Web3 Investing’s Most Important Question
The most important question in web3 is one that is almost never asked in web2, because under ordinary web2 circumstances, the answer is extremely obvious. But web3 offers builders and investors a multitude of vehicles with which to conduct business, and sometimes the answer isn’t so clear cut.
This piece is best read in the context of another previous piece, “VCs (Still) Don’t Understand What They’re Buying” from this blog.
Popping the Question
It doesn’t take a PhD to figure this one out. Short and sweet.
“How are you personally compensated if this project is successful?”
This question appears unassuming, basic, and naïve. How am I compensated if a project does well? Big line goes up, I make cash, obviously. Duh. Why even ask?
Well, because it’s not that simple anymore. In web2, you have a business, you take cash into a bank account, you redeploy that into growing the business (or paying dividends), and the shares that control ownership over those assets see a return.¹ Easy.
But in web3, you’ve got three vehicles: equity, tokens, and NFTs. I’ve referenced this trichotomy ad nauseam before (here, here, and here). And projects have a deliberate responsibility & implicit promise to drive value to each of those vehicles, if issued. But, more often than not, I see both investors (& would-be employees, even) failing to ask that simple “naïve” question of how everyone is really making bank at the end of the day.
Utility Is More Than a Buzzword
The question of how a builder, an investor, and a participant all benefit in a project is ultimately an analysis of the utility of the project. “Aligning utility” is a cute catchphrase that entered web3 with great intentions, but rapidly drowned in a sea of marketing buzzwords (like most good notions in web3).
The idea that a user’s best interests should be aligned with the developer’s best interests which should be aligned with the investor’s best interests is something that is fundamentally at odds with the way traditional web2 businesses are run. And it’s hardly web2's fault — it’s just patently infeasible to let everyone share in the pieces of an ordinary web2 pie, both because of regulatory hurdles and fax machine-age technology. Just try giving your users fractionalized shares of your private company’s stock which they can also use to pay for services on your platform, as well as optionally combine with two portions of semi-fungible slurp juice to produce a one-of-a-kind collectible... good luck with that.
But web3’s singular promise, at least as originally conceptualized, was to resolve this.² Put the power in the hands of users, turn them into product advocates, and watch them effectively build businesses themselves. That’s the flywheel. It’s the user acquisition panacea that keeps Silicon Valley up at night, and it’s even net positive for both developers and users alike, if you can pull it off without imploding.
But this utility alignment must be present from project inception.
It is immensely difficult to untangle a web of misaligned incentives once your project is already rolling. You have milestones to hit, investors to please, and users to woo. You don’t have time to reconfigure your entire value structure. Do it right from the start. Ask yourself “How is each party being compensated if this project is successful,” and make sure the answer to that question is “if this specific vehicle goes up, we all benefit according to our level of participation.” No other answer is really acceptable.
Choosing One Value Accrual Vehicle
Crucially, to align utility in a full-tilt web3 project, developers, investors, and users must singularly benefit from value accrual to the same vehicle.³ Web3 gives us optionality. Keep these vehicles in mind:
- When I say “equity vehicle” I want you to think “fiat bank account.”
- When I say “token vehicle” I want you to think “token chart price.”
- When I say “NFT vehicle” I want you to think “marketplace floor price.”
For Token Issuers
If you’re issuing a token and telling your community that you’ll drive value to it, you have a few simple options. You could charge for your goods and services exclusively in your token, which would implicitly provide price support and drive value back to tokenholders (who are likely to also be your users). Then, if you’re personally compensated in the token only⁴ (e.g. by a modest salary + locked initial token allotment), your utility is now likely appropriately aligned with users. Make sure investors are in the same boat, and you may see benefit from the web3 flywheel.
For NFT Issuers
If you plan to issue NFTs and you’re looking to drive value to them, you have a harder job, but it’s not impossible. You could insist that users stake or trade in NFTs to access your goods or services. The tough part comes in aligning your personal incentives. You may also need to take a majority of your compensation in the NFTs as well, which will certainly prove to be complex. But, if your project is successful, and people love your NFTs, you shouldn’t be scared to accept compensation in the form of your own touted value accrual vehicle, right?
For Equity Issuers
If you’re taking fiat revenue back to a cash bank account to drive value to the project, your primary option is to promise the community 100% of your profits will be responsibly reinvested in growing the ecosystem. This is a loose promise with no recourse on the users’ side, and is less likely to benefit from the web3 flywheel. But it’s also largely unavoidable for many companies, since pure web3 plays are a legal quagmire and require large technical lift.
For Blended Issuers
Many projects issue a combination of the above, and this is neither a moratorium nor a condemnation of those approaches. Builders just have to be extremely careful that they’re not accidentally selling hot air to both users and investors, which will have exactly the opposite impact of the desired web3 user acquisition flywheel. Consider interplay between the vehicles and how value moving into one of the three can be rerouted to support a “main vehicle.”⁵
Hard Lines & Soft Projects
Web3 is not a panacea, and these brief outlines are not one-size-fits-all. But, if you find yourself uncomfortable with the idea of being compensated in exactly the vehicle that you’re looking to sell or otherwise drive value to in the open market, you should seriously consider what the lifetime of your project is going to be in web3.
There are a myriad of combinations of the above that will work just fine because certain businesses are absolute bulldozers, immune to any hamstringing leftover by their original foundations, and carried forward purely by their own momentum. And that’s great, so long as the users are happy, investors are happy, and devs are happy. That’s still web3. But it’s a softer web3, albeit still much needed in the world’s current transformation into this next digital era.
Just make sure you’re taking the time to ask that one little question.
¹Pardon me while I ignore debt and credit asset classes here. If that was your first thought on reading this, congratulations on bailing out of Wall Street.
²Not to resolve the slurp juice part, to be clear. That’s a fun extra. Just to resolve value alignment.
³Or set of vehicles, if you’re extremely ambitious and found a multi-vehicle model that actually works. Please DM me if you’ve solved this.
⁴Plus a salary. Salaries are usually paid in USD, which is usually paid in by either investors or by foundation OTC sales of their native tokens.
⁵For example, you could use 100% of royalties from your NFTs or your fiat cash in your bank account to buy back your token.
Sam is the CEO of Playground Labs, a web3 protocol dev organization, and Partner & Head of Interactive at Hivemind Capital, a crypto-focused multi-strategy fund. Follow him on Twitter.
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