Variant Partners: Do crypto economic models determine better Web3 business models?

Original Title: 《The Next Frontier in Cryptoeconomic Business Models》

Written by: Mason Nystrom, Investment Partner at Variant Fund

Translated by: Frank, Foresight News

The concept of "disruptive innovation" was first introduced by Clayton Christensen in the 1990s. This innovation occurs when a new technology combines with an innovative business model, enabling new market entrants to overcome existing companies in the market.

Like every emerging technology, cryptography is filled with groundbreaking technological innovations (including cryptography, mathematics, finance, and computer science). A large number of technological innovations also means that "disruptive innovation in the crypto space often comes from protocols and companies that implement new cryptoeconomic models or token distribution mechanisms."

By tracking emerging trends in token distribution mechanisms and cryptoeconomic models (which are two components of crypto business models), we can attempt to answer the question: "Where will the next wave of disruptive innovation in the crypto space come from?"

How do token distribution mechanisms and cryptoeconomic models drive innovation?

Blockchain networks provide a blank canvas for token distribution mechanisms and cryptoeconomic models. Bitcoin's cryptoeconomic model of "proof of work" has inspired various new PoW currencies, the most notable being Zcash and Ethereum.

While Ethereum offers various technological innovations compared to Bitcoin (such as Turing completeness, smart contracts, etc.), Ethereum's first killer application did not gain popularity until 2017—namely, the Initial Coin Offering (ICO), which distributed tokens to participants by leveraging smart contracts and the ERC20 token standard.

This token distribution model is crucial for the development of Web3, and we have already seen further iterations of this core concept: Initial Exchange Offerings (IEO), Initial DEX Offerings (IDO), Liquidity Bootstrapping Pools (LBP), automated crowdfunding platforms (such as JuiceboxDAO), and more.

NFTs are another interesting technological innovation, but they only truly exploded after the deployment of NFT marketplaces like SuperRare, LarvaLabs, and OpenSea to facilitate the transfer of on-chain royalties.

A great example of the power of business model innovation compared to technological innovation is zero-knowledge (ZK) technology. This race to scale the Ethereum network has driven billions of dollars in zero-knowledge technology research, resulting in a variety of impressive technological developments.

So far, ZK Rollups (such as Aztec, Scroll, Zksync, and Hemez) have become the driving force behind various technological breakthroughs, and the next wave of Ethereum scalability solutions will be further driven by innovative designs of cryptoeconomic models that incentivize continuous improvements in aspects such as ZK sequencing, verification, proof, and network value capture.

The next wave of cryptoeconomic models

Each wave of crypto has been dominated by new token distribution mechanisms and cryptoeconomic models, so let’s explore three emerging cryptoeconomic models: Contract Secured Revenue (CSR), Nounish DAOs, and MEV Orderflow.

Contract Secured Revenue (CSR)

Contract Secured Revenue (CSR) refers to the allocation of a portion of the fees generated during user interactions with smart contracts to NFTs (for developers to claim those fees) or directly to corresponding addresses (such as developers, etc.).

Currently, on Ethereum, apart from revenue from application-specific transactions (such as NFT marketplace fees), any fees associated with interacting with smart contracts are burned, meaning that protocols available for user use do not receive any rewards for creating value.

Layer 1 public chains like Canto choose to make Contract Secured Revenue (CSR) a core element to coordinate developers and economic activities, allowing CSR NFTs to collect fee revenue from multiple smart contracts (for example, smart contracts based on different protocol versions).

Another Layer 1 public chain on Cosmos, Archway, also chooses to reward applications on the network. More specifically, Archway provides three configurable reward distribution mechanisms: Gas rebates (50% of rewards to developers), inflation rewards (25% of rewards to developers), and smart contract premiums (such as custom fees).

This cryptoeconomic model that rewards developers or protocols based on utility provides a unique approach, where income does not necessarily need to be obtained by requiring governance tokens, nor does the protocol need to charge additional fees on top of the network's Gas costs.

In the future, Contract Secured Revenue (CSR) as an economic business model may also compress the survival space of intermediaries and further align applications built on L1/L2 or those generating significant demand on existing protocols.

Interestingly, this model can apply to any type of application, where a portion of demand or usage-based revenue should flow to stakeholders, creators, developers, users, etc.

For instance, imagine if TikTok's creator fund (a crucial component for creators to earn money) also adopted Contract Secured Revenue (CSR), where a portion of inflation rewards or advertising revenue would be directly allocated to content creators based on views or watch time on the platform.

In summary, Contract Secured Revenue (CSR) offers a brand new business model that can further align applications built on protocols.

Nounish DAOs

Given the uncertainty surrounding the future development of NFT royalties, there are currently two pressing questions:

Where will the recurring revenue for NFTs come from? What is the best NFT business model?

Nounish DAOs, which utilize the Nouns auction model to continuously sell NFTs, provide a new cryptoeconomic model for community groups united by common goals or that can coordinate around the formation and distribution of capital.

Nouns Builder allows anyone to create a Nounish DAO in minutes and has supported the creation of dozens of new Nounish DAOs since its launch.

Perhaps most notably, many of the early Nounish DAOs formed through Nouns Builder do not focus on spreading the Nouns meme:

• ArtHaus: A Nounish DAO focused on collaborating with artists;

• Spores: A Nounish DAO focused on creating next-generation remix tools for on-chain music;

• BLVKHVND—The first DAO to win a professional world championship, which has now transformed into a Nounish cryptoeconomic model;

The Nouns mechanism is not suitable for all types of organizations. Jacob Horne, co-founder of Zora and Nouns Builder, hypothesizes that the Nouns mechanism is most efficient when applied to general purposes rather than specific applications.

A core component of this hypothesis is that when Nounish DAOs fund competitive approaches to achieve broad goals, they are most efficient, whereas they are generally less useful for betting on specific methods to achieve concrete goals.

Consider the following examples of broad goals versus specific goals:

• Spreading the Nouns meme vs. making a Nouns movie

• Creating renewable infrastructure vs. building a solar farm

• Consuming carbon vs. purchasing carbon credits

Nounish DAOs have some existing use case categories:

• Brands, Memes, and Intellectual Property

• Membership

• Thematic funding or investment

• Creating SoV assets (such as artworks, etc.)

As the Nounish DAO model becomes modular, it has begun to offer features such as non-CC0 IP (for other brands and IP), minimum NFT purchases (for larger funding needs), and splitting (for sharing funds between other DAOs). These additions and broader experiments will expand the categories of communities and DAOs utilizing the Nounish model.

MEV Orderflow / Payment for Transaction Flow (PFTF)

As MEV breaks down into multiple stakeholders (i.e., seekers, block builders, and proposers), applications that control users (and transaction flow) will be able to bundle user transactions and sell them to seekers and block builders in private memory pools.

Similar to how Robinhood pioneered Payment for Order Flow (PFOF) to funds and institutions, decentralized applications (such as wallets and DEXs) will also be able to adopt Payment for Transaction Flow (PFTF) to block builders.

As MEV continues to grow as a category and opportunities for multi-chain MEV expand, Rollups, application chains, and super DApps will view MEV as a new source of revenue. Another potential end state is that these PFTF revenue applications will redistribute their MEV order flow income and return part of the income to users in the form of Gas subsidies or other discounts.

MEV will continue to be an integral part of cryptocurrency, and as applications and protocols make product decisions considering MEV, we may find that MEV becomes increasingly important as a core component of bottom-line revenue streams and emerging business models.

Towards Better Web3 Business Models

In fact, Web3 has yet to standardize the business models defined by the era it is in. The most successful decentralized applications today still rely on transaction-based models from Web2—DEXs, NFT marketplaces, etc. These models are likely to remain popular (and profitable), but the ability to program and tokenize value also sparks the potential for new business models.

New token distribution mechanisms and cryptoeconomic models will be key catalysts for the next wave of experimentation and disruption.