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As strong as Uniswap, it still needs social connections to make money.

Author: David Phelps

Translation: Ismay, BlockBeats

Editor's Note: We live in a capitalist world where money is believed to be almighty, however, true cultural power is not always directly proportional to wealth. Wealth not only brings a certain political and cultural influence, but may also lead to the loss of another kind of cultural power. This article delves into the relationship between the business class and the leaders of cultural taste, revealing the difficulties in the transformation between financial capital and social capital. Although there are theoretically various ways to transform financial capital into social capital, the actual operation is full of challenges. We explore the reasons behind this phenomenon and illustrate the difference between financial incentives and social incentives and their impact on community building through the cases of Web2 and Web3.

One

Once you see it, you can no longer ignore it. The phenomenon is everywhere: the influencer living in a studio apartment in the heavily infested Lower East Side, relying on Prada gift bags for a living; the street musician whose rhythm no longer touches hearts after becoming an over-packaged superstar; the wealthy husband standing next to his fashionably dressed wife in a shrunken, wrinkled shirt.

I am referring to the reverse relationship between financial capital and social capital in contemporary society, the relationship between the business class (financiers) and the cultural taste leaders. In a world where both believers and opponents of capitalism believe that money can buy everything, this seems to be a taboo topic.

However, we find that wealth not only means gaining a certain cultural power in terms of political influence, but also means losing another kind of cultural power in the blindness of privilege. The cost of controlling society is becoming a social failure within its norms.

If you are one of the poor people troubled by billions of dollars in savings, I know you may feel worried when you hear these words. Please don't worry, theoretically, you still have three classic ways to transform financial capital into social capital.

You can build a relationship with a cool person (get married), you can invest in something cool (buy art), or you can do both at the same time (become a consumer venture capitalist).

In theory, this ancient script is still useful to you today as it was in the late 19th century. What you, as a financially stretched financier, need to do is find a cool guy with taste in linen and jewelry to help you hang works by George Condo or Vic Muniz on the wall. What you need to do is invest in the latest disposable audio app that every American child will use in the next 7 to 12 days, and then, you will definitely become cool, right?

Right?

The only problem is, in practice…

When investors known for their money collude with taste leaders known for their status, it is the taste leaders who maintain their reputation. Taste leaders may get the investors' money, but the investors can never gain the status of taste leaders.

I am trying to touch on a disturbing fact that the experience of building social finance products over the past two years has taught me time and time again. It is easy to exchange social capital for financial capital, but no matter how much you like to put on the cloak of a blue-chip designer to please your financial peers, exchanging financial capital for social capital is extremely difficult.

You have seen this phenomenon in every washed-up celebrity you know: when the coolest people become wealthy, they cannot even maintain their coolness.

Two

What I want to say is, Web2 has long taught us a truth: for most people, social incentives always outweigh financial incentives. Most people are willing to let companies sell their data to the highest bidder, as long as it gives them even a bit of aspirational opportunity online.

Privacy and civil rights advocates may complain, but most people are willing to bear huge financial opportunity costs for social connections, because these social connections can display their status.

We, who work in the crypto field, often forget this fact. Most people are ordinary people who would rather have someone listen to them than have a million dollars.

And—forgive my dark thoughts—they know that in the attention economy, accumulating social capital is one of the few viable paths to accumulating financial capital. Web2 has long understood this.

If you want to know why almost all Web3 social apps have failed, the answer is here: because Web3 disastrously believes that Web2 was wrong, believes that financial incentives are enough to build user stickiness, and believes that people can buy identity through purchasing status.

Of course, Web3 has ample reason to believe that financial incentives are everything needed to launch a fervent user base. After all, the initial blockchain community—miners and validators—was entirely driven by financial incentives, as was the DeFi community.

What I mean is, financial incentives were the initial unlock for the track of permissionless finance in blockchain! In the speculative bull market cycle, when buyers flocked in frenzy to boost the soaring prices further, financial incentives seemed to work very well.

But with the emergence of crypto applications, DAOs, and NFTs, it has become clear that financial incentives are often fatal for building meaningful social communities. Believing that blockchain is merely a financial tool, and that financial incentives are sufficient to launch social communities—this is a mistaken understanding.

First, it is wrong to think that financial incentives can build user stickiness. In fact, the reason financial incentives perform well in user acquisition is because they perform poorly in user stickiness—because a mercenary who uses an application for profit will leave immediately when there is a better opportunity. Those who came for the price increase will leave when the price drops. Their loyalty is meaningless unless you can continue to pay them.

Most importantly, it is wrong to think that people can transform financial capital into social capital, to think that, as promised by many elite coworking spaces in the 2010s, people can become cooler by purchasing. This is not to say that there are no few who delude themselves into thinking they can become cool by purchasing. But they will soon self-destruct their investment, because no truly cool person would want to be a member of a club that can be bought with money. These clubs not only exclude the true builders of culture and marginalized voices that have been constructing culture for centuries; they also include (sorry) anyone who has decided to sell themselves.

If you want to know why crypto social apps continue to fail, the reason is here: you cannot buy status. In fact, attempting to do so will only have the opposite effect, making you look a bit ridiculous.

Three

However, this does not mean that financial incentives do not play a crucial role in unlocking social applications on the blockchain. Just as the popular belief that financialized social activities are enough to produce a killer app is a response to the so-called mercenaries and the degenerate culture.

The latter view is a reasonable response to the former, but it carries an arrogant attitude towards the global lower class who may actually want to make money to support their families, and more importantly, this view is wrong.

Blockchain has financial properties, and the most radical value proposition it provides for social applications is also the most boring: allowing you to make tiny transactions with every click, eliminating the intermediaries of credit card and app store fees, and providing open on-chain metadata APIs for development to anyone.

In principle, all of this is far less exciting and exhausting than the revolutionary vision of inspiring and exhausting our collective ownership, artist royalties, and decentralized work in 2021. Financially, all of this sounds much more mundane than pure speculation. Perhaps, all of this sounds only like technical details.

But consider what this means, blockchain has changed the way social applications are built and the types of social applications that can be built, for a very simple reason: they allow users to profit directly from other users. Looking back at the entire history of Web2 social applications, except for games, you will not find a major application that meets this point.

Just the financial sustainability of users is already a huge achievement. In fact, this has never really been achieved.

Four

Because the real problem with Web2 is: it profits from social behavior, but its users do not.

Friends, fake friends, bosses, colleagues, lovers—perhaps most importantly, the network of potential friends, fake friends, bosses, colleagues, lovers is so strong that not only do users hand over their data, but the company itself has given up the moat it could have obtained by hosting communication, forums, and job opportunities on its website.

This is the power of social networks: social incentives win out, and they win out at the cost of financial and reputational incentives.

You cannot make money from your valuable content; social networks can. You cannot programmatically own, access, or share the reputation you build while becoming a star creator on a platform; only social networks can use it to attract new users and advertisements.

I think another way to put it is that Web2 is an application era, meaning it is a closed data era. Personal data exists in silos of specific applications, allowing applications to profit by selling this data to advertisers. In short: in the closed data era, advertising and applications win, and everyone needs to gather on their platforms in order to share data with each other.

Then came cryptocurrency, and we entered the era of the blockchain.

Cryptocurrency marks the beginning of the protocol era, or the era of open data. Now, personal data can freely move between applications, and there is no proprietary data to sell on open-source chain networks. Instead, a new model has emerged: tokenization.

Fundamentally, tokens provide a somewhat clumsy solution to the very real problem of permissionless technology, where anyone can input any data into the system.

Tokens are essentially a legitimacy technology, allowing a large number of users to provide economic guarantees, proving that one transaction is legitimate while another is not. You no longer make money by selling data to advertisers, but by providing economic guarantees to prove the authenticity of the data.

In other words, the reason for participating in cryptocurrency is financial incentives.

This blessing has never been realized in Web2, and at the same time, it is a curse. So far, you have understood the problem: in every bull market (including this one), quick profits attract a large number of mercenaries to engage in junk trading, farming protocols, buying tokens, promoting tokens, and launching new tokens, chains, and platforms. But in a bear market, individual financial fervor can turn into financial indifference. Just as the prospect of profit can quickly attract people, the prospect of loss can quickly push them away.

Despite being less discussed, there is another issue here. Financial incentives themselves are often a zero-sum game, where one person's gain is another person's loss. In the purely speculative field, the more you earn in a bull market, the more you may lose in a bear market.

This is why prediction markets—possibly the most hyped use case for crypto applications in the past 7 years—only have about 10,000 total users during their most popular periods (election cycles), many of whom may be bots.

With zero expected return, users must be very confident that they understand the future better than other equally confident people. When you are competing with others who also have deep insights, having deep insights may not necessarily help you.

So, how do prediction markets attract users? Not through rational bets, but through tribal, irrational bets: elections and sports matches. People will bet on their team's victory because it matters to them.

You understand what I mean: to truly make financial products profitable, they must leverage social incentives.

Of course, we know this. Web2 has exceptional social incentives, but poor financial and reputational incentives. Web3 has exceptional financial and reputational incentives, but poor social incentives. Financial incentives are suitable for making quick money, but social incentives are necessary for building a sustainable business. Cryptocurrency can only win when it can achieve both.

Five

You may not believe me—I know there are too many people in this field who think I am wrong.

So let's talk about a specific case study: Uniswap.

Uniswap's protocol has clearly won: not only is Uniswap using it, but so are Cowswap, 1inch, and others, and that's the problem. Because it is a completely open protocol, it can be exploited by competitors. Uniswap presents a unique native crypto problem, one we have never truly seen in tech: you can lose to your own product.

The issue is that on-chain applications cannot charge fees through their protocols, partly due to legal issues, but a protocol with fees would also incentivize competitors to fork it, diluting the liquidity of all participants.

Uniswap, like all on-chain applications, makes money through the frontend, where it needs to win. Only the frontend, not the protocol, is exclusive to crypto companies. If a project cannot attract users to their website, they cannot effectively monetize.

So what drives users to the frontend? Brand, functionality, UI/UX are all important, but an important lesson from Web2 is that the most important frontend driver is user network. You go to a website because there are other users there, and other users can find you. Just as financial liquidity is important for launching a protocol, user liquidity is important for launching a frontend.

Today, you can see that Uniswap embodies this in every decision it 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 what Uniswap's plans are, but I think we will see many similar features in the next year or two—want to issue your own token? Uniswap can be a place for any LP to gather, join chat, and host events for others.

What I want to say is: to win on the frontend, you need to win socially. To establish a financially sustainable model in crypto, you need to win socially.

Six

I mentioned earlier that this is the lesson I have been learning personally over the past year.

On Jokerace, we allow anyone to create on-chain competitions for submissions and voting. Broadly speaking, participants in the competition may win in three ways: win money, win status, win friends. Money is a financial incentive; status is a reputational incentive; friends are a social incentive. These are indeed all the incentives.

For example, suppose someone hosts an on-chain "Genius Winner" competition. The top winner can win a prize (financial incentive), all participants can win status through each vote, and voters can form teams around participants, creating an organic community to support them from the start—creating tribes and making friends (social incentive).

As I describe this, it should be clear that financial incentives are the least attractive incentive, as only the winner can earn money, and this is far from guaranteed. But everyone can gain status by winning even a single vote, and everyone can make friends by creating teams.

Furthermore, the actions of building reputation and social profiles can bring various financial benefits, such as job opportunities, communities, and airdrops, but financial rewards can only provide money.

You can understand why considering financial motivation may seem shallow: because it is. Your reputation and friends represent the fundamental value of you as a missioner for a cause, while your money usually represents your ability to sell these values to the highest bidder as a mercenary.

If this sounds a bit startling, cryptocurrency has proven this time and time again. An important lesson from Web2 is that social incentives operate like a marriage: slowly burning, enduring, deepening over the years, activating relationships for an hour or two every day.

The lesson from Web3 is that financial incentives are more like a fling: all-consuming, burning briefly, burning out in the ashes of its own passion, until finding new opportunities to chase, floating with the wind of the highest returns.

Of course, in a world where we all have to pay for food and shelter, we are all to some extent mercenaries, offering our attention to the highest bidder. So I am not trying to diminish financial incentives, I just want to say that passion is a powerful acquisition tool—but only when it leads to marriage-like loyalty, will it be effective.

Recognizing this means recognizing that blockchain is not just a tool for global interoperable finance, but also a tool for global interoperable coordination and global interoperable reputation. In fact, they are the solution to their own problems, the true social tools needed to address the top issues in this field—loyalty.

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