Author: Li Jin, Partner at Variant Fund; Translation: Jinse Finance xiaozou
A classic use of cryptocurrencies in markets is as a mechanism to drive growth: using tokens to incentivize the inflow of supply and/or demand. Various DePIN networks and other market tokenizations have successfully applied this model to overcome the cold start problem.
In analyzing market tokenization, we have developed a framework for thinking about various market tokenization approaches and the pros and cons of each approach.
At the most basic level, markets facilitate transactions between supply and demand. Over the past few decades, we have seen a variety of evolutions in markets that have either unlocked new sources of supply and demand or abstracted best practices for existing supply and demand participants.
In short, markets can be segmented based on whether they target new or existing supply, and satisfy new or existing demand.
First, let's look at the specific definition:
New Demand: Converting Non-Consumers into Consumers
Markets that meet new needs expand the market for a product or service by converting previous non-consumers into consumers. For example, UberX essentially converts consumers who previously used other modes of transportation (public transportation, private cars, etc.) into ride-sharing users.
New Supply: Converting Non-Suppliers into Suppliers
Marketplaces targeting new supply are expanding the market for a product or service by activating non-suppliers who previously did not provide the service or product to become suppliers. For example, Airbnb adds new supply on the host side in the form of more bedrooms or couches.
Existing demand: Get existing consumers to switch to new markets
Marketplaces that tap into existing demand are pulling existing users of your product or service into new markets. Think about this: Angie’s List’s superior vertical experience may pull existing demand away from a more general marketplace like Craigslist.
Existing supply: Switch existing suppliers to new markets
Similar to the previous point, but for suppliers. Take Faire, for example, a B2B wholesale marketplace that connects brands and retailers.
1. Web2 Market
It can help to borrow a market approach from Web2. By looking at the history of market development and how the biggest successes occurred, we can better understand market dynamics.
The biggest disruptions in Web2 market innovation—and therefore the biggest gains—happen in the “new supply + new demand” quadrant. When you unlock new supply and new demand, you make the pie bigger. This echoes Clay Christensen’s view of disruptive innovation: Christensen argues that focusing on former non-consumers unlocks a much larger market than locking in existing consumers.
Compared to the "Existing Supply + Existing Demand" quadrant, marketplaces in this quadrant typically take existing transactions (Whitepages, travel agencies, etc.) and build better products to serve those transactions. Examples include Priceline for travel reservations and OpenTable for restaurant reservations. The convenience and ease of digital discovery and booking allow them to create an experience that is 10 times superior to offline marketplaces, enabling them to capture market share.
There are two quadrants left: one where the supply is still there but the demand is new, and one where the demand is still there but new supply has emerged. In both cases, growth can come from converting new consumers or suppliers. There are a lot of businesses coming from these quadrants. For example, DoorDash has created a new source of demand for existing restaurant supply (consumers wanting food delivered on demand). By converting non-consumers to consumers, it has opened up a new revenue channel for restaurants - DoorDash had $2.3 billion in revenue last year.
Obviously, there is overlap within these quadrants, and markets often start in one quadrant and then migrate or expand into others. However, this framework helps quantify the size of the addressable market based on existing market dynamics and potential supply and demand.
2. Web3 Market Matrix
Similar to web2 markets, there are four common ways to categorize market tokenization.
Occupying the “Existing Supply + Existing Demand” quadrant are marketplaces that seek to improve upon existing platforms — for example, by offering better products or better economics for participants. For example, Braintrust is a freelance marketplace that shares ownership with users through tokens, charging lower commission rates that beat the industry standard of 40% for staffing agencies. Blackbird is a restaurant loyalty platform that targets existing restaurants and offers lower commission rates for cryptocurrency payments.
In the “New Demand + New Supply” quadrant, businesses can create entirely new markets. For example, DIMO allows drivers to earn tokens by transmitting their vehicle data, unlocking new supply and demand pools in the automotive data space. Drivers who would not otherwise provide vehicle data are attracted to the network by token incentives, and this new data supply unlocks new demand. Helium is another example: individuals set up hotspots at home and are rewarded for creating a decentralized wireless IoT network using the LoRaWan system.
Market tokenization fits nicely into the “new demand + new supply” quadrant, as token incentives can grow markets in an orderly manner by subsidizing one party to join the market before another. This is a new capability compared to the web2 paradigm, where markets must scale both supply and demand.
The risk of building a “New Supply + New Demand” quadrant is that supply or demand is insufficient to underlie a large revenue opportunity, or that new suppliers and/or new demand take longer to emerge than expected. However, founders may also underestimate the size of an emerging market. For example, the Uber founders estimated in their seed round presentation that they would have annual revenue of $1 billion in the most optimistic case. This turned out to be a significant underestimate of the potential demand for transportation—Uber’s revenue was $8.7 billion last year. Founders must prepare for both possibilities, developing flexible business models that can scale quickly if the market reacts stronger than expected, and also developing contingency plans for situations where growth is slower than expected.
3. Impact on Builder
Understanding whether a new market is targeting new or existing supply and demand is critical because it determines the market entry strategy and how builders need to differentiate themselves to win the market’s supply and demand share.
For new supply
To activate new supply, builders must educate potential suppliers on why they should participate in this new market and provide an attractive value proposition. This usually requires convincing them that they will receive monetary or other benefits.
If the value proposition is money, then builders must ensure their solutions are competitive in the broader revenue opportunity market. For example, GPU resource suppliers can choose to rent to different GPU markets, so the revenue potential of the new platform must be attractive enough. Participating as an active or passive supplier is another factor that affects retention and scalability.
For existing supply
Finding existing suppliers and convincing them to switch to a new platform requires developing a strong product and go-to-market campaign, which depends on the nature of the supply. If the existing supply consists of businesses (B2B), founders build relationships with these suppliers and benefit from them. If the existing supply consists of individuals (B2C), founders need strong storytelling and marketing skills, as well as the ability to turn deep user insights into products.
For new needs
Creating new demand requires builders to excel in new market creation. Founders must effectively communicate why this new product or service is valuable and worthy of user attention. This requires skilled storytelling and narrative construction, as well as a strong set of customer acquisition skills. In the crypto space, token incentives can also help drive new demand for the market.
For existing needs
To win over existing demand, founders need to be good at acquiring customers, satisfying potential users’ needs, and convincing them to switch to a different platform. This requires understanding their current needs and providing a significantly better solution. For example, new vertical on-demand market disruptors convert users from Craigslist and other general platforms through a 10x better user experience. In the crypto world, using token incentives to convince end users to switch to a new platform is an effective strategy, as demonstrated by various vampire attacks and token incentive programs.
4. Market tokenization prospects
Market tokenization is unique in the crypto world because they face competition not only from other crypto projects, but also from all other web2 markets in the vertical. This is because Web3 markets deploy token incentives as a bootstrapping mechanism, while the core of the market still depends on the success of transactions. For example, GPU tokenized compute markets like Ionet, Akash, Render, etc. compete with traditional compute services such as Lambda, Coreweave, and AWS.
The lifeblood of any market is liquidity - the ability to find counterparties for targeted transactions. While token incentives can drive initial growth and help overcome cold start issues, long-term success still depends on the core utility of the market: matching supply with demand. Ultimately, market tokenization must build a strong enough market with a superior experience that attracts and retains participants.
