Opportunities and Challenges: How to Drive Web3 User Growth?
TechFlow Selected TechFlow Selected
Opportunities and Challenges: How to Drive Web3 User Growth?
What challenges and opportunities does Web3 growth face?
Navigating Web3 tides with focused insights
Original source: Lattice Capital
Translation: DeFi之道
Note: This article was written on December 14, 2021, and some data may be outdated.
Over the past 12 months, interest in Web3 has exploded. NBA superstars are paying six-figure fees for NFTs and proudly displaying them. OpenSea’s trading volume exceeds that of Etsy. The world's fastest-growing game, ixuo, runs on Ethereum. While this surge in interest has driven new users into the space, actual usage of crypto products remains dwarfed by their Web2 predecessors.
Hundreds of Web2 applications and games have over 10 million monthly active users, while Metamask is currently the only Web3 application at this scale.
We believe the immaturity of Web3 growth strategies is a primary reason these applications struggle to scale. Web2 companies can draw from a decade of proven growth tactics and a rich ecosystem of platforms, while Web3 projects are starting from scratch.
-
Web3 applications support decentralized architectures, anonymity, and user ownership of data.
-
The core principles of Web3 break nearly every mainstream growth strategy. Leading Web2 consumer apps achieved scale by leveraging centralized platforms (like Facebook), digitizing identity to build trust, and owning large proprietary datasets.
-
Web3 applications have no app stores, don’t know who their users are, and lack direct communication channels with them.
If Web3 is to successfully build an internet managed by open, community-controlled services, entrepreneurs will need new growth strategies. Web3 needs a new growth playbook.
1. Challenges and Opportunities in Web3 Growth
Web3 applications face three fundamental challenges in growing and attracting user bases:
Identity
Most Web2 growth strategies begin with the assumption that (potential) customers are known. Viral growth often occurs on platforms where social graphs are built upon real-life identities. Paid growth requires knowing your users to create targeted profiles. Billions-of-dollar companies have been built solely to help businesses do this effectively.
However, Web3 breaks this assumption because the vast majority of on-chain activity today is anonymous.
Ethereum Name Service (ENS) is rapidly growing and making Ethereum wallets—currently the main "accounts" in crypto—more human-readable.
Ceramic and other DID providers are also working to establish consistent account models for Web3.
Meanwhile, regulatory pressure and institutional interest are helping drive adoption of “whitelisted” DeFi products, which offer less anonymity than their predecessors.
Maple recently launched a “permissioned” lending pool requiring participants to go through KYC.
Violet is addressing this more broadly by building an identity protocol that brings off-chain identity onto Ethereum.
Other projects are instead building on-chain identity from the ground up, rather than porting offline data on-chain.
Galaxy is developing a crypto-native identity solution that uses users’ on-chain behavior to build their profiles.
ARCx has launched a “DeFi Passport” that assigns credit scores based on users’ on-chain activity.
Communication
Web2 companies use Facebook ads to reach new users, email to re-engage churned customers, and push notifications to inform users about new features. But there are currently no widely adopted crypto-native growth tools—an obstacle preventing teams from establishing effective growth loops.
Web3 communication tools are even earlier than identity tools, but several teams are building crypto-native solutions. The Ethereum Push Notification Service (EPNS) is developing a protocol to deliver mobile push notifications based on on-chain activity.
CyberConnect and others are exploring decentralized social graphs that could power user-owned social networks.
Additionally, other companies are taking different approaches to integrate Web3 into existing communication tools.
Collab.Land allows Discord servers to set entry requirements based on token balances in users’ Ethereum wallets.
Lit Protocol is building a decentralized access control platform using tokens or NFTs to manage content, software, and data.
Platform Limitations
In the context of major paradigm shifts on the internet, crypto is often compared to mobile. We think this comparison is also useful when thinking about market size. All mobile products are platform-dependent—for example, if you're building a meditation app, your addressable market is limited by the number of Android and iOS devices. Given that nearly every adult on Earth owns a smartphone, this "limitation" is largely theoretical.
Web3 products face more tangible constraints because they depend on the installed base of cryptocurrency wallets. If you build a DeFi app on Ethereum, your immediately addressable market is defined by roughly 25 million people actively using Ethereum wallets (though this number is growing rapidly).
We’re beginning to see products that expand beyond this current installed base. Some achieve this by abstracting away the wallet experience, enabling access to audiences who may not care about controlling their private keys.
Dapper simplified blockchain concepts to make NBA Top Shot one of the most widely used Web3 applications.
Everbloom is applying a similar approach to create a mobile-first NFT experience, positioning itself for true mainstream adoption.
Other products bypass current platform limitations by exciting new audiences about blockchain-based products. For instance, Helium generated excitement around mesh networking and hotspot revenue potential—not the fact it runs on blockchain—reaching over 350,000 installations.
We believe DIMO will similarly bring a large audience of car enthusiasts into Web3.
Finally, another category of products aims to get more people excited about crypto itself.
CoinList and Coinbase offer centralized products that incentivize people to try Web3 applications.
Rabbithole excels at onboarding new users into Web3 in a crypto-native way, while Galaxy does well in getting communities to adopt new products.
Meanwhile, apps like Layer3 are making it easier for people to start earning money in Web3.
2. Web3 Growth Strategies
Partnerships, user ownership, and token-driven growth pools are the pillars of Web3 growth strategies.
Partnerships & Integrations
It’s not new for software companies to grow via large business development (BD) deals, and many Web3 projects have adopted this strategy. For example, ChainLink executed a closed partnership strategy during the 2018–2019 bear market, leading $LINK to outperform significantly.
However, business development in Web3 looks very different when partnerships are negotiated transparently in governance forums rather than behind closed doors. Given such integrations often don’t require permission from either party, they aren't always mutually beneficial. For instance, some platforms integrate Curve in ways that don’t necessarily benefit Curve itself.
Examples of Web3 partnership categories:
-
Token Utility—Projects with native tokens aim to maximize their usefulness. This includes exchange listings, collateral listings (e.g., adding $LINK to Compound), or partnering with DEXs to drive additional liquidity.
-
Distribution—All users interact with DeFi protocols through wallets (Metamask, Rainbow) and increasingly aggregators (Zapper, Zerion). These frontends control which protocols they display to users, so integrating your yield aggregator with a wallet can be a big deal.
-
Lego Blocks—Leveraging another DeFi primitive to add utility to your product. For example, Notional uses Compound to boost its effective yields.
-
Mergers—Recognizing two teams are building toward similar goals, competition no longer makes sense, so protocols merge. Notable examples include Keep and NuCypher, as well as Fei and Rari.
Given the rising importance of partnership/business development leads, we’ll begin to see dedicated hires in these roles.
Liquidity Staking and Token Economics
Over the last decade, as marketing became more analytical and engineering-driven, growth hacking gained popularity. While Web2 growth hacking historically focused on building affordable, repeatable growth loops, in crypto the focus is on using a project’s native token to fuel growth cycles.
Liquidity staking is a “network participation strategy where users provide capital to a protocol in exchange for its native token.” Just as venture funds help subsidize markets until they reach scale, Web3 protocols can use their native tokens to bootstrap growth.
Crypto projects that grew via token incentives face challenges similar to Web2 startups burning through VC funding. Data clearly shows most subsidized liquidity is highly mercenary. As a result, we’ll begin to see more thoughtful liquidity staking designs, including OHM and Rift.
Community
If Web2 companies focus on increasing user loyalty through engagement and retention, Web3 companies focus on increasing user ownership. One of the most exciting and unique aspects of Web3 is that “users…fund the products, information, and services they consume.” We are still early in understanding all the downstream implications of this innovation.
We believe communities are critical in the context of network growth because engaged communities give networks leverage across everything they do. This becomes obvious when looking at tweets from projects with strong community involvement—every announcement receives massive engagement and retweets.
Communities can replace or supplement key stakeholders in Web3 projects:
-
Early Customers (and Cheerleaders)—Having a small group of passionate customers is crucial for any startup. Community members can fulfill this role (and more), as they are both early adopters and have meaningful upside.
-
Augmenting the Core Team—Community members can assist with recruiting, token design, fundraising (tasks traditionally helped by investors).
-
Extending the Core Team—Community members can provide technical and non-technical support. Sometimes they step up to join the core team; other times, contributions emerge organically.
-
Distribution—New token projects want to partner with established projects that have large communities, just as new products seek distribution through high-reach channels.
Although crypto Twitter and markets are often drawn to the latest shiny toy, we’re impressed by teams and communities that keep building even when the spotlight fades.
We’ve seen firsthand that some of the industry’s biggest successes didn’t happen overnight. Teams like Audius, Dune Analytics, OpenSea, and Terra spent years building before the spotlight found them. We want to work with founders who share that same determination.
In an industry built on open-source, interoperable software, we believe partnerships and community are the only sustainable moats.
We’ve spent years helping drive growth for leading companies in the space, including Aztec, Celo, CoinList, Index Coop, and Solana.After witnessing the challenges of growth in crypto, we founded Lattice.
Disclosure
Lattice holds positions in CyberConnect, DIMO, Galaxy, Layer3, Lit, Maple, Rift, and Violet.
Lattice employees hold personal positions in ARCx, Audius, Dune Analytics, EPNS, LUNA, INDEX, Notional, Rabbithole, and OpenSea.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
