Compiled and edited by TechFlow
Guests: Imran Khan, Founder of @alliancedao Support; Wang Qiao, Customer Support at @alliancedao
Moderator: Michael Ippolito
Podcast source: Bell Curve
Finding Consumer Gems in Crypto | Qiao Imran
Air Date: September 3, 2024
Background Information
In this episode, we invited Qiao and Imran from AllianceDAO to join us to discuss weak infrastructure in the crypto space, the Fat App Thesis, and cultural differences between blockchains. We also think about whether L1 has long-term bullish potential and where the developers of consumer applications are. Finally, we deeply analyze how TikTok combines with cryptocurrency and how cryptocurrency has the potential to solve the business model dilemma of traditional media.
Weak infrastructure in the crypto space
Michael expressed his concern about the weak infrastructure in the current crypto space. He mentioned that although cryptocurrencies have existed for many years, there are few real applications and the market is flooded with infrastructure tokens, which often lack a customer base and are difficult to understand. He hopes to see more real applications, not just discussions about infrastructure.
Challenges in Building Infrastructure and Applications
Qiao shared a founder’s view that infrastructure projects are relatively easy to build because they are more like pure engineering projects, while applications require a deep understanding of user psychology and pain points. He emphasized that building infrastructure (such as launching a chain) has become simpler today compared to a few years ago, while building a consumer product that can attract millions of users is still difficult.
Venture capital focuses on infrastructure and consumer projects
Imran pointed out that despite the market's demand for infrastructure and consumer projects, many infrastructure projects are still being launched. He mentioned that many founders do not approach VCs that focus on consumer projects when seeking investment, and these VCs may lack understanding of the consumer market when evaluating, which leads to their negative attitude towards consumer projects.
The adaptability of the venture capital ecosystem
Michael believes that the venture capital ecosystem needs to adapt to this change and start focusing on how to evaluate and support the construction of consumer products. He mentioned that there is too much attention on infrastructure, auctions, and mechanism design in the market, but relatively little discussion on how to bring products to market. He pointed out that venture capital should pay more attention to market strategy and user acquisition when evaluating startups.
Relative Valuation of Applications and Infrastructure
Michael raised the question about the relative valuations of infrastructure versus applications. He noted that infrastructure businesses are often viewed as “shovel and pick” business models that may receive high valuations due to their durability. However, he questioned whether such high valuations are justified if there are not enough applications as customers, since the customers of infrastructure are ultimately applications.
Historical experience and value capture
Qiao explained that historically, applications have generally been able to capture more value. For example, during the dot-com bubble, while infrastructure companies such as Intel and cable companies performed well in terms of market capitalization, a decade later, it was consumer-oriented products such as Amazon, Apple, and Google that really captured value. He believes that this trend will also repeat itself in the crypto space, and although infrastructure tokens will still be valued higher than consumer products in the short term, in the long run, the value of consumer applications will surpass infrastructure.
The Circular Relationship between Applications and Infrastructure
Imran cited Nick Grossman’s article “The Myth of the Infrastructure Phase”, emphasizing that the development of applications will stimulate the construction of infrastructure, and the infrastructure will support new applications. He believes that this circular relationship will continue to exist, and we may be at the bottom of the infrastructure and gradually transition to the rising stage of applications.
The challenges of building infrastructure for founders
Michael discussed the phenomenon of founders developing the infrastructure required while building their applications. He used Amazon’s AWS as an example of founders building infrastructure to meet their own needs.
Qiao believes that founders should not focus on two directions at the same time in the early stage, but should focus on one field and consider expansion after it matures.
Sustainability and resource balance
Qiao stressed that founders need to maintain a balance in resources and focus, especially in the early stages of a startup, and it is best to focus on application development first and then consider infrastructure construction after it succeeds.
Fat App Thesis
Michael brought up the discussion of the “Fat App Theory”, referencing the concept of the “Smiling Curve” proposed by Stan Shih in 1992. The curve described the value chain of personal computers, emphasizing value capture in the ideation and marketing stages, while the value in the manufacturing stage was relatively low. He pointed out that the value capture of modern applications is similar to this model, and mentioned the application theory proposed by Joel Manegro in 2017, arguing that applications will capture more value, while the protocols and on-chain primitives in the middle may be squeezed.
Definition and value capture of the middle layer
Qiao believes that the definition of the middle layer is crucial. He mentioned that if we consider decentralized finance (DeFi) protocols as the middle layer, he agrees that applications will capture more value. He cited the example of Uniswap, pointing out that Uniswap Labs has users, not just the protocol itself, which makes it dominant in the market. He emphasized that the ability to own end users is the key to success.
Transaction costs and user experience
Michael mentioned the difference in transaction costs, especially between Ethereum and Solana. He pointed out that on Ethereum, transaction costs can significantly affect user choice, while on Solana, transaction costs are relatively low, making transactions through aggregators more attractive. Qiao agreed, noting that MetaMask makes huge profits from charging transaction fees, emphasizing the importance of user ownership.
Vertical integration of applications
Imran offers a different perspective, arguing that applications may gradually own the entire infrastructure, especially in terms of vertical integration of DeFi protocols and primitives. He uses Friend Tech V2 as an example of how applications can bring all functions together, forcing users to trade within the app, thereby capturing all fees and value. He believes that if applications can effectively integrate vertically, it may pose a threat to traditional decentralized exchanges (DEX).
Does L1 have long-term bullish potential?
Michael raised a question about whether L1 (first layer blockchain) has long-term bullish potential. He believes that with the possible exception of Bitcoin, other L1 blockchains may face competition in the long run because they need to retain the cash flow generated by the ecosystem. He pointed out that as application developers pay more and more attention to reducing the value extraction on L1, cash flows like MEV (miner extractable value) may eventually be captured by applications.
MEV and value capture
Michael believes that the value capture theory of MEV is reasonable on paper, but in practice, the value of L1 may be weakened over time. He mentioned that the increase in L2 (second layer blockchain) activity does not mean that people will buy Ethereum (ETH) because the incentive of L2 is to allow users to pay in any currency they want.
Qiao further added that he is less concerned with long-term (such as 10 to 20 years) predictions, but rather focuses on the winners at the end of the current cycle. He believes that although the MEV capture theory is correct in theory, there are many other factors that will affect the future performance of L1. He emphasized that in the long run, value storage is the most important, which may make platforms such as Bitcoin, Ethereum or Solana potential value storage.
Short-term and long-term perspectives
Imran believes that the market is still full of variables, and any L1 is likely to emerge in the future competition. He mentioned that although Solana is currently performing well, each Ethereum L2 is likely to catch up after a breakthrough application emerges.
Michael mentioned that the increasing amount of ETH flowing on Ethereum shows a strong network effect, which may be beneficial to the development of L2. He believes that in the future, there may not be too many L2s, and three to four large L2 frameworks will be enough, which can achieve good interoperability within the application ecosystem.
Future L2 Frameworks
When discussing the future of L2, Michael mentioned projects such as Arbitrum, Base, and ZK Sync, believing that these projects may occupy an important position in the future. Imran mentioned Polygon CDK and believed that its architectural design is promising.
Where have the consumer app developers gone?
Michael brings up a discussion about current consumer app developers, asking Imran and Qiao what they think about where the new generation of founders are building and the types of apps they’re focusing on. Imran notes that Solana and Ethereum still dominate the market, while the Base platform has also received a lot of investment in recent founder batches. He mentions some on-chain game development, though most projects are still focused on Base and Solana.
Telegram and TON’s Distribution Advantages
Michael mentioned TON (Telegram Open Network) and its relationship with Telegram, discussing its potential user base and distribution capabilities. Imran shared an interesting case about a developer who released a game on Telegram. He said that the developer spent a lot of advertising money on Web 2 games and only got 1,500 monthly active users after a year and a half, but after releasing the same game on Telegram, it reached 15 million monthly active users in just three days. This shows the strong network effect of Telegram.
Imran further noted that Telegram offers a unique distribution channel, similar to Zynga’s early opportunity on Facebook. He believes that developers building apps on Telegram could quickly gain a user base and become the dominant app on the platform.
User Types and Application Challenges
Despite the distribution advantages, Imran also raised several issues to consider, including the types of users and motivations for use. He asked whether these users use the application out of incentives or for other reasons. In addition, he mentioned the speed and cost issues that the TON network may face when processing on-chain activities. Therefore, many founders began to build hybrid infrastructures, putting most of the game logic off-chain while keeping some functions on-chain to take advantage of Telegram's distribution capabilities.
Cultural differences between blockchains
Michael raised the issue of cultural differences between blockchains, especially the differences between the Ethereum and Solana communities. He observed that Base, as a platform, feels more like an extension of Ethereum culture, full of positive and optimistic atmosphere, encouraging developers to build applications on it, while the Solana community seems more pragmatic and more focused on engineering technology.
Founders influence culture
Qiao believes that this cultural difference can be traced back to the founders’ DNA. Ethereum’s founder, Vitalik Buterin, is idealistic, while Solana’s founder is more pragmatic. Imran further added that during the bear market, Solana’s founders showed stronger unity and pragmatism, emphasizing the power of the community, while the Ethereum community was more about spreading its ideas and beliefs.
Community Response and Challenges
Michael mentioned that the Ethereum community’s response to criticism, such as Bankless’ accusations against the Ethereum community, reflects the tension within the community. He believes that the blockchain community should reflect on itself instead of excluding people with different opinions.
Brand strategy for application platforms
Michael also discussed the challenges of branding for emerging L2 and L1 platforms. He believes that many chains try to differentiate themselves by limiting the types of applications, which may not be a wise choice. He suggested that these platforms should welcome all types of application developers because it is difficult to predict which applications will actually succeed in the current market environment.
Qiao expressed his disappointment with the Ethereum core team, believing that they are biased against founders in certain areas and may miss out on excellent developers. Imran mentioned the Ethereum Foundation’s conservative attitude in funding projects, especially when it comes to speculative applications, which may limit innovation.
Speculation and Financial Principles
During the discussion, Michael made an interesting point that many people have rediscovered the essence of finance after entering the cryptocurrency field. He believes that the financial market is essentially dependent on speculation and gambling, and this allergic reaction to speculation may actually be a new understanding of the working principles of finance.
Qiao added that the performance of the US stock market is an exception in the global financial market, and that markets in other countries tend to perform poorly. They discussed the complexity of financial markets and people's different views on speculation, arguing that this reflects people's different levels of understanding of finance.
What can blockchain achieve?
In this discussion, Michael makes a key point that people tend to focus on what blockchain technology cannot achieve, while ignoring what it can uniquely achieve. He uses the example of mobile devices to illustrate that despite many criticisms of the limitations of mobile phones in the early days, the convenience of mobile phones eventually made them an indispensable part of life.
The core capabilities of blockchain
Qiao believes that blockchain is best at creating new markets and micropayments. For example, creator tokens and the emergence of new markets are advantages of blockchain. In addition, blockchain also performs well in cross-border payments and micropayments, making small payments that are difficult to achieve in traditional payment methods feasible.
Imran further added that although blockchain technology can achieve some specific functions, such as privacy protection and data verification, these functions are usually part of larger applications rather than independent products.
New opportunities for old ideas
Michael mentioned some ideas from the 2017 ICO era that might be worth revisiting. He used earn.com as an example, noting that it was an interesting concept related to micropayments, although it failed to succeed at the time due to the high cost of blockchain. He believes that with the development of technology, micropayments are now feasible, and many new application ideas are still to be developed.
Combining gaming with micropayments
During the discussion, Michael brought up the potential of on-chain gaming, arguing that it is not necessary to convert every action in the game into an on-chain transaction, but the integration of micropayments may be more valuable. He mentioned that when young players make small purchases in the game, it can reduce the friction of using credit cards, which will greatly improve the user experience.
Qiao further elaborated that the concept of on-chain games is closely related to concepts such as data sovereignty, data ownership, and composability, but these ideals were not the main driving force for users in the early stages. Users are still most concerned about practical applications such as speculation and micropayments.
Speculation and the evolution of consciousness
Imran pointed out that many people initially entered the cryptocurrency market for speculative motives, and over time they gradually realized the other advantages of blockchain technology. He believes that while the decentralization concept advocated by Ethereum founder Vitalik Buterin and others will remain important in the future, people's acceptance and timing will be different.
Future users and technologies
Michael finally proposed that future users entering the crypto space may not pay as much attention to the concept of decentralization as early users. He believes that technology should be good enough that users do not have to care about these concepts, but can directly enjoy the convenience brought by technology.
TikTok and Cryptocurrency
During this segment of the discussion, Michael brought up the potential intersection between TikTok and cryptocurrency, particularly in terms of how new generations of users, such as Gen Z and Gen Alpha, interact with cryptocurrency.
A new generation of entrepreneurship
Qiao and Imran discussed the entrepreneurial spirit of the new generations (Gen Z and Gen Alpha), highlighting their preference for non-traditional ways to make money, such as live streaming and content creation. Imran observed that young people are less interested in traditional jobs, but are able to find innovative ways to make money, such as interacting with their audiences through live streaming platforms.
Combination of live streaming and micropayment
Qiao mentioned that on current live streaming platforms, fans reward creators by purchasing virtual gifts, which is actually an application of micropayment. He pointed out that traditional credit card payments cannot support small amount transfers, so virtual gifts have become a disguised form of reward. This model can actually be regarded as a "second-layer" solution, allowing creators to withdraw cash after accumulating enough virtual gifts.
The Challenge of TikTok Content
Michael suggested that despite suggestions for them to be active on TikTok, he thought it would be a challenge to adapt their content to the style of TikTok because their content was more oriented towards the financial and crypto fields, while content on TikTok usually requires a more relaxed and entertaining format. He was worried that this shift might cause a backlash among the core audience.
The future of live streaming platforms
Imran went on to explore the potential of live streaming platforms, mentioning some emerging live streaming apps such as Pump. They believe that as content creators increasingly show their true selves, a new form of content may emerge, namely "complete depravity", which may attract a specific audience segment.
Can cryptocurrency save the business model of traditional media?
During this discussion, Michael made a bold prediction that there might be some kind of marriage between cryptocurrency and media. He believes that as the traditional media business model collapses, cryptocurrency could become a new solution.
The dilemma of traditional media
Michael pointed out that the business model of traditional media has been severely impacted, especially the rise of social media has caused a large amount of advertising revenue to flow to Facebook and Google. The media has lost access to first-party data, which has led to their inability to effectively understand and attract audiences. Relatively speaking, cryptocurrency addresses can be regarded as a new source of first-party data, which provides more precise targets for advertising.
The marriage of cryptocurrency and media
Michael raised an interesting point that certain features of cryptocurrency can be used to reshape the business model of the media. For example, tokens can be used as a tool to interact with the audience, and advertisers can conduct more effective advertising based on user behavior on the blockchain (such as transaction records on decentralized exchanges). In addition, he mentioned that "tokens are the new content and market capitalization is the new engagement metric", which shows that the economic model of cryptocurrency can bring new incentive mechanisms for content creation.
Live streaming and community interaction
Imran further explored the potential of cryptocurrency in the live streaming space. He mentioned that on some live streaming platforms, the interaction between viewers and creators can be tokenized, so that the audience's feedback and needs can directly influence the content direction of the creators. This interaction can not only enhance the cohesion of the community, but also provide a new source of income for creators.
The emergence of new media phenomena
Qiao mentioned a new phenomenon that the way some viral online memes spread is changing. He found that many emerging memes are now spread through decentralized trading platforms such as Dex Screener instead of traditional social media such as TikTok or Twitter. This phenomenon suggests that blockchain and cryptocurrency may become an important channel for the dissemination of new media content in the future.
How will founders change in the next ten years?
In this segment, Michael and other participants explore how the characteristics and backgrounds of founders will change over the next decade, especially in the cryptocurrency and technology sectors.
The evolution of founder traits
Micheal mentioned that as cryptocurrencies and technology evolve, the background and characteristics of founders may change significantly. He believes that traditional founders from elite schools may no longer be the only success stories, and more people from non-traditional backgrounds or non-elite institutions will also emerge. This change may bring about different ways of thinking and entrepreneurial styles.
The difference between infrastructure and applications
Qiao further analyzed the difference between infrastructure (infra) and application (app) founders. He pointed out that infrastructure construction usually has a low iteration frequency, while applications require fast iteration and frequent updates. Therefore, application founders need to have stronger user understanding and market adaptability.
The psychological traits of founders
Imran mentioned some common psychological traits of successful app founders, such as they usually have a "motivation to prove themselves", which may come from their upbringing or background. They have a certain sense of rejection of technical founders, believing that app founders can better understand user needs and market trends.
Emotional tolerance
Michael also mentioned that founders need to be able to withstand extreme emotional fluctuations. He believes that successful founders must not only be smart and creative, but also need to remain calm and tenacious in the face of uncertainty and pressure.
