Progressive Ownership: A Model for Application Tokens and the Hard Thing About Easy Things in Ecommerce

Progressive Ownership: A Model for Application Tokens and the Hard Thing About Easy Things in Ecommerce

In the world of cryptocurrencies and blockchain technology, the use of tokens as a user incentive has proven to be successful for bootstrapping infrastructure networks like Bitcoin and Ethereum. However, when it comes to the application layer, there has yet to be a proven model for using tokens to grow networks effectively. In fact, many examples have shown that distributing tokens can actually impede sustained growth and retention by attracting more speculators and mercenaries than genuine users.

This has led many to dismiss the use of tokens for applications, but there is still potential for a more bottom-up and opt-in ownership distribution model that we call "progressive ownership." Progressive ownership aims to iterate token design towards a model that incentivizes users to become more economically aligned with the success of a network, leading to stronger loyalty and network effects.

Looking back at the evolution of token incentives, we can see how different eras have shaped the use of tokens in various ways. The proof of work era, which began in 2009 and continues to this day, showed that token incentives can be effective in bootstrapping supply in networks where contributed value can be quantified, such as computing power. Miners in these networks are forced to sell the financial asset (tokens) to cover their costs, creating a separation between the capital asset (hardware) and the financial asset.

The ICO era, from 2014 to 2018, allowed projects to bypass intermediaries like venture capitalists and bankers and reach a broader range of participants. However, this era also highlighted the need for more thoughtful token design and distribution models that prioritize community alignment and long-term development. Many projects focused solely on capital provision rather than product-market fit and community engagement.

The airdrop era, which took place from 2020 to 2023, introduced a shift towards a more user-centric and community-driven ownership distribution model. Airdrops rewarded users for their historical usage, but often resulted in users converting ownership to income by selling the majority of their tokens. This left decision-making to governance referendums that most tokenholders did not fully understand, leading to a mismatch between growth strategy and organizational execution.

Progressive ownership takes a different approach by employing economic incentives in degrees to increase user loyalty and retention. Users are incentivized with revenue share income (such as ETH or stablecoins) but can choose to trade individual income for tokens representing ownership of a proportional share of the community's revenue. This model allows users to move fluidly between income and ownership, with fewer steps than the previous default of converting tokens to income.

While progressive ownership can be a powerful tool for projects with early product-market fit and revenue to share, it is not a one-size-fits-all solution. It requires careful consideration of user needs and the development of products that offer a step-function improvement in achieving those needs. Successful startups understand the importance of serving user needs and creating products that provide unique value.

Incorporating on-chain revenue share can be a growth, retention, and defensibility strategy for applications. For example, projects can reward their most valuable users with the option to earn revenue share in the form of ETH or stablecoins, or take a proportional token distribution. This approach aligns user incentives with the success of the network and provides a pathway for users to become more economically involved.

However, it's important to note that the ease of setting up an online store and selling products through platforms like Shopify has both positive and negative impacts on the ecommerce industry. On one hand, it lowers barriers to entry and allows anyone with an internet connection and a credit card to start a business. This democratization of entrepreneurship is empowering for individuals and leads to increased competition.

On the other hand, the ease of entry also leads to a saturated market and increased competition for customer attention. With so many companies armed with the same plug-and-play tools, it becomes challenging for individual companies to generate sustained profits. The battle shifts to marketing and paid acquisition, which becomes the only moat for the majority of brands.

Shopify, as a leading ecommerce infrastructure company, has seen tremendous growth and success. Its revenue continues to grow, driven by the increase in overall spend by Shopify customers. However, the rise of Shopify and similar platforms has made it harder for individual brands to differentiate themselves and achieve profitability at scale.

The arming of everyone with the same ecommerce tools and services creates a highly competitive environment where profitability becomes challenging. Companies are forced to outspend each other on ads to acquire customers, benefiting platforms like Shopify, Google, and Facebook. While Shopify has good intentions of empowering entrepreneurs, it can be seen as more of a war profiteer, benefiting from increased competition and spending.

To navigate this challenging landscape, entrepreneurs in the DTC (Direct-to-Consumer) space have a few strategies to consider. First, bootstrapping and growing slowly can be a viable option, especially for those targeting small niches that can be reached without relying heavily on paid acquisition. Building an audience before launching a product can be a successful approach, allowing for the development of a differentiated tech or IP, or a brand that captures a specific audience.

Another approach is to build a specific audience and then sell it to an incumbent company that struggles to reach that audience. This requires a focus on customer acquisition and retention, as well as the ability to demonstrate the value of the audience to potential acquirers.

In conclusion, progressive ownership offers a potential solution for using tokens to grow networks in the application layer. By incentivizing users with revenue share income and the option to convert income into ownership, projects can increase user loyalty, align incentives, and drive network effects. However, it is important to carefully consider user needs, build products that provide step-function improvements, and find the right balance between income and ownership.

Three actionable advice:

1. Focus on building products that serve user needs and provide a step-function improvement. This will attract genuine users and drive sustained growth.
2. Consider incorporating on-chain revenue share to incentivize user loyalty and retention. This can be done through options like earning revenue share in stablecoins or taking a proportional token distribution.
3. Be strategic in navigating the highly competitive ecommerce landscape. Consider bootstrapping, targeting niche markets, building an audience before launching a product, or positioning your company as an acquisition target for incumbents.

By understanding the challenges and opportunities in both the token economy and the ecommerce industry, entrepreneurs can make informed decisions and develop strategies that lead to long-term success.