Paradigms of Web3 Consumer Applications and Theoretical Considerations for Investment

In the past period, Alliance DAO has gained significant influence due to its successful incubation of Web3 consumer applications such as Pump.fun and Moonshot. This article summarizes Alliance DAO's investment philosophy in the Web3 consumer track, offers observations on this sector, reviews the mainstream paradigms of current Web3 consumer applications, the challenges they face, and potential opportunities, and finally concludes with reflections on the investment theory for Web3 consumer applications.

Alliance DAO's Incubation of Web3 Consumer Track

Alliance DAO Accelerator has co-incubated or invested in 28 Web3 consumer applications, which can be roughly divided into 7 categories:

1. Life Style category: 3 projects, such as StepN, Sleepagotchi, etc.

2. Games category: 10 projects, such as Axie Infinity, Genopets, etc.

3. Crypto Speculation: 3 projects, such as Pump Fun, Moonshot, etc.

4. SocialFi Category: 6 projects, such as fantasy.top, 0xPPL, etc.

5. Creator Economy: 2 projects, such as Koop, CreatorDAO.

6. Financial category: 3 projects, such as Hana Network, P2P.me, etc.

7. Tools: 1 project, Proto.

From the perspective of the development trend of investment preferences, Alliance DAO has been investing in and incubating Consumer-type projects since 2021. From 2021 to the first half of 2023, the main investment and incubation focus was on Games and creator economy projects. Starting from the second half of 2023 until 2024, its preference has shifted to Crypto speculation, SocialFi, and financial categories.

The investment philosophy of Alliance DAO regarding the Web3 consumer sector mainly includes:

1. It is believed that the ecological infrastructure tools have become increasingly完善 and that more application layers are needed to bring real value to the ecology.

2. The founding team should focus on PMF. Typically, during the market validation process, they face product-side risks and market-side risks. The market-side risks for Consumer projects are greater, hence it is necessary to consider avoiding the premature introduction of Tokens to prevent distortion of PMF validation results.

3. The target users of Web3 consumer applications can be divided according to their acceptance of Web3, with non-Web3 ordinary users on the left and Web3 Native users on the right. In the application design for left-side users, Web3 elements mainly reduce customer acquisition costs through "advertising tokens" to capture more market share, while right-side users need to focus on assetizing new targets, bringing additional investment and speculative demands, or addressing the unique needs of Web3 native users. Currently, their preferences lean more towards the latter.

4. Clearly, the user profiles of the Solana ecosystem and the EVM ecosystem are different. The former is more conducive to the success of consumer applications for four reasons:

• A more vibrant community
• Stronger and more efficient ecological resource support
• Faster and lower-cost infrastructure
• Higher product competitive barriers

Web3 Consumer Application Paradigms and Their Opportunities and Challenges

There are three common paradigms of Web3 consumer applications:

1. Utilize the technical characteristics of Web3 infrastructure to optimize the issues present in certain traditional consumer applications:

• Ultimate privacy protection and data sovereignty: Opportunities: The privacy track has always been the main theme of innovation in Web3 infrastructure. From the initial asymmetric encryption algorithm identity verification system, it has gradually integrated numerous software and hardware technologies, such as ZK, FHE, and TEE. This brings data sovereignty to users, allowing personal privacy information to be directly hosted on local trusted software and hardware devices, thus avoiding the leakage of privacy information.

Challenges: Using this as a core selling point has not shown a significant advantage in market competition. The first reason is that consumer users' emphasis on privacy is based on large-scale privacy breaches and infringement incidents, but in most cases, this issue can be effectively alleviated through better laws and regulations. If privacy protection is based on a more complex product experience or higher usage costs, its competitiveness will be significantly lacking. Secondly, the current business models of most consumer applications are built on the value extraction of big data, and overly emphasizing privacy protection will undermine the mainstream business model. If ultimately reliant only on so-called "Tokenomics", it will inevitably introduce unnecessary speculative attributes to the product, which distracts the team's resources and efforts to address the impact of this attribute on the product, and is also unfavorable for finding Product-Market Fit (PMF).

• Low-cost global, always-on trusted execution environment: Opportunity: The emergence of numerous L1 and L2 solutions provides application developers with a brand new, global, and round-the-clock multi-party trusted program execution environment. Typically, traditional software service providers independently maintain their own programs, such as running on their own server clusters or in the cloud. This naturally creates trust costs in business scenarios involving multi-party collaboration, especially when the parties are evenly matched in terms of strength or scale, or when the data involved is particularly sensitive and critical. These trust costs often translate into significant development costs and user usage costs. The execution environment brought by Web3 can effectively reduce the related costs of developing such services. Stablecoins are a great example of such applications.

Difficulties: From the perspective of cost reduction and efficiency improvement, this is indeed a competitive advantage. However, the exploration of application scenarios is relatively challenging. The benefits of using this execution environment only arise in a service that involves multi-party collaboration, where the relevant parties are independent, the scale is balanced, and the data involved is particularly sensitive. These are quite stringent conditions. Currently, it seems that such application scenarios are mostly concentrated in the financial services sector.

2. Utilize crypto assets to design new marketing strategies, user loyalty programs, or business models:

• Reduce customer acquisition costs through token-based marketing activities such as Airdrop: Opportunity point: For most consumer applications, how to acquire customers at a low cost in the early stages of the project is a key issue. Tokens, with their extremely high financial attributes and being assets created out of thin air, can significantly reduce the risks of early-stage projects. After all, compared to directly spending real money to buy traffic and gain exposure, using zero-cost created tokens for user acquisition is indeed a more cost-effective choice. From a certain perspective, such tokens are similar to advertising tokens.

Challenges: This customer acquisition method mainly faces two issues. Firstly, the conversion cost of seed users obtained through this method is extremely high. We know that most of the users attracted by this solution are cryptocurrency speculators, so this group of users does not have a strong interest in the project itself; they are more involved for the potential financial rewards. Moreover, there are currently a large number of professional airdrop hunters or profit-seeking studios, which creates significant difficulties in later converting them into actual product users. Additionally, this could lead to a misjudgment of the project's Product-Market Fit (PMF), resulting in excessive investment in the wrong direction. Secondly, with the widespread application of such models, the marginal returns from customer acquisition through airdrops diminish. This means that if one wants to establish sufficient attraction among the cryptocurrency speculator group, the costs will gradually increase.

• User Loyalty Program based on X to Earn: Opportunity point: Retention and activation is another issue that consumer applications focus on. Ensuring that users continuously use your product requires significant effort and cost. Similar to marketing, leveraging the financial attributes of tokens to reduce the cost of retention and activation has become the choice for most such projects. A representative model is X to Earn, which rewards key user behaviors based on tokens that are predefined, thereby establishing a user loyalty program.

Challenges: Relying on users' motivation to earn profits for activation will shift users' focus from the product's functionality to the yield. Therefore, if the potential yield decreases, user attention will quickly fade, which is a significant harm to consumer applications, especially for products that rely heavily on UGC. If the yield is based on the price of tokens issued by the project, it will create market value management pressure on the project party, especially during bear market phases, where they must bear high maintenance costs.

• Directly monetizing the financial attributes of tokens: Opportunity Points: For traditional consumer applications, there are two common business models. The first is free usage, which monetizes the value of platform traffic after large-scale adoption. The second is paid usage, where a certain fee is required to access some Pro services within the product. However, the first model has a longer cycle, while the second model is more challenging. Therefore, Tokens introduce a new business model, which is to directly monetize using the financial attributes of Tokens, meaning projects directly sell coins for cash.

Challenge: This is an unsustainable business model. The reason is that after the project has passed the early high-growth phase, due to a lack of incremental capital inflow, this zero-sum game model will inevitably place the interests of the project parties in opposition to the interests of the users, accelerating user attrition. If the project parties do not actively cash out, they can only rely on financing to obtain funds to maintain the team or expand the business due to the lack of robust cash flow revenue, which will lead to a serious dependence on the market environment.

3. Fully serve the native Web3 users and address the unique pain points of this group of users:

• Construct new narratives around certain untapped value elements of Web3 native users, design monetization strategies, and create new asset classes: Opportunities: By providing new speculative targets for Web3 native users, such as the SocialFi track (, the benefit is that one has pricing power over a certain asset from the initial stage of the project, thereby obtaining monopoly profits, which in traditional industries requires intense market competition and the establishment of strong competitive barriers to achieve.

Difficulties: This paradigm relies heavily on team resources, specifically whether it can gain recognition and support from individuals or institutions with strong influence among Web3 native users, or those who possess "pricing power" over crypto assets. This brings two challenges: First, as the market develops, the pricing power of crypto assets dynamically shifts among different groups, for instance, it initially transferred from Crypto OGs to crypto VCs, then to certain trading platforms, then to crypto KOLs, and finally to traditional politicians, entrepreneurs, or celebrities. In this process, the ability to identify trends during each power transition and establish collaborations with the newcomers places significant demands on team resources and market sensitivity. Second, to establish a cooperative relationship with the "price setters," it often requires substantial costs and sacrifices, because in this market, you are not competing for a larger market share within a specific application track against other opponents, but rather competing with all other crypto asset creators for the preferences of the "price setters," which is a highly competitive game.

• By providing new tool-based products to serve the unmet needs of Web3 native users in the market participation process. Alternatively, provide better and more convenient products for this group of users from the user experience perspective: Opportunity: As cryptocurrencies gradually become more popular, the overall user base of this segment will gradually expand, which creates possibilities for user segmentation. Moreover, by focusing on the genuine needs of a specific user group, such products often find it easier to achieve Product-Market Fit (PMF), thereby establishing a more robust business model, such as various trading-related data analysis platforms, Trading Bots, information platforms, etc.

Challenge: Due to the return to true user needs, the development path of the product is more robust, but the construction cycle is longer than that of other paradigm projects. Moreover, since such projects are not narrative-driven but driven by specific needs, the PMF (Product-Market Fit) is relatively easy to verify. In the early stages of the project, it is usually difficult to obtain large amounts of financing. Therefore, maintaining patience and staying true to one's original intention amidst the confusing wealth myths brought about by "coin issuance" or high valuation financing is a very challenging task.

![IOSG: Web3 Consumer Application Template