Comprehensive Analysis of Web3 Advertising Technology: Data Sovereignty, Current Issues, and Ecological Overview

Written by: VIKRAMADITYA SINGH, SAM KIM

Original Title: "ADTECH AND GROWTH: A WEB3 PERSPECTIVE"

Compiled by: Deep Tide TechFlow

What is AdTech and how does it operate in Web2?

$377.47 billion.

This is the revenue generated by Google, Facebook, and Amazon from their advertising businesses in 2022. Facebook derives 97.5% of its revenue and Google 80.2% from their advertising services. In contrast to this enormous scale, there was no discussion of such AdTech at the recent Web3 conference.

AdTech, short for advertising technology, may be the most crucial factor in your internet browsing and social media experience. Traditionally, AdTech refers to all the technological services and infrastructure involved in buying, selling, delivering, tracking, and analyzing digital ads and advertising campaigns. There are three main participants in AdTech:

• Publishers: They are the owners or suppliers of digital advertising space. For example, news and media content distribution channels (like The New York Times, Warner Bros.), podcasts, video content creators (like YouTube channels, TikTok creators), gaming and software platforms.
• Advertisers: They are the buyers of the advertising space provided by publishers. For instance, if Samsung has just launched a new phone, they might want to buy advertising space on The Verge.
• Ad networks and exchanges: Essentially, they bundle advertising space from publishers and sell it to advertisers. In doing so, they group inventory by vertical, ad format, and demographics. This allows advertisers to purchase ads that better target their potential customer base. Some popular ad networks include Google AdSense and Facebook Ads. Ad exchanges are slightly more complex versions of ad networks, where advertisers pay on an impression basis. Popular ad exchanges include Google AdX and OpenX.

Currently, five tech giants (Google, Facebook, Amazon, Alibaba, and ByteDance) control over half of the Web2 advertising market. We all know now that the product is not the application or service itself, but the user. By utilizing users as data collection points, large tech companies sell the data they gather from users (after running their quite clever and complex models) to advertisers. You are their primary source of revenue.

Note: The scope of AdTech also encompasses several subfields such as Attribution, Customer Relationship Management (CRMs), Growth Analytics, Community Automation, and other similar platforms. However, there is currently no consensus on what "AdTech" includes, so some may argue that these subfields belong to growth. While this is not incorrect, for the sake of brevity, we will collectively refer to advertising technology and growth services as AdTech.

What changes are there in Web2 AdTech?

Given that over 80% of large tech companies' revenue comes from AdTech, it is not surprising that customer targeting predictive models are very, very good. However, the Web2 model is limited by several factors. First, it is constrained by the breadth and quality of available data. Second, it is limited by statistical regularities. Essentially, Web2 data models use demographics, psychographics, and behavioral data as proxies to predict potential customers' future purchasing behavior. Therefore, even with a wealth of available data, Web2 models can only make predictions, not assertions (although these predictions are very accurate).

However, as users increasingly demand greater privacy protection through transparency and some degree of control over data usage, there is an inevitable push for stronger privacy regulations to curb rampant data collection. To address this issue, several laws have been enacted, the most significant being the General Data Protection Regulation (GDPR). Among a series of regulations protecting personal data, the most important element of GDPR is the concept of "opt-in." This is why you see options to accept or reject cookies when visiting a website. Speaking of cookies, the industry is working to phase out third-party cookies gradually. In 2020, Google announced plans to phase out third-party cookies in the Chrome browser by 2023 and pledged not to use "alternative identifiers to track individuals."

While these regulations do a good job of protecting privacy interests, they do have some key flaws. Because consumers now consent to tracking cookies through opt-in, the traceability of these customers has significantly increased. Higher quality data collected will drive up advertising prices. Additionally, due to GDPR, smaller advertisers and businesses that rely on third-party cookies now collect less data and have "less business due to consumers opting out." This puts them at a clear disadvantage in leveraging their first-party ecosystems to collect data. Thus, the GDPR regulations have not weakened the power of large tech companies in the data economy; rather, they have further solidified their position.

How does Web3 AdTech differ from traditional Web2 AdTech?

Web3 brings a paradigm shift to traditional Web2 AdTech. Web3 presents a very interesting dynamic perspective on on-chain data—it belongs to no one and everyone at the same time.

In a sense, it belongs to no one because on Web3, you are no longer Alice or Bob; you are just an alphanumeric string (0x…), which is your wallet address. No one knows your skin color, age, or place of residence. This means that you, as a user, are no longer the product. You return to your original role—a consumer, not a data point. Essentially, your entire transaction history is on-chain. What you (or more accurately, your wallet address) have bought, sold, what NFTs you own, and which DeFi services you have interacted with—all of this is transparent and accessible to anyone. This is particularly interesting when we think about how Web2 advertising algorithms work and how they might operate in Web3.

As mentioned, Web2 models can make good predictions but cannot provide definitive assertions. In Web3, however, this dynamic changes due to the nature of the available data. Web2 models can predict that you might have purchased those Air Force One shoes you were eyeing during Nike's sale last week, so it won't show you ads about sneakers anymore. However, the Web3 model knows you have purchased that Milady NFT you have been wanting for a month, so perhaps it won't show you any more ads about Milady. Through this, we can see the subtle line between Web2 predictions and Web3 assertions. However, this will have significant implications for upcoming Web3 projects aimed at attracting and onboarding potential users.

Moreover, the lack of demographic and personal data presents two viewpoints. One side questions the strength of Web3 models because they will not be able to account for traditional psychographic and behavioral data, which enable current Web2 models to predict customer tendencies. The other side questions whether we really need such sensitive data to make predictions in Web3. Do you really need to know a person's age, gender, race, and other sensitive information to make predictions? This side believes that abstracting the human element behind a wallet address may not be such a bad thing. Perhaps who you are no longer matters.

Thus, we can view advertising technology as a spectrum, with one extreme representing edge data mining and oppressive privacy practices (Web2), and the other extreme (current Web3) representing privacy maximization but underdeveloped/limited advertising algorithms.

Clearly, the best solution lies somewhere in between these two extremes. This is where the true potential of Web3 lies. We realize that wallet information is limited, and wallet data alone cannot drive Web3 advertising technology. How can we potentially change this while ensuring that consumer privacy is not unfairly infringed upon? Simply put, by allowing users to earn by providing data. Currently, Web2 allows users to "choose" to provide data through opt-in, but users do not actually receive any compensation other than more targeted ads. Through Web3, there could be data exchange platforms or integrated solutions that allow users to choose and voluntarily provide personal data in exchange for monetary rewards. Additionally, there are arguments for compensating users for multi-touch attribution points upon successful conversion through micropayments. Essentially, your data belongs to you, and when you voluntarily relinquish it, you should be compensated.

Let's quickly recap why Web3 advertising technology is cool:

• You, as a user, are no longer the product of large tech companies.
• It eliminates human biases in current advertising and tracking AI/ML models.
• Web3 brings transparency and vast on-chain data.
• Web3 advertising technology models can make clear assertions rather than just predictions.

Now, before we get too excited and start calling for the disruption of Web2 AdTech and welcoming Web3 AdTech as the savior, let's calm down and look at some of its drawbacks. It is important to understand that Web3 advertising technology is not perfect in the short term and is still a long way from perfection; we must be aware of these shortcomings.

Why is Web3 advertising technology not cool enough?

Decentralization leads to customer identities being scattered across multiple wallets and chains, making it difficult to collect accurate data and understand customer behavior. Additionally, Web3 applications still operate on Web2 interfaces, which increases fragmentation and hinders accuracy. How do we unify this data for accurate attribution and personalization?

Currently, on-chain data is limited, and our understanding of it is also limited. Web3 has introduced new quantitative metrics such as Total Value Locked (TVL) in DeFi projects, NFT floor prices, and community participation rates in DAOs. What do these metrics mean? Which are the important metrics to track, and which can be safely ignored?

We need a new hybrid data stack to unify the fragmented data on Web3, trace it back to Web2, and accurately understand customer profiles while protecting their privacy.

Currently, most Web3 dApps still operate on Web2 websites and interfaces. This means that regardless of whether the backend runs on a decentralized blockchain, the frontend of the application still runs on traditional Web2 websites. This disconnect makes it more challenging to coordinate actions performed on Web2 user interfaces (like clicks, page visits, etc.) with on-chain actions (like transactions, swaps, transfers, etc.) and trace them back to a unique identity (like a wallet address).

Web3 Advertising Technology Ecosystem

Now that we understand how Web3 advertising technology works, let's explore some interesting subfields and projects.

Note: Some of these projects may seem to be doing the same thing, but it is crucial to understand how these projects coexist and complement each other from the user's perspective.

Attribution

In the general sense of Web2, attribution mainly involves understanding where users come from and where you should invest to acquire more users. This involves identifying users across online channels, offline channels, and multiple devices. In Web3, attribution presents a new challenge. As we mentioned above, the typical definition of consumers has undergone a significant change in the standard user journey. With touchpoints distributed across Web2 and Web3, the lack of a popular Web3-native social media network, the role of Discord and other DAO communities in influencing the customer journey, and users owning multiple wallets, Web3 attribution faces a difficult road ahead. However, a foundational solution willing to traverse this challenging path is bound to become an extremely powerful force in the coming years. Until the bear market of 2023, startups and projects enjoyed a honeymoon period of funding with little understanding of their potential customer base. Ignoring data, these projects were built on principles fundamentally at odds with basic entrepreneurial beliefs. However, after the depletion of funds in the bear market, fundamental issues like customer base identification have returned to the spotlight, making Web3 attribution absolutely necessary.

Safary aims to build marketing attribution for Web3 while empowering the Web3 growth ecosystem through its SaaS interface/API. With just one line of code, Safary provides detailed attribution analysis through its no-code dashboard. Currently, Web3 projects can only track top-funnel metrics and bottom-funnel metrics like Web2 social media and on-chain wallet purchases. Safary offers analytics for the continuous journey from Web2 channels to Web3 outcomes.

Ad Networks

Currently, cryptocurrency companies face two significant challenges in reaching their desired target customer base. First, cryptocurrency advertising does not work at all on traditional Web2 channels (like Google and Facebook services). You may have seen some L1s advertising on Google and Facebook, but this involves battling regulators and convincing stakeholders that L1 is actually a technology infrastructure company.

Second, Web3 advertising and user acquisition are primarily achieved through one-time token airdrops, incentivizing user activity by promising or assuming the distribution of protocol tokens. However, airdrops are fundamentally a flawed form of user acquisition, with costs far exceeding LTV (lifetime value of a customer) and have not proven to be sustainable. Dune Analytics conducted an in-depth study of the Uniswap airdrop that occurred at the end of 2020 and found some disheartening statistics:

• Only 7% of claiming wallets still hold UNI tokens;
• Over 75% of wallets sold their tokens within the first 7 days;
• Only 5% of claiming wallets are still Uniswap users today;
• 50% of claiming wallets have not been active on Ethereum in the past 610 days.

Thus, it is clear that Web3 advertising needs optimization to ensure marketing strategies achieve their ultimate goal of adding valuable long-term customers for new crypto projects. Projects need to optimize their customer targeting, which is why marketing strategies like airdrops and giveaways almost never work for new projects.

HypeLab and Slise are two startups dedicated to solving the Web3 user acquisition problem. HypeLab provides personalized services for advertisers looking to find new customers and publishers looking to monetize their user base. In addition to primary analytics services, HypeLab offers design services for advertisers to create image and video marketing assets and provides a UI to upload these creatives to the platform. For publishers, HypeLab offers a publisher SDK that can be used to seamlessly integrate ads into their frontend and provides real-time tracking of revenue and other metrics. Slise offers similar services, bridging the gap between publishers and advertisers in Web3 using blockchain indexing, user analytics, segmentation, and real-time bidding. Additionally, both companies cross the Web2/Web3 divide by providing publishing capabilities on Web2.5 platforms like Web3 dApps, crypto media, and coin tracking, as well as general Web2 publishers.

With the emergence of projects like HypeLab and Slise, we can envision a future for Web3 advertising that enables early projects to effectively reach potential customers, rather than merely hoping that the followers of Twitter influencers they pay align with their ideal customer base.

Growth Analytics

Although growth analytics seems to overlap significantly with attribution, growth analytics focuses more on collecting, analyzing, and interpreting data to understand how users interact with advertising campaigns. This data can be used to optimize campaigns for better outcomes, such as improving click-through rates (CTR), conversion rates, and revenue.

Perhaps the best way to understand Web3 AdTech is to look at a company in the market—Cookie3. In addition to providing basic attribution services, Cookie3 offers off-chain to on-chain conversion tracking, Discord server insights, wallet CRM, user segmentation analysis, and Twitter advertising strategy recommendations based on on-chain transactions. With its vast dataset, Cookie3's algorithms are among the most powerful in the Web3 growth analytics space, having processed data from 200 million wallets, 500,000 Twitter accounts, 8 billion transactions, and 4.5 million tokens.

Another interesting and thriving area within growth analytics is gaming analytics. Helika is a startup that provides a comprehensive end-to-end solution to optimize user acquisition and player engagement in Web3 games through real-time operations and A/B testing. By analyzing in-game data and segmenting users into different gaming player archetypes, Helika aims to help game studios understand the communities interacting with their products, ultimately driving higher revenue. They also provide competitive analysis, helping projects understand which other games their users or potential users are engaging with by tracking users' NFT and ERC20 portfolios. By integrating insights from Web2 social media (Twitter and Discord) into their core product, Helika provides a great blueprint for game studios to acquire and engage users.

Wallet Relationship Management (WRMs)

WRMs are essentially CRMs, but where the customer is now replaced by wallets. Projects like Absolute Labs offer end-to-end "wallet" management solutions that enable you to create Web3 profiles by understanding wallet clusters, designing wallet segmentation, and pushing Web2/Web3 marketing campaigns (like airdrops, wallet messages, emails, and SMS). One challenge Web3 startups face today is that they lack experienced marketing teams familiar with the segmented Web3 marketing tech stack. By providing a comprehensive solution from analytics to segmentation to design processes and execution, WRMs offer seamless solutions for better interaction with customers.

Future Outlook for Web3 AdTech

From our discussion above, one thing becomes clear—Web3 needs to have its own native social analytics domain. Web2 services (like Twitter) can only serve as a discussion place for cryptocurrency. Web3 AdTech promises a future where customers can actively participate in the currently restrictive advertising processes, a promise that cannot be realized under the constraints and ideologies of Web2 frameworks.

Web3 ad networks will also drive the creation of new "ad formats." Each generation of new social networks and media platforms has brought original forms of content distribution (like TikTok, Instagram Reels, etc.). New forms of content and culture become the medium for new advertising formats and engagement tools. Web3 opens up a new playground of tools for marketers and growth hackers to experiment and engage with their customer base.

However, we must recognize that we are currently in the early stages of Web3 AdTech. Yes, at present, the advertising algorithms promised by Web3 that do not use personal data seem too utopian and unbelievable. Although all data is aggregated on-chain, on-chain data is inherently limited and does not allow for the establishment of good predictive models. To address this issue, AdTech projects currently rely on linking wallets to their Web2 identities to understand their models. While this is the best they can do at the moment, it is fragmented and regresses on the argument of protecting privacy. However, by leveraging zero-knowledge proofs, on-device data storage integration, and the rise of self-sovereign identity (essentially Web3 passports), frameworks can be designed that allow users to relinquish data in a privacy-preserving manner in exchange for financial rewards.

Projects like Safary, HypeLab, Cookie3, and Helika provide an excellent landing point for upcoming mainstream Web3 social. Beyond that, we hope to see more significant advancements focused on Web3 in this field. These could be achieved through self-sovereign identity (DID), expanded data types, enhanced wallet functionalities, merging reality and digital realms through the metaverse, native Web3 social media applications, Web3 recruitment platforms, or blockchains that provide built-in identities.

Most importantly, Web3 AdTech enables you to control and profit from your data, which is where it truly distinguishes itself from Web2 and is key to driving a massive shift from oppressive Web2 to equitable Web3 social.