on-chain roles, they can make more informed decisions at critical points in the product lifecycle.
In addition to bundling on-chain transactions and behaviors, a key feature of Web3 products is that they often serve as venues for trading digital goods with clear financial value. If economic incentives are implemented, an on-chain race will ensue, where bots always win. This issue has plagued Web3 teams as they lack the right tools to address it. Web2 brands entering Web3 will soon realize that they also need growth analytics to identify and mitigate bot attacks.
Bot attacks can have a strong adverse impact on a product's sustainability. Fine-grained event analysis and on-chain address verification should help address these issues and assist product teams in understanding which of their users are real and which are bots.
In the coming years, user-facing products will leverage on-chain protocols, but most users will not need to interact with the protocols directly; instead, they will use applications built on top of them. Compared to the on-chain data accessible to protocol teams, product-level engagement data is much richer and contains more attributes. We believe that this product engagement data may even be viewed as a form of payment from product teams to protocol teams in the future.
Even more exciting is that once product teams clearly understand who their customers are, they can leverage this data to do something.
User Retention
More mature growth teams are very concerned with customer loyalty and retention rates. Retaining customers is often less costly than acquiring new ones. Web3 identity and attribution data provide product teams with new methods to achieve this, with more robust incentive models compared to Web2 products.
The core of crypto primitives includes coordinating large-scale activities through incentives, which presents a huge opportunity to enhance Web3's retained users. For example, free games can offer NFTs or other tokens to encourage users to return to the game daily. A crypto-native version of Snapchat could release collectible series or verifiable snapshot scores, providing quantifiable social status for users who engage continuously. The core difference is that products could previously allocate rewards in the form of status and utility; now they can allocate rewards in the form of status, utility, and financial value.
Several projects are independently building infrastructure to achieve this. Galxe is building on-chain credentials and other badge-proof NFTs. Aptos and Optimism are using targeted airdrops for early adopters and builders. NFT projects are leveraging token-gated features (e.g., minting rights for derivative series, community calls, etc.) to maintain community member engagement and retention. These growth teams showcase the status or utility objects delivered through products, which then permeate the user community and materialize their value. Teams like Rabbithole, Layer3, and Sonder are also pioneering in this area.
Incentives are necessary but not sufficient for long-term user retention. The ideals of Web3 are sovereignty, ownership, and permissionless access, particularly in opposition to the centralized platform types relied upon by the previous generation of consumer products. Therefore, Web3 data portability and composability are exceptionally strong. This creates a scenario where Web3 products can potentially allow users to own the platforms they are building, but they still need to cultivate customer affinity like consumer products of the past decade.
Cultivating customer affinity through the repeated use of cryptocurrencies will largely depend on customer experience and proactive retention activities. Historically, Web3 platforms have distinguished themselves through discovery, management, trust, and reputation. Leaders in the crypto space, such as Binance, Magic Eden, and Phantom, offer users a higher degree of convenience than their competitors, which in turn enables them to capture user attention at scale. Web3 products that prioritize end users, whether by abstracting the complexity of crypto primitives or having dedicated user support teams, may benefit from the next wave of on-chain user attention.
New Incentive Models
At the beginning of this article, we posited that the two most important models in Web3 growth are crypto-native attribution and identity, as well as native bidirectional value transfer. Looking ahead, as strong regulatory frameworks like GDPR and CCPA come into effect, invasive data tracking tools (such as cookies, event trackers, fingerprints, and third-party data markets) may gradually be phased out. At that point, new privacy-preserving platforms, data sovereignty tools, and next-generation digital growth platforms will replace the old ones.
In addition to all the ideas mentioned above, we are excited about targeted solutions in the following areas:
- DataDAO—For users who choose to share data in a privacy-preserving manner, DataDAO is building an incentive system that allows them to gain value for advertisers and publishers.
- Privacy-first advertising trading platforms—Brave's Themis uses zero-knowledge proofs to build a decentralized advertising trading platform. Around on-chain attribution and minimal trust, they treat user privacy as a first-class object. Can other companies develop high-quality privacy-preserving advertising exchange experiences?
- New types of crypto-native ad units—Whether at the UI layer (e.g., creating NFTs through click ads) or at the advertising platform or database layer (e.g., hosting ad trades on Solana, hosting ad content on Ceramic or Tableland), new types of crypto primitive ad units will emerge.
- Bot resistance and human proof—How can users prove that an on-chain address belongs to a human (rather than a bot) while analyzing a user with multiple addresses? We believe that cryptocurrency is in a great era of application and product experimentation, and growth tools are crucial to its success.