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How to pay for Web 3
This is the second post in a series on how Web 3 can mature toward a more sophisticated ecosystem. The first post was on the wonky topic of attribution, and how the plumbing that determines what does (or doesn’t) happen online could be rebuilt along blockchain lines. More posts will be forthcoming.
If we want everything to remain as it is, everything must change.
-Giuseppe Tomasi di Lampedusa, Il Gattopardo
The same year Thomas Caxton issued the first printed edition of The Canterbury Tales in 1476, he printed something else: an advertisement for the real moneymakers in the early printer’s catalog, a prayer book. For as long as humans have crafted disembodied versions of their voices, whether it be Pompeiian graffiti or the latest tweet, there have been attempts to both guide user attention in some remunerative direction, and measure the effectiveness of that attention-gathering.
The first newspaper circulation numbers in the late 19th-century allowed advertisers to gauge their reach and created the legacy East Coast media currently struggling to survive. Today, embedded mobile SDKs record every click on your iPhone, weaving a thread of causality between initial tweet or TikTok video and an eventual purchase. The attention economy has always had its ledger and its cash register, and Web 3 will be no different.
Web 3 will have ads too. It already does in fact, they’re called NFT or token drops (essentially, giveaways that exploit the ability to send to any wallet). Not only do we have ads, we have ads fraud. When Optimism, a Level 2 chain that tries to make transacting cheaper, announced their token drop, thousands of fake users signed up to ‘farm’ the drop. Optimism had to use network analysis to figure out the fraudulent wallets and block them. The arms race between advertisers and fraudsters, still an ongoing cold war in the Web 2, is well underway in Web 3.
When token go up is no longer a law of physics and money is no longer free, the challenge of number go up—where the numbers are users or revenue—becomes much harder to solve. Right now, Web 3 companies are at pains to even measure those numbers, much less manipulate the few levers they have to make sure they do go up.
Defined broadly, ‘ads’ are pieces of paid, targeted media meant to drive user behavior in a specific direction. In our current Internet, they’ve come to mean the 320x480 pixel interstitial pop-up ad that annoys us on mobile media, but that’s a skeumorphic relic of Web 2 (itself a relic of the print age). Web 3 marketing will be radically different in ways that are hard to imagine now (though we’ll try in a moment), which is why it’s key to get the attribution system right first. With the media cash register in place, the budding web 3 ecosystem can dream up whatever crazy user acquisition mechanisms it likes.
When token go up is no longer a law of your physical universe and money is no longer free, the challenge of number go up—where the numbers are users or revenue—becomes much harder to solve. Right now, Web 3 companies are at pains to even measure those numbers, much less manipulate the few levers they have to make sure they do go up.
There are however some fundamental problems with importing the (relative) sophistication of Web 2 attribution to embryonic Web 3.
Here are a few:
Wallet identity is fragmented and transitory
When we launched Facebook Exchange, the first data linkage of any sort between Facebook and the outside world, we discovered there were roughly four devices for every Facebook user ID, i.e., four completely different split personalities for every user. Mind you, this was in 2013 and a global average; it’s likely much higher now, particularly for high-value users in wealthy markets.
Media monetization is kind of like pressure in physics: it’s the force of the targeting data applied over a set of people and pixels. If you weaken the data applied because now you’re dividing it over a larger set of spurious personas, the effectiveness of any optimization is also diluted by that factor.
Wallets are likely even worse than cookies or devices: true crypto ‘degens’ (degenerates) likely have dozens of wallets: forgotten ones, hot wallets, cold wallets, wallets over different chains, you name it. Their Web 3 identity is split over a trail of pseudonyms. While device ephemerality is also a problem in Web 2, wallets are even easier to spin up in Web 3.
Not everything you care about is on chain
A counter-argument to this separate attribution system thesis is: well, isn’t everything you care about on chain? Sure, it’s hard to query, but it’s there and we’re building more data tooling…why record it in a separate system?
Not everything a Web 2 attribution system records now is necessarily the sort of thing that makes it on chain (and incurs gas fees): abandoned shopping carts, leveling up in a game, making it so far down some user funnel but not converting. These are all commonly logged to personalize the user experience, but won’t be written on chain anytime soon. Even if gas were free, companies don’t want to be broadcasting their user metrics publicly. There’ll have to be more private ways to understand users that’s also persistent. A quick-and-dirty first version of a Web 3 attribution system can limit its attention to on-chain events, but eventually Web 3 will also mature past that as Web 2 did.
Web 2 and Web 3 will co-exist for a long time
One of the gaming companies I interviewed does conventional Facebook and YouTube ads; just normie ads that get you to their desktop wallet sign-in page. (One of the dark secrets of Web 3 gaming is that many of the companies are essentially Web 2 games with a bit of NFT sugar thrown in.)
I asked their head of APAC what their Facebook CACs were….and he had no idea (which is better than having to explain what a CAC is, which I’ve also had to do). “What tool do you use to even measure downstream monetization on your inbound traffic?” “Looker,” he replied. It was then I realized that something has to be built for Web 3 to succeed.
The data flywheel that makes Web 2 work runs in both directions, an iterated dance between targeting and attribution: you throw something out there to try and engage users … some show up in your app … they buy something (or they don’t). Every round-trip cycle, you learn something about your users and then you try something else ad infinitum until you run out of money or figure it out. Right now the Web 2/3 identity wall keeps any of this from happening, and the only way out is a cross ecosystem identity that stably joins the Web 2 you with the Web 3 you. There’s a privacy challenge here of course—particularly hairy given the total lack of legal precedent around (say) the GDPR compliance of blockchain data—but there at the beginning of Web 2 too.
Web 3 will only get to a billion users by siphoning those users from the Web 2 side of the world—drinking their user milkshake, so to speak—and the only way to do that is via an attribution system that spans both.
This Web 2/3 identity merge is inevitable, so long as Web 3 lacks the endogenous user base and media inventory to drive its own independent user-acquisition machine. Web 3 will only get to a billion users by siphoning those users from the Web 2 side of the world—drinking their user milkshake, so to speak—and the only way to do that is via an attribution system that spans both.
The rattling of a stick inside a swill-bucket
We’ve identified lots of problems with how to build Web 3 a modern monetization machine. Let’s talk about future opportunities instead, with the full understanding that the eventual reality will be far weirder.
Take Farcaster as an example, a decentralized Web 3 version of Twitter fully open to other developers. To the user, that’s mostly under the hood and the experience is much like the Web 2 version, except with some well-known Valley figures being even less filtered than usual (you can ask for a beta invite here).
Let’s say Farcaster, or other Web 3 social media like it, wants to run ads for the free version of the product. Rather than going out and building an entire ads system (as Facebook and every other social media publisher had to), they can use the composability and permissionlessness of Web 3 to spin up monetization quickly. Assuming an attribution system that can track downstream events like user sign-ups, NFT purchases, or providing liquidity (the ‘conversion events’ of Web 3), we can use the decentralized computer of the Ethereum blockchain as an ads system.
Advertisers willing to pay to reach new users or re-engaged lapsed ones, can put the associated ads budgets in a wallet. The details of the ads campaign—new-user bounty paid, user targeting specs, and even the NFT ad creative itself—will live on chain and able to be read by anyone who wants to take up the challenge. Whether you’re an influencer, affiliate, or publisher like Farcaster, if you think you can drive user sign-ups for a game or liquidity for a DeFi project, off you go.
Of course, much of that demand will focus on the same set of users, and that advertiser demand will have to be sorted and ranked as any given user could see more than one ad. Someone could offer to do that for Farcaster and any other publisher, and suddenly we have an ad auction on our hands and this starts to look like a media exchange.
Or imagine a different scenario.
I filmed a tracking-drone video with my Jeep in the Virginia City Highlands of Nevada. I think it came out pretty slick, and if Jeep wanted to run an organic marketing campaign (#WheresYourJeep?) that either promoted my post, or simply used the video somewhere else, Web 3 can enable that as well.
Much like Farcaster, imagine a Web 3 version of TikTok where I actually own my video creative in the form of an on-chain NFT. Unlike TikTok (or Facebook or Twitter or Instagram) where the platform essentially owns my creative and takes all the direct value of my content, I can do with that content whatever I see fit. So I offer my creative as marketing collateral on chain, with a minimum clearing price (much as large publishers do now with ad exchanges).
Big influencers already do these sorts of side deals direct with brands, but for anybody less than the million-follower-level, the best you can do is try to monetize your 100%-take-rate content by driving your audience engagement some other way (as I do with Twitter engagement via this Substack). The Web of the future however will be about individual creators, their creative, and their audiences. It will also be about brands and developers, and their direct relationships with users and consumers. It will not be about gated publisher platforms, ad networks, and middle-men data brokers. That lot will (hopefully) be replaced by open protocols and blockchains. Advertising will not go away—it never does—but who profits from it will change radically.
The ad tech ‘degens’ reading this are probably howling: “That buy-side smart-contract thing is just a basic version of a demand-side platform (DSP), and the influencer thing is just an individualized supply-side platform (SSP), and this whole thing smells like an attempt at recreating the LumaScape but using blockchains and decentralized logic.”
Few tech giants of the past have ever been unseated from their dominance via competition alone: Microsoft never lost the desktop, Google never lost search, Twitter has never lost the public square, Amazon will never lose e-commerce, and Apple will never lose mobile devices. The only way to get out from under those weary giants is creating a new playing field and absolutely dominating it before they figure out what’s going on.
Yes, that’s exactly what this is, but unlike the corrupt goat rodeo of the Google ads ecosystem which the company monopolistically exploits, or the closed system of Facebook, this will be open and transparent. And whereas in Web 2 the controllers of distribution (and their middlemen) capture much of the value that should accrue to publishers and creatives, here the creatives themselves control how their content is used.
That refactoring process is already underway with DeFi. The crypto crash of the past few months, rather than being some novel form of financial shenanigans, recreated every piece of speculative imprudence of the regular financial system: depository runs on shaky institutions, over-leveraged borrowing, under (or non) hedged positions, excessive risk in single institutions, and finally a backstopping organization (in this case FTX) choosing who lives or dies with divine-intervention liquidity injections. Read the history of the early 20th-century stock market (or even the 2008 credit crisis) and it would be the same movie with different casting. But changing the cast (while also upgrading the technology) is the entire point.
Similarly, Web 3 will recreate all the same fancy machinery (and likely some of the fraud and fiascoes) of two decades of digital advertising, but with a different cast and a very different implementation. In a society with faltering institutions, rotted from within and mistrusted from without, the chance to finally replace our banks and internet giants (not to even delve into politics) with a new set of characters is too tempting to resist.
Few tech giants of the past have been unseated from their dominance via competition alone: Microsoft never lost the desktop, Google never lost search, Facebook will never lose its type of social media, Twitter has never lost the public square, Amazon will never lose e-commerce, and Apple will never lose mobile devices. The only way to get out from under those weary giants is creating a new playing field and absolutely dominating it before they figure out what’s going on, and finding a business model that exists independently of them. For Web 3, an ads system will have to be part of that rebellion.
Want to know more about our plans?
Read this post too. Together, they’re the pitch we raised the round on in essay form.
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“If it plese any man spirituel or temporel to bye ony pyes of two and thre commemoraios of Salisburi use empryntid after the forme of this preset lettre whiche ben wel and truly correct, late hym to come to Westmonester in to the almonry at the reed pale and he shal have them good chepe. Supplicio stet cedula.” The final Latin is ‘please leave up this notice.’ Caxton worried about the viewability and reach of his ad, much as modern marketers do.
This problem will likely be somewhat mitigated as normie consumers likely won’t be swapping out wallets so much. Also, future Web 3 user experiences will be less wallet-centric, the wallet settling into being more like a browser cookie than something a user sees and manipulates constantly.
Looker is a general purpose dashboarding technology that doesn’t actually do any measurement. This person was looking at some hacked-up numbers a dev had stuck in a SQL table somewhere, updated God knows when and how. This was not a clown-town company, but a well-funded and apparently successful one; this is merely the state of Web 3 attribution right now.
We need a new term for decentralized advertising. DeAd somehow doesn’t have quite the right ring to it.