Why have almost all Web3 social applications failed?

Original Title: “The Social App Thesis: Why every winning onchain app will be social”

Author: David Phelps

Compiled by: Ismay, BlockBeats

Editor's Note: We live in a capitalist world that worships money, yet true cultural power does not always correlate with wealth. Being rich can bring a certain political and cultural influence, but it may also lead to a loss of another form of cultural power. This article delves into the relationship between the merchant class and cultural taste leaders, revealing the difficulties of transitioning between money and status. While there are theoretically various ways to convert financial capital into social capital, the practical execution is fraught with challenges. We explore the underlying reasons for this phenomenon and, through examples from Web2 and Web3, illustrate the differences between financial incentives and social incentives, as well as their impact on community building.

One

Once you see it, you can never unsee it. The influencer living in a studio plagued by rats in the Lower East Side, surviving on Prada gift bags; the street musician whose rhythm can no longer touch hearts after becoming an overly packaged superstar; the wealthy husband standing next to his wife, who is dressed like a haute couture model in a shrunken, wrinkled shirt. This phenomenon is everywhere.

I am referring to the inverse relationship between financial capital and social capital—the relationship between the merchant class (financiers) and the religious class (cultural taste leaders) in contemporary society. In a capitalist world where both believers and skeptics think money can buy everything, this seems to be a taboo topic.

However, we find that being wealthy not only means gaining a certain cultural power in political influence but also entails losing another form of cultural power in the blindness of privilege. The cost of controlling society is becoming a social failure within its norms.

If you are one of those poor people troubled by billions of dollars in savings, I know you might feel worried hearing this. Don’t worry; theoretically, you still have three classic ways to convert financial capital into social capital.

You can build a relationship with a cool person (get married), you can invest in something cool (buy art), or you can do both (become a consumer venture capitalist).

In theory, this old script is as useful to you today as it was at the end of the 19th century. What you need to do—you, the financier whose button is about to pop—is find a cool guy with taste in linen and jewelry to help you hang a George Condo or Vik Muniz piece on your wall. All you need to do is invest in the latest disposable audio app that every American kid will use in the next 7 to 12 days, and then you will surely become cool, right?

Right?

The only problem is, in practice…

When money-famous investors collude with status-famous taste leaders, it is the taste leaders who maintain their good reputation. Taste leaders may get the investors' money, but investors can never gain the status of taste leaders.

I am trying to touch on a disturbing fact that my experiences building social financial products over the past two years have taught me repeatedly. It is easy to exchange social capital for financial capital, but no matter how much you enjoy donning the blue-chip designer's cloak to please your financial peers, it is extremely difficult to exchange financial capital for social capital.

You have seen this phenomenon in every washed-up celebrity you know: when the coolest people become wealthy, even they cannot maintain their coolness.

Two

What I want to say is that Web2 has long taught us one thing: for most people, social incentives always outweigh financial incentives. Most people are willing to let companies sell their data to the highest bidder as long as it gives them even a tiny bit of an aspirational opportunity online.

Privacy and civil rights advocates may complain, but most people are willing to bear significant financial opportunity costs for social connections, as these connections can display their status.

We in the crypto space often forget this fact: most people are ordinary, and they would rather have someone listen to them than receive a million dollars.

And—please forgive my dark thoughts—they know that in the attention economy, accumulating social capital is one of the few viable paths to accumulate financial capital. Web2 understood this long ago.

If you want to know why almost all Web3 social applications have failed, the answer lies here: because Web3 catastrophically believes that Web2 is wrong, thinking that financial incentives are enough to build user stickiness, believing that people can buy status to gain identity.

Of course, Web3 has every reason to believe that financial incentives are all that is needed to kickstart a rabid user base. After all, the original blockchain community—miners and validators—was entirely driven by financial incentives, as was the DeFi community.

I mean, financial incentives are the initial unlock for permissionless financial tracks on the blockchain! In speculative bull market cycles, when buyers rush in to drive prices up further, financial incentives seem to work very well.

But with the emergence of crypto applications, DAOs, and NFTs, it is becoming clear that financial incentives are often fatal for building meaningful social communities. The belief that blockchain is merely a financial tool and that financial incentives are sufficient to kickstart social communities—this is a misconception.

First of all, it is wrong to think that financial incentives can build user stickiness. In fact, the reason financial incentives perform well in user acquisition is precisely because they perform poorly in user stickiness—because a mercenary using an application for profit will leave immediately when a better opportunity arises. Those who come for price increases will leave when prices drop. Their loyalty is meaningless unless you can continue to pay them.

Most importantly, it is wrong to think that people can convert financial capital into social capital, believing that, like many elite co-working spaces of the 2010s promised, people can become cooler by purchasing. This is not to say that there won't be a few delusional individuals who think they can become cooler by buying. But they will quickly self-destruct their investments, as no truly cool person would want to be part of a club that can be bought with money. These clubs not only exclude the true builders of culture and marginalized voices who have built culture for centuries; they also include (sorry) anyone who has ever decided to sell themselves out.

If you want to know why crypto social applications keep failing, the reason is here: you cannot buy status. In fact, trying to do so only achieves the opposite effect, making you seem a bit ridiculous.

Three

However, this does not mean that financial incentives do not play a key role in unlocking social applications on the chain. Just as the popular view holds that financializing social activities is enough to create a killer app, the equally popular view is against the so-called mercenary and degen culture's decline.

The latter view is a reasonable response to the former, but it carries an arrogant attitude towards the global underclass that may actually want to make a living, and more importantly, this view is wrong.

Blockchain has financial attributes, and the most radical value proposition they offer for social applications is also the most boring: allowing you to make tiny transactions with every click, eliminating intermediaries like credit card and app store fees, and providing open on-chain metadata APIs for anyone to develop.

Ideologically, all of this is far less exciting than the revolutionary vision of collective ownership, artist royalties, and decentralized work that inspired and exhausted us in 2021. Financially, all of this sounds much more mundane than pure speculation. Perhaps, all of this sounds like mere technical details.

But consider what this means: blockchain changes the way social applications are built and the types of social applications that can be built, and the reason is very simple: they allow users to profit directly from other users. Looking back at the entire history of Web2 social applications, you won't find a major application that fits this criterion, except for games.

Simply having users' financial sustainability is already a huge achievement. In fact, this has never really been achieved.

Four

Because the real problem with Web2 is that it successfully profited from social behavior, but its users did not.

Friends, fake friends, bosses, colleagues, lovers—perhaps most importantly, potential friends, fake friends, bosses, colleagues, lovers—the network is so powerful that not only do users hand over their data, but the companies themselves also abandon the moats they could have gained by hosting communications, forums, and job opportunities on their sites.

This is the power of social networks: social incentives win out, and they win at the cost of financial and reputational incentives.

You do not profit from your valuable content; social networks do. You cannot simultaneously become a star creator on a platform while programmatically owning, accessing, or sharing the reputation you have built; only social networks can leverage it to attract new users and advertisers.

I think another way to put it is that Web2 is an era of applications, meaning it is an era of closed data. Individuals' data exists in silos of specific applications, and this model allows applications to profit by selling this data to advertisers. In short: in the era of closed data, advertising and applications win, and everyone needs to gather on their platforms to be able to share data with each other.

Then cryptocurrency emerged, and we entered the on-chain era.

Cryptocurrency marks the beginning of the protocol era, or the era of open data. Now, individuals' data can be freely transferred between applications, and there is no proprietary data to sell in open-source chain networks; instead, there is a new model: tokenization.

Essentially, tokens provide a somewhat clumsy solution to the very real problems brought about by the permissionless technology that allows anyone to input any data into the system.

Tokens are essentially legitimacy technology that allows a large number of users to provide economic guarantees to prove that one transaction is legitimate while another is not. You no longer profit by selling data to advertisers; instead, you profit by providing economic guarantees to prove the authenticity of the data.

In other words, the reason to participate in cryptocurrency is financial incentives.

This blessing was never realized in Web2, and it is also a curse. So far, you have learned where the problem lies: in every bull market (including this one), the quick profits attract a large number of mercenaries to engage in junk trading, farm protocols, buy tokens, promote tokens, and launch new tokens, chains, and platforms. But in bear markets, the financial frenzy driving individuals turns into financial indifference. Just as the prospect of profit can quickly attract people, the prospect of loss can just as quickly push them away.

Despite the less discussion, there is another problem. Financial incentives themselves are often zero-sum games, where one person's gain is another person's loss; in the realm of pure speculation, the more you earn in a bull market, the more you might lose in a bear market.

This is why prediction markets—perhaps the most hyped use case for crypto applications over the past seven years—had only about 10,000 total users at their peak (election cycles), many of whom were likely bots.

The expected return is zero, so users must be very confident that they understand the future better than others who are equally confident. Having deep insights does not necessarily help you when you are competing with others who also have deep insights.

So how do prediction markets attract users? By attracting non-rational bets that are not based on reason but have tribal nature: elections and sports events. People bet on their team's victory because it matters to them.

You get my point: to make financial products truly profitable, they must leverage social incentives.

Of course, we know this. Web2 has extraordinary social incentives, but poor financial and reputational incentives. Web3 has extraordinary financial and reputational incentives, but poor social incentives. Financial incentives are suitable for quick profits, but social incentives are necessary for building lasting businesses. Cryptocurrency can only win when it can achieve both.

Five

You may not believe me—I know there are too many people in this field who think I am wrong.

So let’s talk about a specific case study: Uniswap.

Uniswap's protocol has clearly won: not only is Uniswap using it, but Cowswap, 1inch, and others are using it, and that is precisely the problem. Because it is a completely open protocol that can be exploited by competitors. Uniswap presents a unique crypto-native problem that we have never truly seen in the tech space: you can lose to your own product.

The problem is that on-chain applications cannot charge fees through their protocols, partly due to legal issues, but a protocol with fees would also incentivize competitors to fork it, thus dispersing liquidity among all participants.

Uniswap, like all other on-chain applications, makes money through the front end, which is where it needs to win. Only the front end, not the protocol, is unique to crypto companies. If a project ultimately cannot attract users to their site, they cannot effectively monetize.

So what drives users to the front end? Brand, functionality, UI/UX are certainly important, but one important lesson from Web2 is that the most important front-end driver is the user network. You go to a website because there are other users there, and other users can find you. Just as financial liquidity is crucial for launching a protocol, user liquidity is also crucial for launching a front end.

Today, you can see this reflected in every decision Uniswap makes. Wallets, domain names, acquiring “Crypto: The Game”—these are all ways to keep users loyal to its front end, and these are all ways to gradually make Uniswap more social.

I don’t know what plans Uniswap has, but I think we will see many similar features in the next year or two—want to issue your own token? Uniswap can become a place where any LP gathers, join chats, and initiate events for others.

What I want to say is: to win at the front end, you need to win socially. To build a financially sustainable model in the crypto space, you need to win socially.

Six

I mentioned earlier that this is a lesson I have been learning personally for a year.

At Jokerace, we allow anyone to create on-chain competitions for people to submit and vote. Broadly speaking, participants in competitions can win in three ways: win money, win status, win friends. Money is the financial incentive; status is the reputational incentive; friends are the social incentive. These are indeed all the incentives.

For example, suppose someone holds a chain-based “Smart Winner” competition. The top winner can win a prize (financial incentive), all participants can win status through every vote (reputational incentive), and voters can form teams around participants, creating an organic community to support them from the start—creating tribes and making friends (social incentive).

When I describe it this way, it should be clear that financial incentives are the least attractive incentives, as only the winners can earn money, and this is far from guaranteed. But everyone can gain status by winning even a single vote, and everyone can make friends by forming teams.

Moreover, the act of building reputation and social profiles can bring various financial benefits, such as job opportunities, community, and airdrops, but financial rewards can only provide money.

You can understand why thinking of money as a motivator seems superficial: because it truly is. Your reputation and friends represent your fundamental value as a mission-driven individual, but your money usually represents your ability to sell that value to the highest bidder as a mercenary.

If this sounds a bit shocking, cryptocurrency has proven this time and again. One important lesson from Web2 is that social incentives operate like marriage: they burn slowly, lastingly, deepening over the years, activating relationships for an hour or two each day.

And the lesson from Web3 is that financial incentives are more like an affair: intense, short-lived, burning out in the ashes of their own passion until a new opportunity is pursued, while the yield farmers float with the winds of the highest returns.

Of course, in a world where we all have to pay for food and shelter, we are all mercenaries to some extent, and our attention is open to the highest bidder. So I am not trying to downplay financial incentives; I just want to say that passion is a powerful acquisition tool—but it only works when it leads to marriage-like loyalty.

Recognizing this means recognizing that blockchain is not just a tool for globally interoperable finance, but also a tool for globally interoperable coordination and globally interoperable reputation. In fact, they are solutions to their own problems, the real social tools needed to solve the top issues in this space surrounding moats and monetization—loyalty.