Paradigms of Web3 Consumer Applications and Theoretical Reflections on Investment

Recently, Alliance DAO has gained widespread attention for successfully incubating Web3 consumer applications such as Pump.fun and Moonshot. This article will summarize Alliance DAO's investment philosophy and provide observations on this sector, reviewing the current mainstream paradigms of Web3 consumer applications, the challenges they face, and the potential opportunities. Finally, it will conclude with reflections on the investment theory of Web3 consumer applications.

Alliance DAO's Incubation of Web3 Consumer Track

Since its launch, the Alliance DAO Accelerator has incubated or invested in 28 Web3 consumer applications, which can be roughly divided into 7 categories:

1. Life Style category: Projects that cultivate innovative and healthy lifestyles for users, a total of 3.

2. Games: Web3 games or GameFi, a total of 10.

3. Crypto Speculative: Related products that meet users' Crypto speculative needs, a total of 3.

4. SocialFi Category: Tokenizing users' social media influence to create new speculative target projects, a total of 6.

5. Creator Economy: A Web3 content distribution platform that provides new economic models for content creators, a total of 2.

6. Financial category: Products that reduce users' costs of using and managing Crypto, such as deposits and withdrawals, a total of 3.

7. Tools: Products that solve practical problems in users' lives, such as Web3 maps, a total of 1.

From the perspective of the development trend of investment preferences, Alliance DAO began investing in and incubating Consumer-type projects in 2021, primarily focusing on Games and creator economy projects from 2021 to the first half of 2023. In the second half of 2023 to 2024, its preference shifts to Crypto speculation, SocialFi, and financial types.

The investment philosophy of Alliance DAO regarding the Web3 consumer sector mainly includes:

1. It is believed that the ecological infrastructure tools have become increasingly完善, and more application layers are needed to bring real value to the ecology.

2. The founding team should focus on PMF, usually facing risks on both the product side and the market side. Consumer projects have greater market-side risks and should consider avoiding the premature introduction of tokens.

3. The target users of Web3 consumer applications can be divided based on their acceptance of Web3, with non-Web3 ordinary users on the left and Web3 Native users on the right. In the application design for left-side users, Web3 elements mainly lower customer acquisition costs through "advertising tokens"; for right-side users, the focus is on new assetization targets, bringing additional investment and speculative demand, or addressing the unique needs of Web3 native users.

4. It is believed that the Solana ecosystem is more conducive to the success of Consumer applications for reasons including: a more active community, stronger ecological resource support, faster and lower-cost infrastructure, and higher competitive barriers for products.

Web3 Consumer Application Paradigms and Their Opportunities and Challenges

Based on the analysis of the investment philosophy of Alliance DAO and my own observations, there are three common paradigms of Web3 consumer applications:

1. Optimize the problems existing in certain traditional consumer applications by utilizing the technical characteristics of Web3 infrastructure.

• Ultimate privacy protection and data sovereignty:

Opportunities: The privacy sector has always been the main theme of innovation in Web3 infrastructure. From the initial asymmetric encryption algorithm identity verification system, it has gradually integrated numerous hardware and software technologies. Web3 technology brings data sovereignty to users, allowing personal privacy information to be directly hosted on locally trusted hardware and software devices, avoiding privacy information leaks.

Difficulties: After years of market validation, having privacy protection as the core selling point does not have a significant advantage in market competition. There are two reasons: first, consumers' emphasis on privacy is based on large-scale privacy breaches and infringement incidents, but effective alleviation can be achieved through the improvement of laws and regulations; second, most current consumer applications are based on the value extraction of big data, and overly emphasizing privacy protection may undermine the mainstream business model.

• Low-cost global 24/7 trusted execution environment:

Opportunities: The emergence of numerous L1 and L2 solutions provides application developers with a brand new, global, and around-the-clock multi-party trusted program execution environment. Leveraging the execution environment brought by Web3 can effectively reduce the related costs of developing such services.

Challenges: From the perspective of cost reduction and efficiency improvement, this indeed has a competitive advantage, but it is relatively difficult to explore application scenarios. The benefits of using this execution environment only arise when a certain service involves multi-party collaboration, and the relevant entities are independent from each other, are of balanced scale, and the data involved is particularly sensitive. These are quite stringent conditions.

2. Utilize encrypted assets to design new marketing strategies, user loyalty programs, or business models:

• Reduce customer acquisition costs through Token-based marketing activities such as Airdrop:

Opportunity point: For most consumer applications, how to acquire customers at a low cost in the early stages of the project is a key issue. Tokens, with their high financial attributes and being assets created out of thin air, can significantly reduce the risks of early projects.

Challenges: This customer acquisition method mainly faces two issues: first, the conversion cost of the seed users obtained through this method is extremely high, with most being cryptocurrency speculators who do not pay much attention to the project itself; second, as this model is widely adopted, the marginal returns from acquiring customers through Airdrop diminish.

• User loyalty program based on X to Earn:

Opportunity point: Retention and activation is another concern for consumer applications. Utilizing the financial properties of tokens to reduce retention and activation costs has become the choice for most such projects.

Challenges: Relying on users' motivation to earn profits can shift their focus from the product's functionalities to the yield. If the yield is based on the price of the tokens they issue, it puts pressure on the project team regarding market capitalization management.

• Directly monetize the financial attributes of tokens:

Opportunity: For traditional consumer applications, there are two common business models: free usage, monetizing platform traffic value after mass adoption; and paid usage. Tokens introduce a new business model that directly monetizes using the financial attributes of tokens.

Difficulty: This is an unsustainable business model. After the project has passed the early high-growth stage, due to a lack of incremental capital inflow, this zero-sum game model will inevitably place the interests of the project party in opposition to the interests of users, accelerating user attrition.

3. Fully serve the native Web3 users and address the unique pain points of this group of users:

• Construct new narratives, focusing on the monetization design of the untapped value elements of Web3 native users, and create new asset classes:

Opportunities: By providing new speculative targets for Web3 native users (, such as the SocialFi track ), one can have pricing power over a certain asset from the initial stage of the project, thus gaining monopoly profits.

Challenges: This paradigm relies heavily on team resources, specifically whether it can gain recognition and support from individuals or institutions with strong influence or "pricing power" among Web3 native users. This presents two difficulties: first, the pricing power of crypto assets dynamically shifts among different groups, necessitating the identification of trends and the establishment of partnerships with new elites; second, establishing cooperative relationships with "price setters" typically requires significant costs and sacrifices.

• By providing new tool-based products, serving the unmet needs of Web3 native users during their market participation, or offering better and more convenient products for this group of users from a user experience perspective:

Opportunity: As cryptocurrencies gradually become more popular, the overall user base of this segment will gradually expand, creating possibilities for user segmentation. Furthermore, by focusing on the real needs of a specific user group, such products often achieve PMF (Product-Market Fit) more easily, thereby establishing a more robust business model.

Challenge: Although the product development path is more robust due to returning to the true user needs, the construction cycle is longer than that of other paradigm projects. Additionally, since such projects are driven by specific needs rather than narrative, the product-market fit (PMF) is relatively easy to verify, and large-scale financing is usually not attainable in the early stages of the project.

Reflections on Investment Theories for Web3 Consumer Applications

1. How to transcend the speculation cycle is the primary concern for Web3 consumer applications.

The development path of Friend.Tech has given us great inspiration. Its cumulative Protocol Fee has reached $24,313,188, with a total of 918888 users including (Trader), which is impressive for Web3 applications. However, its current development faces significant challenges due to various reasons. Firstly, the product design introduces a Bonding Curve, bringing speculative attributes to social applications, attracting a large number of users in the short term through the wealth effect. However, in the medium to long term, this raises the entry barrier for users to join the community, which is contrary to the approach taken by most Web3 projects or KOLs that rely on public domain traffic to build influence. Additionally, the excessive bundling of tokens with product utility has led to an overabundance of speculative users in the Web3 product, causing users to detach from the focus on the product's practicality.

Therefore, for most Web3 consumer applications, after accumulating a large number of users, it is essential to carefully consider how to find Product-Market Fit (PMF), maintain user engagement, help the project surpass the speculative cycle, and build a sustainable business model. Only by effectively addressing these issues can Web3 consumer applications achieve true Mass Adoption.

2. How to evaluate Web3 consumer applications?

Overall, the investment assessment of Web3 consumer applications mainly starts from two aspects:

First, analyze the market potential from the product operation data, which can be divided into two dimensions:

• User Data: User data is always the most important. Traditional evaluation metrics such as active user count, user growth rate, and user retention rate can be used to determine whether PMF has been found. The focus may vary for different categories and stages of Web3 consumer applications. For example, in the case of Web3 Social applications, user retention rate becomes particularly important.

• Transforming Data: Assessing the potential commercial value through transformed data, such as AUM and user spend. If a project has many users but a small AUM, or if the average spend per user is low, it indicates limited commercialization value. The quality of revenue can also vary significantly; if the revenue structure is based on real income, it shows that users are paying for the provided products rather than for mining tokens. Such a business model is more sustainable.

Second, the judgment of the team mainly focuses on three aspects:

• The technical strength of the team is the core of establishing a product moat and forming a competitive advantage.
• The team must have a strong market sense and possess great openness, able to promptly identify market opportunities, which user needs are unmet, and timely adjust the business direction.
• Team resources are also very important, such as partnerships with other applications and collaborations with KOLs, as these determine the success rate of the issuance process.

3. How to define a successful Web3 consumer application

From an investor's perspective, is the success of Web3 consumer applications driven by revenue or token prices? Generally speaking, the two are interconnected; if a project cannot continuously generate revenue, the tokens it issues have little future. However, this assessment criterion mainly depends on the investment timeframe. If the overall investment period is short, then the judgment on token prices becomes more important. If it is a long-term value investment, then the performance of revenue data and the sustainability of the revenue structure are more important.

4. "Applying the Factory Pattern" may be a more deterministic business strategy for Web3 consumer applications.

Referring to the development of the Web2 industry in China, ByteDance has developed many successful consumer applications. Their business strategy is to continuously experiment and create a large number of different types of products, allowing the market to choose a few successful directions and continue to invest resources to expand the business. For them, the key to the success of this strategy is the accumulation of a large user base, which reduces the cost of trial and error. This experience can be applied to the Web3 industry.

From this perspective, projects like Friend.Tech still have opportunities in this cycle, at least showing attractiveness in the short term, attracting a large number of users and having good revenue capabilities, which will help them become a Web3 application factory. Therefore, their subsequent development is also worth paying attention to.

![IOSG: Web3 Consumer Applications