Jesse’s new piece, Everything Is Market, sets the direction. We’ve put an excerpt below. Just read it.

We’re also getting you up to speed on three really interesting recent posts we’ve done on markets:

• Elijah explains why institutions aren’t getting onboarded onto derivatives exchanges despite the obvious financial upside.

• Daniel outlines what does and (probably) doesn’t count as insider trading in prediction markets.

• Salah & Elijah explore three legal and regulatory battles that will determine prediction markets’ futures.

Plus: new investments, open roles, and where to connect with our team.

Enjoy!

Everything Is Market

Jesse Walden

There has been a lot of debate about whether crypto is for finance, or more than that.

My view is that, yes, crypto is for finance.

But also, finance is becoming much more expansive than is commonly understood.

There are three fundamental drivers. First, mass accessibility and participation in markets means that finance is increasingly intertwined with, and influenced by, culture. Second, that dynamic is enabled and accelerated by permissionless markets, which act as change agents, enabling a global user base to express new behaviors, and, in the process, pull regulators and institutions forward. Third, financial markets are evolving from discrete venues into programmable endpoints; they are becoming APIs with embedded economic data that produce real-time information that no other system can generate, is costly to fake, and can be used seamlessly by intelligent agents.

Mass participation changes who uses markets; permissionless innovation changes which markets exist; and the programmability of new markets opens up new design space for how we (and our agents) will use them.

Taken together, as all the world’s value becomes software, finance is undergoing a radical transformation that demands a much more expansive view of its end state.

Read the full post here

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Ideas and perspectives from the team

We Are Not Onboarding Institutions (for Now)

Elijah Fox

Crypto traders love leverage. So derivatives exchanges heap it on. 10x. 20x. 100x. As they do, they increase the chances of auto-deleveraging — and keep institutional players on the sidelines. Elijah looks at traditional finance to see how crypto can design derivatives markets that attract institutions.

Thoughts on the Law of Insider Trading and Prediction Markets

Daniel Barabander

Seemingly every time a big bet pays off on Polymarket or Kalshi, people wonder, “Was that insider trading?” Our resident lawyer (though not your lawyer, and this isn’t legal advice) explains what insider trading actually is and where he thinks prediction markets fall in the legal definition.

Prediction Markets Meet Derivatives Law

Salah Ghazzal & Elijah Fox

Nearly 150 years ago, “bucket shops” let people bet on commodity prices without going to an exchange, leading to the development of modern derivatives law. Now, with prediction markets ticking up in popularity, there are some unresolved legal and regulatory questions founders will have to consider before building. Salah and Elijah explore.

Firm Announcements

Highlights and important info

• Variant invested in Derive, an onchain crypto options exchange that takes over where perps leave off.

• Variant invested in Levl, a stablecoin infra startup.

• Variant is hiring for two killer roles: AI lead and deputy general counsel. Come work with us!

• We have a few spots open for founders for a private dinner with Blueyard. Sign up if you’ll be in NYC on March 11.

Thinking in Public

Recent posts from Variant’s policy team

Jesse stops by The Bell Curve:

Daniel sees a path for agent monetization:

Caleb is looking for meme market forecasters:

Alana wants a word:

Disclaimer: All information contained herein is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. None of the opinions or positions provided herein are intended to be treated as legal advice or to create an attorney-client relationship. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by Variant, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Variant (excluding investments for which the issuer has not provided permission for Variant to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://variant.fund/portfolio. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated. All liability with respect to actions taken or not taken based on the contents of the information contained herein are hereby expressly disclaimed. The content of this post is provided “as is;” no representations are made that the content is error-free.

Congress is finally focused on crypto regulations (thanks, in part, to tireless work from our Chief Legal Officer, Jake Chervinsky). And Variant is back with another newsletter.

Okay, so it’s not the type of stuff that makes headlines, but we’re really excited to put regulatory questions aside and see what people are actually building. 

In our posts below, Mason breaks down the four layers of the SocialFi stack, Li explores the different ways projects are merging AI and crypto, and Alana examines AI models with subjective outputs. Jake, meanwhile, muses about how token-based projects can calibrate for regulatory risk after last month’s EIGEN launch.

Finally, if you want to learn what’s new in the world of interoperability, come join us—and our friends from Base, Hyperlane, Reservoir, and AcrossBase—at our first Variant Builder Day. Click here to apply before June 7.

Enjoy reading.

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What to read

Recent posts from Variant

Mason Nystrom: Verticalization of the Web3 Social Stack

As the SocialFi frontier expands, applications must own multiple layers of the web3 social stack to build protocol defensibility.

Li Jin: On the Intersection of AI and Crypto

At Variant, we believe the coupling of crypto and AI is fundamental to making AI equitable and user-owned. Here are the types of projects we’re seeing.

Alana Levin: AI Models with Taste

AI models can be trained to complete many types of objective tasks. But some have more subjective outputs, like making art. They need "taste."

Jake Chervinsky: On Non-Transferability, Geofencing, and the Regulatory Risk Spectrum of Token Distributions

The SEC has refused to provide a workable pathway for the registration of digital assets. So what is a risk-averse lawyer to do?

Updates from our portfolio

April and May highlights from the startups we’re proud to invest in

• Phantom, the multichain wallet, acquired Bitski.

• Zora, the NFT minting platform, acquired Mint.fun and is now on Coinbase Wallet.

• Turnkey, which builds wallet infrastructure, raised a Series A.

• Worldcoin’s World App reached 10 million users.

• Reservoir's Relay, a cross-chain payments system, launched swaps. 

• LsETH from Alluvial, a contributor to the Liquid Collective, is now the exclusive liquid staking solution of Blockdaemon.

• Variant announced our investments in Farcaster, a decentralized social protocol (Series A), and in Farcaster client Nook (preseed).

Thinking in public

We welcome your input and replies on X and Warpcast.

Jesse sees two paths converging toward onchain media:

Alana is putting out the call for Farcaster economics experts: 

Jake isn’t sure there will be another crypto ETF soon:

Jack is looking for Farcaster AI data:

If this newsletter gave you ideas, remember that at Variant we’re always trying to help builders take their projects from -1 to 0. That means we love it when founders get in touch with us before they’ve even founded anything. Here are some ways to get on our radar at any stage:

• Next Thing Dinner Series: Apply to join us for an intimate group dinner with builders across the full crypto stack who are beginning to think about their next things (-1 to 0 stage). Our next one is at EthCC. 

• Taco Tuesdays: Come co-work with us—we’ll bring the hot sauce.  

• Our DMs and DCs are open.

Thanks for reading. We’ll see you next issue.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

Memecoins are everywhere. To some, they’re a “plague” on the market, while others see them as a perfect encapsulation of capital. Either way, this “new way to angel invest into culture” has us talking. Li argues that memecoins are evidence that crypto is where the attention economy is headed—only with much more economic efficiency than web2. She’s got another take, this one for founders: building products based on memecoins might just be a winning go-to-market strategy. We’ve got links to both pieces below. 

Also in this edition: Derek explores why DeFi founders might look to high-performance chains for building opportunities, and the whole team lists startups we’d like to see in the Farcaster ecosystem.

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Crypto as the Next Iteration of the Attention Economy 

Li Jin

Last week, an NFT of Achi, the original dog wearing a hat, sold for 1,210.8 ETH on Foundation. It’s a perfect encapsulation of how crypto translates attention value into economic value—and enables a more efficient attention economy. 

The term “attention economy” has gained major traction over the past several years, but it traces its origins to the 1970s and social scientist and Nobel laureate Herbert A. Simon. Simon observed that "a wealth of information creates a poverty of attention.” Attention is a scarce resource, with dynamics of supply and demand surrounding it. 

People commonly refer to web2 as “the attention economy,” where platforms compete intensely for user attention and treat attention as a commodity to be monetized; but the web2 attention economy is plagued by rampant value leakage, with positive and negative externalities. 

Read the full post on our site to learn how crypto’s attention assets lead to a more efficient market.

Read this next

More fresh posts from Variant

Li Jin: Memecoins as the New GTM Strategy

One emerging go-to-market strategy is to draft off a memecoin that is gaining adoption and momentum. While traditional GTM consisted of first building a product then building a community around it through marketing and memes, this new playbook involves identifying a vibrant community of users around a memecoin then building a product that incorporates that token.

Derek Walkush: DeFi Opportunities on High-Performance Chains

Thanks to growth in L2s, the Ethereum ecosystem remains where the majority of DeFi resides. However, the recent success of Solana, Aptos, and other high-performance chains suggests they will play a major role in DeFi moving forward. But high-performance chains are different from Ethereum in ways that DeFi builders seasoned in the Eth ecosystem may not fully appreciate. Builders who understand these features of high-performance chains will be able to jump on opportunities that might not be viable on the familiar playground of Ethereum.

Variant Team: Request for Startups for the Farcaster Ecosystem

At Variant, we’ve been spending a lot of time in the Farcaster ecosystem. We often find ourselves discussing the ideas that we’d like to see — both as users and as investors. We’ve compiled a list of requests for startups. (We’re also hosting a Farcaster developer meetup + brunch on Saturday, April 6 at our office in NYC, which you can apply to here: https://lu.ma/p43szrum.)

Updates from our portfolio

March highlights from the startups we’re proud to invest in

• BottoDAO raised $1.67M to continue growth, with participation from Variant.

• Euler Labs has set aside $1.25M for a competition to audit Euler v2.

• Gevulot took its devnet live.

• Modulus Labs used zero-knowledge proofs to verify a large language model onchain. 

• Morpho partnered with Gauntlet, which has created DeFi lending vaults on Morpho Blue.

• Phantom wallet topped 4M monthly active users.

• Scroll started Scroll Studio, its new startup accelerator for Chinese entrepreneurs.

• Uniswap released a wallet browser extension to make swapping simpler.

Thinking in public

We welcome your input and replies on Warpcast.

Alli is seeking opinions on hot topics in infrastructure:

Alana wants a better way to view memecoin trends:

Jack is monitoring Farcaster frames action:

If this newsletter gave you ideas, remember that at Variant we’re always trying to help builders take their projects from -1 to 0. That means we love it when founders get in touch with us before they’ve even founded anything. Here are some ways to get on our radar at any stage:

• Farcaster Fridays: Find Jesse in /0to1 channel in Warpcast, every Friday.

• Next Thing Dinner Series: Apply to join us for an intimate group dinner with builders across the full crypto stack who are the beginning to think about their next things (-1 to 0 stage).

• Taco Tuesdays: Come co-work with us—we’ll bring the hot sauce.  

• Our DMs and DCs are open.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

If you’re flying in for ETHDenver, you’ll definitely need caffeine to battle the jetlag. So it’s a good thing we’ve rented out a cafe! Stop by the Variant co-working space for coffee, networking, and a warm place to log on.

Whether you’re in the departure lounge or sitting this conference out, enjoy our curated reads below, including Jake’s opinion piece on the crypto industry’s shift toward impact litigation. We’ve also got Li’s thoughts about loyalty and points programs, as well as Alana’s take on new opportunities in the Farcaster ecosystem.

Speaking of Farcaster, make sure to follow Variant on Warpcast, where you can check out Jesse’s /0to1 channel for early-stage builders and Li’s /web2web3 channel for insights on how to apply best practices from web2 to crypto. 

Bon voyage!

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ETHDenver Events

Where to find us in the Mile High City

February 29 (11 am - 4 pm)

Variant Co-working + Coffee

Where: Register here to find out https://lu.ma/gcq8nxy8

February 29 (5:45 pm) 

Fireside chat with Jesse and Jake: Why Sufficient Decentralization Is No Longer Sufficient

Where: Atlantis Main Stage

March 1 (2:15 pm)

Li panel moderation: How Modularity Drives the Next Wave of DeFi Lending

Where: Atlantis Main Stage

Crypto Goes on Offense in the Courts

Jake Chervinsky, Amanda Tuminelli

It’s no secret that the crypto industry has a chilly relationship with the U.S. Securities and Exchange Commission (SEC). It wasn’t always this way, though — the SEC’s views on crypto have shifted over time. In Bitcoin’s early days, the SEC’s approach to crypto was largely benign neglect. During and after the ICO bubble of 2016 and 2017, the SEC started to take interest in the space, engaging in selective enforcement and providing the beginnings of guidance.

In recent years, however, the SEC has taken a strong position in the anti-crypto camp. The current SEC appears to believe that the securities laws apply to the vast majority of crypto transactions and that most crypto industry participants are breaking the law. The agency has shown no signs of pursuing a path to compliance for the industry, instead prioritizing regulation by enforcement against stalwart companies like Coinbase and Kraken, among many others.

The SEC’s hostility toward crypto leaves the industry in a difficult spot. Many builders are afraid to operate in the United States due to fear of an SEC enforcement action. Even builders who spend hundreds of thousands of dollars on law firms still feel the chill of the SEC’s threat, since the high cost of defending an enforcement action can be devastating to a young company regardless of the outcome. As a result, many crypto companies are forced to act like sitting ducks, keeping their heads down and hoping the SEC looks elsewhere.

But this week the industry went on offense.

Read the full post on our site.

Read this next

More fresh posts from Variant

Li Jin, Jake Chervinsky: Dissecting the Points Meta: Best Practices for User Loyalty

Recently, we hosted a fascinating discussion about loyalty and points programs at the Variant office. The conversation covered best practices from the web2 loyalty space and how they could be cross-pollinated to crypto; the distinction between points and tokens; what kind of rewards and redemption experiences users care about; and whether to put points onchain.

Alana Levin: New Opportunities in the Farcaster Stack

We’re seeing the emergence of a new social graph in real-time: Farcaster. Up until [a few] weeks ago, today’s most popular client (Warpcast) looked, at face value, similar to a Twitter clone. Then the team launched Frames and it kicked off a wave of growth as it became clear that Farcaster’s permissionless infrastructure enables a new distribution channel. 

But even beyond Frames, there’s a rich stack of layers that the Farcaster network has unbundled and made open to developers. And with that unbundling comes new opportunities.

Updates from our portfolio

February highlights from the startups we’re proud to invest in

• Euler launched v2 of its DeFi lending protocol.

• Reservoir released Relay, a protocol for cheaply and quickly executing transactions across chains.

• Magic Eden took its Ethereum marketplace live and introduced its Mint to Earn feature to reward users who support NFT creators.

• Syndicate launched Frame Chain, an Optimism L3 built on Base so Frame developers can benefit from lower gas costs.

• Sound introduced channels to enable community-powered discovery of new music.

• Blockaid became the default security setting for the Metamask extension.

• Morpho became the second-largest DeFi lender in Ethereum, as measured by volume borrowed.

See you next issue. And if you read this on Substack or in your inbox, remember you can also read on Mirror, where you can collect this issue as an NFT.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

“Builder energy is clearly back.” On Friday, Farcaster launched Frames, a way to turn any Farcaster post into an embedded app. The feature had crypto builders building, and resonated with our thinking on “headless marketplaces.” On Sunday, we hosted a spontaneous Frames hackathon at our office in NYC. Read on for Jesse’s hack: an essay on how Frames deliver a composable way to build headless marketplaces. We also recap a few of the cool Frames that builders came up with at the hackathon.

Happy reading, and happy building.

—Dan Roberts, Editor in Chief

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Headless Marketplaces: Go Where the Wallets Are

Jesse Walden

Composability has been a holy grail for crypto, and we’re on the verge of an explosion of it. The reason is a new go-to-market strategy for founders may have just become viable: go to where the wallets are, build a headless marketplace.

A headless marketplace is a market leveraging global, onchain identity, money, and data while distributing locally—wherever a user’s wallet already is (e.g. inside a Telegram group chat or Farcaster feed).

Since major social platforms cut API/platform access, bootstrapping a new app or marketplace demanded a miracle in distribution hacking. The rise of decentralized social protocols and wallet infrastructure might simplify things a bit.

That’s because it’s now possible to go to where the users are, without fear of platform risk—and crucially, because decentralized social networks leverage crypto wallets for identity, it’s now possible to tap users’ existing identity, money, and data in your application too.

Historically, most marketplaces have been destinations. Users have to travel to a website or open an app, sign up for a fresh account, input a credit card and profile data, etc. With headless marketplaces, the destination can be the user’s wallet in whichever application they’re already spending time. The result is much lower friction to transacting.

About a week ago, I wrote a tweetstorm on this topic and used Bountycaster as an early example of a headless marketplace:

A great example is @bountycaster (on Farcaster), which leverages the social network for its ‘local’ distribution. By tagging the Bountycaster bot in a cast, users can participate in a global marketplace for talent or bounties. Anyone can build an interface to view or transact with the market’s liquidity (and a number already have) but users don’t need to go anywhere but their @warpcast feed to participate.

Since then, Farcaster launched Frames. Frames leverage Facebook’s OpenGraph standard to enable third-party developers to build “mini apps.” These apps can pass signed messages from Farcaster user wallets, enabling arbitrary, structured interactions with third-party applications directly from the feed. Running with Bountycaster as the example, a soon-to-be-built Bountycaster Frame will enable users to bid on a bounty or pitch in funds to a bounty, directly from an embed in their social feed.

For founders, the takeaway is that you now have the ability to tap directly into existing user attention, engagement, identity and data as you plan your GTM, the same way that Zynga famously did with Facebook. Only this time, users’ money will be there too, and their identity and data can’t be rugged from underneath them.

When a new go-to-market strategy becomes clear, a wave of innovation and opportunity often follows. In 2024, you can go to where the wallets are.

Read other recent writing on our site.

Frames Hackathon at Variant HQ

This past weekend, we hosted a Frames hackathon at our NYC office that pulled in hundreds of online or in-person attendees to make Farcaster embedded apps. Here are some of the cool frames that came out of the event, as recounted by Alana.

A better way to browse NFTs in your wallet

20 questions with ChatGPT

“Wowow or meh” - help artists get feedback from their audiences on what looks good (and what doesn’t)

And my all-time favorite… buy girl scout cookies direct from your feed (not live yet, but counting down the minutes til it launches)

Updates from our portfolio

January highlights from the startups we’re proud to invest in.

• Gevulot, the decentralized network for zk-proof verification, raised a $6m seed round led by Variant and announced its devnet coming in March. If you’d like to participate, sign up here.

• Morpho Blue, a new lending protocol from Morpho, went live on Ethereum.

• Euler Labs introduced its Ethereum Vault Connector, a public good and the “first building block” for Euler v2.

• NFT marketplace Magic Eden launched its NFT rewards program.

• Coordinape unveiled CoLinks, a “LinkedIn for web3.” Many members of the Variant team have joined: you can link up with us there. 

• Looking for something fun? ZORA released a new game called CYTO.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

We’re kicking off the new year by sending a few things directly to your inbox that you might have missed amid the madness of the holidays:

• First, our key takeaways and lessons for founders from an extensive hiring and compensation survey we conducted with our friends at USV. It was great to work with our chief of staff Tom (his first bylined piece on the site!), our strategic advisor Calder (head of recruiting at OpenSea), and USV’s Matt Cynamon on this post. 

• Next, from the Variant investment team, it’s our 2024 RFS (requests for startups), spanning consumer payments UX, DeFi tooling, gaming, prediction markets, and more.

• Finally, a fun and smart new Jesse piece on memecoins and airdrops, and embracing “the game on the field” right now. 

Happy reading, and happy building.

—Dan Roberts, Editor in Chief

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Building Through the Crypto Cycle: A Variant/USV Portfolio Survey on Web3 Hiring and Compensation

Tom Dils, Calder Zwerling, Matt Cynamon

Earlier this year, Variant and USV conducted an extensive web3 compensation survey of our portfolio companies. Our goals were twofold: create a proprietary dataset exclusive to web3 startups, and capture a snapshot of the state of web3 compensation amid a hard year for the industry.

The survey’s key findings are encouraging for founders building amid a bear market. A majority of respondents said the prolonged bear market either did not have an impact on their hiring plans or did not change their plans for hiring engineers specifically. Moreover, the international nature of web3’s labor market is allowing startups to calibrate for different-sized budgets. 

Builders looking to hire, however, should know that web3 talent comes at a premium—you may have to pay more than web2 firms in order to compete. Additionally, compensation structures are changing, with traditional equity becoming just as important a benefit as tokens.

The survey yielded over 1,000 data points from employees at 32 web3 startups across the Variant and USV portfolios. We received input from companies that cover the spectrum of web3 today: pre-seed to later stage; small (<10 employees) to large (>200); infrastructure, DeFi, and consumer; DAOs to SaaS business models and everywhere in between. 

Based on the anonymized dataset, which we’ve shared with all survey participants, we’ve identified four key observation areas about the current state of web3 compensation and talent as we turn the page to 2024.

1. Web3 startups compete for talent mainly within web3
   

   • Approximately 50% of survey respondents say they compete almost entirely with other crypto startups for new hires, 25% say they compete primarily with web2 (mainly FAANGs and other mature/public companies), and 25% recruit equally from both realms.

   • This suggests that during a bear market, it’s easier to recruit from within web3 than attract first-timers to join the crypto space.

2. Engineers dominate crypto teams—in headcount and pay

   • Engineers account for 50% of headcount across web3 companies surveyed. In particular, Web3 values specialized engineers, e.g. those with these keywords in their titles: smart contract, solidity, rust, protocol, web3, ZK, or cryptography.

   • Web3 engineers are also paid more than the general engineering market: Senior-level web3 engineers earn a 23% premium, and early-career engineers earn 27% more than their counterparts in the general market. (All comparison data via Pave.)

   • The next-largest employee groups, product and marketing/community, lag far behind engineers, with neither exceeding 10% of average web3 org headcount. The relative lack of sales-focused roles is a reminder that web3 is still in its early building phase.

3. Web3 startups are growing more geographically decentralized

   • Across our data set, more than half of employees are located outside of the U.S. 

   • 70% of companies surveyed are headquartered in North America, but 50% of them have employees across three or more continents. 

   • Employees in the U.S. earn 28% more than those outside of the U.S., and for engineers, that gap is 33%. (Interestingly, we did not see any strong correlation between engineer salary and specific location within the U.S.)

   • In our survey, 56% of employees hired in 2020 or before 2020 are based in the U.S. But for employees hired in the past three years (2021-2023), that falls to 46%.

4. Token compensation was a longtime staple of crypto firms—but that’s changing 

   • Web3 companies have been compensating employees in the form of tokens since 2013, and none (in our survey) bestowed equity compensation prior to 2018.

   • Fewer than 40% of employees polled have received equity, while roughly 50% have received tokens. But in 2023, those numbers flipped: new hires were three times more likely to receive equity than tokens.

   • While it may be too early to describe this as a trend, the data suggests that startups are experimenting with new incentive mechanisms that may be less reliant on tokens than in previous crypto market cycles. 

The data we’ve gathered suggest that crypto companies didn’t spend 2023 bemoaning the bear market. Rather, they used market limitations to further decentralize their operations, experiment with new compensation models, and add more engineers.

You can view open positions across Variant’s portfolio here. Special thanks to USV and The People Design House.

Requests for Startups: Crypto Projects We’d Like to See in 2024

As soon as we returned to the office in the new year, we started talking about the projects we’d be thrilled to fund in 2024. Here are our requests for startups (RFS), spanning consumer payments UX, DeFi tooling, gaming, betting and prediction markets, and much more.

We’re excited to see these areas get developed this year and beyond. And if you’re building in one of these areas—or working on other crypto ideas—please reach out: projects@variant.fund.

Crypto payments infrastructure

The opportunity to improve payments globally by leveraging crypto is large. Yet it remains challenging for users and developers to make payments with crypto and move between crypto and traditional payments rails. Within the crypto payments value chain there are many opportunities to eliminate friction for developers, users, and merchants.

Institutional-grade DeFi 

In the medium term, the distinction between crypto and traditional finance will disappear as much of the two systems converge. There remain opportunities to build highly performant financial applications and infrastructure that take full advantage of the capabilities of crypto and serve existing crypto users while over time onboarding new users, including institutions.

Consumer-focused trading with amazing UX

There’s a very large design space for apps that build a hyper-engaging experience around buying and selling crypto. Current and future users would benefit from having more options for how they interact with crypto. 

—Geoff Hamilton, investment partner

Information markets

Blockchains make two types of information markets significantly easier to create: markets to access existing information and markets to create new information. The former is about pricing access / removing information asymmetries; an example might be paying for attestations about selective consumer behaviors or demographics. The latter focuses on making previously unobservable information observable via unique aggregation of existing data or mechanisms to facilitate new rates of exchange. Examples in this category may look like novel structures for pricing risk, participation in onchain simulations, or prediction markets with real liquidity. The financialization of information has already been seen in systems like Friend.tech’s keyholder rooms, Polymarket, and Arkham’s Intel Exchange as a new way to assign value to information that has previously been difficult to uncover.

—Alana Levin, investment partner, and Jack Gorman, data scientist

Product-led payment apps, especially experiments with micropayments

These would be apps where leveraging crypto rails creates an opportunity to access a new or expanded market: a global audience that would normally be priced out by currency conversion fees, a large set of users who have lower willingness to pay than traditional subscribers (but make up for it in volume), etc. It could also look like something as simple as a reinvention of movie tickets with crypto rails under the hood.

New namespaces

Subdomains in particular feel underutilized. These are digital resources with verifiable ownership. Issuing subdomains from a trusted party (e.g. a parent organization) can help prove an entity’s legitimacy. Charities are a prime example: the FTC estimates that hundreds of millions are lost in charity fraud each year. A trusted issuer granting verifiable subdomains to registered charities could create a useful log of which organizations are actually legitimate.

—Alana Levin, investment partner

Privacy infrastructure

Privacy infrastructure is in an extremely early phase, still being built. The category is exciting from its sheer size. I firmly believe the majority of onchain state will be private in the long run, as it introduces advantages for market efficiency, security, and consumer preferences. Solutions leveraging FHE, ZK, MPC, and TEEs all come with different sets of trade-offs, making each ideal for different sets of applications. The design space at the infrastructure layer is vast, and the opportunity set is massive.

Uniswap V4 hook-enabled marketplaces

One of the most exciting new design spaces in DeFi has clearly emerged: Uniswap V4 hooks, which are plugins for designing pools with unique features and functions, such as new auction mechanisms, fee designs, and much more. Onchain and offchain liquidity is becoming increasingly blurred with the release of intents-based trading protocols such as UniswapX. Thus, hooks are becoming the new frontier of mechanism design in DeFi; they’re an effort to make onchain liquidity more competitive with CEX liquidity, which DEX traders can now tap into. 

—Derek Walkush, investment partner

Attention betting apps

Top creators like Mr. Beast create videos with views that rival the eyeballs of NFL games. Fantasy games and betting already exist around sports, but now social media and players of “the great online game” (e.g. creators) are large enough to have their own betting and prediction experiences. Think of it as sports betting for social media, on crypto rails. 

Real-world MMORPGs 

Stepn showcased the potential of crypto lifestyle games that leverage mobile-first web2-esque experiences, gamified IRL activity (e.g. running), and subscription-based assets (e.g. degradable sneaker NFTs). However, Stepn had flaws—the game was mostly single player, used complex tokenomics, and was overly financialized. There’s room for new types of real-world games around social habits that combine incentives and verifiable offchain actions.  

Onchain AI agent marketplaces

As crypto AI agents become more complex, developers will design agents that perform specific tasks. Rather than building an agent that has to know how to do everything, it will be easier for general agents to buy services from other specific agents. Marketplaces for crypto AI agents will allow people to purchase targeted agent services or trade trained consumer app agents within platforms or games (e.g. Parallel Colony NPCs, ASM brains, Frenrug, etc).

—Mason Nystrom, investment partner

Onchain reputation systems

While blockchains are trustless systems by design, it’s still very difficult to trust the various actors onchain. I see a large opportunity to build a reputation system that leverages onchain data to help us trust the contracts with which we interact and the participants with which we engage. A reputation system not only can easily prevent bad actors such as scammers or airdrop sybil attackers, but can also reward good behavior onchain, which can be leveraged in areas like under-collaterized lending or freelancer markets.

—Jack Gorman, data scientist

A Tale of Two Cryptos: Speculation vs Decentralization

Jesse Walden

Nearly a decade into smart contract platforms, many are huffed that as of late 2023, the most successful crypto products still feature crypto as the “what,” rather than the “how.”

Products where crypto is the “what” revolve around assets as investments: users buy, earn, trade, lend, borrow, lever assets including internet money, memecoins, and NFTs in hopes the number will go up. Fortunes are made and lost, sometimes quickly. The extremes are celebrated internally in crypto by self-proclaimed “degens” and derided externally by the establishment.

Many are disappointed that there has not been more innovation beyond crypto assets as investments, but this class of products has incredibly strong product-market fit, and I think that trend is likely going to intensify and grow. I’ll try to explain why I believe that; the reason is nuanced and also under-appreciated.

Our thesis at Variant is that the next generation of internet networks will turn users into owners—specifically asset owners. The internet enabled everyone to become a publisher, and similarly, crypto enables everyone to become an asset owner, and therefore, an investor. You don’t need capital to invest, you can invest your time or work by producing art, running machines, or doing physical work.

Through this lens, crypto can be viewed as the “democratization of investing.” Robinhood did it for stocks. Crypto does it for many other forms of internet-native value: money, digital art, memes, and early-stage technology projects.

Both in and outside of crypto, the democratization of investing has materialized in the most spectacularly speculative ways, giving credence to the saying “the most entertaining outcome is the most likely.” GameStop, Dogecoin, Bonk, Dogwifhat. What is going on?

The recent movie “Dumb Money” attempts to capture the cultural milieu underlying this trend. It offers a view into the world of modern retail investing that is marked by online accessibility, social media’s influence on information cascades, David vs. Goliath mentality, and a chance to get a piece of the action.

To the establishment, this kind of speculative investing seems like a joke, or maybe a weird form of entertainment. For participants, it’s a lottery ticket, a movement, a team sport played with friends online, or some combo thereof. Like all games, there is an expectation of winners and losers. And there are cheaters who try to gain unfair advantages (this should be refereed.)

I ask every crypto entrepreneur I meet how they got started in crypto. The most common story I hear is that they got started by making a speculative investment, usually BTC, ETH, ICOs, DeFi summer, or NFTs. And I’ve heard countless stories of people who made their first “real” money this way. That resonates, because that’s my story too. For many entrepreneurs, myself included, those early investments were life changing—they went from having little or no savings to having some, a cushion to take another risk.

And suddenly, they were also investors on the ground floor of some technologically optimistic project or community. That initial investment catalyzed their interest in the underlying technology or ideology, and many took jobs in crypto, or founded startups. Often, the investment didn’t work out. But nowhere else could anyone who was simply paying attention get that kind of access to bleeding edge financial opportunity.

At the extreme, memecoins still represent the same prospect to people who are paying attention today. The prospect of participating in economic growth is what has drawn in so many entrepreneurs and users—and it’s important because some portion of those users learn from those experiences, to think, and act, like investors. It often starts with things that look like toys (or dogs) but drives towards a serious shift in psychology, where money, effort, or skill are honed to contribute more seriously to the space. Many people also get hurt in the messy, volatile free market process. But despite that, speculative investing continues to drive crypto’s growth and in turn, technical progress towards non-speculative use cases.

Variant’s vision for crypto is a more equitable internet; the mission is to make a billion users into owners. Its a long term, ambitious goal. I believe the path there is forged by this cultural shift that is already underway, toward more users thinking like investors, and wanting to own things they believe in and know because they use them. That means embracing memecoins like we embrace memes: as part of internet native culture and an invitation through the front door to investing/using/contributing to projects that have legs (maybe four).

In late 2023, the speculative side of crypto is once again the game on the field. It has the most activity, users, and attention. In parallel, permissionless rails continue to develop and enable innovation around non-speculative use cases. Its not a question of if, but when the latter will make a dent that will validate the speculative fervor around the former.

Avoiding the speculative reality can seem “high status,” even in failure, while embracing speculation is considered a “low status” path to success. The reality is more nuanced: speculation can be a powerful tactic to get users through the front door and invested in the success of a project, and the space at large; it’s not only an end, it can also be a means.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

It’s hard to succinctly summarize 2023. A year that began with such negative media attention on crypto is ending with renewed enthusiasm for web3. It’s also ending with buzz and debate over the use of points in crypto apps, and Li has some new thoughts on that topic below.

Crypto startups spent the year building, independent of external noise. And we spent it working to support them. 

Here is what we wrote, read, and invested in this year.

—Dan Roberts, Editor in Chief

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Lessons on Points Programs for Crypto Apps

Li Jin

Li riffs on the sudden topic du jour in crypto: points. They have the power to build an engaged user base, but beware of what kind of users you’re attracting with the promise of points.

Our 5 most-read Variant posts from 2023

1. Li Jin & Jesse Walden: Progressive Ownership: A Model for Application Tokens

The application layer doesn’t yet have a proven model for using tokens to grow networks. So, Li and Jesse created a new framework for token distribution that builds on progressive decentralization while hopefully avoiding many of its drawbacks. 

2. Mason Nystrom: DePIN and DeREN: Toward a Better Classification of Decentralized Infrastructure Networks

There’s not one type of decentralized infrastructure network, Mason wrote in July, but two: physical infrastructure networks and resource networks. Read this piece to understand where wireless, storage, compute, and other networks fit on this spectrum.

3. Alana Levin: App-Specific Rollups: A Trade-Off Between Connectivity and Control

Ethereum app teams face multiple decisions when determining whether to launch their own rollups. Alana looked at where gaming, social, marketplace, and other apps sit on the continuum between connectivity and control.

4. Li Jin: Web3 Social Networks: The Case For and Against Financialized Approaches

When thinking about how to build crypto-powered social networks, Li sees two main paths: asset-first or ideology-first. In this piece, she explained and explored both.

5. Jesse Walden: The Interplay Between AI Abundance + Crypto Scarcity

Robbie Barrat produced one of the first-ever onchain AI-generated artworks. Jesse wrote about its significance to web3 and the broader excitement around generative art NFTs.

7 essays we loved from industry peers

We welcome your input and replies on Twitter.

1. Eugene Wei: How to Blow Up a Timeline

Li said: “Great dissection of why Twitter feels meaningfully different now -- down to the mechanics of its algo changes (from a follower graph that proxied interest, to a more TikTok-like feed that emphasizes virality).”

2. Jacob Phillips at Perennial Protocol: A deep-dive on fees in DeFi derivatives

Geoff said: “Good read on DeFi derivatives from the @perenniallabs team. Traders and LPs take note!”

3. Trace at Figment Capital: Revisiting the Application Layer

Alana says: “One of the best pieces I read all year.”

4. Dcbuilder.eth at Worldcoin: The Future of Digital Identity

Jesse said: “Great map of the digital identity space and enabling technologies.”

5. Morgan Housel at Collab Fund: Everything Is Cyclical

Mason says: “Sometimes crypto seems uniquely cyclical. But if you look deeply enough, everything is cyclical.”

6. Paul Frambot at Morpho: The Two Paths Ahead For DeFi: Decentralized Brokers vs. Protocols

Derek says: “Great framework for a trend toward lower-level modular DeFi protocols.”

7. Joel John and Saurabh at Decentralised.co, On Airdrops

Jack says: “One of my favorite reads this year. Explains why airdrop farming is the way it is and what the future of airdrops may look like.”

5 new investments we announced this year

Modulus: Zero-Knowledge Machine Learning for Decentralized Protocols

Doubling Down on Botto: Because Everyone’s a Critic

Blockaid: Protecting Users Onchain

Alluvial: Liquid Staking for Institutions

Turnkey: Removing Barriers for Crypto Developers

See you in the new year.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

Don’t call it a comeback: although many have been quick to write off NFTs, the numbers tell a different story. Variant’s resident data scientist Jack Gorman (aka J.Hackworth) has uncovered data showing NFT interest has actually grown this year, and is primed for broader adoption. The rise of Ethereum layer 2s like Optimism, Base, and Zorachain is a big reason why.

Elsewhere, Mason Nystrom explains why humans will soon be using AI bots as an entrypoint into the crypto economy, and Alana Levin makes the case for putting more apps onchain.

Enjoy the arrival of the holiday szn, and while you’re thinking about presents, let us suggest you gift this newsletter to your fellow crypto builders and onchain pals.

—Dan Roberts, Editor in Chief

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New Signs of Life for NFTs on Ethereum & L2s

Jack Gorman

To the outside world, NFTs are dead. 

When you look at secondary-market sales data—the most commonly cited metric—it's hard to argue. Since the NFT market peak in January 2022, secondary trading volume on Ethereum has fallen by ~90%, and the number of distinct addresses buying an NFT on secondary platforms has fallen by ~82%. September 2023 saw the lowest NFT trading volume and number of buyers on Ethereum since June 2021.

But the secondary market (which has been picking up in recent weeks) only paints a partial picture. When you look elsewhere, there are new signs of life for NFTs. 

One encouraging indicator of NFT adoption is the growth in both creation and collection across Ethereum plus layer-2 solutions such as Base, Zora, and Optimism. For collecting, the number of distinct addresses minting paid NFTs over time has continually grown, suggesting there are new participants minting onchain.

The growth in collecting activity has been accompanied by a rise in new NFT contracts on chains like Zora and Base, driven by an array of creator tools that make it easier to create NFTs.

While there is certainly some spam and airdrop farming in these numbers, these stats should still be encouraging. 

One possible explanation for the growth in distinct addresses and new contracts is a simple Occam's Razor view: As more projects, use cases, and art are being created, more cryptonatives are engaging in NFTs. And by lowering the overall financial costs of NFTs, more non-cryptonatives will join in the coming waves.

We may also be witnessing a shift in the perception and use cases for NFTs. In the past, rarity, exclusivity, and power-user trading were defining factors of the NFT market, making it harder to onboard more users to crypto. Now, the proliferation of NFTs in various formats and use cases beyond high-end collectibles presents a new opportunity to engage users and promote widespread adoption…

Read the rest of the post on our site. (We can’t fit the entire post in this email because of all the great charts—make sure to click through!)

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More fresh writing from the Variant team

Mason Nystrom: Crypto AI Agents: The First-Class Citizens of Onchain Economies

As more applications and protocols leverage AI agents, humans will use them as a conduit for accessing the crypto economy.

Alana Levin: What Onchain Apps Enable

When it comes to onchain apps, the question shouldn’t be whether blockchains are necessary but rather whether they’re helpful.

Li Jin: Love vs. Fame: A Framework for Social Applications

Social apps fall on a spectrum: love products are about deepening connections; fame products prioritize discovering new content from creators.

Thinking in public

We welcome your replies on Twitter and Warpcast. Click images to view on Twitter/X.

Jesse wants to uncomplicate how we think about app rollups:

Li views Spotify Wrapped as an example of where web3 can borrow from web2

Jack looked into what’s driving the growth in stablecoin supply

See you next issue. And if you read this in your inbox via Substack, remember you can also read on Mirror, where you can collect this issue as an NFT.

Find all of our writing here

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated. Variant is an investor in Zora.

In January 2020, Jesse published the influential Progressive Decentralization Playbook for building crypto apps. In the years since, through the ICO and airdrop eras, we’ve seen a proliferation of crypto apps—but have yet to see a winning model for how those apps can distribute tokens to their users in a way that achieves sustained growth and retention. Now Jesse and Li think they’ve landed on one: progressive ownership.

Read on for the full playbook. Forward it to friends, share it on social, and don’t be shy with your feedback.

Scroll to the bottom here to see our other recent writing—we’ve been doing a lot of it.

—Dan Roberts, Editor in Chief

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Progressive Ownership: A Model for Application Tokens

Li Jin, Jesse Walden

We founded Variant on the thesis that the next generation of the internet would transform users into owners through tokenization. Utilizing tokens as a user incentive has worked exceptionally well for bootstrapping infrastructure networks like Bitcoin and Ethereum. However, the application layer has yet to see a proven model for using tokens to grow networks. Rather, there are many examples where distributing tokens has actually impeded sustained growth and retention by attracting more speculators and mercenaries than genuine users, obfuscating product-market fit. 

Because of these failures, many dismiss the use of tokens for applications as a category error, but we don't see it that way. Instead, we believe the answer is to keep iterating token design toward a more bottom-up and opt-in ownership distribution model that we call “progressive ownership.” This approach focuses on deepening loyalty among users of applications with product-market fit.

In this framework, we outline previous eras of token distribution mechanisms—PoW mining, ICOs, and airdrops—and their key lessons and problems. We then propose high-level steps and tactics for a new token distribution model, which we believe could sustainably grow applications with early product-market fit. By applying this playbook, apps can leverage user ownership to deepen existing user loyalty, paving the way for further growth and retention.

Three eras of token distribution

Crypto has undergone three major eras in token distribution models:

1. Proof of Work (2009–present): hardware formation

2. ICOs (2014–2018): capital formation

3. Airdrops (2020–2023): bootstrapping usage

Each model lowered the skin in the game for participants while broadening access, so each era naturally coincided with a new wave of growth and development in the space.

1. Proof-of-work era (2009–present)

Bitcoin pioneered the idea that a permissionless network could be operated by anyone willing to run software on their machines (“mining”) in exchange for tokens representing ownership in the network. Miners who devoted more computational power had a greater chance of earning rewards, fostering professionalization that required meaningful investment in computing resources.

The PoW era showed token incentives can be very effective at bootstrapping supply in networks where contributed value can be quantified, e.g. computing power. Critically, the capital asset (hardware) is distinct from the financial asset (BTC), which forces miners to sell the financial asset to cover their costs. As specialized hardware became a necessary cost, miners had to have more skin in the game, but this dynamic also edged out ordinary users.

2. ICO era (2014–2018)

The ICO (initial coin offering) era marked a significant departure from the proof-of-work distribution model: projects raised capital and distributed tokens by selling them directly to prospective users. This approach theoretically allowed projects to bypass intermediaries like VCs and bankers and reach a broader range of participants who could share in the upside of products and services they would use.

The promise of the model attracted entrepreneurs and investors and incentivized a wave of speculative interest. In 2014, Ethereum was partly bootstrapped through an ICO, serving as a blueprint for many projects in subsequent years, including large 2017-2018 ICOs such as EOS and Bancor. But the ICO era was rife with fraud, theft, and lack of accountability; and the failure of many ICO projects, plus intense regulatory scrutiny, brought about its quick decline. 

ICOs highlighted the capabilities of blockchains for permissionless, global capital formation. But this period also underscored the need for more thoughtful token design and distribution models that prioritize community alignment and long-term development, not just capital provision. 

3. Airdrop era (2020–2023)

In 2018, an SEC official suggested that BTC and ETH were not securities because they were “sufficiently decentralized.” In response, many projects designed tokens that incorporated governance rights and retroactively distributed them broadly to their users, with the aim of achieving sufficient decentralization.

Unlike ICOs, which distributed tokens for monetary investment, airdrops rewarded users for their historical usage. The model kicked off “DeFi Summer” in 2020, which popularized liquidity mining (supplying liquidity in a financial marketplace to earn tokens) and yield farming (selling the earned tokens as short-term gains).

While airdrops were a shift toward a more user-centric and community-driven ownership distribution model, very little skin in the game was required from users, and most airdrops resulted in users converting ownership to income by selling the majority of their tokens upon receipt. 

Many projects leveraged airdrops before establishing true product-market fit. Tokens drew in bots and short-term, mercenary users driven solely by incentives, rather than putting ownership in the hands of users who were aligned with the long-term success of the project. The rush to claim and sell tokens obfuscated signals around product-market fit and contributed to boom/busts in prices.

A number of projects that rushed out tokens also saw their founding teams step back in an attempt to comply with an ambiguous regulatory litmus test of sufficient decentralization. That left decision-making to governance referendums that most tokenholders did not have the time or context to fully understand. Before reaching product-market fit, and even afterward, projects need founders to continue to iterate quickly. Airdrops often proved to be a mismatch between  growth strategy and a startup’s organizational execution.

We think the primary lesson from the airdrop era is that the pursuit of sufficient decentralization guided many projects away from product-market fit. Instead, token distributions should be more thoughtfully targeted with a heavier weighting to power users, after early product-market fit is validated.

Each era of token distribution spurred growth and development of applications. Credit: inspired by app/infrastructure cycles [USV]

A novel token distribution framework: Progressive ownership

Progressive ownership builds on progressive decentralization, which advised that tokens are not a substitute for product-market fit. This approach employs economic incentives in degrees to increase user loyalty and retention, step-by-step, culminating in ownership. Under this model, users are incentivized with revenue share income (e.g. ETH or stablecoins) but can decide to trade individual income for tokens representing ownership of a proportional share of the community’s revenue. 

This has advantages for users, who can move fluidly between income and ownership, with fewer steps than the previous default of converting tokens to income. It also enables them to tune their economic participation to the level of risk and engagement appropriate to their circumstances.

And there are advantages for builders, who can leverage revenue share incentives to drive growth, build loyalty, retain control, and iterate quickly without being distracted by sufficient decentralization. Further, founders can still work toward paths to realizing liquidity via tokens, while trying to mitigate the risks associated with broad, untargeted token distributions. 

Progressive ownership is only an option for projects that have early product-market fit and revenue to share. While the current scale of revenue among most crypto projects is relatively small, the list of projects meeting this criteria is growing. Optimism has logged roughly $30 million in revenue year-to-date. MakerDAO accrued $16 million in fees from the protocol in October and has seen 25% compounded monthly average revenue growth in the past year. And ENS (Ethereum Name Service) has generated $1.1 million in revenue in the past month. 

Progressive ownership shifts token distributions from an opt-out to an opt-in model, which has the potential to engender stronger loyalty and network effects due to more skin in the game. As committed users level up into ownership, they are more economically aligned with the success of a network and incentivized to encourage others to join, which creates a virtuous growth loop. Users or developers who opt into ownership are more likely to skew long-term, as is the case with startup employees with stock options.

Conversely, in the airdrop model, loyalty can be eroded as most users choose to sell and convert tokens into income, creating downward price pressure. Studies have shown that experiencing losses as a shareholder can induce lower customer satisfaction and loyalty toward the company. By making ownership opt-in, networks can mitigate these boom-and-bust cycles and their ensuing erosion of user goodwill.

The playbook

Progressive ownership involves 3 steps:

1. Build products that serve users' needs

2. Use onchain revenue sharing to drive growth, retention, and defensibility

3. Allow power users to level up into economic ownership (e.g. trade income for tokens)

1. Building products that serve user needs

This is the hardest step. The foundation of the progressive ownership model begins with developing products and services that serve users in novel ways. As Li recently wrote: "Successful startups offer a step-function improvement in enabling people to achieve a core need." 

By meeting these needs, which range from income to esteem, apps can find product-market fit—and even cultivate psychological ownership.

2. Using onchain revenue share for growth, retention & defensibility

Projects can employ onchain revenue share models that allow users to share in the success of a product/service, deepening their interest and commitment.

A primary example is Zora's protocol rewards, which allocate a portion of earnings to creators and developers for driving NFT mints. This approach not only encourages user retention but also bolsters defensibility.

Some projects stop here—and indeed, this is a canonical playbook of web2 companies, ranging from Substack to OnlyFans to YouTube to X/Twitter. Revenue share is a powerful draw and has obvious scaling effects.

But the reason to go further than revenue share is that economic ownership can more meaningfully align users with the long-term success of the platform rather than conditioning them for short-term gains. Users with economic ownership would be more attuned to how their contributions fuel the platform’s growth. This mirrors the age-old Silicon Valley playbook for incentivizing startup employees.

3. Allowing power users to level up into ownership

Finally, the most loyal power users can opt into ownership via tokens that comprise both economic and governance rights. This transition is not automatic and passive, but something users choose. For example, the most valuable users as measured by revenue generated could be given an option to either 1) earn revenue share in the form of ETH/stablecoins, or 2) take a proportional token distribution in the project’s native token. 

In choosing the latter, a user is trading some of their individual income for a portion of the community’s total income. If the network grows, the community’s income will grow, and the token should enable them to participate proportionally. Further, the token might offer governance over key protocol parameters, such as fee or revenue share variables, to ensure long-term alignment.

There are many more implementation details to work out. (Should users have to stake their tokens to earn platform fees? Should tokens be subject to vesting?) But without getting too deep in the weeds, a few hypothetical examples:

Coming back to Zora, about 1,008 ETH in protocol rewards has been distributed to date. Those rewards are revenue-share splits, mainly distributed to NFT creators who drive minting activity, but also developers and curators. In the progressive ownership model, top Zora revenue generators could choose to claim hypothetical Zora tokens instead of ETH protocol rewards. How many creators and developers would opt to do that? Probably a small percentage, but those who did would have meaningful skin in the game and potentially become even more active and incentivized to grow the network. 

Another hypothetical is Farcaster, which charges roughly $7 in annual fees to individual users to store data on the network. Imagine if the protocol shared that revenue with developers building clients that drive attention. Developers could then choose whether to pass that value on to end-users, akin to a rebate. Alternatively, developers could convert a portion of their revenue share into protocol tokens that give them exposure to growth in the ecosystem and governance over key protocol parameters.

Precedent in web2 models of loyalty

The progressive ownership model closely aligns with business researcher James Heskett's  ladder of customer loyalty (2002), which comprises four stages: “loyalty (repeat purchase), commitment (willingness to refer others to a product or service), apostle-like behavior (willingness to convince others to use a product or service), and ownership (willingness to recommend product or service improvements).” 

Progressive ownership recognizes that customer loyalty requires ever-deepening levels of psychological ownership. As users ascend the ladder from income to tokens, they might feel an increasing degree of psychological ownership, culminating in more vocal advocacy—acting like an owner of the product and taking on more responsibility for its continued success.

This emotional connection can be nurtured through financial levers (revenue share) as well as product elements (personalized experiences, interactive features, and user input), making users more inclined to become long-term stakeholders. 

Leveraging economic ownership to entrench user loyalty also aligns with research from the public equities world, which suggests that stock ownership can boost brand loyalty among existing users. As Li wrote:

A Columbia Business School study found that in a fintech app where users selected certain brands or stores to receive stock from once they shopped there, users' weekly spending jumped by 40% at those brands… Users intentionally selected their stock holdings and invested time shopping at those brands in order to receive a stock grant.

Transitioning to a new era of token distribution

The progressive ownership playbook represents a significant departure from previous eras of token distribution. Whereas ICOs and airdrops were primarily intended as bootstrapping tools, they often proved ineffective at motivating organic users. As a result, entrepreneurs were often led astray from finding product-market fit.

In the progressive ownership model, revenue sharing spurs growth and entrenches loyalty, culminating in ownership that users proactively choose, ensuring that only the most deeply committed users become stakeholders. This paves the way for a community of dedicated advocates who are invested in the long-term success of the network. While there will likely be unforeseen challenges with this model, it aligns closely with precedent examples of economic ownership enhancing loyalty.

How progressive ownership relates to the compliance framework of sufficient decentralization is the subject of another post. The industry will need novel compliance arguments that enable teams to continue building great products while leveling up power users through ownership. That is work we plan to push forward at Variant. 

Innovation in token distribution has catalyzed spurts of new growth and development in the ecosystem, and the playbook is very much still being written. We’re excited to see what future iterations on token distributions emerge. If you're thinking about creative ways to incorporate/distribute tokens into what you’re building, we'd love to hear from you.

Thank you to Nathan Schneider, Joel Monegro, Liam Horne, Jackson Dahl, Jacob Horne, Chris Dixon, Fred Wilson, Mario Laul, Ben Leventhal, Joey Santoro, Scott Moore, David Phelps, Benny Giang, Lakshman Sankar, Henri Stern, Cooper Turley and Variant team members Caleb Shough, Alana Levin, Geoff Hamilton, and Jack Gorman for feedback that strengthened this piece.

If you’d like to work on projects building in this space, fill out our talent form.

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More fresh writing from the Variant team

Geoff Hamilton: The Next Big Thing in Stablecoins

Why we’re so excited about the potential of yield-bearing stablecoins.

Mason Nystrom: The Post-Mint Problem

Most NFT apps focus on getting the user to mint the NFT. Very few focus on what comes after.

Derek Walkush: Embracing Speculation as a Go-To-Market Approach in DeFi

Some of the most prominent DeFi success stories achieved rapid product-market fit by enabling financial speculation.

Li Jin: Love vs. Fame: A Framework for Social Applications

Social apps fall on a spectrum: love products are about deepening connections while fame products prioritize discovering new content from creators.

Find all of our writing here

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated. Variant is an investor in Zora.

For the last three months, everyone at Variant had the pleasure of working closely with a special group of early-stage crypto founders as part of our first ever Variant Founder Fellowship (VFF). We wrapped the program in September with two incredible Demo Days, and we’re putting the spotlight on our ‘graduates’ in this issue.

Read on to learn more about the fellowship, meet the fellows and their exciting projects, hear some of the wisdom they received from our stacked speaker lineup, and see the special graduation NFT by artist Ix Shells. Know a crypto builder who needs to see this? Forward this newsletter.

—Dan Roberts, Editor in Chief

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Meet our first VFF cohort

Li Jin, Medha Kothari, Alli Pope

Variant is always looking for ways to catalyze more innovation and exploration in crypto at the early stages. 

While there are many startup accelerator programs out there, we felt early-stage web3 founders needed a tailored curriculum that deals with topics unique to them, including incentive design, community building, and protocol architecture. 

Thus, the Variant Founder Fellowship (VFF) was born: a 12-week, cohort-based educational program for early-stage founders in crypto. 

From nearly 400 applications, we welcomed just 24 projects. These founders spent the summer putting their business plans through the paces, from crafting go-to-market strategies to mapping out back-end infrastructure. 

Our extensive Variant Network meant the fellows had access to exclusive guest lectures and firesides from some of the top players in the space: Uniswap founder Hayden Adams went in-depth about building at the product and protocol levels; former Polygon president Ryan Wyatt spoke candidly about business development tactics; former Eventbrite chief product officer Casey Winters unpacked best practices from web2 growth and onboarding; and half a dozen prominent founders dove into emerging infrastructure considerations. 

VFF fellows brainstormed with each other, the Variant investment team, and our portfolio founders, receiving feedback that helped them reevaluate and strengthen their projects.

The experience culminated in our first-ever VFF Demo Days on September 6 and 7. Below, you can watch each project’s demo and learn more about what they’re building.

If you’re interested in applying to join our next VFF cohort, stay updated here.

Congrats again to our 2023 fellows! 📣 Roll call: Capsule (Stephanie Carroll, Frankie Li); Chroma (Jack Longarzo, Tim van Scherpenzeel, Aaron Xie); Clave (Doğan Alpaslan); Dawn (Isaac Rodriguez, Tom Waite); Digito (Amhed Herrera); Doormat (Trevor Aron); Forum (Peter Ferguson, James McComish); Future Primitive (Benny Giang); Hashcurve (Jack Kim, Kristof Lommers, Boris Skidan, Viktor Smits); Heimdall Labs (Nikhil Raghuveera, Jesse Sawa); Mezzanine (Graham Novak); Neynar (Rish Mukherji, Manan Patel); Nosh (Gleidson Gouveia, Mike Perhats); Pathfinder (Cody Born, Isaac Wooden); Ponder (Kevin Koste); Poolshark (alphakΞY); Probably Something (Natalie Meurer, Beth Nakamura); Rocko (Jason Camp, Thomas Harrison); Seam (Katy Atherholt, Nick Confrey); Shield (Emmanuel Udotong, Isaiah Udotong); Studio X (Pooja Nagpal); Troops (Nico Gallardo, Kevin Tjiam); Turbo (Josiah Savary).

Watch all their Demo Day presentations here.

And check out the cryptonative graduation gift our fellows received: this custom NFT by the artist Ix Shells. Stay tuned to our Mirror for a Q&A with the artist coming soon.

Read this next

Actionable advice from our VFF speaker sessions

Uniswap Founder Hayden Adams: Product vs Protocol

Uniswap founder Hayden Adams on why protocol builders should tackle UI themselves, when to add new features, and how to release an “anti-hype” project.

Applying Lessons from Web2 to Unlock Web3 Product Growth: Casey Winters

Pinterest, Grubhub, and Eventbrite alum Casey Winters discusses product-market fit, growth loops, and onboarding—and how to apply them in web3.

What Brand Marketing Can and Can’t Do in Web3: Ryan Wyatt

Former Polygon Labs President Ryan Wyatt speaks candidly about the advantages and pitfalls of brand marketing partnerships in web3.

Rethinking Decentralized Trust: EigenLayer’s Sreeram Kannan

EigenLayer's Sreeram Kannan talks about creating infrastructure around decentralized trust, what it takes to hyperscale, and why new L1s don’t solve every problem.

Denis Nazarov Holds Up a Mirror to Onchain Brands

Mirror CEO Denis Nazarov explains how web3 brands can use NFTs to turn passive audiences into active communities.

Shane Mac Has a Message to Deliver (via Your Blockchain Wallet)

XMTP co-founder Shane Mac shares his vision for the web3 wallet as a messaging hub.

Recruiting and Hiring for Early-Stage Web3 Startups: OpenSea’s Calder Zwerling

OpenSea's Calder Zwerling shares how to take your recruiting and hiring process from stressful to strategic.

Case Studies in Psychological Ownership: Li Jin

Variant's Li Jin argues that web3 apps must make their earliest users feel like owners—not just tokenholders.

Watch more speaker sessions here.

Thinking in public

We welcome your input and replies on Twitter.

Jesse is pondering how protocols can share revenue with users:

Alana is thinking aloud about the Nouns fork and potential challenges:

Mason is categorizing the creator economy:

See you next issue. And remember you can also read this newsletter on Mirror, where you can collect this issue as an NFT.

Subscribe now

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

Call it hot DEX summer? Okay, maybe not quite, but even amid a bear market, DEXs have continued to demonstrate their resilience, climbing in active usage. For our new issue, our in-house data scientist Jack Gorman (you may know him on Crypto Twitter as J.Hackworth) is diving into why that’s been the case. 

Meanwhile, five other Variant investment partners just returned from EthCC in Paris, and they’re bringing the buzz back to you. Stay cool during all this heat, and remember to forward this newsletter to your fellow crypto builders.

—Dan Roberts, Editor in Chief

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How DEXs Are Demonstrating Their Resilience

Jack Gorman

Amid the meltdowns and tumult of the ongoing bear market, decentralized exchanges have continued to operate as designed—and have even managed to capitalize on the prevailing volatility. 

While DEXs date back to 2014, 2020’s “DeFi Summer” marked a pivotal moment. DeFi tokens mooned and DEX metrics soared, experiencing a compounded monthly growth rate of 47% in monthly volume and 26.4% in active users from June 2020 to June 2021.

As everyone in crypto is well aware, the party eventually stopped. After hitting its second-largest month ever in December 2021 at ~$123 billion, monthly DEX volume crashed to a bottom almost one year later of ~$28 billion.

Despite the drop, DEXs continued to do exactly what they were programmed to do: provide permissionless trading. On days when centralized entities (like FTX, BlockFi, Celsius, and Voyager) were collapsing, DEXs saw large spikes in trading volume and some of their biggest single trading days ever. (The SVB collapse and USDC depeg caused the largest single day of DEX trading volume with ~$19.7B in trading volume.)

2023 reversed the downward trend in volume: DEX volume on Ethereum saw an increase for the first three months, hitting a peak for the year in March at ~$85B. Volume has since decreased, but there are other indicators that DEX activity is on the rise. Fueled by new token launches, liquid staking tokens, and memecoins, active users and number of swaps have grown month over month an average of 11.7% and 7%, respectively, from December 2022 to June 2023. Another positive indicator: the ratio of DEX to CEX spot volume rose to 22% in May, the highest ever.

So, why the sudden rise in these DEX usage metrics? Many might point to the memecoin madness seen this past May. While that is certainly a large determining factor, it’s just one piece of a larger trend gaining steam.

Read the full post on our site

Read this next

More fresh posts from Variant

Geoff Hamilton: Building a Truly Scalable Lending Protocol: Morpho at EthCC

Morpho co-founder Paul Frambot lays out a radical path for scaling DeFi lending and teases the next generation of Morpho.

Jack Gorman, Derek Walkush: Why UniswapX Will Be Additive to the Uniswap Protocol

Based on how fat-head and long-tail token trades work on DEXs, UniswapX should be net good for the Uniswap protocol.

Mason Nystrom: DePIN and DeREN: Toward a Better Classification of Decentralized Infrastructure Networks

With the rapid expansion of decentralized infrastructure networks, it’s worth classifying them into two categories.

Jesse Walden, Derek Walkush, Caleb Shough: Alluvial: Liquid Staking for Institutions

Why we invested in Alluvial, a non-custodial liquid staking protocol that meets the needs of institutional investors, ourselves included.

Bonjour from EthCC

Variant investment partners share their reactions after a whirlwind EthCC in Paris.

Alana: “The conversations in Paris this year felt very infra-oriented, but it feels like a different part of the infra cycle than last year. A year ago, many of the conversations focused on scaling solutions. Now the meta is very much about infra in service of better UX (like abstracting complex transactions from the user, removing frictions in bridging, and improving security tooling). I find that really exciting; better UX should lead to better apps. The opportunity now is to ensure those UX-focused infra devs are connecting with app devs. I’m optimistic that if we can make sure that happens, we’ll soon see a wave of really delightful applications.”

Li: “I agree that the broader conference was more infrastructure and DeFi heavy, but that left a vacuum and hunger among the consumer builders that were present. I felt like there was an overwhelming demand for more consumer-focused events and programming. There was a view that being able to message people through wallets is very significant because it will open up an avenue that wasn't present before—both for businesses who can have a notifications channel, and for new peer-to-peer web3 social connections. There are also a lot of tailwinds behind web3 social and a lot of desire for something to work in that category. Everyone’s rooting for web3 social networks to succeed. There's a need for verticalized apps that give users a reason to want to own something: tokens themselves are incomplete as products, and need to exist in a context in which people value them. You need to build around a token and create a fuller product experience.”

Medha: “EthCC was buzzing, which was very refreshing to see during a bear market. I spent a lot of time at the MEV side events, and I’m excited to see the conversation is slowly shifting toward how MEV can be utilized by different layers of the stack, particularly the app-layer and wallets. Seems like there’s still a long way to go there from an educational perspective, but it feels like there is a strong appetite to learn. I also noticed Base had a large presence throughout the conference: lots of momentum, many activations, and lots of interest to build or partner with them. Finally, the most used word of the conference was 100% ‘modular.’ Every part of the stack is going modular in Ethereum. My biggest takeaway was that the space is extremely optimistic and focused on shipping.”

Derek: “I saw two narratives at the forefront at EthCC: re-staking, and specifically the ability for upstarts and other staking protocols to both capture value and carve out parts of the market for themselves; and discussion around the emerging field of intents, partially sparked by the UniswapX announcement.”

Geoff: “I attended a side event focused on stablecoins and came away very excited about the coming acceleration in growth for stablecoins and tokenized US treasuries. In talking with a number of teams building in these markets, I was impressed both by the pace of innovation and the pragmatic focus on bootstrapping demand. It was also striking to see the diversity of promising designs: some deriving yield from purely cryptonative sources and others integrating yield from ‘real world’ sources.”

Thinking in public

We welcome your input and replies on Twitter.

Jesse is wondering if we’re all over-emphasizing decentralization:

Geoff wants to know how FX stablecoins can scale:

Jack analyzed layer-zero usage as it related to new address creation on L1s and L2s:

Tina is moonlighting as a hitmaker on Sound.xyz. We are her biggest fans:

See you next issue. And if you read this newsletter on Substack or in your inbox, remember you can also read on Mirror, where you can collect this issue as an NFT.

Subscribe now

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

While we love art for the sake of art as much as anyone in the space (and have written a lot recently about the value we see in generative art NFTs), we also think very carefully about practical use cases of crypto tooling—both developer-facing and consumer-facing. 

In that spirit, we’ve got two smart features this issue aimed at builders: Alana Levin maps out a decision tree for how different apps can operate within the evolving rollup infrastructure; and Mason Nystrom offers a new path for using NFTs, tokens, and onchain identity data for better digital advertising.

Earlier this month, we welcomed the first cohort of the Founder Fellowship, our three-month accelerator program for builders; we’ll share selected content from VFF with you over the course of the summer.

Thanks for reading and subscribing.

—Dan Roberts, Editor in Chief

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App-Specific Rollups: A Trade-Off Between Connectivity and Control

Alana Levin

Two years ago, app developers faced a fairly simple choice when determining where they wanted to deploy their application: Ethereum, Solana, Cosmos, or maybe a few additional layer-1 chains. Rollups weren’t yet operational, and few had ever heard the phrase “modular stack.” The differences between the L1s (throughput, fees, etc.) were stark and relatively easy to grasp.

Today, the landscape looks quite different. App developers are faced with a much larger array of choices: L1s, general-purpose rollups (both optimistic and zk), advanced IBC infra, rollup-as-a-service providers, appchains, and more. With more choices come more questions, including: whether teams should deploy to a general-purpose rollup or build an app-specific rollup; if they pick a general-purpose rollup, then which one; if they go the app-rollup route, then which SDK/rollup-as-a-service to use; which data availability layer to select; whether EigenLayer can help; how to think about sequencers; and if there will even be a colored orb emoji within Optimism’s Superchain ecosystem left if they choose to go the OP Stack route. It’s overwhelming.

To narrow down the set of questions, this piece will take the framing of an app already deployed on Ethereum that wants to scale within the Ethereum ecosystem. Consequently, the focus will be on the decision tree that app teams face when determining whether to launch their own rollup, my hypotheses around which types of apps are particularly well suited for this infrastructure, and when I think we might hit the tipping point in adoption.

Read the full post on our website

‘This Protocol Is Brought to You By’: An Onchain Model for Web3 Advertising

Mason Nystrom

Crypto has always been reluctant to use advertising as a business model. 

Ads in general can stir up negative associations for many internet consumers. Web2 tech giants milk user data and serve it back to us in the form of super-targeted ads. Moreover, most smaller-scale individual creators haven’t been able to convert ads into a stable income, relying instead on subscriptions to make money online.

But advertising aligns the objective of broad product distribution with a viable revenue stream, making it one of the best monetization models out there. This is why social and search networks subsidize their platforms with ads, and top content creators leverage ads over subscriptions on platforms like Substack and Spotify. 

The open nature of crypto protocols breaks down traditional platform business models that rely on siloed data and user lock-in. Core elements of the web3 advertising stack are already emerging, including advertisers, ad protocols, marketplaces, and applications. As crypto platforms search for viable business models, the advertising model sits there, waiting patiently for its inevitable adoption.

Read the full post on our website

Read this next

More fresh posts from Variant

Mason Nystrom: Overcoming ‘Token Debt’

Token debt afflicts crypto protocols that have issued a token but must make significant changes down the road.

Li Jin: Web3 Social Networks: The Case For and Against Financialized Approaches

A framework for thinking about how to build crypto-powered social networks: asset-first or ideology-first. We explore both paths.

Caleb Shough: Adventures in Onchain Ownership

Crypto is fun. Here's how trying cool stuff onchain made me a real degen.

Jesse Walden: Libraries vs Networks

A new framework for thinking about the open, stateful networks crypto supports.

Alana Levin: Blackbird Makes Me More Excited to Dine Out

Blackbird gives restaurants tools to better understand their guests, while rewarding diners for their loyalty.

Thinking in public

We welcome your input and replies on Twitter.

Jesse is putting forward a thesis for protocol development:

(For a longer explanation, check out Jesse’s talk at Summer of Protocols.)

Geoff is wondering about lending protocol pain points:

Derek is seeing new trends around the unbundling of wallets:

See you next issue.

Subscribe now

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

Every day inside Variant, we talk through the latest trends shaping crypto and tease out new mental models. Now we’ll be sending those ideas straight to your inbox. Each issue will focus on a theme we’re thinking about right now, anchored by one smart take on the topic. For Issue 1, we’re taking a critical look at web3 social media at a time when everyone is talking about the new challengers to Twitter.

Writing has always been in Variant’s DNA. That’s part of what attracted me to join the firm last month after 13 years in business journalism (12 of them covering crypto). Jesse and Li are widely followed and admired for their public thinking and idea sharing. Jesse’s January 2020 playbook on progressive decentralization (at a16z) and July 2020 treatise on the ownership economy have stood the test of time; Li’s writing is all over the web, from her personal newsletter to guest columns at Harvard Business Review and Fortune.

The rest of our investment team and strategic advisors, all crazy smart and super plugged-in, have written valuable thought leadership on everything from NFT MEV to wallet unbundling to sufficient decentralization in token design.

To commemorate the newsletter launch, we’ve commissioned an art piece by Giorgio Balbi—subscribe through Mirror to receive it. You have until June 11 to mint! Or you may certainly choose to stick to Substack.

Thanks for reading and subscribing.

—Dan Roberts, Editor in Chief

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How to think about web3 social networks

Li Jin

I see two main approaches to building in web3 social: asset-first or ideology-first. 

The asset-first approach focuses on users' desire for profit, unlocked through digital ownership, which places money at the forefront of the platform. Financialized features allow users to spend, collect, and earn within the network. 

BitClout fit squarely in the asset-first approach and enabled users to bet on the trajectory of prominent profiles through trading creator coins, creating a speculative social game at the center of the network. Lens is another example of an asset-first web3 social network, where users’ posts are instantiated as NFTs that can be collected and purchased, with the top creators earning upwards of $90,000 from collectible posts. PFP NFT communities can also be thought of as asset-first social networks: interest groups that are incepted through collecting assets. In all of these instances, users’ motivations for participating aren’t purely intrinsic, but involve, at least to some degree, the potential for financial gain. It’s like collecting stamps or baseball cards: it’s fun and enjoyable, but also, what if they could be worth something someday? 

In contrast, the ideology-first approach toward building in web3 social entails appealing to users’ values and ideals. That means emphasizing characteristics enabled by blockchains, including censorship-resistance, data privacy, and portability of social graphs and content. The actual user experience may closely resemble a web2 social product, but the underlying architecture involves some portion of data being stored onchain, and all the benefits that come with it.

My view is that web3 social networks will succeed by taking the asset-first approach, i.e. creating opportunities for profit that will appeal to users. In other words, these networks are not purely social networks, but socioeconomic networks. This approach also creates a more clearly differentiated user experience that should in theory resonate more broadly. (Income is a universal need, whereas ideals can feel abstract to many.) This also mirrors the path for wider adoption elsewhere in crypto, including in NFTs, DeFi, and even L1s: desire for financial gain bootstrapped new networks and apps and played a pivotal role in their adoption.

To be clear, leaning into an asset-first approach doesn’t mean catering only to speculators and creating a financialized game that’s easily manipulated. Social networks can be easily polluted with spam and bad actors who detract from the network, creating a negative network effect. Unlike a DeFi lending protocol where all liquidity is valuable even if it comes from users with financial motivations, in social networks the quality of content and users matters. Simply rewarding all content creation, reach, or usage is too blunt of a financial incentive, risking an environment that’s full of spam or useless content, or is downright toxic. 

A successful financial game at the heart of a web3 social network should combine both intrinsic and extrinsic motivations. Stealcam, a content-sharing platform where fans earn a cut of the sale when NFTs they own are subsequently purchased for a higher price, attracted both profit-motivated traders who engaged in the hot potato game of trading images back and forth, but also appealed to true fans who wanted to keep the content their favorite creators had made as collectibles.

Taking an asset-first approach will also allow networks to construct novel social graphs. Social networks are constructed around distinct social graphs, which form the basis of their network effects: Facebook got its start by leveraging your real-world friend / college graph; LinkedIn mapped out your professional connections; and TikTok’s social graph is based on your interests, inferred from your behaviors on the app. An asset-based social network can pioneer and popularize an ownership graph, wherein users connect based on shared onchain ownership. This goes beyond simply clustering users into PFP communities, which is the primitive version of this idea that we’ve already seen. As the density of users’ ownership history grows onchain, over time, this ownership graph can richly reflect users’ interests, supplementing users’ self-professed interests or real-world contacts. 

In sum, there is a unique window of opportunity right now to build web3 social networks. Existing web2 social companies like Twitter and TikTok are facing upheaval, and users are hungry for something new. 

Our vision for web3 social networks is rooted in leveraging the distinct capabilities of crypto to offer a differentiated user experience that rewards continued usage.

Read this next

More fresh posts on the Variant site.

Mason Nystrom: SocialFi: A Blank Canvas for New Social Games

The winning web3 social platforms will leverage financialization as a core component of the user experience.

Li Jin: Web3 Social Media Under the Lens

On decentralized social protocols like Lens, more of the value accrues to content creators.

Tina Dai and Simon Hudson: Generative Art Will Be a Multiplayer Exercise in Meaning-Making

Where human and machine creation converge, a multiplayer ecosystem will emerge to shape a collective meaning-making experience on crypto rails.

Jesse Walden: Libraries vs Networks

A new framework for thinking about the open, stateful networks crypto supports.

Alana Levin: The NFT MEV landscape

A clinical and crucial look at the opportunities for MEV in the NFT market today.

Thinking in public

We welcome your input and replies on Twitter.

Li is wondering how we can move NFTs out of the investment mentality and into patronage:

Jesse is predicting the return of token-curated registries:

Mason is thinking about more use cases for app rollups:

Geoff wants to know more about dark pools and DEXs focused on preserving privacy, after he attended IFCA in Croatia last week:

See you next issue.

Subscribe now

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.

You’re receiving this email because you subscribed to another newsletter in the Variant network or attended a Variant event. To unsubscribe, click below.

We are extremely excited to deliver our team’s latest writing and ideas directly to your inbox, and to mark the occasion, we’ve commissioned a special art piece from Giorgio Balbi that you can mint for free if you subscribe the cryptonative way, on Mirror. (More on the artwork in a moment.)

We know a lot of people are suffering from newsletter fatigue, and we recognize adding another to your plate is a big ask. That’s why our goal with all of our writing is to only produce content that helps push the space forward. We also aim to create a conversation, so we’ll want to hear your response to the ideas we posit.

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About the subscriber NFT

Before Giorgio Balbi became a generative artist, he was an industrial engineer who explored not just how things work, but also their geometric beauty. His idol is the fellow Argentine artist Eduardo MacEntyre, who also reconciled the mechanical with the natural. But Giorgio’s process is all his own, combining technical drawing with coding—and plenty of colors, like in his collection “Speranza,” which launched on Canto earlier this year.

In 2021, he began turning his art into NFTs. He starts with a hand-drawn sketch, which he uses as the basis for an algorithm. Once he’s programmed the design using software, he creates multiple pieces and modifies those he likes until he’s happy with every pixel.

You can see that mathematical influence in his new piece made exclusively for Variant, “Técnicismo,” with its ever-expanding circles and spirals against our Variant-blue backdrop. The immediate effect is to “[expose] mechanical concepts of distribution of forces such as gears and pulleys,” according to Giorgio. But those who look closer will find a “hidden universe in the details.”

Once you’ve subscribed to our Mirror site, you’ll be able to mint the NFT below:

We felt the piece was just right for our newsletter, which will seek to peek inside the machinery of crypto systems, and link the disparate ideas that power this ecosystem.

Or you may certainly choose to stick to Substack. Either way, we hope you’ll enjoy our forthcoming issues, and forward it along to fellow crypto builders.

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