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“Money, as it turns out, is very often the most expensive way to motivate people.”

― Dan Ariely

CCAP: Crypto’s Cost of Acquiring Customers

Fun fact: Of the six founders that started PayPal, four had built bombs in high school.

It was an eclectic bunch that’s gone on to do even more eclectic things (like getting a long-shot candidate elected president and buying Twitter for a laugh).

And it was that type of out-of-the-box thinking that got PayPal off the ground — transforming their original sub-scale network of Palm Pilot users into a critical mass of email users required creativity.

After several failed starts, the founders landed on the novel idea of simply paying people to use their service: $10 just for signing up and another $10 for referring a friend.

It worked, of course. PayPal’s network, growing as much as 10% per day, quickly ballooned to over 100 million members.

But this success in motivating with money has proven to be an exception to the rule: In most cases, if you pay someone to use a product, you don't learn anything useful about that product.

Just the opposite: A business built around users that are paid to be there is a business that risks failing when the users are no longer paid.

This is a problem in crypto.

Can’t buy me love

In Zero to One, PayPal founder Peter Thiel argued that “distribution” (i.e., sales and marketing) is so essential to the success of a new product, it should be baked into its design: “If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business — no matter how good the product.”

DeFi protocols don't seem to give much thought to distribution. And the result is that there are a lot of bad businesses in DeFi.

Rather than employing tried and true marketing strategies (newsletter sponsorships, for example), protocols have mostly relied on token emissions.

This is understandable for two reasons:

1) Tokens are what protocols have the most of. (They can always print more.)

2) Even if they had dollars, it’s not clear where they should send them.

PayPal’s target audience was everyone, and everyone was useful to them: Even if a new user never sent any money with PayPal, they’d still have value to the network as someone might want to send some to them.

In DeFi, the pool of useful customers is much smaller and much harder to identify.

If you’re the product manager at a new DeFi protocol, how do you find users?

You could look for wallets that have done similar things on-chain, but how do you reach out to them?

All you can do is offer money, in the form of token rewards or airdrops, and see who shows up.

Mostly that will be the type of mercenary user who’s likely to leave as soon as the emissions end.

And the activity generated by those users won’t create any useful feedback.

When Uber subsidizes a ride it 1) discovers who’s interested in paying for rides and 2) encourages the habit of taking them.

In DeFi, by contrast, token emissions generally create activity that has no other economic rationale: As if Uber were paying people to take a ride to nowhere.

When crypto protocols pay people to use their product, the usage therefore contains no signal: They haven’t discovered what users are willing to pay for — they discovered only what users are willing to do for pay.

Worse still, offering token rewards can be counterproductive, like bribing kids to do things they don’t want to do: Once you’ve paid a kid to clean their room, you can’t expect them to ever clean it without being paid, can you?

Similarly, if DeFi users are attracted to a protocol for the rewards, they’re liable to wonder why they’d ever use that protocol without the rewards.

Consider, for example, that two of the most successful crypto applications, Uniswap and OpenSea, have never used rewards to attract users: Every user is there because they want to use the product.

And, in both cases, copy-cat competitors (SushiSwap and LooksRare, respectively) have struggled to keep the users they attracted away with token rewards: Once they stop paying, the poached users go back to Uniswap and OpenSea.

Money, as it turns out, is often an expensive way to motivate.

Thinking big

PayPal spent about $60 million on its referral program — a large sum for a startup, but an infinitesimal fraction of its $85 billion market cap now.

Happily, the referral payments quickly phased themselves out: “As the network got bigger and bigger,” Elon Musk explained, “the value of the network itself exceeded any sort of carrot that we could offer.”

Thinking about token emissions as the cost of acquiring customers does not map perfectly to crypto: With switching costs being negligible, attempting to calculate the lifetime value of a user may be a misleadingly Web2 concept.

But to achieve its PayPal-like ambitions, DeFi will have to figure out how to create a network that is valuable enough to attract users without any carrots.

It may take some eclectic thinking.

— Byron Gilliam

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How does UDSC help solve the Emerging Markets Liquidity Gap?

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Blockworks Research Alpha

Bitcoin has a long-term sustainability problem stemming from its lack of transaction fee generation. I explained my view of this issue and why it will lead to the flippening in the Blockworks Research 2023 Theses report.

In late January, ordinal inscriptions were popularized as a way to attach files (text, audio, video, etc.) to individual sats (0.00000001 BTC). The idea became quite popular on Crypto Twitter as it essentially mimics NFTs for Bitcoin and could be a way to drive more fee revenue to Bitcoin miners. Galaxy wrote a detailed piec e on the concept, suggesting the ordinal inscription market could grow to $5B by 2025. Over 345k inscriptions have been created to date resulting in $1.5M of fees for miners.

The chart of the day details the daily Bitcoin miner revenue broken into block subsidy, transaction fees, and ordinal inscription fees. If you break out the microscope, you can see ordinals generated just 0.2% of the total block rewards paid to miners in February.

I see this as the most exciting development on Bitcoin in recent years, but I am personally not sold on ordinals becoming a $5B market. Regardless, it is a refreshing sight to see innovation on Bitcoin.

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🟪 CCAP: Crypto’s Cost of Acquiring Customers