It’s time for crypto to address the elephant in the room. The recent market crash has not only shaken the public’s faith in cryptocurrencies but has also forced Web3 stalwarts to wonder if crypto has become another centralized market of grifters. Consistent volatility and new record lows have left many wondering: Is the dream of crypto just an empty feeling?
However, this dejection stems from an obvious but solvable problem within Web3: the lack of revenue. Most of the mechanisms, protocols and decentralized apps are financial instruments built on top of small streams of real revenue. These are fees used for access to blockchains, like gas on Ethereum. This type of revenue is not like revenue from commercial activities, which is the income generated through the purchasing and selling of products and services.
For Web3 to become a healthy ecosystem, we must focus on driving commercial activity between buyers and sellers. Without real-world commerce, there is no economic substance from which to generate sustainable financial yields.
Commercial activity and financial activity: What’s the difference?
In traditional markets, companies engage in commercial activity by selling products and services. A company like Dunkin’ Donuts makes money by selling their coffee and donuts. This revenue then drives secondary financial activity that allows Dunkin’ to secure a line of credit for operating capital, structure multi-year lease payments or use other financial instruments.
In the world of crypto, almost all activity is financial. When someone makes money on Web3, it could be new money minted through the blockchain. The difference between commercial and financial activity can be illustrated through what I call earning money and printing money:
- Earning money: Earning revenue from customers. Someone is parting with their hard-earned cash to receive a product or service.
- Printing money: The process of collateralizing things of value, like putting funds into a vault to generate an alternate form of money.
The constant printing of money factored into the recent crash. Yield from DeFi platforms mint (or print for our purposes) new tokens to reward depositors who are willing to provide funds and lock them in a vault. Proponents of this logic argued asset value would increase if nobody withdrew assets from the vault and sold them off. This is the mentality of “If we all hold on, we’re all gonna make it (or WAGMI).”
This shaky pact ultimately caused a financial avalanche where token-holders began selling their assets, quickly spiraling into a chaotic race to the bottom.
What does making money really mean?
Sustainable financial ecosystems rely on primary markets where transactions are fulfilling. Customer needs are fulfilled when they buy useful products and services. Purchasing an Uber fulfills the need to get somewhere. Buying dinner fulfills hunger. Purchasing new software fulfills a pain point in the quest to work successfully.
Currently, crypto is driven by the secondary markets for trading and reselling scarce goods. Someone buys a Bored Ape only to flip it weeks later. Or, for an example more rooted in the real world, a ticket scalper might buy 10 concert tickets with the sole purpose of reselling them at a higher price. The transactions here generate very little real-world utility, so their financial performance is all there is. The value of the BAYC itself is mostly derived from its exchanges. In order to create a healthy financial ecosystem in crypto, secondary markets must be secondary.
How can Web3 help people generate revenue?
Web3 markets should stop pricing products in volatile cryptocurrency denominations like Ether (ETH). Someone purchasing an Uber does not want to pay more for their ride because the price of ETH dropped. Instead, crypto should embrace asset-backed stablecoins like USDC that are collateralized 1:1. This rail of US dollar-denominated stablecoin payments not only helps create healthy primary markets but also allows for discounts that will attract customers. For example, a member of a DAO could receive a discount on products if they stake a certain amount of tokens.
What can Web3 offer businesses that earn revenue?
The programmability of Web3 blockchain protocols gives businesses new ways to manage revenue.
Split revenue
Blockchain logicallows for more transparent distribution of commission, income sharing and loyalty rewards. Once revenue is received by a business, a payment protocol can redirect funds in trustless ways to the correct parties.
Complicated payments involving multiple parties will no longer require trusted middlemen. Programmability can also give customers discounts, subscriptions and rewards automatically. Ultimately, businesses, their vendors and employees can organize around a cascade of revenue through a network of wallets that can be used to drive profits created by trackable financial activity.
Process refunds
Web3 payment protocols can also bring about new modes of automated escrow, release and adjustment. When missteps in payments occur — data entry errors, customer refund demands — smart contracts can offer corrections based on predetermined rules.
Advance cash
Businesses that built an on-chain history of revenue from a customer base can offer to sell their future invoices at a discount to other third parties that are ready to front the cash in return for a short-term yield. Invoice discounting or factoring plays a core part in global commerce, but in the traditional finance world, it is only available to well-heeled financiers. When payments are moved on-chain, these factoring opportunities become available to any party with a wallet. The yield is coming from someone taking a discount when they want their payout earlier.
Real-world revenue must be the next foundation for DeFi. It can no longer just be about speculation, flipping and yield farming. We must use real-world revenue as the engine to power Web3 in order to create a sustainable financial ecosystem. We need to begin asking how it can help everyday people. What does Web3 Uber look like? What does the Web3 software marketplace look like? Answering these questions will help pull the ship back on course.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Chris Tse is the Founding Director of the open-source Cardstack Project. He is a technologist and designer devoted to humanizing Web3.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.
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