Why Have Almost All Web3 Social Applications Failed?
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Why Have Almost All Web3 Social Applications Failed?
Even Uniswap has to rely on social connections to make money.
Navigating Web3 tides with focused insightsBy David Phelps
Translation: Ismay, BlockBeats
Editor’s note: We live in a capitalist world that preaches the omnipotence of money, yet true cultural power does not always align with wealth. Wealth can bring certain political and cultural influence, but it may also lead to a loss of another kind of cultural authority. This article delves into the relationship between the merchant class and cultural tastemakers, revealing the difficulty of converting financial capital into social status. While there are theoretically multiple pathways to transform financial capital into social capital, in practice this conversion is fraught with challenges. We explore the reasons behind this phenomenon and use Web2 and Web3 case studies to illustrate the distinction between financial and social incentives—and their impact on community building.
I
Once you see it, you can't unsee it. The influencer living in a rat-infested studio in the Lower East Side, surviving on Prada gift bags; the street musician whose rhythm no longer resonates after becoming an over-packaged superstar; the wealthy husband in a shrunken, wrinkled shirt standing beside his wife, dressed like a haute couture model. This phenomenon is everywhere.
I’m referring to the inverse relationship between financial capital and social capital—the dynamic between the merchant class (financiers) and the clerisy (cultural tastemakers) in contemporary society. In a capitalist world where both believers and critics are taught to believe money can buy anything, this seems like a taboo topic.
Yet we find that wealth doesn’t just confer one form of cultural power—it also entails losing another. Gaining control over society comes at the cost of becoming, within its norms, a kind of social failure.
If you're one of those poor souls burdened by billions in savings, I know this might sound worrying. Don’t worry—there are still three classic theoretical methods to convert financial capital into social capital.
You can associate with someone cool (marry them), invest in something cool (buy art), or do both (become a consumer venture capitalist).
Theoretically, this old playbook should work for you today just as well as it did in the late 19th century. All you need to do—yes, you, financier with buttons about to burst—is find a cool guy with taste in linen and jewelry to help hang a George Condo or Vik Muniz on your wall. You just need to back the latest disposable audio app every American kid will use in the next 7 to 12 days, and surely, you’ll become cool, right?
Right?
The only problem is, in practice...
When money-famous investors collude with status-famous tastemakers, it's the tastemakers who preserve their reputation intact. Tastemakers may take the investor’s money, but the investor never gains the tastemaker’s status.
I'm trying to touch on an uncomfortable truth—one that my past two years building social finance products have taught me repeatedly. It's easy to trade social capital for financial capital, but no matter how much you enjoy dressing up in blue-chip designer clothes to impress your financial peers, trading financial capital for social capital is extremely difficult.
You've seen this in every washed-up celebrity you know: even the coolest people struggle to stay cool once they get rich.
II
Here’s the thing: Web2 has long taught us that for most people, social incentives consistently outweigh financial ones. Most people are happy to let companies sell their data to the highest bidder—as long as it gives them even a sliver of aspirational visibility online.
Privacy and civil rights advocates may complain, but most willingly accept huge financial opportunity costs for social connections that signal their status.
We in crypto often forget this: most people are ordinary, and would rather have someone listen to them than receive a million dollars.
And—forgive my dark thought—they know that in the attention economy, accumulating social capital is one of the few viable paths to building financial capital. Web2 understood this long ago.
If you’re wondering why nearly all Web3 social apps have failed, here’s why: because Web3 disastrously assumed Web2 was wrong—that financial incentives alone are sufficient to build user stickiness, that people can buy their way into identity and status.
Admittedly, Web3 had good reason to think financial incentives were enough to ignite a passionate user base. After all, the original blockchain communities—miners and validators—were entirely driven by financial incentives, as was the DeFi community.
I mean, financial incentives were the initial unlock for blockchain’s permissionless financial track! During speculative bull markets, when buyers rush into rising prices to push them higher, financial incentives seem to work perfectly.
But as crypto applications, DAOs, and NFTs emerged, it became clear that financial incentives are often fatal to building meaningful social communities. Believing that blockchains are merely financial tools—and that financial incentives alone suffice to bootstrap social communities—is a profound misunderstanding.
First, it's mistaken to think financial incentives build user loyalty. In fact, the very reason financial incentives excel at user acquisition is why they fail at retention: a mercenary using an app for profit will leave the moment a better opportunity arises. Those who come for rising prices leave when prices fall. Unless you keep paying them, their loyalty means nothing.
Above all, it's wrong to believe people can convert financial capital into social capital—wrong to think, as many elite co-working spaces promised in the 2010s, that you can buy your way into being cooler. Of course, a few delusional individuals who try this do exist. But they quickly destroy their own investment, because no genuinely cool person wants to join a club where membership is for sale. These clubs exclude not only the real culture builders and marginalized voices who’ve shaped culture for centuries—they also include (sorry) anyone who ever decided to sell out.
If you want to know why crypto social apps keep failing, here’s why: you can’t buy status. In fact, trying to do so backfires—it makes you look slightly ridiculous.
III
That said, this doesn’t mean financial incentives play no critical role in unlocking on-chain social apps. Just as it’s popular to believe that financializing social activity is enough to create a killer app, it’s equally popular to rail against the supposed degeneracy of mercenary and degen culture.
The latter view is a reasonable reaction to the former, but it carries a dismissive arrogance toward the global underclass—many of whom simply want to earn a living—and more importantly, it’s wrong.
Blockchains are financial by nature, and the most radical value proposition they offer to social apps is also the most boring: enabling tiny transactions with every click, eliminating intermediaries like credit card and app store fees, and providing open, on-chain metadata APIs for anyone to build on.
Ideologically, this pales compared to the revolutionary visions of collective ownership, artist royalties, and decentralized work that inspired—and exhausted—our collective imagination in 2021. Financially, it sounds far less exciting than pure speculation. Perhaps it just sounds like technical details.
But consider what this actually means: blockchains change how social apps are built and what kinds can be built—simply because they allow users to profit directly from other users. Looking back at the entire history of Web2 social apps, aside from games, you won’t find a single major app that meets this criterion.
User-level financial sustainability alone would be a massive achievement. In fact, it’s never truly been achieved.
IV
Because the real problem with Web2 is this: it succeeded in monetizing social behavior—but its users didn’t.
Friends, fake friends, bosses, coworkers, lovers—and perhaps most importantly, networks of potential friends, fake friends, bosses, coworkers, lovers—are so powerful that not only do users hand over their data, but companies themselves forfeit the moats they could have built by hosting communications, forums, and job opportunities on their sites.
This is the power of social networks: social incentives win—at the expense of financial and reputational incentives.
You don’t earn money from your valuable content; the social network does. You can’t become a star creator on a platform while programmatically owning, accessing, or sharing the reputation you’ve built; only the social network can leverage it to attract new users and advertisers.
I’d argue another way to put it is that Web2 was an app era—an era of closed data. Personal data existed in siloed islands within specific apps, allowing platforms to profit by selling that data to advertisers. In short: in the age of closed data, ads and apps win, and everyone must gather on their platforms to share data with each other.
Then came cryptocurrency, and we entered the on-chain era.
Cryptocurrency marks the beginning of the protocol era—or the open data era. Now, personal data can move freely across apps, with no proprietary data to sell on open-source, on-chain networks—replaced instead by a new model: tokenization.
At its core, tokens provide a somewhat clunky solution to a very real problem created by permissionless technology: how to ensure that anyone can input any data into the system.
Tokens are essentially legitimacy technology—enabling large groups of users to provide economic assurance that one transaction is valid, and another is not. You no longer earn money by selling data to advertisers—you earn it by economically vouching for the authenticity of data.
In other words, the reason to participate in crypto is financial incentive.
This is both a blessing and a curse—a blessing never realized in Web2. By now, you know the issue: in every bull market (including this one), quick profits attract hordes of mercenaries to spam, farm protocols, buy and promote tokens, and launch new tokens, chains, and platforms. But in bear markets, the financial fervor that drove individuals turns into apathy. Just as the prospect of gain rapidly draws people in, the threat of loss rapidly pushes them away.
Less discussed is another issue: financial incentives are often zero-sum—one person’s gain is another’s loss. In pure speculation, the more you earn in a bull market, the more you risk losing in a bear market.
This is why prediction markets—the most hyped crypto application use case over the past seven years—only ever reached around 10,000 total users at their peak (during election cycles), many of whom were likely bots.
Expected returns are zero, so users must be extremely confident they know the future better than others who are equally confident. Having deep insight doesn’t help when you’re competing against others with equally deep insights.
So how do prediction markets attract users? By attracting not rational bets, but tribal, irrational wagers—elections and sports. People bet on their team winning because it matters to them.
You see my point: for financial products to truly make money, they must harness social incentives.
Of course, we know this. Web2 has extraordinary social incentives but weak financial and reputational ones. Web3 has strong financial and reputational incentives but weak social ones. Financial incentives are great for fast profits, but social incentives are essential for building lasting businesses. Crypto only wins when it achieves both.
V
You might not believe me—I know too many people in this space think I’m wrong.
So let’s talk about a concrete case study: Uniswap.
Uniswap’s protocol has clearly won: not only is Uniswap used, but so are Cowswap, 1inch, and others—and therein lies the problem. Because it’s a fully open protocol, it can be exploited by competitors. Uniswap presents a uniquely crypto-native challenge we’ve never seen in tech: you can lose to your own product.
The issue is that on-chain apps can’t charge fees at the protocol level, partly due to legal concerns, but also because a fee-charging protocol incentivizes competitors to fork it, fragmenting liquidity across all participants.
Like all on-chain apps, Uniswap earns money through its frontend—the place it must win. Only the frontend, not the protocol, is unique to crypto companies. If projects fail to attract users to their website, they can’t monetize effectively.
So what drives users to the frontend? Brand, features, UI/UX—all important. But a key lesson from Web2 is that the most crucial driver is user networks. You go to a site because others are there—and they can find you. Just as financial liquidity is vital to bootstrapping a protocol, user liquidity is essential for launching a frontend.
Today, you can see this reflected in every decision Uniswap makes. Wallets, domains, acquiring *Crypto: The Game*—these are all ways to keep users loyal to its frontend, to gradually make Uniswap more social.
I don’t know Uniswap’s plans, but I suspect we’ll see many such features in the next year or two—want to launch your own token? Uniswap could become a place where any LP gathers, joins chats, and starts events for others.
My point is: to win at the frontend, you must win socially. To build a financially sustainable model in crypto, you must win socially.
VI
I mentioned earlier that this is a lesson I’ve been learning personally over the past year.
On Jokerace, we let anyone create on-chain contests for submissions and voting. Broadly speaking, participants can win in three ways: win money, win status, or make friends. Money is financial incentive; status is reputational incentive; friends are social incentive. These are indeed all the incentives.
For example, imagine someone hosts a *Shark Tank*-style contest on-chain. The top winner gets a cash prize (financial incentive); all contestants gain status with every vote (reputational incentive); voters form teams around contestants, creating organic community support from day one—building tribes and making friends (social incentive).
When described this way, it should be clear: financial incentives are the least compelling. Only the winner earns money—and it’s far from guaranteed. But everyone can gain status with even a single vote; everyone can make friends by forming teams.
Moreover, building reputation and social profiles can unlock various financial benefits—jobs, community access, airdrops—while financial rewards offer only money.
You can see why monetary incentives feel shallow: because they are. Your reputation and friends reflect your intrinsic value as a mission-driven contributor, while your money typically reflects your ability to sell that value to the highest bidder as a mercenary.
If this sounds harsh, crypto has proven it repeatedly. A key lesson from Web2 is that social incentives operate like marriage: slow-burning, enduring, deepening over years, activating relationships for an hour or two each day.
The lesson from Web3, meanwhile, is that financial incentives are more like flings: intense, short-lived, burning out in their own ashes until a new opportunity appears—degens floating wherever yields blow strongest.
Of course, in a world where we all must pay for food and shelter, we’re all mercenaries to some degree, our attention open to the highest bidder. So I’m not dismissing financial incentives—I’m saying passion is a powerful acquisition tool, but only effective if it leads to marriage-like loyalty.
Recognizing this means recognizing blockchains aren’t just tools for global interoperable finance, but also for global interoperable coordination and global interoperable reputation. In fact, they are the solution to their own problems—the real social tools needed to solve the field’s top challenges around moats and monetization: loyalty.
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