Until very recently I was a total crypto skeptic. My main reasons were 1. Anything done on a blockchain can be made simpler and cheaper by an impartial third party, and 2. Blockchain design has inherent limits in throughput that can’t be solved*. I recently listened to the podcast “Web3 Marketplaces” on the Acquired LP show and it all finally clicked!

Here’s why the killer use case of web3 is aligning incentives with tokenomics!**

If we look at marketplaces it typically plays out something like this:

1. Someone starts a marketplace.
2. To grow they take on venture capital, this allows them to continue to invest in growing both the demand and supply side of the site and constantly improving the experience.
3. If the site continue to grow it eventually becomes “the place” to buy and sell goods, once it becomes the first place people look then the marketplace has all the leverage... and can raise fees.
4. Over time eventually the fees keep rising to increase profits, the hard part of this is that the founder/CEO doesn’t actually have a choice here... they have to keep raising prices, and if they don’t, they’ll get fired by the board so they can be replaced by someone who will.

The main problem here is that the marketplace is incentivised to increase their profits at the expense of sellers who will now either earn less, pass extra costs onto consumers, or have to find a new place to sell their products... which unless it’s controlled by them will likely have the same downfalls.

Now as a thought experiment let’s replace traditional VC with raising capital via a token offering where the utility of tokens is: 2% profit share, voting rights for future decisions, ability to transfer tokens. Given that there is profit share no creative accounting needs to happen to suggest these have real world monetary value. Tokens are created at roughly 10% of the value that the action contributes to the network - this is necessary to ensure the tokens increase in value.***

1. Someone starts a marketplace.
2. To grow they sell a stake in their future cashflows via tokens, this allows the marketplace to:
   1. Invest in growing their team of contributors to build the site
   2. Incentivise everyone to bring more buyers to the site via token rewards
   3. Incentivise everyone to onboard sellers via token rewards
   4. Inventivise everyone to participate in the site via token rewards
3. Network continues to grow continuously via step 2. The key decision makers are the ones that are the biggest participants in the network - major choices are voted on and in theory everyone is aligned.

The benefit of this approach is that all voices are heard where decisions are made and incentives are better aligned. The caveat here being that buyers and sellers are interested in lower fees, whereas investors and project contributors are interested in higher profit share. This should be taken into account when designing token payouts.

Another alternative is self funded - this can work but realistically most marketplaces grow by VC money funding “too good to be true” deals to get people onto the platform. As far as I can tell there aren’t any major players that are self funded.

This is currently being played out by Braintrust! If you’re interested in hearing more I’d recommend listening to the podcast “Web3 Marketplaces” on the Acquired LP show!

*This year Solana came along and basically solved both of these problems! For point 2 it turns out that if you’re willing to sacrifice a some security and incentivise correct actions with proof of stake you can make operations cheap enough to make sense for most operations (Solana $0.00025/transaction vs Ethereum $50-200+). In regards to 1 when things are this cheap and the network is as solid as this then it actually becomes the simplest solution.