Web3-Native: The Double Flywheel

I've written about how brands of today can evolve to leverage web3 features in a meaningful way. In today's post, I want to explore what it means to be a web3-native (w3n) brand and how w3n companies can shift into higher gears of growth when combining brand building with blockchain technology.

Some guardrails

In business and innovation, brand is integrated into everything that an end user interacts with. So as a preface to my thoughts on w3n brands, let me outline some parameters. For the purposes of this post, we will focus on:

Brands that are consumer-first
Application layer brands, meaning that users can easily interact with a brand interface. Brands may have their own underlying protocol but are more likely to be built on top of existing layer 1 or layer 2 solutions
Brands that exist to create more than just financial gain (this would exclude de-fi for example)

What makes a brand w3n?

Quite simply, a w3n brand cannot operate without the underlying technology of web3. Their business model, operations and user experience are contingent on the use of smart contracts. If the blockchain didn't exist, nor could that brand.

Tokenomics play an important part in how a w3n brand operates. Tokens are a powerful tool to raise capital and to incentivize or reward behavior. However, the price of a token cannot be the main source of value. Speculation will always have an impact, however a business shouldn't be reliant on a ponzi or 'greater fool theory' structure. The business must be economically viable outside of its token price. It must have a thing that is valuable outside of its own shares.

All of the ways that I outlined in my post about how yesterday's brands can enter and meaningfully participate in web3 are still relevant. However, when we think about brands that are w3n, the sources of value creation and defensibility are more deeply rooted.

Some of the overarching principles of web3 include ownership, decentralization and participation. What does that mean for brands building natively in web3? Are there different forces at play in building and defending a brand now that we're on-chain? If so, are those forces only different because of the speculative and financial aspects of crypto?

Forces at play

There are many web3 initiatives out there that could be executed off-chain with little compromise. The blockchain has been used because it can and because it's a hot topic. This isn't necessarily a bad thing. It unlocks consumer interest and extreme amounts of venture capital, which is helping the space progress. 2021 saw a huge spike in VC funding:

Despite all this interest, I've been grappling with this question: If the financial benefits of any given token didn't exist, would the non-financial benefits that the token affords (namely the ability to participate in an ecosystem) be a sufficient value driver for a brand? Practically speaking, it should. Executed well, there should be incremental value to be gained by additional ecosystem participation. But we’re not excited about incremental value.

The reality is that the financial / ownership component of web3 helps drive early adoption, fuels hype and gives tokens real-world value. Speculation is in web3’s DNA. Separating the financial and non-financial components is possible, but you risk diluting web3's rocket fuel by doing so.

Compounding effects

Consumer brands can use both on and off-chain elements to create and maintain a strong engagement ecosystem using a brand flywheel framework. The addition of a protocol layer gives the brand the ability to generate a significant competitive moat. I call this the Web3 Double Flywheel.

A flywheel is a device that stores and distributes energy. In the context of a brand framework, a flywheel allows brands to keep customers engaged and to attract like-minded consumers.

If you're unfamiliar with a brand flywheel, take a look at this post by Zoe Scaman, which does a good job of explaining the concept and why flywheels are an overdue departure from the traditional brand structures marketers have been using. The outer circle in the above diagram is the competitive moat that works independently of, but in conjunction with, the brand flywheel. This double flywheel effect will lead to compounding growth at a scale and pace far larger than web 2.0 brands could achieve.

We'll go through each component in turn below.

Brand Flywheel

Content

Centralized content creation: What we currently think of when we think about brand content. Product info, marketing materials, NFTs and their surrounding narratives.

Decentralized content creation: Content created by customers, facilitated by the brand. Rewarding community creation of content with tokens will shift flywheels into gears brands haven't yet experienced. The combination of community participation and reward for fungible, tradable tokens has the ability to ignite creativity amongst a customer base. Brands like Glossier already display the benefits of encouraged content creation (see my article here that touches on their strategy), so creating further incentives holds great promise.

Curation: When carefully managed, curation can be a powerful addition to a brand's arsenal of content. As Ana Andjelic notes:

For brands, curation can retain an audience and attract the new one that hasn’t considered a brand before. It can attract a collaborator or start a brand partnership. It can increase product value and protect pricing.

There are many levers that curation can pull. In a world of direct conversation with customers through platforms like Discord, brands should be seeking the community's input: asking what they find most valuable. This is a shortcut to content-market fit.

Community

Free discourse: Tightly regulated brand management, this is not. Discord is platform number one for community building in web3. It can be gated, parameters can be set, topics defined. But ultimately, the community is at the whim of its members.

Decision making: The community, through use of governance tokens or even simpler methods such as polls can not only input on decisions, but can set the strategic direction of the org. I enjoyed this take on a shift from Minimum Viable Product to Minimum Viable Community.

Play to earn: A tokenized reward for time and effort put into a game. Web3 allows gaming environments to create real micro economies, as tokens can be traded for fiat currency.

*Axie Infinity: the leading case for play to earn*

Collaboration

Brand: Traditional brand collabs. We're seeing this already with Bored Ape Yacht Club and Adidas, for example. Each entity is borrowing the equity from the other in order to increase their cultural clout or for visibility to new audiences.

Celebrities: The dimension this takes on in web3 is the ability for fans to interact with or gain access to celebrity partners. The dynamics of the deal could be a lot different as well, where incentive structures can be coded into the smart contracts of tokens issued as payment.
Creators: The potential here is huge. Today's web is powered by creators. Consider the scale and variety of content you see across YouTube, TikTok, Discord or Substack. Now imagine a world where the creators that speak to your audience can opt-in to a partnership, where their effort can be rewarded based based on pre-defined rules of engagement. Web 3 has been called "Speculation + Creator Economy" and for good reason. An entire sector has stood up to service the needs of Creators and we should expect to see many more surface in web3:

Protocol Moat

Token Value

Investment could initially come from VC or other sources of capital. This capital inflow establishes a base line valuation of the token. The token value will appreciate as demand increases. In addition, miners (or alternative sources of validation) will be incentivized to act as proof points for the protocol, increasing trust and therefore overall value to the network.

Governance

The challenge many brands face is how to continue engaging audiences once a campaign ends. There's a solution for that: give audiences control of your brand. When the token value is connected to the success of the brand, participants are highly motivated to build and grow the brand.

Scale

Once enough users are on platform, network effects will kick in. New users will come on board because there's a critical mass of existing users. Likewise, there will be data network effects that can unlock value for both users and the brand.

Composability

The beauty of web3 is that different applications built on the same blockchain are interoperable with one other. They are like lego bricks, where the overall structure is greater than the sum of its parts. Packy McCormick's write up is worth a read. Once a brand's application is widely used and part of the web3 tapestry, this will provide a high barrier to entry for competitors.

Room for improvement

When I set out to write this post, I expected to find very clear use cases for consumer brands that would rely on web3 infrastructure. That naturally replicate the Web3 Double Flywheel, weaving membership, product creation, brand building and business models altogether. In truth, many of the examples I've come across outside of gaming seem a bit gimmicky. Whether it's a beverage company, a luxury sneaker label or a restaurant. This is an area that can be vastly improved, so expect to see a lot of energy and capital directed to this space.