Dialogue Wang Qiao: Searching for Treasures in Consumer-Level Crypto Applications

Original Title: Finding Consumer Gems in Crypto | Qiao \& Imran

Source: Bell Curve

Compiled by: Deep Tide TechFlow

Guests: Imran Khan, co-founder supported by @alliancedao; Wang Qiao, customer support at @alliancedao

Host: Michael Ippolito

Air Date: September 3, 2024

Background Information

In this episode, we invited Qiao and Imran from AllianceDAO to discuss the weak infrastructure in the crypto space, the Fat App Thesis, and the cultural differences between blockchains. We also pondered whether L1 has long-term bullish potential and where consumer application developers stand. Finally, we delved into how TikTok can integrate with cryptocurrency and how cryptocurrency might solve the commercial model dilemmas of traditional media.

Weak Infrastructure in the Crypto Space

• Michael expressed concern about the current weak infrastructure in the crypto space. He mentioned that although cryptocurrencies have been around for years, there are very few actual applications, and the market is flooded with infrastructure tokens that often lack a customer base and are hard to understand. He hopes to see more practical applications emerge, rather than just discussions about infrastructure.

Challenges in Building Infrastructure and Applications

• Qiao shared a founder's perspective, suggesting that infrastructure projects are relatively easier to build because they are more like pure engineering projects, while applications require a deep understanding of user psychology and pain points. He emphasized that building infrastructure (like launching a chain) has become easier compared to a few years ago, while creating a consumer product that can attract millions of users remains challenging.

Venture Capital's Focus on Infrastructure vs. Consumer Projects

• Imran pointed out that despite the demand for infrastructure and consumer projects, many infrastructure projects are still being launched. He mentioned that many founders seeking investment have not reached out to venture capitalists focused on consumer projects, and these VCs may lack an understanding of the consumer market, leading to a negative attitude towards consumer projects.

Adaptability of the Venture Capital Ecosystem

• Michael believes that the venture capital ecosystem needs to adapt to this change and start focusing on how to evaluate and support the building of consumer products. He noted that there is too much focus on infrastructure, auctions, and mechanism design in the market, while discussions on how to bring products to market are relatively scarce. He pointed out that VCs should pay more attention to market strategies and user acquisition when evaluating startups.

Relative Valuation of Applications vs. Infrastructure

• Michael raised the question of the relative valuation between infrastructure and applications. He noted that infrastructure companies are often viewed as having a "shovels and picks" business model, which may receive higher valuations due to their durability. However, he questioned whether such high valuations are reasonable without sufficient applications as customers, since the ultimate customers of infrastructure are applications.

Historical Experience and Value Capture

• Qiao explained that historically, applications have typically captured more value. For example, during the internet bubble, while infrastructure companies (like Intel and cable companies) performed well in market capitalization, a decade later, it was consumer-facing products like Amazon, Apple, and Google that truly captured value. He believes this trend will also reappear in the crypto space, where although infrastructure tokens currently have higher valuations than consumer products, in the long run, the value of consumer applications will surpass that of infrastructure.

The Cyclical Relationship Between Applications and Infrastructure

• Imran cited Nick Grossman's article "The Myth of the Infrastructure Phase," emphasizing that the development of applications will incentivize the construction of infrastructure, which in turn will support new applications. He believes this cyclical relationship will continue, and we may currently be at the bottom of the infrastructure phase, gradually transitioning to an upward phase of applications.

Challenges for Founders Building Infrastructure

• Michael discussed the phenomenon of founders developing the necessary infrastructure while building applications. He used Amazon's AWS as an example to illustrate how some founders build infrastructure to meet their own needs.

• Qiao believes that founders should not focus on both directions simultaneously in the early stages but should concentrate on one area and consider expansion once it matures.

Sustainability and Resource Balance

• Qiao emphasized that founders need to maintain a balance in resources and focus, especially in the startup phase, where it is best to first concentrate on application development and consider infrastructure building only after achieving success.

Fat App Thesis

• Michael initiated a discussion on the "Fat App Thesis," referencing Stan Shih's "smile curve" concept from 1992. This curve describes the value chain of personal computers, emphasizing value capture in the conception and marketing stages, while the manufacturing stage has relatively low value. He pointed out that the value capture of modern applications is similar to this model and mentioned Joel Manegro's application theory from 2017, which posits that applications will capture more value, while the middle protocols and on-chain primitives may be squeezed.

Definition of the Middle Layer and Value Capture

• Qiao stated that the definition of the middle layer is crucial. He mentioned that if we view decentralized finance (DeFi) protocols as the middle layer, he agrees that applications will capture more value. He cited Uniswap as an example, noting that Uniswap Labs has users, not just the protocol itself, which gives it a dominant position in the market. He emphasized that the ability to have end-users is key to success.

Transaction Costs and User Experience

• Michael mentioned the differences in transaction costs, particularly comparing Ethereum and Solana. He pointed out that transaction costs on Ethereum can significantly impact user choices, while on Solana, the relatively low transaction costs make trading through aggregators more attractive. Qiao agreed and noted that MetaMask has generated substantial revenue by charging transaction fees, highlighting the importance of user ownership.

Vertical Integration of Applications

• Imran presented a different perspective, suggesting that applications may gradually own the entire infrastructure, especially in terms of vertical integration of DeFi protocols and primitives. He used Friend Tech V2 as an example, illustrating how applications can integrate all functionalities, forcing users to transact within the app, thereby capturing all fees and value. He believes that if applications can effectively achieve vertical integration, they could pose a threat to traditional decentralized exchanges (DEX).

Does L1 Have Long-Term Bullish Potential?

• Michael raised the question of whether L1 (Layer 1 blockchain) has long-term bullish potential. He believes that, aside from Bitcoin, which may be an exception, other L1 blockchains may face competition in the long run as they need to retain the cash flow generated by their ecosystems. He pointed out that as application developers increasingly focus on reducing value extraction from L1, cash flows like MEV (Miner Extractable Value) may ultimately be captured by applications.

MEV and Value Capture

• Michael believes that the theory of MEV value capture is reasonable on paper, but in practice, over time, the value of L1 may be diminished. He mentioned that the increase in L2 (Layer 2 blockchain) activity does not necessarily mean people will buy Ethereum (ETH), as L2 incentives allow users to pay with any currency they want.

• Qiao further added that he is less concerned about long-term predictions (like 10 to 20 years) and more focused on the winners at the end of the current cycle. He believes that while the MEV capture theory is theoretically correct, many other factors will influence L1's future performance. He emphasized that, in the long run, value storage is most important, which may position platforms like Bitcoin, Ethereum, or Solana as potential value stores.

Short-Term vs. Long-Term Views

• Imran believes that the market is still full of uncertainties, and any L1 could emerge in future competition. He mentioned that although Solana is currently performing well, every L2 on Ethereum could catch up after a breakthrough application emerges.

• Michael noted the increasing amount of ETH flowing on Ethereum, indicating strong network effects that could benefit the development of L2. He believes that in the future, there may not be a need for too many L2s; three to four large L2 frameworks could suffice, enabling good interoperability within the application ecosystem.

Future L2 Frameworks

• In discussing future L2s, Michael mentioned projects like Arbitrum, Base, and ZK Sync, believing these projects may play significant roles in the future. Imran mentioned Polygon CDK, considering its architectural design promising.

Where Have Consumer Application Developers Gone?

• Michael raised a discussion about the current consumer application developers, asking Imran and Qiao for their views on where the new generation of founders is building and what types of applications they are focusing on. Imran pointed out that Solana and Ethereum still dominate the market, while the Base platform has also received significant investment in the recent batch of founders. He mentioned some developments in on-chain gaming, although most projects are still concentrated on Base and Solana.

Distribution Advantages of Telegram and TON

• Michael mentioned TON (Telegram Open Network) and its relationship with Telegram, discussing its potential user base and distribution capabilities. Imran shared an interesting case about a developer who published a game on Telegram. He noted that this developer spent a lot on advertising for a Web 2 game and took a year and a half to gain 1,500 monthly active users, but after publishing the same game on Telegram, he reached 15 million monthly active users in just three days. This demonstrates Telegram's strong network effects.

• Imran further pointed out that Telegram provides a unique distribution channel, similar to the early opportunities Zynga had on Facebook. He believes that developers building applications on Telegram may quickly gain a user base and become dominant applications on the platform.

User Types and Application Challenges

• Despite the distribution advantages, Imran also raised several considerations, including the types of users and their motivations for using the applications. He questioned whether these users are using the applications out of incentives or for other reasons. Additionally, he mentioned potential speed and cost issues the TON network might face when handling on-chain activities. Therefore, many founders are starting to build hybrid infrastructures, placing most game logic off-chain while keeping some functionalities on-chain to leverage Telegram's distribution capabilities.

Cultural Differences Between Blockchains

• Michael raised the issue of cultural differences between blockchains, particularly between the Ethereum and Solana communities. He observed that Base, as a platform, feels more like an extension of Ethereum culture, filled with a positive and optimistic atmosphere that encourages developers to build applications. In contrast, the Solana community appears more pragmatic and focused on engineering.

Founders Influence Culture

• Qiao believes that this cultural difference can be traced back to the DNA of the founders. Ethereum's founder, Vitalik Buterin, is idealistic, while Solana's founders are more pragmatic. Imran further added that during bear markets, Solana's founders exhibited stronger unity and pragmatism, emphasizing the power of community, while the Ethereum community focused more on spreading its ideals and beliefs.

Community Reactions and Challenges

• Michael mentioned the Ethereum community's reactions to criticism, such as Bankless's accusations against the Ethereum community, reflecting internal tensions within the community. He believes that blockchain communities should engage in self-reflection rather than exclude those with differing opinions.

Branding Strategies for Application Platforms

• Michael also discussed the challenges emerging L2 and L1 platforms face in branding. He believes many chains attempt to differentiate themselves by limiting the types of applications, which may not be a wise choice. He suggested that these platforms should welcome all types of application developers, as it is difficult to predict which applications will truly succeed in the current market environment.

• Qiao expressed disappointment with the Ethereum core team's biases against founders in certain areas, which may lead to missing out on excellent developers. Imran mentioned the conservative attitude of the Ethereum Foundation when funding projects, especially those involving speculative applications, which could limit innovation.

Speculation and Financial Principles

• During the discussion, Michael made an interesting point that many people rediscover the essence of finance after entering the cryptocurrency space. He believes that financial markets fundamentally rely on speculation and gambling, and this allergic reaction to speculation may actually be a re-recognition of the principles of financial operations.

• Qiao added that the performance of the U.S. stock market is an exception in the global financial market, where markets in other countries often perform poorly. They discussed the complexity of financial markets and the varying perspectives on speculation, reflecting different levels of understanding of finance.

What Can Blockchain Truly Achieve?

• In this segment, Michael made a key point that people often focus on what blockchain technology cannot achieve while overlooking the unique functions it can provide. He used the example of mobile devices to illustrate that although early criticisms of phones were numerous regarding their limitations, the convenience of phones ultimately made them an indispensable part of life.

Core Capabilities of Blockchain

• Qiao believes that blockchain excels at creating entirely new markets and micropayments. For instance, the emergence of creator tokens and new markets are advantages of blockchain. Additionally, blockchain performs well in cross-border payments and micropayments, making small payments that are difficult to achieve with traditional payment methods feasible.

• Imran further added that while blockchain technology can achieve specific functions, such as privacy protection and data verification, these functions are usually part of larger applications rather than standalone products.

New Opportunities for Old Ideas

• Michael mentioned some ideas from the 2017 ICO era that might be worth revisiting. He cited earn.com as an interesting concept related to micropayments that failed at the time due to the high costs of blockchain. He believes that with technological advancements, micropayments have now become feasible, and many new application ideas are still waiting to be developed.

The Integration of Gaming and Micropayments

• During the discussion, Michael highlighted the potential of on-chain gaming, suggesting that not every action in a game needs to be converted into an on-chain transaction; rather, the integration of micropayments might be more valuable. He noted that young players can reduce friction in credit card usage when making small purchases in games, significantly enhancing user experience.

• Qiao further elaborated that the concept of on-chain gaming is closely related to data sovereignty, data ownership, and composability, but these ideals are not the primary drivers for users initially. Users are still most concerned with practical applications like speculation and micropayments.

Evolution of Speculation and Awareness

• Imran pointed out that many people initially enter the cryptocurrency market out of speculative motives, but over time, they gradually become aware of other advantages of blockchain technology. He believes that while the decentralization ideals advocated by Ethereum founder Vitalik Buterin and others will remain important in the future, people's acceptance and timing will differ.

Future Users and Technology

• Michael concluded by suggesting that future users entering the crypto space may not focus on decentralization ideals as early users did. He believes that the technology should be good enough that users do not have to worry about these ideals but can directly enjoy the conveniences brought by the technology.

The Integration of TikTok and Cryptocurrency

• In this segment, Michael raised the potential intersection between TikTok and cryptocurrency, particularly how the new generation of users (like Gen Z and Gen Alpha) interacts with cryptocurrency.

Entrepreneurial Spirit of the New Generation

• Qiao and Imran discussed the entrepreneurial spirit of the new generation (Gen Z and Gen Alpha), emphasizing that they are more inclined to earn money through non-traditional means, such as live streaming and content creation. Imran observed that young people are losing interest in traditional jobs but are finding innovative ways to make money, such as interacting with audiences through live streaming platforms.

Integration of Live Streaming and Micropayments

• Qiao mentioned that on current live streaming platforms, fans tip creators by purchasing virtual gifts, which is essentially an application of micropayments. He pointed out that traditional credit card payments cannot support small transfers, making virtual gifts a form of indirect tipping. This model can be viewed as a "Layer 2" solution, allowing creators to withdraw only after accumulating enough virtual gifts.

Challenges of TikTok Content

• Michael suggested that while there are recommendations for them to be active on TikTok, he believes adapting their content to TikTok's style is a challenge, as their content leans more towards finance and cryptocurrency, while TikTok content typically requires a more casual and entertaining format. He worries that this shift might alienate their core audience.

Future of Live Streaming Platforms

• Imran continued to explore the potential of live streaming platforms, mentioning some emerging live streaming applications like Pump. They believe that as content creators increasingly showcase their authentic selves, a new form of content, termed "complete degradation," may emerge, potentially attracting specific audience segments.

Can Cryptocurrency Save the Business Models of Traditional Media?

• In this discussion, Michael made a bold prediction that there could be a certain integration between cryptocurrency and media. He believes that as traditional media business models collapse, cryptocurrency may become a new solution.

Dilemmas of Traditional Media

• Michael pointed out that traditional media's business models have been severely impacted, especially with the rise of social media, which has siphoned off a significant amount of advertising revenue to Facebook and Google. Media has lost access to first-party data, making it difficult for them to understand and engage audiences effectively. In contrast, cryptocurrency addresses can be seen as a new source of first-party data, providing more precise targeting for advertising.

Integration of Cryptocurrency and Media

• Michael presented an interesting idea that certain characteristics of cryptocurrency could be used to reshape the business models of media. For example, tokens could serve as tools for interacting with audiences, allowing advertisers to conduct more effective ad placements based on user behavior on the blockchain (such as trading records on decentralized exchanges). Additionally, he mentioned that "tokens are the new content, and market capital is the new engagement metric," indicating that the economic model of cryptocurrency could introduce new incentive mechanisms for content creation.

Live Streaming and Community Interaction

• Imran further explored the potential of cryptocurrency in the live streaming domain. He noted that on certain live streaming platforms, the interaction between audiences and creators could be conducted through tokenization, allowing audience feedback and demands to directly influence the content direction of creators. This interaction could not only enhance community cohesion but also provide new revenue streams for creators.

Emergence of New Media Phenomena

• Qiao mentioned a new phenomenon where the dissemination of some viral internet memes is changing. He observed that many emerging memes are now spreading through decentralized trading platforms (like Dex Screener) rather than traditional social media (like TikTok or Twitter). This phenomenon suggests that blockchain and cryptocurrency may become significant channels for new media content dissemination in the future.

How Will Founders Change in the Next Decade?

• In this segment, Michael and other participants discussed how the characteristics and backgrounds of founders may change in the next decade, particularly in the cryptocurrency and technology sectors.

Evolution of Founder Characteristics

• Michael mentioned that as cryptocurrency and technology evolve, the backgrounds and characteristics of founders may undergo significant changes. He believes that traditionally, founders from prestigious schools may no longer be the only successful archetype, and more individuals from non-traditional backgrounds or non-elite institutions will emerge. This change could bring different ways of thinking and entrepreneurial styles.

Distinction Between Infrastructure and Application Founders

• Qiao further analyzed the differences between infrastructure (infra) and application (app) founders. He pointed out that building infrastructure typically has a lower iteration frequency, while applications require rapid iteration and frequent updates. Therefore, application founders need to possess a stronger understanding of users and adaptability to the market.

Psychological Traits of Founders

• Imran mentioned some common psychological traits among successful application founders, such as a "proving oneself motivation," which may stem from their upbringing or background. They tend to have a certain aversion to tech founders, believing that application founders better understand user needs and market trends.

Emotional Resilience

• Michael also highlighted the need for founders to possess the ability to endure extreme emotional fluctuations. He believes that successful founders must not only have intelligence and creativity but also remain calm and resilient in the face of uncertainty and pressure.