Convergent evolution

Early on in the adoption cycle of new technology paradigms, we often see convergent evolution around similar ideas and problem spaces, with sometimes slightly different solutions and assumptions. I've highlighted this before in a blog post about the different ways in which the wallet experience stack, which represents a convergence of the b2b middleware ecosystem in web3 around wallet-enabled identity and commerce, is approached by a diversity of players. We see something similar here in the consumer finance side of web3, with wallets, payment apps, neobanks and centralized exchanges all converging around some common obvious use cases enabled by blockchain rails that have actual teeth. Let’s take a look at some examples.

Noncustodial payments apps

One of the ironies of crypto has been that payments, perhaps the most obvious canonical example use case for crypto from the days of its inception, has found itself among the last use cases to actually develop and gain traction. Payment in volatile assets like Bitcoin and ETH were obviously niche activities and have sustained things like DeFi and NFTs, but it has only been with the advent of stablecoins and cheap blockspace that blockchain payments have finally begun to have their day in the sun. The crypto wallet’s most basic feature - the ability to send tokens - is finally ergonomic enough to be delivered in a web2-caliber experience. We see a number of apps and infrastructure focusing on enabling this now, with slick consumer “crypto Venmo” and global payments applications like Sling and Beam from Eco. There is even a community behind the quasi-meme $SEND token crowdsourcing and building an AA-enabled p2p payments app. Rather than crypto wallets, these apps look and function more like slimmed down versions of an early Cash app, and are typically focusing on either p2p payments for students and young people, or for expats and people sending remittances from abroad.

Noncustodial / semicustodial neobanks

While some of the emerging noncustodial fintechs are positioning for a narrow payments use case (a giant one in and of itself), others are taking a more holistic approach to their offering, complementing payments with features like additional yield on stablecoins, crypto multi currency accounts, investing features and combined crypto-fiat accounts with integrations into the traditional banking and card systems. The likes of Decaf and Paie come to mind (both Solana apps), as well as the forthcoming IBAN linked smart contract wallet coming from Obvious. Even the government in exile in Malaysia is turning to Polygon for a noncustodial neobank for its citizens called the Spring Development Bank. These are centralized entities, to be clear, and while they straddle the traditional, KYC’d financial system on behalf of their users in their centralized capacity, their fundamental functionality and value proposition consist in the user interacting onchain with their non-custodial wallet (or semicustodial/MPC). Many of the things you used to use a bank (or a challenger bank) for are starting to go on-chain, and these noncustodial neobanks provide a simplified interface to leverage all the power of onchain lending, borrowing, yield and trading protocols in a slick UX. In some cases, noncustodial neobanking functionality will be paired with traditional banking functionality, but as more and more of the financial “jobs to be done” of the user move onchain, the tradfi banking system (like centralized exchanges are starting to look right now to crypto users) starts looking more and more like a dumb on/off ramp.

Neobank 2.5

While most of the noncustodial payments apps and neobanks so far are new crypto-native startups, we are also seeing significant activity from the existing neobanking / challenger bank side of the space, taking the form of both existing neobanks spinning up non/semi-custodial wallets for their users and offering crypto services, as well as custodial crypto-focused neobanking and investing models that offer similar services but in a custodial form. Not quite full web3 noncustodial neobanks, but utilizing either blockchain technologies directly or indirectly to provide their services, we can safely call this category our “Neobank 2.5s” Cenoa, based in Turkey and focused on geos including Turkey and Argentina, offer a custodial solution for accessing dollar stablecoins and onchain yield protocols in a slick consumer app as an inflation hedge in countries hardest hit by local currency volatility. Most recently (and perhaps importantly) is of course PayPal, which has extended its crypto foray from custodial buying and selling of crypto to an EVM-based stablecoin and accompanying embedded wallet. , similar to Yellow Card in Africa. And besides the quintessential FinTech itself becoming a crypto neobank, we have Brazil’s NuBank, Germany’s N26 and the UK’s Monzo and Revolut and the American Cogni on similar paths. Neobanks operate in a competitive environment as the ostensible challengers to the stodgy consumer banks, and in crypto they find themselves on the backfoot from challenger to challenged. They are responding to that challenge and opportunity by doubling down on crypto services, and becoming hybrid tradfi-crypto neobanks. It would not be shocking to see their bigger cousins, the traditional consumer banks, start to think similarly.

Centralized exchanges

Centralized exchanges are some of the oldest “applications” for crypto, and while they are the epitome of “centralized” in a crypto context, they are doubling down on their own noncustodial wallets and quasi-superapps, and serving more and more of these “fintech” crypto cases with even their centralized rails. Binance Pay (very often Tether or TronUSD denominated) has significant remittance corridor and emerging market traction and everyday usage, particularly in Latin America. Coinbase’s USDC yield offering in their main app and staking aggregation in their Coinbase Wallet app combine with their semi-payments focused L2 launch in Base (Beam Eco for ex). Centralized exchanges are in a great position to offer financial services to their existing users, and have invested in growth areas like standalone wallets to capture more and more of this emerging set of use cases.

While the exact scope and approach may very, all of the above players are starting to converge around - what is that? Could it be ? Actual consumer crypto fintech use cases with early product-market fit?

Users and Use Cases

Much has been written about the early adopters in the crypto-native economy, but the most important cohort of users to reach next for crypto is obviously the “early majority” in Geoffrey Moore’s parlance, a group for whom everyday financial products can finally be meaningfully addressed. In order to move from the early adopters to the early majority, a technology paradigm needs to “cross the chasm” of early adopters trying to see the value in something new, to the early majority of people just trying to get things done in their lives.

Moore also describes the process by which this usually occurs, wherein first a set of vertical use cases emerge as a set of “bowling pins” which get traction and can later be “knocked over together” as adjacent use cases provide ample opportunity for horizontalization and generalization. It all comes to a head in the “tornado,” when these early use cases get swept together in a huge adoption pull from the early majority, creating huge consolidated winning platforms and a deluge of applications finding product-market fit. In our noncustodial finance world, we’re seeing the following bowling pins emerge, which give us some hints as to what the tornado might look like.

Payments

As mentioned earlier, despite the Alice-and-Bob obviousness of sending value from person A to person B that crypto’s very design intimated, for years, crypto payments amounted to not much more than a novelty or an implementation detail of some very crypto-native niche application (or crime). The canonical reference use case for crypto doesn’t even have any real traction, as goes an inside joke in crypto circles. But that is rapidly changing, first funnily enough with real traction by Tron and Binance in emerging markets with everyday payments, and now more and more of the crypto application layer is trying to reorient around “it just works” consumer payments using blockchain rails. A key catalyst here of course has been the advent of stablecoins like USDT, BUSD and USDT, which represent crypto’s first killer “ meta-app” as stablecoins feature prominently throughout the rest of the noncustodial fintech space. Broadly we can slice the kind of payments traction that crypto is seeing into two nearer term buckets and one more medium term one - p2p venmo-like payments, remittance corridor payments and b2c payments. A web3 Venmo is perhaps the most obvious crypto dApp to imagine, but really only with the advent of stablecoins, cheap networks and layer twos and seedless self-custody and account abstraction is the full capability and benefit of crypto being brought to bear in a consumable way. Those same benefits apply to international or remittance payments, with remittance corridors like Latin America<>US and Africa<>Europe beginning to see significant flows of crypto remittances.

Inflation resistance

In emerging markets in particular, inflation resistance goes hand in hand with payments and remittances. The major factor here again is the stablecoin - particularly the dollar stablecoin - as people in countries with weak or volatile currencies seek ways to preserve their wealth. Latin America is again the earliest on this trend, as can be expected given its bumpy monetary context, but we are seeing it everywhere people want to hold the gold standard in value preservation - the US dollar (no goldbug trolling intended). NoFi apps can offer basic access to dollars to anyone in the world (often in an easier/cheaper way than traditional forex rails) so long as they can onramp them in some way from fiat. These dollars can be held, put into interest bearing accounts, sent to anyone with a compatible wallet worldwide at an increasingly low cost.

Save / Earn

Everyone who has any extra cash is someone who needs to store and save that value somewhere, and we are seeing NoFi applications leveraging the onchain primitives for yield and interest accrual in easy to use, consumer-friendly interfaces. While onchain rates had been low for a while, more aggressive interest from centralized stablecoin issuers to match the offchain fixed income environment has pushed onchain rates closer to those of offchain money markets. Even without a huge base interest rate advantage over savings account rates (as DeFi had during its speculative mania phase), the variety of different permissionless yield products that are (relatively) safe still makes it a powerful way for people to grow their savings. DEX LP positions for stable or blue chip pairs, conservative money market positions, stablecoin risk-free rates, conservative yield aggregator strategies all provide potential onchain yield sources for NoFi apps to proxy for their users, both for their stable assets (thereby multiplying the inflation hedge use case in those situations) and for any volatile/investment assets. We see the outlines of this experience in apps for UX-conscious web3 natives, like Instadapp and Zerion, who make depositing into yield-bearing positions one or two clicks, and consumer apps like the aforementioned Cenoa turning it into a completely simplified “Save” feature.

Borrowing

Onchain borrowing is a bit harder to bring to consumers than lending due to the fact that most credit in the world is under/uncollateralized, but we are still seeing interesting progress and innovation. NoFi apps have yet to go all-in here (other than really Binance, who does crypto loans for its users), but we can expect that to change pretty quickly as progress is made on the underlying protocols and can be passed through to interfaces. MakerDAO’s Spark protocol offers you the ability to borrow DAI at a fixed 3.19% interest rate (and spend it with your optional linked debit card), which is pretty attractive in today’s environment, so long as you’re OK putting up double the collateral of your loan. It will be interesting to see if this attracts any retail borrowers who are otherwise priced out of personal loans from banks in the current interest rate and credit score regime, and want to lock in a low rate loan to make a purchase without actually spending money. Alchemix offers the “self-repaying loan” - something which might end up being a good fit for buying something like a car or making a house downpayment. DeFi protocols like Goldfinch are getting deeper into undercollateralized lending for offchain businesses, an idea which could conceivably scale to millions of small businesses, and the learnings from which will definitely inform the next round of people trying to build more and more accessible credit applications, whether they be oracle-based uncollateralized models, post-Sybil reputation models or innovative new collateralized lending protocols with more attractive properties to retail borrowers. The “final boss” is the opaque, centralized, orwellian credit agency and traditional bank credit ecosystem, and as soon as DeFi comes up with a better solutions, NoFi will be able to surface it to consumers.

Forex / MCA

For certain cohorts of users, like students studying abroad, expats, freelancers and digital nomads, dealing with multiple currencies regularly is a fact of life. Getting paid in one currency but needing to send home your home country’s currency, needing to pay for a SaaS application in another currency, having multiple clients or gigs paying you in multiple currencies are all situations where quickly exchanging money between fiat currencies is a must. Doing this through the traditional banking system may be cumbersome, slow, and expensive, and for certain people, the administrative overhead might actually be prohibitive. Stablecoins and DEX’s delivered through NoFi applications offer a way for people to have a “crypto multicurrency account” with multiple stablecoins that they can send, swap or save depending on what they need to do with it. MCAs have become a popular feature of non-crypto fintech/neobanking applications in these same cohorts, and one would expect the two sets of use cases to start to converge over time as more crypto neobanks focus on these use cases and existing fintechs start exploring blockchain rails as an alternative to their own cost and operational structure.

Trading/Investing

Trading is the first and core use case of crypto, so we won’t spend much more time on it here, other than to point out that access to investing and even trading risky assets is something that the tradfi fintech world has been pushing for some time (think Robinhood) on the equities side, and its a legitimate user need that NoFi fintech applications will obviously provide for their users. DEXs, bridges and aggregators make it relatively simple for consumer applications to offer ononcustodial trading of cryptos to their users, allowing their users to take some risk exposure. And with the advent of more tokenized RWAs coming onchain, the prospect of toffering rading everything onchain from a single app - cryptos, equities, forex, real estate and fixed income - becomes an obvious one for NoFi apps. If you already put enough of your inflation-hedged digital dollars in a yield bearing DeFi protocol to meet your monthly savings goal, why not simply ape a little into the latest memecoin crypto or stock with the leftover from the same application?

Implementation patterns

Convergent evolution around the problem space is, of course, accompanied by convergent evolution around the solution space. As we see are finally seeing NoFi applications that can reasonably compete for a mass market TAM, we see some common threads that underpin the different approaches. Let’s start with the stack at a high level, from the settlement layer all the way up to the app layer, and then zoom into some key tech themes that are coming up.

MPC, account abstraction and other seed phrase elimination

It’s clear that the next billion users will not be safely storing 24 word phrases, and the crypto industry has largely taken this meme to heart over the last 12 months and cranked out a number of different implementations, standards and SDKs to help dApp developers deliver a web2 style login experience with a crypto wallet. I wrote about this space extensively in The Wallet-Centric Experience Stack, but it is worth reiterating the importance of secure self-custody solutions which give web2 style login and recovery capabilities to the development of the NoFi application layer. Whether the exact implementation is MPC-based, smart account based or a hybrid of the two, NoFi apps are taking advantage of the latest and greatest in wallet experience stack middleware innovations and bringing them to the masses. Eco from Beam uses ERC-4337 compatible smart accounts and account abstraction infrastructure on Optimism (and soon Base) to deliver both a seedless onboarding flow and a sub 5-cent payment experience that can be accessed via a link even if the user has never setup a wallet before.

Solana

As a known Ethereum mosti, it pains me to praise Solana, but I have to give credit where credit is due. Sling, Decaf and Key.app all run on Solana, and they are probably the 3 slickest NoFi apps in existence right now. Solana has obviously always had the right cost properties for retail payments (despite decentralization tradeoffs), but what stands out about Solana’s outsized presence in the NoFi space is the quality of the application builders and the orientation towards everyday user value. So, even though Ethereum’s rollup ecosystem is rapidly catching up to Solana on cost and speed, Solana’s app ecosystem is arguably a step ahead in terms of innovating on NoFi UX.

Zaps, metatransactions and intents

Without getting into a gigantic detour on the topic of blockchain intents and the future of MEV, I will just mention that the general concept of packaging multiple onchain actions together for easy transacting on behalf of the user is not just going to be something that degens take advantage of to get the best limit order price. Be they onchain “zaps” or recipes of multiple transactions to be executed together, or signed offchain messages representing what the user wants, NoFi apps will be able to take advantage composing multiple kinds of transactions and transaction-like orders to simply give the user what they are looking for. It won’t be long before we see these little frictions polished away in NoFi apps with buttons like “Swap into USDC and save” or “Swap into ETH and stake.”

Straddling crypto and tradfi banking and payment system

Another implementation theme we’re seeing in this NoFi wave is the blending of crypto and tradfi in a few meaningful ways. One is that often the entities operating these apps are able to add additional value by entering into a banking relationship or a relationship with some banking infrastructure provider. The ability for noncustodial neobanks, which are themselves really just 95% noncustodial wallets, to layer on fiat-to-crypto services and bank accounts is being utilized in order to deepen the kind of value these apps can provide. Being able to receive a portion of your paycheck into your noncustodial wallet automatically makes all of the other services within that wallet more valuable and essential, and being able to spend your crypto at the grocery store with a swipe or a tap extends it even further. Users are giving up measures of anonymity when they KYC themselves to use these services, but for most users - real life is already “KYC’d” and this simply helps crypto fit into their life better. With players like Visa and Mastercard already experimenting with payments using smart accounts and account abstraction on the EVM, the hybrid world where onchain and offchain are interlinked in an easy interface for users is becoming more and more prevalent.

Tokenized real world assets

As was alluded to before, more and more high quality real world assets are moving onchain, enabling new kinds of consumer financial products that otherwise weren’t possible. The most obvious and immediate way this is happening is through stablecoins themselves. Issuers like Circle and Tether are printing money with the billions they are able to put into short term paper, and they are increasingly passing that yield from Treasuries and other short term offchain securities to onchain stablecoin holders. Another example of this is the recent wave of onchain US treasuries that crypto investors can tap into from the likes of Ondo Finance. While you need to be KYC’d (and there are geographical restrictions depending on which product of theirs you want to use), once you have been you are able to get a juicy yield in an ergonomic onchain wallet with none of the clicking around through a confusing brokerage application. The more valuable real world assets are tokenized and brought onchain, the more potential financial products they can spawn for regular users.

Why now?

To understand why we’re now seeing this explosion in traction in these use cases (love it or hate it, TRX chain has 2 million DAUs) and entrants as serious as PayPal, we need to look to a few factors coming together to push things forward.

Stablecoins

The first and most obvious reason why NoFi is taking off now is the maturation of the stablecoin ecosystem. Digital dollars (and increasingly other fiats) are arguably the killer application of blockchains so far. As we have talked about throughout most of the examples, stablecoins are the lifeblood of actual everyday commerce in a way that volatile crypto definitionally cannot be. Digital frictionless fiat is making its way into all kinds of applications, locales and niches. The traction is accelerating, not slowing down, with Circle alone having over $700m in revenue in the first half of 2023 on their 26 billion circ supply USDC, already surpassing their 2022 revenue total. Tether is making so much money they might become a systemically important holder of US treasuries if things continue. And far more important than giant aggregate issuance or revenue statistics is the adoption by everyday users and businesses to do mundane and necessary things as mentioned above, particularly those who were previously un/underbanked in developing markets. We’ve yet to see the explosion of their use in the mainstream in developed markets, but there are reasons to believe that could change (more later).

Maturity of scaling solutions

I don’t want to declare victory on the trilemma for practical purposes too early in the scaling wars, and there is still a lot of architecture, engineering and decentralization to be built out in the blockchain scaling ecosystem, but we are nearing the end of decentralized blockchains being too expensive and cumbersome for everyday use. Solana has been at negligible transaction costs for a while, and the Ethereum ecosystem’s Manhattan project style bet on the rollup-centric roadmap is finally bearing real fruit. We’ll see not only a drastic reduction in rollup costs from EIP 4844 and all of the scaling gains in the zk world still to be eked out, but have also seen the creation of a flourishing L2 infrastructure ecosystem, to the point where applications will be able to easily spin up dedicated “rollapps” for their application for maximum control, performance and monetization. Crypto in general and Ethereum in particular went through a “dark night of the soul” on scaling, and those efforts are bearing fruit in consumer-grade “good enough” L2s for nearly any use case being basically being one hard fork away. NoFi applications are therefore launching into the most permissive blockspace environment in the history of crypto, with multiple good and improving options to choose from in terms of network.

Innovation in the wallet stack

As mentioned a bit above, technologies like MPC, account abstracted smart accounts with gasless transactions, and products like Privy and Web3Auth which tie the entire “wallet stack” together have given app developers looking to build crypto functionality with deep native wallet capabilities much easier. The next round of crypto neobanks and noncustodial fintech apps will not need to worry about users’ seed phrases or the need to already have a wallet installed. Not only are these blockchains finally cheap enough to use, you can add the ability for your app to interact with them frictionlessly with the most advanced smart account functionality in a few lines of JavaScript.

Macro tailwinds

Stepping back from crypto itself to the context in which it operates, we can see that the world around crypto is heading in directions which make this kind of NoFi innovation more attractive and necessary. Inflation volatility has returned with a vengeance, and particularly in developing countries with weak currencies, the desire to hedge exposure to international and local inflation volatility is growing. E-Commerce is trying to penetrate through all corners of the earth, but is finding difficulty in areas where local banking and payments infrastructure is weak, or where lack of internet access has disincentivized traditional fintech innovation. And the long, boring march of market efficiency runs right through the disintermediation of centralised (read: expensive) intermediaries in an unassailable way. Every cent that can be squeezed out of financial transactions and coordinated trust through smart contracts will be.

Blockchain as a vector of competition

All of the above factors and more have converged to imbue blockchain with being a “vector for competition” in multiple ways for fintech apps to compete. Instead of speculative future value or ideology, crypto is beginning to bring cold-hard practical reality into its value proposition in this emerging NoFi space.

Transaction costs

Centralized intermediaries have certain margin needs, and the more centralized intermediaries that are stacked up on one another to move value from one place to another, the more of that margin is taken from consumers and businesses. Blockchains are able to subsume intermediaries into smart contracts and do far more with far less in a fundamental way. In no other area is it more apparent where crypto is beginning to win than in the reduction of transaction costs for international payments. What costs me nearly $100 in fees to send via the international wire system across two countries costs less than a dollar when sending via USDC. As gas and scaling become less and less of a foreground concern, this strict transaction cost advantage of crypto rails is going to permeate through every potential service offering to consumers and businesses, and every margin that is able to be recuperated in this way by those who use blockchain to do it will be. There is likely a lot more “margin” that autonomous DeFi protocols can design out of finance, which NoFi apps can pass along to consumers with better financial products.

Composability

Bigger than simple interoperability, composability refers to the way in which different pieces of the ecosystem can be plugged in to one another to create higher order and more complex value. Starting with the most basic, NoFi products based around EVM wallets instantly gain the ability to pay any other EVM wallet on any chain, interact with DeFi protocols, read from identity NFTs from other applications, and create their own EVM based application logic which uses the wallet, all the above and more. While this is a bit of an abstract property, and it goes hand in hand with interoperability and network effects in general, crypto’s unique composability allows for the combination of services towards a greater end customer value. When combined with the next property, permissionlessness, NoFi builders have an enormous sandbox to plug into immediately when they enable their users to connect to the blockchain, and can easily enable trading, lending, borrowing, payments, or anything which combines them or builds on top. I talk more about composability as a web3 superpower here.

Permissionlessness

When building a fintech app, integrating with other complimentary providers or value added services can be a cumbersome, expensive and time consuming process. Integrating with crypto protocols is entirely different - because while there may still be rough edges around the DX of working with some of these protocols, the fact remains that anyone worldwide can add a basic “savings” feature to their app if their app is a wallet and they plug in to Compound or Aave. This kind of permissionless integration leads to faster innovation cycles and a broader variety of potential building blocks for compelling financial products and experiences.

Reduced business footprint and liability surface

One of the more interesting aspects of noncustodial finance that make it an attractive approach for fintech players is the way in which noncustodiality, by its very nature, creates a different separation of responsibilities between the user, the developer and other services. Hand in hand with the permissionlessness above, noncustodiality not only reduces the initial upfront friction of integrating something like DEX trading into your app, it (in many jurisdictions) makes it legally and regulatorily able for you to do so in the first place, relative to integrating something like traditional equity trading. The same applies to things like lending and borrowing, activities reserved for your tradtional bank typically, but which through DeFi protocols are accessible to anyone with a wallet (including your customers). NoFi apps can offer a suite of financial services, BD licenses, MTL licenses, even banking licenses themselves can be avoid if you are thoughtful about what you can offload to the chain (and your exact jurisdiction) and third party providers like regulated on/off ramps. There are even experiments with a more decentralized way of doing wealth management onchain with actual advisors (though again, this is not legal advice). This completely flips fintech app development on its head, as it implies a much broader potential range of entrants into the financial services space. By minimalizing the offchain footprint of the business and making money through things like interface taxes on transactions, NoFi apps can de facto enter markets that they de jure could not in a non crypto way.

UX

Wait, UX is a potential selling point for cypto fintech services? I thought it was the one and only thing holding us back from mass adoption? Without minimizing the work that still needs to be done to improve crypto UX, we can actually start to expect significant UX benefits to crypto rails over non crypto rails as time goes on. Take login and payments for example. It will take a certain critical mass of applications who already support crypto and users who already have wallets for this to fully be realized, but the ability for people to just simply connect with a wallet and pay without entering any additional information because they control their private keys is going to result in a better and better experience than web2 over time. Instead of a ton of annoying wire transfer screens from your bank to send a payment internationally, an instant crypto payment could be fundamentally less taps than even its fastest web2 counterpart. For now, UX is working against crypto as much as it is working for it, but that is soon going to change (for some of the reasons mentioned above), leaving the opportunity for the fundamentally inverted sovereign UX that wallets imply to win consumers over on mere ease of use.

What’s next?

NoFi is starting to hit its stride, and I think we should expect the number of players vying for this opportunity to grow by an order of magnitude in the coming years. Not only will it become a very competitive space, but it will merge with the existing competitive dynamic in fintech and neobanking, and the two will become one dynamic. It’s hard to say exactly who the winners are going to be, but there are a few future directions worth paying attention to.

Social and social finance

Almost in parallel to all of this NoFi stuff is a burgeoning decentralized social networking ecosystem, much of it centered around crypto. Protocols like Lens, Farcaster and BlueSky are going to open up entirely new design spaces for social apps, and as that explosion in social networking design inevitably comes with business model innovation for people like content creators, the financial side is likely to meld with the emerging NoFi meta. We have in the last week seen a very interesting experiment coming from deep within crypto twitter around social tokens in Friend.tech, and while still very early and niche, as more and more innovation happens in so-called “De-So,” there will be an interplay with NoFi in both directions. Perhaps the most impactful example of this would be what happens if Twitter/X gets into crypto payments. There are also experiments going on around community finance, micro credit and social insurance and UBI schemes onchain that finally are technically simple to implement, and we should expect to see finance made multiplayer in ways that solve actual real world problems for people.

B2C messaging and conversational blockchain commerce

Messaging protocols like XMTP are finally starting to get adopted not only in consumer wallets like Coinbase Wallet, but also b2b focused experience stack providers like Dynamic.xyz. This is beginning to hint at a very powerful set of commercial use cases possible with all of these connected wallets, ones which involve conversations between consumers and either dapps or even merchants. Conversational support, sales and marketing will make its way into wallet-delimited commerce and bring additional layers of consideration for NoFi apps. Do they become b2c platforms themselves (as Decaf is doing, with its consumer wallet and merchant crypto PoS solution) or do they try to become universal clients for blockchain commerce, supporting transactional messaging on behalf of the user’s allowed applications? This opens up an entirely new space of trusted commercial communications, something which is becoming even more dire as AI clogs up all of our digital comms channels and spammers become ever more effective.

Experience stack providers focusing more on NoFi as a use case

I expect the wallet experience stack providers mentioned throughout this piece and my other writings to focus on NoFi more and more as a vertical. Beyond gaming, NFTs and traditional DeFi, these consumer facing financial applications are a perfect fit for the value proposition of middleware products who sell a web2 caliber experience on top of web3 rails. This focus from the 40+ well funded companies and projects in this space will lead to better and better solutions for NoFi devs, and more killer apps.

Traction in developed markets finally arriving

Much of the early NoFi progress has been in emerging markets, or involves people with a tie to those emerging markets. This makes intuitive sense, as usually they are the least well served in a particular kind of market, with rich countries having oftentimes overserved consumers. But as all of the above forces work through the system, we will see more and more innovation happening in markets where the consumer is overserved on some obvious dimension, but underserved on some non-obvious one. This could very well take the form of innovation happening in developing countries making its way back to more developed ones.

A noncustodial super app

Finally, while this post presupposes a plethora of different NoFi apps with different approaches, it is very well possible that this bundle of financial “jobs to be done” gets rolled up by a few dominant players who create “non custodial super apps” in the vein of WeChat or GoTo. These apps could not only do everything mentioned above, but tie together the entire decentralized internet with some kind of dApp browser (or, more likely, a “mini programs” style mini app framework). General web3 wallets certainly hope this to be the case and many are raising on it as a thesis, and while I think its possible that we see one of the current crop of web3 all-in-one wallets reach super-app scale and scope, I think it’s probably more likely it comes from either the existing gigantic tech players and smartphone manufacturers, or NoFi apps starting with a much more focused approach with a maniacal focus on the mass market and a more limited initial scope.

Closing thoughts

As excited as I am about the potential for completely avant garde use cases that come directly from on-chain culture, the completely decentralized internet and metaverse is going to take time, whereas NoFi is here right now, and is crypto’s bridge across the chasm to the early majority.

The Experience Stack

One of the biggest prizes in b2b software across different tech paradigms has been what I’ll call the "experience stack." It means different things in different contexts, and there are overlapping and coexisting experience stacks in many cases, but broadly we can identify platforms like Salesforce and later Intercom, Twilio, and Shopify, companies who have, from diverse product strategy starting points and target markets, converged around the same privileged position of being a company's "vendor of record" with which they primarily manage their end-to-end customer relationship. The “experience stack” is not the sole component that companies need to integrate, but it is the sun around which everything else in the value chain orbits and enjoys outsized strategic optionality, pricing power and value extraction. This usually coincides with a kind of "customer record" innovation that reflects the centrality of that vendor's complete solution for managing the customer relationship, such as the cloud CRM, the e-commerce order history or, more recently, the "customer conversation" history as chat-based (and very soon, the long promised AI chatbot-based) customer engagement begins to become more and more central.

As technology is always changing and evolving, and new S curves spring up and advance as old ones peter out, we have a few overlapping "experience stack" paradigms coming out of web2. Salesforce's major victory in SaaS CRM laid the groundwork (and also the inertia) for its fight with Intercom, Twilio et al for the "conversational" CRM of the future, while the e-commerce stack that Shopify used to build a complete merchant platform for small and medium sized businesses has begun to see competition from below from the cloud providers ever increasingly large "lego block" services. While AI will pull forward and emphasis of conversation on this "experience stack," in the web3 corner of the world, we are watching a very interesting contender for this category - and unsurprisingly, it's completely oriented around wallets and the on-chain transactions they help users execute. This wallet-centric experience stack is being approached from multiple angles, but we can see it converging around the same chokepoints in terms of user flows to enable:

• Allow users to onboard easily, regardless of whether they are an existing web3 user or a new user, with some kind of seedless or equivalent experience

• Manage wallet connection, transactions and switching

• Allow users to make gasless transactions, pay with any gas token, authorize actions with session keys

• Manage users, sessions and all the edge cases around accounts connected to wallets

• Make it easy for users to on and offramp into crypto with their payment method of choice

• Make it easy for users to make more complex transactions and accomplish higher-level wallet-aware workflows, like depositing into a defi yield-bearing vault or gaining access to token-gated content

While there is much more to it than the wallets themselves (i.e. linking web2 credentials to web3 wallets for simple sign in, session management pre/post transaction), the wallet is the primary and most important customer relationship paradigm, one which flips the web2 paradigm on its head. In web3's wallet-centric world, the wallet is a self-contained payment and identity solution that the user has some kind of custody over and which natively lets them express their preferences as blockchain transactions. Fundamentally, the dapp or protocol is using the wallet (in whatever form) to communicate with the customer and engage in a rich, ongoing "conversation" - the history of which is (at least for now) public and onchain. Fundamentally what something like WalletConnect's 2.0 protocol is doing is allowing dapps and wallets to communicate with one another through cryptographic means, initially ferrying value and data related to transactions, but soon even messages themselves. Establishing a wallet-mediated relationship with the consumer is the name of the game.

Slicing the market

The crypto downturn has emphasized the need for clarity on exactly what “consumers” we are talking about, and so I’ll try to lay out in a handy 2x2 what the potential buyer/integrator demographics look like for this emerging experience stack category.

First, we have Web3 native apps trying to reach web3 natives, i.e. Defilama and Bungie. These are crypto-native builders who are trying to reach the niche (but valuable on an ARPU basis) segment of existing web3 users, whether that be hardcore NFT or hardcore DeFi or hardcore technical users. This segment is definitely likely to grow, and I'm very bullish on the on-chain web3 native economy’s absolute growth prospects in the medium and long run, but this is definitely the most challenging segment for experience stack providers to be focused on at the moment (and is generously maybe 5 or 10 million MAUs in size in terms of active smart contract platform users). Some of these companies can roll their own stack for some of these needs and are more comfortable using lower-level technologies themselves like wagmi and ethers. And since many of these interactions for web3 natives are very transactional (thin-ish UIs on top of mint, swap, deposit, etc), the free + OSS Wallet Connection libraries for free from the likes of Rainbow and WalletConnect are likely sufficient for a lot of their use cases. The preferences of this segment are the lumpiest and hardest to nail down from what I can tell, and so providers competing here are going to face an uphill battle.

We also have web3 native builders who are taking swings directly at the mass market from an upstart position What comes to mind here are the likes of Stepin, Axie, Polymarket, OpenSea. These are app developers who have come from the crypto world, have crypto bona fides, but are firmly trying to swing for the fences and target the mass market with their products. They are highly experience-sensitive because their users are much more likely to be new to crypto, and have more of a need for an end-to-end customer experience and onboarding management platform. Still, these are startups, they're likely going to want to have a very product-led sales experience where they are getting to use the product for free up to some point, their developers are able to kick the tires and weigh in, and only talk to sales when it's directly necessary. Other examples of this kind of company are what I’ll call “noncustodial neobanks” like Cenoa in Turkey, which are using DeFi rails to bring a differentiated financial service (in this case, inflation resistance and dollar savings yield) to a mass market audience. Some of the first category are confused and think they are in this second bucket (“our TAM is everybody!”), and some may well make it to the mass-market as they struggle through the gauntlet of finding PMF.

On the BigCo and Web2 side, in terms of builders, we have a group of existing players trying to reach the high net worth, existing web3 niche either as an experiment or as an extension of their loyalty footprint in the overlap between their most loyal and valuable customers and the existing web3 userbase. This brings to mind examples like the Tiffany's NFT drop and even the Twitter profile picture integration, which was really meant to pull in existing web3 users who already had NFTs and simply give them a great experience in their niche on Crypto Twitter.

And finally, we have what might be the Big Kahuna, which are the existing Web2 brands and large companies trying to reach the mass market. They might be targeting their existing audience, sometimes a new audience, but fundamentally trying to reach normal people with web3 tech for one reason or another. The user experience premium here is likely to be very high, particularly as these forays into web3 from existing migrate from innovation departments to more line-of-business deployments (and therefore more rigorous ROI/P&L analysis). I’d also lump influencers and celebrities who are getting deeper into web3 into this category, being as they are “enterprises” in and of themselves.

Diverse players converging

Some of the big players like OpenSea have chosen to stitch together their own solution (afaik) and integrate lower level libraries like themselves, but a growing sector of startups and projects are emerging to solve these problems in a repeatable way for dapp developers across all segments. They are diverse in their approaches, starting points and strategies, but are convergent around the central needs of this end to end “experience stack” mentioned above. Note that many of these categories are overlapping, and this inexhaustive list of players in the industry is an attempt to categorize in order to understand, not in order to reify. Broadly, contenders are coming from the following starting points and/or initial emphases:

• Key management focused (like Lit Protocol), leaning heavily into security, programmability of recovery options, trustlessness)

• General web3 platforms (Like Thirdweb), who provide a wide range of dapp building blocks all under one roof

• Smart account platforms (Like ZeroDev), which focus the offering around the smart account, and put things like gasless or sponsored transactions in the center. Some vendors are focused on the account piece itself, while others are focused on the paymaster/bundler piece separately

• Authentication focused providers (Like Dynamic and web3auth), who have a robust feature set around managing users in relation to their wallets, including Oauth integration, session management etc.

• Minting platforms (Like Hypermint), who are focused on a specific common web3 use case and providing a complete turnkey solution for brands

• Wallet connector libraries (Like RainbowKit), which focus almost exclusively on the minimal connect/sign-in-with-wallet functionality required to interact onchain

These solutions are increasingly competitive with one another directly, and indirectly are all competing for the very scarce integrator attention and relationship that the “experience stack” usually confers to the vendor/solution which occupies that keystone position. They typically come in the form of SDKs with backend services attached, and vary in terms of what standards they are built upon. This type of convergence around the same problem chokepoint from a variety of solution angles highlights the category creation moment that we are in.

The Fog of War

The fog of war here is thick, there are several moving parts, and different players taking different views of those moving parts - views as to what is core versus peripheral to value, what should be a proprietary differentiator versus an open standard. That means several instances of “friendpetition” where one or more of these players, all vying for either the same limited attention and budget from the buyer around their “web3” needs, or as a value-added infrastructure component that can extract a tax without being designed out of the equation due to some accrued long term advantage.What will the winning focus(es) turn out to be? What are the winning combinations of components in this space to in-house and differentiate on, versus outsource or integrate with? There are a few different theories of the case, which I'll illustrate here in a quick Wardley map of this emerging landscape at a very high level. For those that aren't familiar with Wardley mapping, it's a way to represent a value chain of components and dependencies in a dynamic competitive system evolving over time. I’ve mapped out here a high level view of the value chain underpinning the wallet-centric experience stack:

Players like ZeroDev are focusing on the smart account services side and integrating with arbitrary key management providers, whereas Dynamic is taking a more holistic auth-centric approach which spans embedded wallets to session management. Safe, of course the creator and maintainer of the Safe smart account core protocol, has widened its offering with basic kits for auth, making transactions and connecting to relayers. Some components in the value chain aggregate one another, and it's unclear whether the aggregation of things like MPC wallet providers or SCW implementations by the experience stack provider will be what wins over customers, or whether an integrated approach that chooses one implementation for each of these major pieces does better. For instance, Zero Dev, starting from the smart account SDK corner of the problem and working backwards, has has multiple custodial, semi-custodial and non-custodial embedded wallet offerings that it lets you use with its smart accounts. Thirdweb and Dynamic similarly offer both first party and third party options for these "instant wallets," and one can probably anticipate players experimenting with integrating one or more smart account frameworks as the “account abstraction” fueled smart contract wallet bonanza continues.

Such a tangled web - albeit one clearly forming into this end-to-end experience stack - is not uncommon in the early stages of category creation. While a bunch of experiments in this space are happening, we can see a few different potential winning hands but not their exact details, configuration, and timing. We’ll probably only get a real category name from Gartner in 18 months when the war is effectively over (and the spoils of the peace can begin in earnest).

Many unanswered questions = Alpha

This moment of category creation is a liquid one, one where various permutations of similar concepts, components and messages are tried. As the customer development process continues and early PMF begins to solidify, there are still many outstanding dimensions of the idea maze that providers in this space (and their customers) will need to wander through and eventually resolve. And that means that there is still a ton of “alpha” in the space.

For instance, there are some obvious directions that we can expect this experience stack market to lean into as web3 almost speedruns web2 history, including the development of a rich and competitive “integrations” ecosystem, a deeper emphasis on dapp<>user communication and embedded communication tools (perhaps web3 ones this time like XMTP), and features for more explicitly managing the stages of the customer journey, like retention management and marketing automation tools (again, likely web3 native ones). We can likely expect sales pitches in this space to converge more around traditional metrics like LTV or ARPU, with a blockchain transactional twist. The “Salesforce” of web3 will have a lot of web2 Salesforce in it.

But there are a ton of very thorny questions pretty specific to web3 that still need to be answered before this category shakes itself out.

The spectrum of “non-custodiality” is vast, and there are a lot of strong opinions on the right design, considerations and assumptions should hold across MPC and related approaches for handling traditional EOAs from a security and usability perspective. Without delving too deep into the specifics of the debate, there's a fundamental difference between what Lit protocol is trying to accomplish and its properties, and something much more institutional and web 2.5 like Fireblocks, and yet both (and everything in between) are being evaluated by developers looking to add the ability for users to create and maintain easy to use seedless accounts. The folks at Silence Laboratories have given a good view on the different ways of thinking about this in this blog post "**Redefining the Nomenclature of Web3 Custody." We even see lower-level experimentation from the likes of the Odsy network which takes a completely different approach in the Cosmos ecosystem by making the wallet itself decentralized and programmable with so-called "dWallets."

Relatedly, the coexistence of these embedded wallets and existing standalone wallets, as well as the portability and ejectability of keys, is another major open question. There is a so-called “graduation” problem if and when a user with an embedded wallet wants to move on into a more standalone wallet experience, discussed at length in Privy CEO Henri’s Stern’s great post on “progressive onboarding.” As their newly minted web3 users “grow up” in their web3 journey, there may be a pull to a more independent standalone wallet, and dapps will need to take a view on how they want to handle that. Some experience stack vendors like Sequence are leaning into this - making their particular wallet app offering both the solution for early onboarding and later engagement, retention and graduation into a full web3 user of multiple dapps with the Sequence wallet. Others like Coinbase WaaS are looking at a lower level of technology and the flexible approach dapps to white labeling their starter wallets and allow users to eject keys to a standalone wallet. There is a natural tension between the “app wallet” thesis that the experience stack is so focused on and the “fat wallet” thesis which sees today’s wallets as embryonic superapps which will intermediate web3 on behalf of the user. But eventually, even in a world post-traction of these embedded wallets, there will need to be some natural re-aggregation for users who either have multiple embedded wallets across the different apps they are using, potentially a ripe opportunity for the major web2 platforms (like the phone operating system or the default messaging superapp) to step in and yank the end user relationship away from experience stack providers and standalone wallets alike.

We also, of course, have the question of MPC vs smart account emphasis. Are these technologies substitutes or complements? Some experience stack providers are focused on one or the other, whereas some are seeing value in offering hybrid solutions (like we see with Lit + Stackup or Safe and web3auth). One observation is that key management, while there are still a host of problems to solve, is likely commoditizing in terms of the benefits that integrators in this space can absorb, so I've represented it in the map above as being on the cusp of commodity/utility status. It seems likely that pure key management providers/networks will compete to power many of these higher-level all-in-one SDKs and will not usually have a direct integrating customer relationship, unless some aspect of key management ends up becoming enough of a differentiator to move the needle. And the way that key management plays out will have a lot to do with the speed of adoption of smart accounts which are paired with key management solutions versus something like a pure MPC-based solution. Smart accounts also have an emerging concept of "modules" which extend the functionality and programmability of the wallet logic to external developers who can specialize in things like different recovery schemes. It’s unclear whether this becomes the important point of extensibility for the experience stack, or whether another higher-order abstraction like a full-stack “workflow” captures developer mindshare. Both MPC and Smart Accounts seem likely to play a big role in how the experience stack develops.

The question of depth versus breadth of chains, related to the smart account / account abstraction question, is another that will be important to track. There is one school of thought which says that vendors in this space should be on as many chains as possible, catering for the long tail of any requests clients may have in terms of chain - which speaks to one of MPC's best advantages, its fundamental blockchain agnosticity. There are forces which will pull experience stack providers to more or less custodial implementations, as well as between more or less decentralized chains, but part of the fundamental value proposition of using web3 technologies like NFTs in your product to begin with is the “return on composability” that they offer, giving the ability for your product to interoperate with native web3 standards, liquidity and existing primitives, permissionlessly. It’s unclear how this shakes out exactly, as different integrators may have value interoperability and composability more or less than other factors.

Whether experience stack providers should be generalized or focused on a particular sector is also an open question. For example Sequence is focusing on game developers holistically, so in addition to offering wallet and auth infrastructure, are offering data indexing and NFT merchandising solutions, as well as fiat on-ramps and Unity/Unreal SDKs. We will likely see other vendors leaning into the "noncustodial neobank" segment and selling to legacy and neobank fintech customers as they look to bring onchain benefits to users without the onchain hassle.Other players like Dynamic are making a much more generalized pitch. There will also be players who focus on bottoms-up distribution and web3 native developer community traction as a bet on the future innovation coming directly from the heart of web3 (i.e. the web3 native maximalist bet). Likely there will be a few big winners in a few different focus areas, and a race for underlying general infrastructure and standards which run right through the smart contract wallet and key management ecosystem questions.

There is also a fundamental fuzziness in the “account” model that is emerging here. It’s unclear what exact identity and login model will prevail in which segment. Are we talking about the Waystar Royco dapp account, or experience stack vendor AcmeCo’s embedded wallet account? Some solutions are more focused on one or the other approaches, and many have differing levels of white-labelability inherent to their design and the exactly part of the stack that they occupy. The different segments of potential experience stack customers might have different views on “owning the customer” through the wallet relationship or not, depending how how deep down the web3 rabbit hole their offering actually goes.

And finally - what is the endgame organizational structure or business model? Are we likely to see a few gigantic, centralized players left standing at the end? Probably. But there may also be a lot of open solutions that, over time, erode the margin of more centralized service providers, and constantly force them to innovate higher and higher up the stack to remain a value-add. On the other hand, there’s possibility is that the winners become so big that the only way to relieve the pressure that the contradiction of their existence (a centralized and hegemonic vendor proxying access for people to the "trustless" web3) is to decentralize or open pieces of their solution in some way.

Web3’s fundamental and most important risk remains value risk - the risk that we are not able to apply those properties which only blockchains afford us to bear upon problems outside of a narrow band of speculative activities of early adopters. In that sense, improving the UX of web3 alone will not save it from its current use case winter. But that doesn’t mean that improved UX for dapp users - web2 experiences with web3 guarantees - isn’t a necessary condition for that value risk to be reduced over time. The wallet-centric customer experience stack is the most important and biggest “picks and shovels” b2b infrastructure opportunity in crypto right now, and as far as I’m concerned, it’s wide open.

*Thanks for reading. You can follow me me on Twitter @basche42 or Farcaster *

The speculation casino is here to stay, at least for the medium run, but it cannot sustain web3 into the future. A few hundred million people worldwide have purchased crypto, and a few tens of million have done something on-chain. It's unknown how many will stick around through the rest of the bear market (active traders and active wallets have already shrunk significantly), but there will be a lot. However, unless the GDP of crypto grows out of the current meta of alt l1s or defi forks to recreate the same 7 ideas over and over again with slightly different tokenomics, one wonders what kind of future cycle could even be supported by the fundamentals. Pure pvp speculation and the products and services that surround it likely will always have a place, but that obviously represents a ceiling and a plateau for the industry which very well might severely dampen any sort of new speculative narrative. After all, the traditional financial system isn’t just big because of financialization per-se, but because all of that financialization ostensibly supports real economic flows.

Of course, the web3 builders and true believers are not going anywhere, and the core infrastructure that makes this industry truly tick continues to be built out and deployed at a staggering rate. Nobody thought we were this close to production-grade validity rollups even 18 months ago. Confidence is shaken, and out of position companies and projects will perhaps meet an untimely end, but Pandora's box has been opened and the tech is actually basically in the process of completing its preparation for prime time within the next 1-2 years. With the pace of improvement of layer 2s, protodanksharding and account-abstracted smart contract wallets, we're actually not too far off from being able to abstract away nearly all of the rough edges of web3 without sacrificing key properties of decentralization, censorship resistance, credible neutrality and composability. The scaling and UX problems of web3 have actually been solved, it’s just not evenly distributed yet, and they are no longer an excuse for a lack of adoption.

The key will be in figuring out how to apply this newly abundant secure blockspace to real world problems outside of investing and speculation, or services for the crypto wealthy. Cryptonative builders and users are sticking around in ecosystems like Ethereum, Solana and Cosmos, and they’re running many interesting experiments across decentralized consumer finance, NFT-enabled cultural production, social networking, decentralized marketplaces, decentralized compute and blockchain enabled gaming. Enterprises, web2 platforms and brands are likely to continue experimenting with the non-speculative use cases like we've seen from Reddit, JP Morgan and Starbucks (incidentally all Polygon related). We will need to see use cases which actually serve the real needs of people and businesses in a way that is not possible without the properties of blockchains, decentralized oracle networks, decentralized storage/compute etc.

All of the above was true before FTX blew up. If Sam had been able to hide the fraud or make it all back secretly in one trade and continue, crypto would face the same value winter in the months and years ahead. Some green shoots around mass market and real world economic use cases popped up in this past bull market, and will continue to be explored in the bear. How these and yet-to-be-discovered green shoots progress will basically determine the fate of the entire crypto market, not the casino.

No more excuses. At least now the tech is basically ready.

Within that “value risk” question, the question of “does this web3 stuff provide value to everyday people?” is obviously the most important, but not too far behind is the question “does this web3 stuff provide value to existing businesses?” In today’s world, people have numerous existing commercial and cultural relationships with businesses, institutions, celebrities, products and services around which much of their lives revolve. While the cryptonative economy is growing fast and has been a fruitful proving ground for many of cyptos biggest ideas, and despite the fact that the breakout use cases which take crypto mainstream may very well come from the more cryptonative hacker side of things, it’s safe to say that web3 “going mainstream” will also involve some critical mass of existing web2 and real world economy businesses buying in to web3.

The question is, are they also buying into permissionlessness, credible neutrality, decentralization and composability? Or are they seeing commercial opportunities in things like tokens, NFTs, and trust minimized contracts that could just as well be serviced at the end of the day by much more centralized, custodial or other types of services which break web3’s core tenants. What are these existing orgs are “buying” when buying into web3?

It certainly can’t primarily be to reach some untapped mass of cryptonative users, a niche that is maybe tens of millions of people at most. In fact, it’s likely that these existing organizations would be the ones bringing their audience into a web3 experience and not the other way around. We must then assume that they see some additive opportunity to their business and a fear of missing out on a net-new opportunity that web3 represents for them. One answer is that it is a bet on the number of exciting emerging and potential use cases for blockchains and decentralized applications. The emerging and potential applications of blockchains and related technologies for real commercial use cases are growing exponentially. Call it web2.5 or otherwise, the Fortune 500 and web2 giants are jumping into this new world headfirst. But are we seeing the existing economy make a bet on web3 in its most expansive sense? Do they really need the “real” web3 to achieve their goals?

My bet is yes on a medium run time horizon, but it’s definitely a live question, and one whose answer bears heavily on the prospects for the web3 revolution. I think in a longer post I will go on at length about other core aspects of web3, and to what extent or another they are in alignment or tension with the needs of existing economic and cultural entities. But for now I want to cover perhaps the most important and promising of those aspects which only web3 can really deliver: composability.

Composability is very much related to other core pieces of web3 like decentralization and permissionlessness. Something which is composable describes a system as a whole (or a part of that system) in which functionality can be broken up into building blocks with well-defined interfaces to other building blocks, and where the pieces of the system can be combined and recombined into higher-order, more valuable systems (which themselves can be combined with other systems, and so-on). Blockchains and decentralized systems offer unparalleled opportunities for composability between services. If there are relatively more centralized and therefore less composable ways to solve some of the initial “web2.5” use cases that companies are experimenting with, but we see enough evidence of them participating in open, permissionless blockchains more and decentralized networks, then there must be some kind of “return-on-composability” that companies are either seeing or expect to see which explains their participation. Where might these returns come from?

One “vector” of composability in web3 is through open networks of liquidity. Companies who make their NFTs truly permissionless on-chain NFTs on something like Ethereum or Polygon can connect an audience of people new to crypto (say, the Reddit community) directly to the liquidity of the cryptonative community through (relatively) open NFT marketplaces like OpenSea. After all, Reddit’s NFTs got an enormous second wind of awareness and engagement once the Redditors started realizing cypto people were bidding on their avatars for thousands of dollars. Something similar seems to be happening around the edges between traditional banks and defi blue chip protocols. Cryptonative liquidity is potentially one kind of “composability tie-in” that will pull existing orgs onto public blockchains.

Another potential source of these benefits from composability centers around the remixability that NFT-defined audiences and communities afford. Alex Danco has spoken about the potential for one merchant to offer a special token-gated discount to both holders of its loyalty token, and the loyalty token of a related brand, or a partnership where users need to hold both loyalty tokens in order to access some exclusive drop. Interoperability across and between different brands’ ecommerce, loyalty and community stacks is made much simpler with tokens, which means partnerships and “collabs” can become much deeper and build upon one another in a combinatorial way. In some sense, the more web3 initiatives users are participating in, the more opportunities there are for new web3 initiatives to plug in, mash up and connect together.

Perhaps the most important driver here will likely be a shift in user preferences as individual, siloed web3 use cases start to pile up on each other and users begin want to take their “cursor” from one application seamlessly into another. Initially, many people are likely to come into crypto through the initiative of a single entity. An artist they follow drops a song as an NFT. Their favorite fashion brand experiments with an NFT version of an AR filter for Snapchat. Their bank offers self-custodial staking yield as a value-added service to their neobanking services. Their favorite game adds a new unlockable NFT avatar from their favorite movie franchise. What could start to happen is that not only are users likely to want to consolidate these “app wallets” over time (a totally separate discussion), but they may start to want these services to talk to each other in more fundamental ways. They may want to use tokenized KYC from one service to login to another one. They may want to wear their NFT avatar in multiple games. They may want to take their staked position from their bank and use it to get a secured credit line to instantly purchase something on a merchant’s site using crypto BNPL. They may want their web3 data backpack that stores their basic profile data for various social apps to be usable in applying for a job or joining a dating site. The more users are exposed to effortless interoperability in certain aspects of their online life, the more we are likely we are to see them expressing preferences for more of that interoperability in others. As users are exposed to web2.5/web3 experiences, my bet is that they’ll pave desire paths towards this interoperability from within siloed experiences and complain when things don’t play nicely while actively seeking ecosystems where everything “just works” together.

So, when watching existing companies dip their toe into web3 and crypto, what I’m looking most closely for in their approach is whether I can see a significant present or future return on composability. If we see too many of these types of “web2.5” initiatives where composability doesn’t really bring much of a benefit, then I fear that the overall web3 economy will stall out, contract, and collapse in on itself. It may very well be that out of a collapsed existing iteration of cypto might arise a more hardcore, cockroach like crypto in the form of something like DarkFi, but that would likely take decades and several apocalyptic events before a real impact would be made. If however returns to composability are strong, enough of the existing economy may very well be pushed and pulled into participating in an open, permissionless and decentralized web3 because they can’t afford to miss out. The latter world seems like a significantly better outcome for the web3 experiment than the former. We’ll have to see where things shake out.

Now that I’ve got some downtime, I wanted to get back into writing more regularly, and Mirror seems to me to be the best option going forward.

I’ll be posting short and longer form thoughts here on web2, web3, web5 and beyond. Maybe some geopolitics and political economy here and there too.

First longer post will probably be about how Patreon, Substack and even OnlyFans are sitting ducks to be replaced by a web3 model. Mirror itself may very well play a big role

Until then,

Ben