W Labs Why are all Web3 models Ponzi schemes?

Why are all Web3 models Ponzi schemes?

Author: W Labs of Melon Field Laboratory

Editor’s Note: The origin of this article is that last week I participated as a guest in an AMA about chain gaming assets. The host was not online at the beginning due to network issues, so the guests took turns hosting. Melody, a guest with a good voice, spoke quickly: the current GameFi lifecycle is too short! I started to joke: why is the cycle too short? Melody: because they are all Ponzi models! I continued to pretend to be humble: why are they all Ponzi? After that, everyone started discussing, but unfortunately, the topic did not develop further, and the AMA ended due to network problems. So in the next few days, I published some insights every day and compiled them into this article: Ponzi is the inevitable path and transitional path for most WEB3 application projects in the early stage, and it is actually more accurate to say: Why do most WEB3 application projects start with a Ponzi model in their economic models?

Although there is a saying that the ass determines the head, I still firmly believe that without spending more time thinking about the economic models of WEB3, it is impossible to predict what kind of business model WEB3 can use to subvert WEB2. Previously, I was always timid and dared not use the word “subvert.” One is that I am annoyed by a lot of clickbait titles, such as “XX revolution” and “epoch-making,” and the other is that I am afraid of making too big of a leap. Recent knowledge has made me feel that there may be a probability of realizing the word “subvert” in the future. Even if it is not realized, at least it adds some belief to myself. It’s not bad to be able to hodl BTC for a longer time, right? Anyway, my investment model cannot rush to make a big fortune like others. They bald overnight on their base, hundreds of times the return, while I have nothing and become truly bald…

Let’s start by reviewing the changes in business models in recent decades.

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Stage 1: Product Side vs. User Side

Before the rise of the Internet and mobile Internet, the relationship between the product side and the user side was simple. The product side sold products to users, and users paid for the basic functions of the products. If the product is good and users recognize the brand, the number of users of the product will increase. This is a one-sided relationship: product side vs. user side.

Stage 2: Product Side vs. Platform Side vs. User Side

With the spread of the Internet and mobile Internet, human habits have been firmly bound by the 01 system. At this time, a platform side emerged. They first used the technical advantages of the Internet to develop products to attract users, and then persuaded the product side, who were slow to react, saying: now, users’ information and access are all here. If you want to sell products, you have to pay me the toll. At the same time, they talked to advertisers: I have so many eyeballs here, don’t you want to advertise? My minimum bid is very low. If you give me money, I will let you appear on the first page, and so on.

Taobao, Didi, and Douyin are all platform sides that have played this way. But they encountered a problem. It is difficult to change users’ habits. How did these platform sides attract users at the beginning? The nature of users is greed, whether it is WEB2 or WEB3. So the platform side went to PE institutions for financing and used the PE’s money to subsidize early customers, such as letting you take a taxi for 1 yuan or buy rice for 1 yuan. The early users of WEB2 are like the initial mining players in WEB3. Why did PE institutions play the role of Lei Feng and give money to platform sides and users? Because they know that in the end, there will be product sides to pay the bill (this point is very important!). In the future, there will be product sides obediently giving money to the platform sides, and the platform sides can continue the story. If the story continues, there is a possibility of going public, and going public means exit. The platform sides can do whatever they want with the money from PE, and some of them have really succeeded, even becoming giants. Mature platform sides can look down upon product sides and users.

Currently, the platform itself is also evolving and trying to divert the attention of frustrated users. They need to enhance the functionality of the product, rather than solely focusing on the product itself. Otherwise, the platforms will quickly collapse. As a result, new paradigms have emerged, such as private traffic and live-streaming hosts promoting products.

Let’s take live-streaming hosts promoting products as an example. They set a great flag, criticizing monopolistic e-commerce platforms and advocating for revolution. They claim to be users recommending other users, seemingly replacing the platform. Then, they start adding various functionalities in the live stream room to provide users with pleasures beyond the product’s functionality: Dong Yuhui’s literary and artistic atmosphere, the excitement brought by the welfare goddess, the six-pack abs of the cute puppy. Users can choose what they desire, and their wallets are emptied even faster. In fact, behind these internet celebrities, there are organizations similar to the platform called Multi-Channel Network (MCN).

To summarize, in the second stage, both the product and platform experience growth, but ultimately, it is the users who are being consumed. The new paradigms like internet celebrities provide users with some additional pleasures compared to simple platforms.

However, whether it is e-commerce platforms or internet celebrities promoting products, they cannot change the fact that users are still like naive and sweet fishes on the chopping board. The product and platform are planning together on how to make users spend their money. It seems that initially, you gained something, but later, you have to give it all back.

Third Stage: Product vs. Decentralized System vs. Users

If we want to solve the problems mentioned in the second stage, let’s see what the third stage dominated by WEB3 has done differently.

Compared to the commercial system of “Product vs. Platform vs. User” in WEB2, WEB3 should evolve into “Product vs. Decentralized System vs. User”. In this case, the intermediate connector changes from a centralized WEB2 platform to a decentralized system composed of various protocols and interactions based on code. It embodies the characteristics of decentralization, privacy, and consensus rights of WEB3. From the user’s perspective, there are several benefits:

• Value assets can be stored in their own wallets, and no one can take them without their consent;

• Individuals can determine whether to engage in external business cooperation based on their own information, rather than directly selling it to advertisers like in WEB2 platforms;

• Everyone is empowered with the right to vote and decide the operational model of a decentralized system. For example, if a despised search engine is built on a WEB3 architecture, users can vote to replace it.

If it’s so good, then why do many WEB3 applications have such short lifecycles? Is it still a Ponzi scheme? It’s because it’s still too early, and there aren’t any real product players involved yet. So, the envisioned “Product vs. Decentralized System vs. User” currently only exists as “Decentralized System vs. User”. There is no final benefactor, the product, to support the entire system. Therefore, the various teams in the decentralized system can only compete and deceive users, trying to outsmart each other and run faster.

Does anyone think that there are currently any Web3 products that are as phenomenal as Alipay or WeChat? Don’t talk about these successful products, even the services that these products can provide to the general public are not clear. If I am a pure Web2 user, at this stage I cannot convince myself why I should try various Web3 products: What can DeFi do? Play with a bunch of so-called tokens generated by code, and keep playing with them? Can DeFi have a negative impact on Web2 users who don’t use DeFi? What can SocialFi do? Chatting with a dozen active users every day in a Telegram group or platform with thousands of people, discussing dog fighting, brothels, and welfare girls? What can GameFi do? A bunch of boring games that require high short-term returns, forcing oneself to spend a lot of time and effort, becoming a hardcore player.

The key point is, what role do these so-called Web3 applications, such as various FIs, play in solving the problems and pain points that still exist in the Web2 world for users? For now, it seems that they have no effect at all.

So is Web3 just a false proposition? No, it’s just that it is still in its early stages, with poor infrastructure and no reliable product solutions. Most of the so-called project teams are a combination of “contract code developers” and “marketing experts”. In fact, they are just the forerunners of the “decentralized system”. However, if we look back at the development of Web3 over the past five years, we will find that it has evolved a lot. From simple public chains and token issuance, to DeFi, to the emergence of NFTs and blockchain games, at least new functionality modules have been continuously added.

DeFi has established a rudimentary decentralized self-circulation system, where people do not rely solely on centralized exchanges (CEX) as the main system, and token flow can be reversed. NFTs are beginning to demonstrate the characteristics of value accumulation (whether it can last remains to be seen), and we can imagine how the traditional financial system would operate without value-accumulating assets like gold. As a pioneer in Web3 application products, blockchain games have been constantly exploring whether games combined with blockchain technology can enter the world of real game users, beyond just Ponzi schemes.

This process may be very long. If we look at the development of AI, even starting from Geoffrey Hinton’s proposal of deep learning neural networks in 2007, it took 16 years until ChatGPT was widely accepted by the public. Therefore, it is expected that for a relatively long time, the model of “decentralized system vs users” without real product solutions will continue to exist, and Ponzi schemes will continue as well. In the view of Gualab, Ponzi schemes are just a category of models, without right or wrong, and they can be designed in an elegant or rough manner.

So when can we expect real product solutions to come in and start moving away from pure Ponzi schemes?

First, on a global scale, regulatory issues are no longer a problem;

Second, as mentioned earlier, the infrastructure is improved, including the reduction of hacker problems;

Third, decentralized consensus is beginning to be accepted by everyone, giving a sense of “the world has long suffered from centralization”;

Fourth, there are pain points that cannot be solved or require a significant cost to solve using WEB2 (such as the recent rise of RWA, which is currently mostly based on US bonds, but at least partially solves the problem of encrypted users holding U tokens buying US bonds), which must be addressed using WEB3.

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