In Part 1 of this series, we looked at lessons learned from web 2.0 native brands and identified what traits we should keep and what we ought to leave behind.

In Part 2, we took a snapshot of some brand activity that's going on in web3 today.

In Part 3, we're going to dive a little more into the functionality of web3 and outline some overarching trends, so we can piece everything together and map out a framework for how brands could show up in a meaningful way.

Before doing so, I want to give a shout out to Dror Poleg's course, Hype Free Crypto, which I recently took. He untangled a lot of theory and provided extremely practical guidance to navigating web3, strands of which you'll read in this post.  If you want to learn more about this space, I highly recommend it.

The Architecture of Web3

Most people know about crypto through the lens of artifacts, not functionality. Cryptocurrency or NFT artwork, for example. But in order to understand web3's possibilities, it's important to wrap your head around the underlying technology and what it can do. Below, we'll get into a top-line explanation. For those unfamiliar, hopefully this will be just enough context so you can see the logic that underpins the framework for participation.

A number of years ago, Joel Monegro sketched out the difference between the existing web and the blockchain, identifying where the value is captured:

When we're talking about 'applications layer' on the web, we're talking about things like Facebook or Google or Fortnite. When we refer to the protocol layer, that's the tech infrastructure those apps are built on: TCP/IP, HTTP, SMTP, etc. The protocol layer is fundamental to the apps, but the apps were where the value was distributed and the revenues captured. That's why you're more likely to have heard of Mark Zuckerberg than Jon Postel.

Conversely, on the blockchain, the protocol layer is where the value is distributed - it is the blockchain itself. There are Layer 1 protocols, which include Bitcoin, Ethereum or Solana. Then there are Layer 2 protocols like Polygon, StarkWare or Loopring, which are built on top of Layer 1 blockchains. The Layer 2s are designed to improve speed and scale whilst reducing costs. The application layer is what the user interacts with. The app could be a game, a currency exchange or a supply chain management interface.

There are two reasons for the value being stored at the protocol layer on the blockchain instead of the application layer:

1. There's a 'shared layer' of data on the blockchain, meaning that the apps built on a particular blockchain all have access to the same information. This is the opposite to how apps on the web are built - where your data on one website is completely siloed from other websites (and thus the data is private and monetized)

2. Because protocols use tokens to function. These tokens give access to the service provided by the network. The tokens appreciate in value as the protocol is used. That appreciation drives speculation, which increases awareness and adoption. 

This has a couple of implications for brands. Firstly, brands must really understand how to build their web3 presence using tokens. The token infrastructure has an outsized impact on how users will interact with and experience an app. I’ll share some cliff notes on tokens below. Secondly, brands must get comfortable with decentralization. Until now, brand management has relied on high levels of control and opacity, but that is not possible with web3.

Web3 Mechanics

Tokens & Smart Contracts

Tokens are what allow the blockchain to operate. A token is a thing that stands for another thing - namely ownership or rights. A token can be accessed and used by any Decentralized App (DApp) built on the same blockchain. This is known as interoperability. For example, a gamer can purchase a virtual good in one game and that item can also be used in a totally different game. That wasn't possible on the OG Web and is still somewhat limited today, but has a lot of focus (and capital) directed towards it.

Smart contracts are what allow tokens to do different things. It's what is coded into the token, giving it the ability to confer that ownership or those rights. The term ‘smart contract’ is a bit of a misnomer. They are neither particularly smart, nor necessarily a legally enforceable contract. They are simply a protocol, coded into a digital object on the blockchain. It's essentially a "if this, then that" function.

A useful (and well referenced) analogy to think about for smart contracts is that they are like a vending machine. There is a pre-programmed protocol that determines that specific conditions or inputs will trigger a certain action. For example, $2 is paid into the machine and button F5 is pushed: this executes a transaction and delivers product from F5 to the buyer. The machine doesn't know or trust the buyer, but given the protocol that the buyer and the machine opt into, a successful exchange is made. No need to include intermediaries, lawyers or bankers - it's pre-programmed and fully automated. Smart contracts are one of the features that have unlocked new functionalities on the blockchain that make it more than just a ledger. 

Tokens come in two forms: fungible and non-fungible.

Fungible

As outlined in Part 1 of this series, a fungible token acts like money. Any token can be exchanged for another token of the same variety. Fungible tokens could be traded, used to buy items or could be earned through certain activities. They can be broken down into smaller parts and still retain the pro rata value of the whole. It's what we think of when we talk about cryptocurrency.

A subset of fungible tokens are 'social tokens'. These tokens can be created by celebrities, sportspeople, influencers, musicians or brands. They are a way for audiences to 'buy into' the entity. What the tokens do is totally dependent on how the entity designs their incentive structure (using smart contracts). They can grant access to spaces, events, product drops or people either virtually or IRL. They can also give governance rights, allowing token holders to participate in decision making and voting. 

Non-fungible

A non-fungible token has a unique property built into it, making it a scarce resource. Its provenance can be coded into it, ensuring its authenticity. The Internet we know today is one of abundance. Infinitely replicable copies of information. Scarcity has always been the domain of the off-line: high-heat sneakers, one-off artworks or exclusive access to a person or event. The invention of NFTs enables a new Internet of scarcity but with the old Internet of scale. This scarcity is a huge component of what is driving the hype, speculation and innovation in web3.

The most popular example of non-fungible tokens are JPEG avatars (known broadly as collectibles). Ape, punk or kittie profile pics. But this is just one application of NFTs. Anything that could be uniquely identifiable could act as an NFT. That includes music, writing, code, real estate, ID or attendance.

Meaningful Participation

The term ‘tokenomics’ was coined (🥁) to describe the architecture of an organization’s on-chain structure. What do the tokens do? How many are there? What do they represent, or what rights do they give? How do users obtain them? How are users incentivized to participate? There are countless ways token systems can be designed and for brands entering web3, understanding (and leveraging) tokenomics is crucial.

As web3 is decentralized, the culture of participation is deeply rooted in community. Showing commitment can be achieved by literally buying into one, where your commitment is financial. Or it could be buying into a vision, where you donate your expertise, time and efforts (maybe some capital too).

What does this mean for brands? As we saw from the learnings in Part 1, a dedication to community provides businesses a vehicle for sustainable growth. If brands are considering entering web3, they should be prepared to commit to a community. Communities don't always play by the company handbook - they're made up of autonomous people with different motivations. This is a long-term commitment and one that brands might not be able to control as tightly as their social media campaign.

Web3 Community Trends

I want to lightly touch on some trends relevant in this space before mapping out a possible framework for brands in web3. You'll notice the thread is how community can find and create value.

1. Membership programs

2. The value of digital things

3. Communities Enabling Creators

4. The Community Decides

1. The loyalty program is dead. Long live the loyalty program.

Loyalty or membership programs in their current guise have been around since the 1980s. Modeled off of frequent flyer schemes, the design of rewards systems are widely assumed to work, but empirical research suggests otherwise.  As Harvard Business Review concluded:

“The irony of most of today’s customer loyalty programs is that they aren’t about loyalty at all. They have more to do with an economic transaction than with true affinity for a brand.” 

MIT also found that loyalty programs are 'surprisingly ineffective'.  The youth agree. They aren't seeing the value in today's programs, nor do they trust most brands. Consumer behavior and expectations have changed,  but membership programs haven't kept up. Transactional benefits don't cut it, because today's consumers expect a true value exchange with brands. HBR again:

"Loyalty programs that effectively bribe people into buying more of your products — are lazy. In the modern aspiration economy, people develop true brand affinity only when it gives them a sense of community. Membership strategies are an effective way to achieve that goal. To do this effectively, remember to focus on the micro, niche groups of passionate consumers."

Web3 gives us an opportunity to redesign membership programs in a way that delivers true value to customers and the business. We can do this by incentivizing engagement and rewarding participation and in doing so, strengthening the brand's connections to its followers.

2. Standing out and fitting in

Ever since digital ownership was possible, it has always been considered inferior to owning a real, tangible thing.

Harvard Business Review looked at the link back in 2017. Their conclusion when comparing the two was that the reason physical formats had a higher value to people was that they gave a sense of ownership.

"We think that the difference in ownership that people feel for digital and physical goods may be due to a weaker sense of control over digital objects"

Yet, now we're looking at a future where users can control and have proof of ownership over digital items. That value equation is shifting and doing so even as the technology is still nascent. The virtual goods market is already on track to reach $190 billion by 2025. Much of this is driven by gaming, most of it off-chain. It signals a real reorientation in what today's consumers value. Digital things > Physical things for some people, for the first time in history. A common critique is that it's ridiculous that people would pay so much for items that don't exist in real life. But that's missing a couple of important points. Firstly, people will pay for what they value, no matter what format it takes. Secondly, with most of us spending most of our lives online now, identity and self-expression in the digital world is becoming more important. And people are willing to pay for that.

Once scarcity, proof of ownership and interoperability are introduced to the mainstream, the future of virtual goods will  grow exponentially. We're already seeing RTFKT virtual sneakers commonly selling around the $10k mark and the virtual land market has exploded, with 7-figure sales becoming commonplace. Speculation is unquestionably a factor here, but even so, the attitudinal shift has taken place.

3. Fans Take Stock, Creators Reclaim Control

A few months ago, Rex Woodbury had some great observations and sharp takes on social tokens. The premise being that communities of fans can buy 'stocks' in people (let's call those people 'subjects') they have an interest in. Unlike traditional stocks, these tokens can unlock benefits for fans. They can give access to tickets, content, merchandise or to the subject themselves. They can allow token holders to decide on life choices made by the subject, or guarantee a cut of future earnings. Fans can buy the tokens, or they could earn them. Tokens are used to reward fans for their engagement and incentivize the subject to continue delivering value.

Social tokens also provide liquidity to subjects. This has important implications. Let's take the music industry as an example. If an artist needs capital (for recording or promotional purposes, for instance), then labels have traditionally been the resource for that. But social tokens can act as an artist’s IPO. Capital raised from minting those tokens can remain with the artist themselves. Of course, this is assuming the artist has any following at all. For many artists, labels are a necessary but unwanted part of their professional ecosystem. Social tokens could be a compelling alternative.

Whilst we're on the topic of the music industry, let's diverge for a couple of paragraphs to discuss a couple of other ways web3 could disrupt it. As Paul Chodirker explains, the music industry is opaque and fraught with complexity in how music royalties are tracked and paid out. Intermediaries and inefficiencies are in abundance and that complexity has reduced margins and concentrated power away from artists. Web3 opens up the possibility of tracking usage, cutting out middlemen and ensuring royalties are maximized for musicians.

Web3 and the decentralized, open source philosophy that underpins it, is surfacing some disruptive thinking. We are now seeing experimental platforms that are intentionally designed to maximize earnings for creators. A complete inversion of where value gets distributed between the platform and the performer - see below for how Audius is flipping the script on Spotify. This could usher in a whole new economic paradigm.

Social tokens will be the backbone to a creator economy. As Coopatroopa explains, for a creator to succeed, they'll need to produce both content and collectibles. Yet community is the connective tissue... and social tokens are the mechanism for true fans to gather together to keep that flywheel going.

4. Mob Rules 

In this post, I've spoken a lot about 'ownership' that's enabled by web3. But another important by-product enabled by smart contracts is 'participation'. If smart contracts have governance rights coded into them, tokens allow holders to participate in decision making. This is made possible with pre-defined rules that outline how the community can vote and how decisions will ultimately be made. This has been popularized by newest kid on the crypto block, DAOs (Decentralized Autonomous Organizations), which bring total strangers together to unite behind a common objective and pool resources. Some are success stories and some are gloriously failed experiments.

If you want to learn more about DAOs, you can start here and here. But there are ways to infuse participation through voting with a lower level of effort than DAOs require. Which might also be a good thing if you're a more centralized organization like a brand. Because smart contracts require pre-defined rules, minting governance tokens doesn't necessarily cede control from the executive leadership team to the crypto-sphere.  It can be contained, small, focused. Designed to incentivize engagement and reward behavior around specific things.

How the community does this in a practical sense will vary. But for the most part, web3 communities operate publicly on platforms like Twitter and operate privately on platforms like Discord. Server access and voting mechanisms can be managed well through Discord, but more bespoke experiences can be built as an alternative.

Web3 Community Framework

Now that we've covered a few community trends, understand the underlying functionality and have assessed a few projects that are live and in market... what happens next? If you manage a brand and are contemplating getting into the space, the first thing to say is: don't feel the need to rush it. Take some time to learn. Read a lot, get involved. Buy and trade NFTs. Use different DApps, different blockchains. Become part of a DAO. We are still extremely early, so don’t be too hasty.

Then, really think about whether your brand needs to step into web3. What are your reasons? Could it be done without crypto? Is your company the type of company that should feasibly build a community? Not all brands should try, after all.

If your answer is "because it's what everyone is talking about", then think harder. But if you see a future where web3 can be a skeleton for a healthy brand community and sustainable business growth, then what follows can be some inputs in how you design your ecosystem.

framework components

Below are a number of ways brands can design their incentive and reward structure using tokens.

Earn tokens by:

Content Creation or Participation

Involve creators or fans in your content / marketing materials. Pay them in fiat, but also reward them with tokens to incentivize participation in the community.

Consumer insights

Use your community for market research. Discord is the perfect place for discussion and can be gated to token holders. Listen to and reward your fans.

Engagement

Whether to reward past behavior or incentivize continued activity, recognizing the community's efforts can go a long way

Proof of Attendance

POAPs (Proof Of Attendance Protocols) are a way to verify that someone attended a particular event. This could be ornamental, or it could give permissions to future experiences or governance.

Transactional rewards

Like a traditional rewards card, the community can earn tokens by purchasing your brand's product.

Use tokens for:

Unlock high value moments, activities and items, such as:

Access to talent

If your brand leverages influencers or celebrities, tokens can provide access to activities they’re involved with. That could be a live performance, content they make early access to products they’ve collaborated on.

Access to exclusive content

If you create the sort of content that audiences clamor over, reward your token holders with exclusive access to restricted content.

Access to merch & product drops

Exclusive or early access to goods for the community.

Access to events

This could be into real life events, VIP areas or virtual events as well.

Access to virtual spaces

If your brand can show up in a gaming environment, token ownership can provide a ticket to that branded experience.

Access to your organization

For many customers, getting a peek behind the curtain into the companies they love is a dream. Tokens could give rights to holders to see the processes and people at your company.

Governance

Allow the community to vote. This could help you with product validation or allow fans to participate in innovation. For example, hearing their design preferences or flavor choices

Be aware that there are different voting structures that can be leveraged (e.g. one vote per token vs one vote per wallet), so do your research.

The above diagram is brand-centric and community-centric. It is by no means an exhaustive list and certainly doesn't attempt to cover all tenets of crypto. What a brand chooses to do in web3 should be thoughtfully connected to what their fan base values and what will keep the flywheel spinning.

Putting it into action

We are still so very early in the cycle for web3. A small amount of people have made a ton of noise, but the reality is, we're a long way off from mass adoption. Plus, there are significant challenges to overcome before that is possible:

Security concerns are real: scammers are everywhere.

Setting up a wallet is complex.

Overall UX of anything web3 related for normal users is terrible.

Mistakes can be costly.

The infrastructure is still being built.

Fees can be insane.

The key to success for brands will be ensuring their communities are safe and feel comfortable in the environment. It's worth investing time and in the right resource to achieve that. For some companies, that could mean acquisitions. But we’re starting to see platforms to help brands do the heavy lifting. One such company is making a huge play to be the platform of choice for businesses: Shopify. They recently launched their web3 presence to help companies mint and list NFTs, selling directly from their stores with payments either in crypto or fiat. It's another example of a centralized source coming into the crypto world, surfacing real tension points between usability and decentralization. But regardless of your perspective, Shopify and more like it will come. Each one that does gets us closer to the potential and reality of mass adoption.