Why does the design of Web3 token economies often exhibit a "Ponzi model"?

Original Title: “Why is WEB3 a Ponzi Scheme?”

Written by: W Labs Guage

Edited by: Babywhale, Foresight News

Editor's Note: The origin of this article comes from an AMA I attended last week as a guest, discussing chain game assets. The host went offline due to network issues, and the guests took turns hosting. The guest with a pleasant voice, Melody, quickly pointed out: the current Gamefi lifecycle is too short! I started to play along: why is the cycle so short? Melody: Because they are all Ponzi schemes! I continued to feign humility: why are they all Ponzi schemes? The discussion began, but unfortunately, the topic did not unfold as the Space was shut down due to network issues. So, in the following days, I shared some insights daily, which culminated in this article: Ponzi schemes are a necessary path for the early stages of Web3 application projects and also a transitional path. In fact, a more accurate title should be: Why do the vast majority of Web3 application projects' economic models start as Ponzi schemes?

Although there is a saying that "the butt determines the brain," I firmly believe that without spending more time pondering the economic models of Web3, one cannot predict how Web3 will disrupt Web2 with its business models.

Let's first sort out the changes in business models over the past few decades:

Stage One: Product Side VS Users

Before the rise of the internet and mobile internet, the relationship between the product side and users was simple: the product side sold products to users, and users paid for the basic functionalities of the products. If the product was good and users recognized the brand, the number of users would increase. This is a one-sided relationship: Product Side VS Users.

Stage Two: Product Side VS Platform Side VS Users

With the spread of the internet and mobile internet, human habits have been firmly bound to the 01 system. At this point, a platform side emerged, first attracting users through the technological advantages of the internet, then persuading the latecomer product side: now the user information and entry points are with me, if you want to sell products, you better pay the toll. Meanwhile, they would talk to advertisers: I have so many eyeballs here, why not invest in some ads? I can set a very low bottom line; if you bid, I will let you appear on the first page, etc.

Platforms like Taobao, Didi, and Douyin all played this way. However, this encountered a problem: user habits are hard to change. How did these platforms acquire users at the beginning? Users are inherently greedy, and this is the same for both Web2 and Web3. Thus, the platform side sought financing from PE institutions and used the PE funds to subsidize early users, such as letting you take a taxi for 1 yuan or buy rice for 1 yuan. Here, the early users of WEB2 are akin to the head miners in WEB3. Why do PEs act like good Samaritans, giving money to the platform side and users? Because they know that in the end, this business model will have the product side footing the bill (this is very important!). In the future, there will be product sides that will obediently share profits with the platform side, allowing the platform side to continue telling their story, which may lead to an IPO and an exit. With PE's money, the platform side can go all out; some have even succeeded and become giants, with mature platforms able to look down on product sides and users.

Currently, the platform side is also evolving, trying to shift the attention of somewhat enlightened but struggling users: they need to enhance product empowerment, not just let users focus on the product's functional use, or else the platforms will quickly start competing against themselves. Thus, new paradigms have emerged, such as private traffic and influencer marketing.

Take influencer marketing as an example: influencers set a good flag, criticizing e-commerce platforms for monopolizing and calling for revolution, claiming to be user-recommended users, seemingly replacing the platform side. Then, various empowerments began to be added in the live broadcast room, providing users with other pleasures beyond the product's functional use: Dong Yuhui's poetic charm,福利姬's allure, and the little puppy's eight-pack abs, with users taking what they need, and in the midst of the fun, users' pockets are emptied even faster. In fact, these influencers are still backed by organizations similar to the platform side: MCN.

To summarize, in the second stage, the product side and platform side grow bilaterally, but in the end, users are still consumed. New paradigms like influencer marketing are slightly better than simple platform sides, as users can gain some additional enjoyment.

However, whether it's e-commerce platforms or influencer marketing, it doesn't change the fact that users are still the naive fish on the chopping board, with the product side and platform side colluding on how to extract money from users. It seems that while you may have gained something at first, you will have to give it back later.

Stage Three: Product Side VS Decentralized System VS Users

To address the issues mentioned in the second stage, let's see what different things Web3-led third stage has done.

Compared to the "Product Side VS Platform Side VS Users" business system of Web2, Web3 should evolve into "Product Side VS Decentralized System VS Users," where the intermediary connection shifts from centralized Web2 platforms to a decentralized system composed of various protocols interacting with code, reflecting the characteristics of decentralization, privacy, and consensus rights confirmation in Web3. From the user's perspective, the experience includes:

1. Value assets can be stored in one's own wallet; if you don't say yes, no one can take them away;
2. Personal information can be determined by oneself for external commercial cooperation, rather than being directly sold to advertisers like on Web2 platforms;
3. Everyone is granted voting rights, which can decide the operational model of a decentralized system. For example, if a certain platform that everyone despises were structured as Web3, voting could potentially eliminate it.

Since it's so good, why do so many Web3 application projects still have such short lifecycles and remain Ponzi schemes? Because the current stage is too early, and no real product side has entered yet. Therefore, the envisioned "Product Side VS Decentralized System VS Users" currently only exists as "Decentralized System VS Users," with no final financial backer product side coming in to ultimately foot the bill for the entire system. Thus, the various teams within the decentralized system can only engage in mutual extraction with users, competing on who is smarter, who can deceive better, and who can run faster.

Let's ponder whether there are currently Web3 products that are as phenomenal as Alipay or WeChat? Don't even mention these successful products; it’s hard to articulate what services the product projects can provide to the general public. If I am a pure Web2 user, I cannot convince myself why I should try the various products in the Web3 track at this stage: What can DeFi do? Just a bunch of so-called tokens generated by code, endlessly looping? Does not using DeFi have a negative impact on Web2 users' lives? What can SocialFi do? In a Telegram group or platform with thousands of people, chatting daily with a few active users about dog coins, models, and福利姬? What can Gamefi do? A bunch of uninteresting games, yet I have to force myself to grind for short-term high returns to become a head miner.

The core point is, what role do these so-called Web3 application FI play in addressing the existing problems and pain points of users in the Web2 world? Currently, it seems to have no effect.

So is Web3 a false proposition? No, it is just in the early stages, with poor infrastructure and no reliable product side emerging. Most so-called project teams are a mix of "contract coders + operations," essentially just the precursors to a "decentralized system." However, looking back at the development of Web3 over the past five years, one can see significant evolution, from simple public chains and token schemes to DeFi, then to the emergence of NFTs and chain games, at least continuously adding functional modules.

DeFi has established a prototype of a decentralized self-circulating system, allowing everyone to not completely rely on the centralized system dominated by CEX, thus reversing token flow; NFTs are beginning to show characteristics of value accumulation (whether this can last is uncertain), and one can imagine how the traditional financial system would operate without value accumulation assets like gold; chain games, as pioneers of Web3 application products, are continually trying to explore beyond Ponzi schemes, combining blockchain technology with games to see if they can enter the world of real game users.

This process may take a very long time. If we draw parallels with AI development, even starting from Geoffrey Hinton's proposal of deep learning neural networks in 2007 to this year's acceptance of ChatGPT by the general public, it took 16 years. Therefore, it is expected that for a relatively long time, the model of "decentralized system VS users" will continue to exist without real product sides, and Ponzi models will persist. From our perspective, Ponzi is merely a category of models, with no right or wrong, and Ponzi models can be designed elegantly or brutally.

When can we expect real product sides to come in and begin to break free from pure Ponzi models?

First, regulatory issues are no longer a problem globally;

Second, as mentioned above, infrastructure must be improved, including the frequent occurrence of hacking issues;

Third, decentralized consensus begins to be accepted, creating a sense of "the world has long suffered from centralization";

Fourth, there are pain points that Web2 cannot solve or would require significant costs to address (for example, the recent rise of RWA, which is currently primarily based on US Treasury bonds, but at least addresses some issues for crypto users holding US dollars in buying US Treasury bonds), which must be solved by Web3.