pseudotheos

Investing in the infrastructure of the Ownership Economy

I'm excited to announce that I've joined Variant as an investment partner focusing on infrastructure. I'll be working alongside Jesse, Spencer, Li, Medha, Derek, Geoff, and the rest of the growing team.  

Since my introduction to the crypto ecosystem in 2013 through BitcoinTalk, I have watched this space evolve from a series of ideas to what we’re seeing today: the beginning of an actual on-chain world. My role has usually been a researcher and explainer, helping others understand the nuances of the bleeding edge in crypto, from zero-knowledge and monolithic vs modular to EIP-4844 and rollup fees. I’m excited to both leverage this knowledge and also deepen my relationships on the ground with developers, researchers, and the broader crypto community.

As I get started, two things are top of mind. First, the Ownership Economy cannot be built on a weak foundation, and quality infrastructure is an often-overlooked piece of building projects in this space. Secondly, it must continue to adhere to the foundational aspects of decentralization, trustlessness, self-sovereignty, and governance through distributed systems. 

There are a few reasons why I joined Variant in particular.

The first is phase. Variant supports projects from Day 0, and I have a special passion for helping founders work through the difficult questions that emerge at the very beginning. The second is scope. Variant focuses on strengthening the entire ecosystem by investing in the full stack across the DeFi, infrastructure, and consumer landscape. Investing with this wider angle and bringing in lots of different voices allows us to support founders even more. 

And lastly: Variant is truly a collection of independent thinkers. So, beyond collaborating closely with some of the most knowledgeable people in the space, I can remain true to my original views and perspectives. My ethos, conviction, and participation in the research and broader crypto community will not change.

In the months to come, I'll be investing in all parts of the infrastructure stack: oracles, rollups, execution layers, data availability solutions, bridges, ZK tech, and more. If you're working on something innovative, reach out via Twitter DM or to my email at pseudotheos@variant.fund.

I'm excited to announce that I've joined Variant as an investment partner focusing on infrastructure.

Joining Variant: pseudotheos

Variant Team

By Li Jin, Geoff Hamilton, Jesse Walden, Spencer Noon, Derek Walkush and Medha Kothari

Thirty years into the development of the world wide web, a handful of companies control most user attention and advertising revenue, with closed ecosystems that hold back innovation by independent developers. The economic interests of the biggest internet platforms are poorly aligned with their most valuable contributors: their users. 

Ownership has long been embraced by Silicon Valley startups to align incentives among employees through option grants. Still, the vast majority of internet users own exactly 0% of the services they contribute to. Creators don’t own their content, developers can’t control their code, and consumers can’t influence the policies or decisions of the platforms they use. This scenario, which once went unquestioned, looks increasingly archaic. 

This is starting to change via the ownership economy—often referred to as web3—with products and services that turn users into owners.

What started with Bitcoin and Ethereum—both of which reward participants who secure the network with their native tokens—is becoming prevalent across all categories of software, from developer infrastructure and new financial markets in DeFi to consumer products, marketplaces and social. 

If the last generation of software was built upon a foundation of user-generated content, the next generation of software will be user-owned, with digital ownership leveraged as a building block to enable novel user experiences. At its core, the ownership economy not only offers a powerful new tool for builders to leverage market incentives to jumpstart new networks—it also holds the potential to create positive social change through the wider distribution of wealth-building assets.

In the two years since Jesse Walden published the initial vision for a user-owned internet, the landscape has dramatically shifted and expanded. There are now more than 15,000 projects in the ownership economy, from user-owned financial markets to user-owned social networks, investment clubs, and digital assets. While the ownership economy still represents a small portion of all internet platforms, it’s a fast-growing segment. Ethereum, one of the more mature networks that supports the ownership economy, grew 46% in monthly average accounts in 2021.

Amidst all this growth, we wanted to take a step back and re-introduce this ecosystem through some fundamental questions: what is the ownership economy? How big is it, and where is it headed? What trends are defining its current state, and possible future? To answer all of these, we’ll turn to data and case studies that illustrate how the ownership economy is playing out in real time. 

This report is meant as a primer for new entrants to web3 who are looking to go one level deeper. We’ll also be using it as a jumping-off point for more in-depth pieces that we’re planning to publish this year on topics like token distribution strategy, regulatory issues and more. 

Simply put: the products and services that will define web3—and the next generation of the internet—are those that transform users into owners. We call this the ownership economy.

Still, identifying this phenomenon isn’t always simple, or obvious. That’s because ownership manifests across a spectrum of experiences that range in user effort, responsibility and degree of collectivity. One user might own a single digital media asset, like an NFT. Another might influence a network’s operation via a governance token. The experience of being an owner encompasses both passive (i.e., hodling) and active participation.

Note that for this report, we focus on crypto tokens—rather than equity—as the basis of the ownership economy. Tokens have a richer and more frictionless design space. They can be distributed programmatically, with the potential to reward participants versus those who buy in; they are effectively free to deploy, and they can transfer value in the same way we transfer information—instantly, to anyone, anywhere in the world. 

The ownership economy is big—and growing

As of April 26th, 2022, the market capitalization of the over 19,000 tokens tracked by data aggregator CoinMarketCap is $1.76 trillion. For comparison, the market capitalization of global stock markets is over $100 trillion. 

The largest cryptonetworks by market capitalization are established layer 1 blockchains: Bitcoin ($725 billion), which was launched in 2009, and Ethereum ($337 billion), which was launched in 2015. Other layer 1s in the top 20 tokens by market capitalization include Solana, Polkadot, Terra, and Avalanche. 

We can also think about the scale of the ownership economy in terms of people—the users who become owners in the networks they build. 

The Financial Times and Chainalysis estimated that there were 360,000 owners of NFTs as of 2021. Beyond that, there are tens of millions of users of cryptonetworks. Metamask, a wallet that is used to connect to decentralized applications, recently announced that it had 32 million monthly active users as of February 2022, and Phantom (a wallet currently focused on Solana) announced monthly active users of 2 million in January 2022. In the fourth quarter of 2021, Ethereum had monthly average transactional users of about 6 million and daily active transactional users of about 400,000. From a multi-chain perspective, there were approximately 2.5 million average daily active users interacting with the smart contracts tracked by DappRadar. As a rough approximation, if we extrapolate these 2.5 million daily users to calculate monthly users using Ethereum’s DAU/MAU ratio of 0.06, we could estimate MAU of 39 million across the 29 networks covered by DappRadar’s data.

DAOs, decentralized autonomous organizations, are online communities owned and governed by their members. They can be thought of as the organizational building blocks that make up web3’s economic, social, and cultural landscape. New DAOs are forming at such a rapid pace that it’s difficult to count them, but it seems safe to say there are over 1,000. DeepDAO, a data source, tracks detailed information about around 180 DAOs. In these DAOs alone, there are 1.7 million holders of governance tokens, and about 500,000 of these holders actively participate in DAO governance. And some of these DAOs are quite large: 69 of the 180 have more than 1,000 members.

Today, user ownership is transforming how people transact, invest, create, build, play, learn, communicate, and socialize. 

Don't see your project on this map? Submit it here.

Walden’s original essay “The Ownership Economy” posited that user ownership could result in “platforms that can be larger, more resilient, and more innovative.” As we discuss throughout this report, many of these aspirations are not yet realized, or have mixed results, owing to nascent playbooks on how to best effectuate user ownership. Still, we remain confident in the power of user ownership to build bigger, more defensible networks and to catalyze positive social change. Realizing that potential requires additional research on best practices regarding ownership distribution and education geared towards developers and users. As a step towards that, we wanted to share a few key insights on the state of the ownership economy today.

1. User ownership can jumpstart growth, but sustaining it is more challenging

Giving users ownership in the form of tokens can be a powerful alternative to paid marketing, helping to bootstrap networks and overcome the cold-start problem.

But before we dive into that, let’s consider how much it costs for non-crypto services and products to bring users on board. In 2015, Facebook's mobile app install advertising business reached $2.9 billion in revenue, comprising 17% of Facebook's total ad revenue. That’s a huge sum of money going into the pockets of an intermediary platform—Facebook—rather than flowing to app developers to invest in R&D and product improvements, or reaching the end users in the form of lower prices or greater rewards. The hefty upfront fees for user acquisition also means that consumer apps that are unable to raise outside capital are hard-pressed to get off the ground: the average cost to acquire an app user was $3.52 in 2019.

In contrast, for crypto projects, giving users ownership can function as marketing, drawing in new users through the promise of ownership and increasing engagement as a result of having skin in the game. A case study is Coinbase and Uniswap, two cryptocurrency exchanges that enable users to swap various tokens. 

While Coinbase is a centralized exchange that custodies users’ wallets and funds and matches trades using its order book, Uniswap is decentralized and facilitates automated transactions entirely through smart contracts. Coinbase was founded in 2012, and employs 3,730 people as of 2021. In contrast, Uniswap was founded in 2018, and has less than 100 employees. With just 3% of the headcount of Coinbase, Uniswap does 73% of its trading volume. How is this possible? Importantly, Uniswap makes its users owners via governance tokens and LP shares, giving it leverage to grow bigger, faster. In addition, because Uniswap is decentralized, anyone can add any asset. If all the world’s value will be tokenized in the same way all information was packetized on the internet, then we should expect decentralized exchange growth to outpace their centralized counterparts.

Tokens aren’t a replacement for product-market fit

However, in our analysis, it is clear that simply giving users ownership is not sufficient to ensure that a product wins out over its competitors. Tokens can be useful in capturing user attention and bootstrapping initial adoption, but they need to be coupled with strong product-market fit—solving a widespread need for users—in order to sustain usage.

The NFT landscape is a prime example of the insufficiency of ownership to drive consistent, ongoing engagement. The dominant NFT marketplace, OpenSea, has over 90% market share of transactions despite not having a token, whereas multiple competitors do (e.g. LooksRare, SuperRare, Rarible). Notably, after Rarible launched liquidity mining—token airdrops to users who buy and sell NFTs on the Rarible marketplace—in summer 2020, its volume briefly surpassed that of Opensea, but Opensea’s deeper liquidity, stronger product, and better search features helped it to win out over time. For users of marketplaces, liquidity—the presence of a counterparty for one’s desired transaction—is still the strongest motivator to choose any marketplace over another. The existence of a token that incentivizes transactions in alternative smaller marketplaces is insufficient to overcome OpenSea’s advantage in meeting the core user need of transacting.  

Another example is layer 1 blockchain ecosystems. Despite L1 blockchains all offering their own native token representing network ownership, Ethereum is still the fastest growing platform because of the network effects of users and developers, more mature developer tooling landscape, and ability to compose with other existing applications. Those factors indicate that even the lower fees of alternative blockchains are not sufficient to overcome Ethereum’s network effects (though whether it’ll maintain its advantage is unknown).

There is also the question of whether ownership actually crowds out intrinsic incentives to use a product, causing users to engage with products in a more mercenary, transactional (and likely temporary) way. There has been an abundance of research on the interplay of extrinsic motivations—behavior undertaken for some external reward like financial benefits—on intrinsic motivation. According to some studies, extrinsic motivations can undermine intrinsic motivation, especially when users previously found that behavior intrinsically rewarding. The implication is that token incentives should be optimized in terms of timing (via progressive decentralization), magnitude, eligibility, and other factors so as to preserve users’ intrinsic motivation.

2. New token distributions designs are boosting user loyalty

In theory, when users become owners and are (literally) invested, they should become more highly engaged and retained. Today, the reality is mixed.

One powerful illustration of ownership engendering loyalty is the success of play-to-earn games like Axie Infinity. Axie Infinity is a blockchain-based game in which users collect, breed, and battle digital creatures called Axies, which are NFTs. The ownership of in-game assets is a key difference between blockchain games like Axie Infinity and non-blockchain games: in the latter, “owned” assets generally cannot be exchanged for money or transferred outside of the game.

Ownership of in-game assets can engender more player loyalty.

Powered by a play-to-earn mechanism in which players earn tokens in the game that can be exchanged for their local currency, Axie Infinity has achieved significant scale, with over $1 billion in cumulative revenue and nearly 3 million daily active users. And the game’s player retention is dramatically higher than that of traditional mobile games. Axie Infinity’s player retention has remained strong and consistent over time, suggesting that engagement is not simply a function of the game’s novelty.

Axie Infinity’s retention has remained strong over time compared to traditional mobile games, highlighting the importance of digital ownership.

But there are counterexamples of token incentives’ mixed impact on user engagement. The entire field of tokenomics is in its infancy, with best practices around ownership distribution still unknown. To date, users have raised important questions and made critiques around token incentives and the efficacy of ownership to translate into user loyalty or desirable societal outcomes.

While liquidity mining programs (rewarding users with ownership via tokens for providing liquidity) have become pervasive and driven short-term participation in new products, they have not historically contributed to long-term sustainability. According to research from Nansen, "A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours. Around 16% leave within 48 hours, and by the third day, 70% of these users would have withdrawn from the contract." The extrinsic nature of token incentives means that many liquidity providers are financially motivated by the highest rewards, leading to churn.

Furthermore, while almost impossibly high token incentives became a defining feature of the “DeFi 2.0” wave, their sustainability is now in question. Changing market sentiment led to dramatic price crashes for many of these projects, and their tokenemonic models became the subject of serious debate. These downturns most acutely impacted contributors paid in a project’s native token—often subject to vesting schedules—and the project’s most passionate supporters. 

As a result, many projects are rethinking token incentive mechanisms, and a wave of new models is beginning to emerge. For example, Curve’s voting escrow (“ve”) contracts use lockup periods to increase token rewards; Gro also introduced a vesting mechanism to encourage long-term engagement. As scholarship about token engineering and cryptoeconomics proliferates, these models are increasingly tested and scrutinized, suggesting the next generation of tokens will more effectively engage users and incentivize long-term contributions.

At a high level, the opportunity is to make token distribution more granular and targeted in rewarding behaviors that actually contribute to a network’s retention and sustainability, versus simply rewarding users whose tech-savvy networks translate into early knowledge of new products or who engage in mercenary behavior. Such distribution would result in more accessibility than first-generation projects that priced out later users, and be orders of magnitude better than compounding returns to capital that exist in the real world, where capital needs to be bought rather than earned. As an example, the token-gated social community Friends with Benefits (FWB) requires 75 FWB tokens to join, which at one point was equivalent to over $12,000. But beyond buying the tokens, there are ways to join the community through earning ownership, including writing, designing, creating artwork through FWB’s studio, or contributing to various work streams. 

Beyond direct contributor rewards, some DAOs began implementing bounty programs to attract users and delegate work. These one-off tasks range from short-term developer assistance and business development to simple community participation, with payouts in the project’s native token. Platforms such as Rabbithole and Layer3 aggregate these bounties for multiple DAOs, giving potential users the opportunity to search for both projects and tasks that fit their interests. A new generation of token incentives seems to be placing greater emphasis on contributor growth compared to solely deepening liquidity—an imperative transition to grow the ownership economy’s user base. 

3. User ownership can foster richer ecosystems of projects and contributors

When they combine distribution of ownership with permissionless access, user-owned projects can foster rich ecosystems. Deployed in this way, distributed ownership can be a catalyst for projects to become platforms that third-parties build on.

Ethereum is one of the most powerful illustrations of this. The distributed ownership of the network has fostered a community of developers and users with an interest in the continued success of Ethereum: the value of their stake in Ethereum—their Ether—supplies ample incentive to continue building on and using the network, engendering an ecosystem of applications across social, marketplaces, DeFi, and more. Shared ownership reinforces network effects and creates a disincentive to switching to other blockchains. Of course, Ethereum’s success is not only a consequence of distributed ownership; it has also benefited from capable leadership and from embedding values that have helped align and motivate its community. 

In the NFT space, another manifestation of decentralized ownership is emerging in the form of CC0 (or “no copyright reserved”) projects—those that relinquish all copyright and turn over their work to the public domain. Nouns, Cryptoadz, Chain Runners, and Loot have placed their assets in the public domain, allowing their intellectual property (IP) to be freely used, remixed, and commercialized.

As a result of their permissionless nature, users, creators, and developers have been attracted to these projects and have begun building around and on top of them. Loot is a CC0 NFT collection that exploded in popularity in September 2021, with each NFT containing a simple list of fantasy adventure gear. There are now more than 53 Loot derivatives and at least nine guilds—groups for owners of specific items in the Loot universe.

CC0 NFT projects create the potential for their IP to be used in novel and generative ways—increasing the reach, relevance, and, ultimately, the value, of that IP. 4156, a contributor to Nouns DAO, said: “In the same way that academic citations make the original paper more important, citation of Nouns in whatever form … will make the originals more important and more valuable.” Nouns is putting this theory into practice by catalyzing the proliferation of its IP and pursuing collaborations with other brands (like Bud Light, which incorporated the iconic Nouns glasses in a Super Bowl commercial) and traditional media companies. 

Similarly, the team behind Cryptoadz collaborated with Arcade NFT, an art and gaming studio, to produce Toad Runnerz, an NFT collection in which each NFT is a playable arcade-style game that incorporates Cryptoadz as in-game assets. Arcade NFT hosts exclusive tournaments for Toad Runnerz NFT holders, further extending the reach and content of the underlying Cryptoadz IP into the gaming space.

By enabling free use of their assets, CC0 NFT projects extend the definition and possibilities of ownership. This approach has the capacity to stimulate building, creation, and collaboration—and we’ve only just begun to see its potential.

4. The ownership economy allows users to become owners earlier and participate in value creation

A key theme of the ownership economy is that users become owners faster than in their centralized counterparts, allowing them to contribute to and benefit from value creation. 

In our analysis, we found that on average, web3 companies that launched a token did so 2.7 years after founding; in 2020, VC-backed companies went public approximately 5.3 years after securing their first VC investment. The timeline of IPOs, compared to token launches, serves to eliminate a significant amount of upside potential for retail investors.

This phenomenon comes into sharp focus when comparing Coinbase and Uniswap. Coinbase went public in April 2021, nearly nine years after the company was founded. The stock ended its first day of trading with a market capitalization of $85.7 billion, an incredible outcome for private investors such as Y Combinator, which seeded the company in 2012 at a valuation of roughly $2 million.

However, Coinbase’s public listing did not represent a great outcome for retail investors, whose opportunity to invest only came after the company’s valuation had multiplied 40,809x from its first private investment round. In fact, every retail investor who purchased and held Coinbase stock since its public listing has lost money on their investment, as of April 2022.

In the ownership economy, by contrast, projects exit to their communities much earlier in their lifecycles, allowing users to contribute to and benefit from greater value creation. Uniswap launched its UNI governance token in September 2020, less than two years after the protocol was originally deployed onto the Ethereum mainnet. Unlike Coinbase, whose direct listing meant no new shares were issued when it went public, 60% of the UNI genesis supply was allocated to Uniswap users. This profile is commonly seen with projects in the ownership economy.

The playbook is still being written, but one thing is certain: ownership is becoming a keystone of new experiences across all categories of software products. Web3 started as a developer phenomenon with layer 1 blockchains, and most innovation has historically been developer-facing initially. But Chris Dixon predicted with his adage—“what the smartest people do on weekends is what everyone else will do during the week in ten years”—ownership is now extending to all kinds of products and networks. 

We are eager to work with builders who are applying new models of ownership to design a more meritocratic internet. If you are working on a project in this space, please reach out.


To learn more about some of the projects that comprise the ownership economy and Variant’s growing portfolio, see below. 

This report is the result of input and contributions from many people. Variant would especially like to thank Chuxin Huang, Kate Lee and Caleb Halter. In addition, many others contributed both data and advice: Mohammed Nasirifar from Chaincrunch, Rob Hoogendoorn from DappRadar, Adam Whitaker-Wilson from Covalent, @ruvaag, Adam Delehanty and Mason Nystrom.

The Ownership Economy 2022 – Variant

Derek Walkush

Understanding lockups, auction innovation and bottoms-up token distribution

Since the summer of 2020, the DeFi ecosystem has been experimenting with progressive decentralization – that is, the process by which founding teams of token-based startups relinquish control of their networks over time. Of course, crucial to that process is the distribution of tokens. In this piece, we’ll be diving into three of the key trends we are seeing in token distribution, with some actionable guidance for early stage teams.   

Until recently in DeFi, token distribution usually occurred through liquidity mining (LM) incentives and public sales. But that convention is changing – and quickly. TVL in DeFi has exploded ~5x over the past year and traditional LM programs have fallen out of favor, largely due to the abundance of capital and many LPs having dumped their token rewards. 

Instead of solely bootstrapping initial liquidity, many newer projects have used tokens to acquire long-term community members. With this increasing liquidity, protocols are able to be more selective and better attract long-term stakeholders. 

We’ve tracked three key developments in token distribution over the last year:

The token design process is becoming increasingly bottoms-up, with more responsibility transferred to the community. 

New innovations in auctions are helping founding teams launch tokens without ICOs or public sales.

Networks are experimenting with lockup mechanisms for ongoing emissions in an attempt to improve price volatility and exclude speculators. 

Token distribution design is becoming more community driven  

One notable shift is that token distribution is becoming a more bottoms-up process that actively involves a project’s contributor community. It wasn’t always this way. Early DeFi token distributions – such as MakerDAO’s and Compound’s – were created almost entirely by the initial team. These frameworks were then applied to the network with little opportunity for alteration; the default was to not change anything, although alterations could be proposed through governance. 

Beginning in 2019-2020, we started to see hints of token design being more inclusive of a project’s larger community. Early tokens from this era had parameters that could be set by governance; for example, Uniswap contains a fee switch for protocol revenue that can be turned on and set to different percentages through voting processes. This flexibility proved helpful for future growth – for example, Yearn actually minted ~$200m of additional tokens in early 2021. This less rigid design transferred more power to the project's community of long-term stakeholders and governance participants.

This process continued with entire token distribution models voted on by contributors. For example, Gro’s “DAO first” approach was to launch the DAO before the token, which enabled contributors  to finalize its design and distribution. Interestingly, despite having the allocation decided by the community, only 1% went to airdrops – far less than many protocols. In other words, this process did not attract speculators looking to distribute tokens to themselves, but rather long-term stakeholders supporting the DAO and protocol. Established protocols also adopted similar approaches, most notably Yearn’s recent tokenomics overhaul, where a Curve-like model was proposed and revised by the community.

This more inclusive and democratic process cultivates a stronger community of stakeholders more aligned with a protocol’s long-term success. It also introduces additional layers of scrutiny and review for token distribution. Over the next year, we expect the responsibility of token distribution and design to partially shift to the community from the founding team; while both will certainly play key roles, project contributors and governance participants will serve as reviewers and a source of new ideas to ensure more sustainable token value accrual. External parties could even be brought into the design process; communities like Fire Eyes or the Token Engineering Commons (TEC) specialize in tokenomics, and could propose designs voted on by DAOs for a bounty. Importantly, this process also gives more responsibility to DAO contributors by allowing them to impact the protocol’s long-term vision. Rather than feeling like passive supporters, they will gain a sense of ownership and fulfillment, further strengthening the community. 

New auction formats are helping teams launch tokens more successfully 

In the past year, a number of novel auction mechanisms were used to assist with price discovery and make for a more equitable distribution of tokens. Many tokens in the ICO wave of 2017-2018 were famously scooped up by large whales able to manipulate prices given weak secondary market liquidity. This severely hurt a few parties, notably contributors paid in a project’s native token and long-term investors – groups that should ideally be rewarded the most. 

In light of the chaos of that ICO era, a few new types of auctions have emerged in the last year. Liquidity Bootstrapping Pools (LBPs) auction tokens over a set period of time according to demand; the price is initially set to decrease at a given rate, but if the token sees high demand, the price increases. LBPs aim to capture each investor’s willingness to pay and prevent whales from scooping up large quantities of the token, as doing so would cause the price to skyrocket. (Tokens can also only be purchased in small amounts). However, LBPs also make it difficult to attract a wide base of stakeholders since inexperienced investors are less willing to underwrite complicated price risk over the time period. 

Tokemak’s “Degenesis” sought to correct this shortcoming by having all investors pay the same price at the auction’s conclusion. The event set an initial price range to be decided over a period of days. Investors could withdraw their funds if they felt the price became too high, and the tokens weren’t distributed until a final price was determined at the end of the event, where everyone paid the same price. There was no “guessing” for price movements, encouraging a broader base of investors to participate. However, the event may have raised less funds than a potential LBP since some investors may have been willing to purchase tokens at a higher price.

More recently, Locke Protocol introduced streaming auctions to distribute tokens. This mechanism distributes tokens to stakers over a set period with participants able to move in or out of the auction as the price moves. When there is a net inflow of staked tokens, the price increases, and when there is a net outflow, the price decreases. The ability to move in and out with price changes makes for a friendlier UX for less experienced participants and prevents whales from taking large quantities of the tokens since the price would jump.

Unlike traditional ICOs, these more innovative mechanisms can be used for greater price stability through more equitable initial token distributions. They cleverly utilize programmability – a feature not available for TradFi products – to distribute tokens in ways that make it difficult for speculative whales to pump and dump the token, and, at the same time, provide a better experience for smaller participants.

Over the next year, we expect these auctions and new mechanisms to become the standard for initial token distributions in DeFi. Using the more bottoms-up process detailed above, teams can propose auctions to the community through forum discussions and customize the model to meet the different goals of individual protocols. 

Lockups can stabilize prices and attract longer-term stakeholders

In the last year, many protocols have experimented with lockups that changed the secondary market structure for their native tokens by decreasing circulating supply. The purpose of these lockups is to force participants to align themselves with a protocol’s long-term success (or at least until the lockup ends). 

OlympusDAO pioneered the concept of protocol owned liquidity (POL) through a bonding mechanism. Users would deposit stables or blue chips and receive OHM at a discount a few days later – a mechanism like discounted zero-coupon bonds, so not analogous to locking but quite similar. Olympus also famously offered seemingly impossibly high APYs to incentive holders to stake their tokens, reducing circulating supply. Then, OHM in pairs with assets from bonding would be deposited in liquidity pools on leading DEXs, allowing the protocol to “own its liquidity.” The model became so popular that it saw the second largest number of forks (after Uniswap) at about 109 protocols. While the mechanism performed quite well during bull runs, it also proved somewhat disastrous in poor market conditions when investors were unwilling to accept price and market risk over the bonding period. Token prices crashed as OHM was unstaked and sold; the model’s popularity declined quickly.

Released in mid-2020, Curve introduced voting escrow (ve) contracts, and ve tokenomics have become one of the most popular frameworks in DeFi. The model allows CRV holders to lock their tokens for various periods of time, with longer lockups receiving higher reward boosts (multiples). veCRV holders also vote on gauge weights that determine CRV emissions to Curve’s LPs, leading to the “Curve Wars” where other protocols “bribe” veCRV holders to direct reward emissions to their pools. Many other protocols are adopting ve tokenomics, including major projects like Ribbon and Balancer. While young, the model seems to be limiting volatility.

Other lockup mechanisms became more common over the past year. Gro introduced token vesting schedules for emissions, where holders could increase their GRO rewards by lengthening the vesting period. Lockups can also be applied to initial distributions. For example, some airdrops, such as a recent announcement from Mars Protocol, introduced lockups to prevent recipients from immediately dumping the token; these distributions are sometimes explicitly called “lockdrops.”

Opinions on lockups are mixed. Supporters argue that they lower short-term volatility and reward long-term holders, while discouraging speculative, high frequency traders from claiming large portions of rewards. Conversely, critics believe that retail users – unwilling to accept lockups due to financial constraints and less experience underwriting market risk – avoid investing and interacting with the protocol; they can sometimes place artificial upward pressure on the price in bull runs with large drawdowns from exits in bear markets. Nevertheless, projects can still consider lockups broadly so long as they also understand the specific drawbacks and limitations of the model they’re implementing, particularly the types of people that are attracted to or deterred from participating.

The purpose of this article is not to provide “copy & paste” models for token distribution, but instead to provide a high-level overview of the experimental frontier of the space. The growing popularity of ve tokenomics, Olympus-style PCA bonding, and other mechanisms has led to a highly standardized landscape. As the field becomes more homogenous, it seems to have broadly turned into a yield competition, with projects introducing more and more inflationary rewards. This trend is not sustainable. 

Instead, early-stage projects can consider bottoms-up token design, new auction mechanisms, and  lockups as a means of  cultivating a community of  long-term stakeholders through token distribution. Broadly speaking, innovation in token design has lagged the larger ecosystem; the emphasis for researchers has been on scaling, smart contract optimization, and other more technical topics, with token design seeming like a bit of an afterthought. But founders are becoming increasingly aware of its importance and are pouring substantial resources into designing their tokens. 2022 will be a fascinating year across the crypto ecosystem, and we’ll be eagerly watching as innovations in token distribution continue to evolve.  

If you’ve been experimenting with any of the above, have ideas on what we’ve missed, or just want to chat about token distribution, don’t hesitate to reach out. 

I couldn’t be more excited to announce that I’ve joined Variant as an investment partner. I’ll be working alongside Jesse, Li, Spencer, Medha, and Geoff, and collaborating with our network of venture partners and founders. At the conclusion of this semester, I’ll be joining the team full-time in June and going on leave from university.

After being briefly introduced to Bitcoin in high school, I grew interested in crypto around DeFi summer in late 2020. I then applied to intern at Accolade Partners, one of the top crypto fund of funds. The experience completely changed my view of the industry. Watching capital swarm the sector, talent flood in, and the ecosystem’s rapid growth made it hard to ignore what seemed to be occurring: a once-in-a-lifetime technological transformation. Accolade also invested in early-stage consumer and enterprise tech funds (the other hottest segments of the VC market), yet the developments in crypto dwarfed that activity.

I started spending my nights and weekends teaching myself the basics of distributed systems and low-level computing while beginning to experiment with on-chain DeFi apps. My conviction and interest only seemed to grow. To get more involved in the on-chain world, I joined Index Coop as a part-time contributor to help with some BD work; I also became a core contributor at AladdinDAO, developing a content strategy for their yield farming research. Around the same time, I started writing for Spencer’s newsletter, OurNetwork, to become more familiar with on-chain analytics and DeFi fundamentals, teaching myself SQL to query data on Dune. 

While at Accolade, the extremely thesis-driven funds, with investors proudly wielding contrarian, independent thinking always stood out. Of those, Variant’s ownership economy thesis seemed most powerful: growing up through the highly centralized, “walled garden” era of the internet, the flaws of a small group of often quite personalistic companies controlling the consumer web experience became increasingly apparent. Ownership through token networks introduces an entirely new design space for web applications; to me, it offers a multitude of new attack vectors - including airdrops, vampire attacks, and others - for challenging seemingly invincible incumbents, creating an opening for a new generation of highly innovative tech startups. 

Looking to learn more about web3 and VC, I applied to join the Variant team in early January as an intern, initially assisting mostly with OurNetwork, and then dove more into supporting investment research and diligence. Interfacing with top entrepreneurs only furthered my conviction; their stories and determination inspire me. Watching the space evolve for just over a year, I realized I was facing a generational opportunity, and couldn’t miss out on it. I couldn’t be more excited to start this next chapter of my career at Variant.

My primary research interests are on-chain data analytics and token distribution. Public ledgers unlock unparalleled availability of real-time data for any protocol. Unlike TradFi, where the market gets four quarterly snapshots of a company’s fundamentals-based health, protocols can be constantly monitored. At scale, these data flows can be more efficient and reduce the need for a “guessing game” of key indicators each quarter. I also grew fascinated by token design as an economics and math student. The scholarship coming out of centers like the Research Institute for Cryptoeconomics in Vienna, especially that of Sherman Voshmgir and Michael Zargham, fascinated me; I quickly sought to learn more about the topic. Token engineering is one of the most exciting greenfields in economics, with unparalleled applications and importance for the entire field. 

At Variant, I will primarily be focusing on DeFi investing. Even with limited experience at TradFi startups - covering solar investing and income share agreements - during the pandemic, the unlocks of DeFi’s composability and trustlessness became apparent; taking classes on the history of the financial system at Georgetown, it became easy to contextualize DeFi and realize that smart contract-based finance represents one of the greatest advances in modern economic history. Broadly, two themes excite me: consumer adoption and token distribution innovation. 

First, more consumer-facing, retail adoption is a necessary step in DeFi’s path to mainstream adoption. 2021 was a record year for crypto-asset allocations, and for part of the year, the majority of DeFi transactions were from institutional investors. Retail adoption, however, is lagging. The entire sector has only seen about 4m unique wallets, about 1/80th of the DAU of Snapchat. Despite small user numbers, equating TVL to assets would rank DeFi as the US’s ~17th largest bank. I believe projects building smooth, user-friendly onboarding experiences are poised for massive expansion; these kinds of products include wallets/fiat on-ramps for new crypto investors, abstractions to access DeFi yields through easy bank account integrations, and user-friendly mobile apps.

Second, token distribution design seems to be having a “wake-up” moment. Many projects understandably prioritized security, smart contract optimization, scaling, and other technical features for their initial launches, with token design taking a backseat. Even just the past few months have seen new, highly experimental distribution mechanisms, utilizing lockups and new programmable auctions. These innovations can be used to transform token distribution from primarily ensuring secondary market liquidity to better aligning the long-term incentives of network participants. Founders ideating net new, experimental token designs that translate to novel game-theoretic mechanisms interest me most; like ownership, token-based incentivization creates an entirely new design space. 

DeFi still feels like an experiment; a distributed, global community is currently building an alternative financial system that’s decentralized and permissionless. In other words, anyone can participate or build; the same composability of open source code now applies to finance, creating an entirely new opportunity set of products and strategies. It’s certainly a lofty mission, but I couldn’t be more excited to play a part.

Here are a few categories that I’ve been tracking:

Experiments with under-collateralized lending

Bringing RWAs on-chain to serve as collateral

Consumer-friendly DeFi apps for retail investors

Abstractions to help non-crypto-users access DeFi yields

If you’re working on something that sounds like a fit, reach out on twitter or by email at derek@variant.fund.

I couldn’t be more excited to announce that I’ve joined Variant as an investment partner. I’ll be working alongside Jesse, Li, Spencer, Medha, and Geoff, and collaborating with our network of venture partners and founders.

Derek Walkush - Joining Variant

Alli Pope

I could not be more excited to announce that I am joining Variant as the Director of Education and Events. I will be working alongside Li, Jesse, Spencer, and the rest of the incredible team to proliferate learning and knowledge sharing around building for the ownership economy.

For the past several years I have spent my time learning and working in the realm of education, with a focus on increasing opportunity and access to quality learning for all. As the world shifted into the pandemic and so many existing inequities in our educational system— and larger, our society— were magnified, I began searching for what a more equitable and accessible future might look like.

Historically, many have perceived education to be a catalyst for promoting economic mobility. It is largely true that higher levels of educational attainment positively correlate with increased income, but these gains exist relative to the different socioeconomic positions that dictate when, how, and if students enter the educational system. As a result, the average impact of education is to reinforce the differences and inequities that students bring with them into the classroom. The pandemic both exposed and exacerbated such inequities. So where do we go from here?

Insert the ownership economy. Our current systems— of work, education, and more— are flawed. Wealth, power, and opportunity continue to lie in the hands of a privileged few; the ownership economy aspires to change this. Both Jesse and Li have written extensively on the potential of the ownership economy in creating personal economic empowerment, and combating economic inequality by enabling everyone to become an owner of wealth-building assets. Further, Spencer is working to make building said ownership more open and accessible. Variant does not simply aim for financial returns, but to support and empower the builders and companies that will enable larger economic and social equality for the masses. Variant understands the power of community ownership and the vast impact it can have in building networks that grow bigger, faster, and as a force for developing more economic opportunity across the internet. 

As Director of Education and Events it is my role to partner with founders, builders, and community members alike to provide the tools, education, and support needed to bring the ownership economy thesis to fruition. This includes fostering connections and knowledge sharing opportunities for the talented founders in Variant’s portfolio in addition to ensuring that as builders, they have the resources, support, and expert mentorship they need to achieve their goals. It also includes working with the community LPs, experts, and larger community in Variant’s network to create educational materials and programs that help onboard and assist current and future builders understand emerging best practices in this still-nascent space. Variant is excited to partner with founders at the earliest possible stages, and my role is to help guarantee we have the best possible resources, materials, and know-how to do so. 

If you are a founder, aspiring builder, LP or community member, I would love to get to know you! You can reach me via DM or at alli@variant.fund with any questions, comments, event requests, etc. at any time. I can’t wait to hear from you!

Education to accelerate the ownership economy

Geoff Hamilton

I’m incredibly excited to announce that I’ve joined Variant as an investment partner. I’ll be working alongside Jesse, Li, Spencer, and Medha and collaborating with our network of venture partners and builders.

Before joining Variant, I spent over a decade investing in public consumer and technology companies. I was first exposed to crypto by a trading colleague around 2017, but it took a little longer for me to see beyond cryptoassets as speculative instruments and fully appreciate the potential of the technology. Over the last several years, a series of conversations with crypto founders, traders, and venture investors pointed me in the right direction. Inspired by these conversations, I started spending most of my free time reading and learning about crypto. Soon, “most of my free time” became “all the time I wasn’t eating or sleeping,” and it wasn’t long until it was clear that I wanted to focus exclusively on investing in the space.

Builders and creators in Web3 are creating technologies, organizations, and cultural assets that are transforming our world. Whether they intend to or not, everyone who contributes to Web3 is taking part in this transformation, which goes beyond building a better internet, or better financial technologies. Thanks to the hard work of many, we’re at an important inflection point in this transformation–a time when many different event paths seem possible.

For me, this is both the “why” and the “why now.” I believe strongly in the power of Web3 to benefit a broad swath of people–to create broad opportunities for wealth creation, to restructure and revitalize work, to enable richer modes of social interaction, and to unleash latent creative potential. Projects in Variant’s portfolio are among those leading the way. For example, Goldfinch is enabling uncollateralized loans that expand access to capital for underserved borrowers in emerging markets. Braintrust, a talent network, helps freelancers maximize their earnings by connecting them with work and by distributing ownership of the platform itself in the form of BTRST tokens. Sound, a music NFT platform, is enabling musicians to develop a new source of income and creating new ways for fans to express their passion. Syndicate is democratizing investing, lowering the barriers for starting an investment fund. And Mirror is enabling communities to raise funds, in addition to providing a publishing platform and other creative tools. 

To realize its full, transformative potential, Web3 needs determined, visionary, and values-driven builders. And the builders deserve all the help we can provide. I joined Variant because I believe the team is truly committed to supporting founders and the Web3 ecosystem more broadly. The fund is sized for its dedicated focus of seed investing, and every investment we make receives the support and resources of the entire partnership. The partnership is made up of true community builders, who have created some of the canonical educational resources for web3 and early-stage startups. And all of our work as a firm is supported by the Variant Community, a network of 100+ LPs who represent the top builders in the space. I’m inspired by the mission of investing in the ownership economy and humbled to be working with people I view as thought leaders in the space.

At Variant, I’ll be investing in all areas of Web3 that align with our thesis and mandate. If you’re working on something that sounds like a fit, hit me up on twitter or by email at geoff@variant.fund.

Jesse Walden

Why Web3 projects should commoditize the complement (the product)

Co-Authored with Jonathan Glick

Nearly twenty years ago, Joel Spolsky coined a phrase that informed the decision-making of countless startups and tech giants: “commoditize the complement.” 

In general, a company’s strategic interest is going to be to get the price of their complements as low as possible. The lowest theoretically sustainable price would be the “commodity price” — the price that arises when you have a bunch of competitors offering indistinguishable goods. So: Smart companies try to commoditize their products’ complements. If you can do this, demand for your product will increase and you will be able to charge more and make more.

Companies selling cars, cereal, and printers benefit when prices decrease for gasoline, milk, and ink, because the total price of a product includes the product plus anything else you need to maximize its potential--the complement. When the cost of complements decreases, the core product becomes overall more affordable. As affordability improves, so do sales — and with increased sales, pricing power leverage over the complements increases — a virtuous cycle. The biggest fans of virtually free ink would be Canon and HP,  which would see their products become effectively cheaper to use without having to lower prices.

Web3 teams have an opportunity to learn from and improve on the strategy of commoditizing the complement. In this essay, we’ll discuss why building and commoditizing a product on top of a user-owned protocol offers maximum leverage to execute this strategy, with potential for stronger economic equilibriums that drive growth, and value, beyond that of earlier implementations executed by legacy tech companies. 

Let’s start with some historical examples.


Licensing, Co-opting, and Walled Gardens
 

In hardware, perhaps the most famous example of “commoditizing the complement” was Microsoft’s strategy of fostering competition among PC hardware manufacturers by licensing Windows, its popular operating system, to anybody who could pay. Doing so weakened the market position of hardware manufacturers by encouraging cut-throat competition within the PC industry. By reducing the total cost of buying a desktop computer, Microsoft eliminated IBM as a hegemonic threat, increased the addressable market for PCs, and in turn increased demand for Windows, which compounded their pricing power.

In software, corporate embrace of open source projects has inhibited startups’ ability to develop profitable and threatening businesses at that layer, while also encouraging the use of proprietary services that further extend the tech giants' advantage. Google licensing TensorFlow — its machine learning engine that cost millions of dollars to develop — killed would-be competitors building general machine-learning frameworks and increased the number of developers using and improving the TensorFlow software, driving demand for TensorFlow Enterprise on Google Cloud. 

In the Web2 era, platforms like Twitter and Facebook ran powerful but temporary versions of the “commoditize the complement” strategy early in their growth phase. By giving away their products and APIs for free, the platforms were able to attract invaluable social graphs and user data, which in turn helped attract an ecosystem of third-party developers that built products to reach those users and extend the platform’s functionality. But there was a catch: After commoditizing the API  as a way to drive growth, social networks shut off the valve and turned their platforms  into proprietary walled gardens to capture more of the value therein. This put them in zero-sum conflict with third-party developers and often, their users, by eroding their choice. 

Web3 protocols have an opportunity to do things differently, owing to the fact that they can distribute tokens to turn their users into owners, empowering them to govern the platform in alignment with their continued interests. 

Bootstrapping Through Commoditizing in Web3


The first and largest “user” of a Web3 platform — defined as a software service running on an open blockchain (and often called a “protocol” in Web3 parlance) — is usually the product team that built the underlying platform. Web3 teams building these platforms are wise to build the first product on top and give it away for “free,” as a commodity, in order to bootstrap users, data, and network effects.

An example is Uniswap: Uniswap Labs, the company, built app.uniswap.org, the first and primary interface to the Uniswap Protocol, which is open and runs on the Ethereum blockchain. Compound Labs, also a company, did the same for the Compound money-market protocol. Making these early DeFi protocols accessible via an intuitive, user-friendly front-end was critical to bootstrapping liquidity in each respective marketplace platform—and once liquidity poured in, so too did network effects wherein the pricing of the product got better for each additional user. A growing user base, coupled with solid developer documentation, greased the wheels for third-party devs to integrate the underlying protocols to new products and services. For example, Metamask includes token swaps directly in their Ethereum wallet, where the liquidity is sourced directly from Uniswap. Critically, Metamask  could do this without asking for permission, and without fear of the API getting yanked from underneath as was common in Web2, because the Uniswap protocol and all its data runs on a public blockchain, and is owned by users.

So to recap: Making the complement (the Uniswap trading app) accessible at zero cost is a way to maximize benefit to end-users, whose usage mobilizes the network effects of the underlying platform (Uniswap Protocol). These network effects bootstrapped by the commoditized product can help to attract third-party developers, who build more functionality, attracting more users and usage, compounding those network effects. Finally, a distribution of ownership of the underlying platform — in the form of tokens — can be distributed to those driving the value, typically users and developers. 

Web3 companies, in other words, can commoditize the complement — but not as a means of draining profits and position from a potential competitor, as in Web2, but as a practical means of furthering sustainable innovation.

This practice of progressive decentralization aligns all parties’ incentives around growing value in the underlying platform or protocol — and puts teams that earn tokens for their contribution in a position to commoditize the complement, their own product, in order to capture value in the underlying platform. 

Balancing the Needs of Protocol and Product


This Web3 model of commoditizing the complement — and the accompanying structural separation of protocol from product — creates the need for an economic equilibrium, in which protocols incentivize developers to commoditize their complementary products while reaching the widest possible user-base and aligning their success with the growth of the underlying platform.

With more teams jumping into Web3, it is worth highlighting best practices that enable this equilibrium. Two steps stand out as important: 

First, as a Web3 platform matures, there may be a benefit to structuring the core project development work between two teams: those focused on the underlying platform or protocol, and those building the initial product for the end-user (each might have its own distinct brand to avoid confusion).The product team learns what end-users need, and can help inform the protocol design. And as the protocol team learns what product devs require, they can consider adding features that will attract more of them.

Second, both the product and protocol team should be aligned around a singular goal: a KPI focused on protocol growth. Measuring against a protocol-level metric helps ensure the product is truly complementary, driving the intended value to the underlying protocol.  With dedicated product and protocol teams aligned around a shared metric — a protocol or platform level KPI—it should be possible to measure contributions to that KPI and meritocratically distribute value of the underlying platform to the developers and users who drove it.

The initial product team, which helps to bootstrap the network effects of the underlying protocol, should be rewarded for that outsized contribution to the ecosystem. But ultimately, protocol treasuries would be wise to optimize for multiple product teams building on top, as that’s likely a way to grow the platform bigger, faster. An economic equilibrium that can achieve that end has the potential to be a tide to raise all boats. 

In this equilibrium, a product that seeks to extract too much value from the protocol layer will face stiff competition from others that are commoditizing their product to capture value elsewhere. This excessive value capture would replicate, rather than reform,the Web2 model—third-party innovation would be suffocated, developers would be inclined to fork, and users would look for cheaper, more innovative alternatives. 

Some early examples of protocols working toward a proper equilibrium include grants programs from large DeFi protocols like Uniswap, Compound, AAVE, et al., which reward third-party developers for ecosystem-growing products and services in their native treasury token. Liquity Protocol rewards developers who build front-ends to their stablecoin protocol with LQTY rewards pro-rata to users who deposit funds to the protocol. These front-end operators can receive a portion of these rewards by tagging deposits facilitated by their interface and specifying a percentage of LQTY rewards to split with their users. UMA Protocol tried something similar with its Developer Mining program, which encourages distributed innovation using economic incentives to reward developers who directly contribute to sustainably increasing UMA’s Total Value Locked (TVL) KPI. If you’ve built or seen other good examples, I’d love to learn about them.

Commoditizing the complement is a concept with long roots in technology strategy. Web3's ownership economy provides us with new tools to employ it, not as a means of stifling innovation and community, but encouraging them.

To close, here's a summary pocket playbook:


Thanks to Jonathan Glick for being a great thought partner in crystallizing the piece, and to Li Jin, Spencer Noon, and many of the builders in Variant's portfolio and community for conversations that helped shape the ideas. 

Why Web3 teams ought to build & commoditize the complement (the product)

Product vs. Protocol: Finding a Balance in Web3

Li Jin

The passion economy is the what, the ownership economy is the how

Last summer, I left Andreessen Horowitz to start Atelier Ventures, an early-stage venture firm devoted to the passion economy: new platforms that enabled users to “monetize individuality.” In a world in which one-third of people’s lives are spent working, providing more freedom in how people make money is a direct way to improve their quality of life. The mission has been crystal clear since day one: to create paths for economic mobility at scale by allowing people to monetize their skills and creativity and lowering the barriers to entrepreneurship. In the midst of COVID lockdowns, that mission became even more urgent as large swaths of the population suffered job loss and turned to online platforms for income.

As I was starting Atelier, Jesse Walden was working on Variant Fund, a seed-stage venture firm focused on the ownership economy thesis, backing software that is built, operated and owned by users themselves. I first met Jesse Walden when we were both working at a16z: he was on the crypto team, and I was on the consumer team. In those days (2018), there was a wide gulf between consumer applications and crypto, and the deals that our respective teams evaluated hardly overlapped — yet in spite of that, we often mind-melded over internet creators and online platforms. 

Fast forward to today. Both of our funds are notably different in a sea of venture firms: they exist not just out of a desire for financial returns, but to support companies that catalyze greater social and economic equality. Our missions were, and are, two sides of the same coin: ownership is a cornerstone of financial freedom and enables greater enfranchisement of participants in the networks to which they contribute their time and energy.

The ownership economy has the opportunity to address one of the biggest and most morally troubling issues of our time: economic inequality. As the wealth gap continues to widen to levels not seen since just before the Great Depression, the best way to combat this is to enable everyone to become an owner of wealth-building assets. For too long, ownership has been restricted to a privileged set of individuals — whether on the basis of geography, network, expertise, access, or for regulatory reasons. This phenomenon is especially true in the online creator economy: despite platforms’ critical dependence on the contributions of creators and users, platforms’ value accrues to a cadre of founders, early employees, and investors, rather than to users themselves. Furthermore, to maintain defensibility, creator platforms own and lock in users’ data, content, identities, and interactions — leading to erosion of creator leverage and lack of control of their own businesses. As more of our time spent and work opportunities become mediated by online platforms, giving ownership of these platforms — in terms of value, content, and data — to their participants becomes a powerful vector for facilitating social and economic empowerment. Yet, broader distribution of ownership isn't just a more socially optimal outcome, it’s also the most optimal way to scale a network. Platforms that reward their users with ownership align incentives towards creating internet-scale armies of talent that will enable them to outcompete those who don't.

Crypto has showcased the power of ownership in rallying independent participants all over the world to help steward and grow internet-scale networks. The first to realize this opportunity were developers and technologists who were critical to the growth and operation of networks like Bitcoin and Ethereum; since they owned a piece of those networks in the form of their native tokens (BTC and ETH, respectively), they were eager to contribute to those protocols in deeper ways. Now, founders are pushing this more cooperative economic model towards mainstream consumer adoption, resulting in an avalanche of new platforms whose participants engage with the products and services they use in deeper ways because they’re aligned with their economic success. The future of consumer software is crypto, centered around the belief that what users create and the value they engender belongs to them.

User-owned and operated networks are nascent but already percolating in various verticals. For example, in gaming, Yield Guild Games is providing on-ramps to income-earning opportunities in the metaverse via a scholarship program that is community-owned and operated. In the creator economy, Mirror offers crowdfunding and publishing tools and plans to distribute governance tokens to its community; members can use these tokens to propose grants from Mirror’s treasury and influence how its product works. Uniswap, a crypto exchange, distributes its fees to the traders that provide liquidity and make the product useful. And this is just the beginning! 

Today marks a new chapter for both of our funds as I’m excited to announce that Atelier Ventures and Variant Fund are joining forces to invest in software that is owned and operated by its users. Together, we will lead investments in early-stage crypto companies out of our new $110 million fund. Enabled by crypto, the ownership economy is how we can truly deliver on the promise of the passion economy, and consumer technology more broadly. As someone who has worked and invested in Web2 companies for my entire career, this was not a decision I took lightly. But I arrived here in full confidence that the intersection of the passion economy and ownership economy is the future I want to work towards, and the area of technology that holds the most entrepreneurial and equitable potential for humanity. 

Our merger represents a belief that the future of the passion economy, and of consumer software, is crypto. Together, our partnership — Jesse Walden, Spencer Noon, and I — will back founders at the earliest stages. Jesse was an early believer in crypto’s consumer potential and gained hard-won insights from a number of vantages: as a founder of Mediachain, an early protocol that pioneered ideas since popularized by NFTs; a research lead at Spotify, which acquired his startup; and as an investor, where he has written the playbooks on emerging best practices for founders building in the crypto space. Spencer was an early expert in DeFi; a one of the first crypto investors to leverage on-chain analytics to value the fundamentals of new financial marketplaces at DTC Capital; and was also a crypto entrepreneur, starting Bitcoin on-ramp company BTCity in 2014. Together with my expertise in consumer marketplaces and platforms, we provide a diverse and unique perspective that will help founders execute on strategy decisions unique to crypto projects, but also bridge the gap in go-to-market for crypto’s next leg up towards mass-market adoption.

If you’re a founder aligned with our vision for a more meritocratic internet, we’d love to chat.

A first-check venture fund investing in the Ownership Economy

Atelier Ventures and Variant Fund are joining forces - Variant

Atelier Ventures and Variant Fund are joining forces

Silicon Valley has known for years that ownership is a keystone of building great products. In order to build the best products, startups need to attract the best talent, and to attract the best talent, offering equity in the form of stock options is a best practice to align employees with the company’s success. But today, only a small group of insiders — founders, investors, and employees — get to reap the rewards of ownership, while the broader community who are also instrumental to a company’s success are locked out of this opportunity for life-changing wealth creation. Just imagine: if every early Uber driver had received $5,000 of Uber stock when it was a seed-stage company, that equity would be worth $25 million by the time the company went public. 

Given the overhead of legal contracts and legacy financial infrastructure, it has historically been infeasible to distribute ownership at the scale required to reward every user who participates in the value creation of today's largest platforms. Crypto tokens are an innovation that enables the movement of value with the speed of information, akin to data packets. Tokens can unlock the vision of more meritocratic distribution of ownership and align incentives toward building networks that grow bigger, faster. We call this the ownership economy — products and services that are built, operated, and owned by their users — and it is unfolding even faster than we initially imagined when we started Variant. 

We believe that ownership will be a keystone of all next-generation products and platforms. The first to realize this were the developers and technologists who contributed to the movement by building and operating the first multi-billion dollar internet scale networks: Bitcoin and Ethereum. Now, a new generation of entrepreneurs are rebuilding the internet with this more meritocratic and competitive model in mind. From developer-facing infrastructure to financial marketplaces, social media, gaming, digital art and collectibles, ownership has unlocked a new design space for scaling products faster than predecessors because users are aligned with their success. Some examples from our portfolio: Uniswap is a financial exchange, similar to Coinbase, where users who make the exchange liquid are rewarded with fees and given tokens conferring governance rights. Mirror is a publishing platform and toolkit for Web3 creators, where users — rather than the core team — decide how to grow the platform. Blitmap is one of the healthiest communities in Web3, whose users are anchored around ownership of NFTs created by artists and remixed by community members. And the list goes on.

The insight that next-generation networks would be built, operated and owned by their users is the reason why Variant was founded: to support and push forward the ownership economy. Beyond driving positive social outcomes in terms of how wealth is built and distributed, we believe that moving and distributing ownership at the speed of information is also the most optimal way to scale software services and communities. This is proven out by quantitative data: in April 2021, $122 billion in transactions took place on decentralized exchanges, up from less than $1 billion a year earlier. Ethereum settled more than $6 trillion in transactions in the past year despite being only 6 years old. Art Blocks, a curated digital art marketplace has seen billions of dollars in transaction volume grow alongside a fanatical community of collectors, including us.

Success for Variant is a world in which everyone becomes an owner of the products and services that they use. For this future to become reality, we need to continue to pull it forward. We believe it will take the support of a new kind of investor — one that is crypto-native but also has deep empathy and intuition for mainstream consumers. That is why we are thrilled to announce that Li Jin — our friend and a former colleague at Andreessen Horowitz — is merging her esteemed Atelier Ventures with Variant. The New York Times called Li the “It girl of venture capital,” but those that have worked with her know that she is an incredibly smart, thoughtful, and mission-driven investor. Li deeply believes in the values of the ownership economy, and her expertise in consumer and creator products is unparalleled in the crypto space.

As Li beautifully outlined in her blog today, crypto and the ownership economy are how we fully realize the vision of the passion economy that she laid out in 2019 with her seminal essay. The future of consumer technology is in crypto, and for it to fully blossom, we need investors who can help navigate the next wave of adoption from the early majority of internet users.

With that, we are pleased to announce a new $110 million first-check fund to continue investing in the ownership economy — from consumer platforms to gaming to infrastructure to DeFi. By design, we are sized for early-stage investing, where our expertise in startup building, protocol design, and consumer-focused go-to-market strategy can really move the needle for companies, networks, and DAOs.  

Given our vision of user ownership, we also felt that it was imperative for Variant to embody and live our own thesis as a firm — to be owned by our users, the founders that we back. Therefore, we purposefully expanded Variant’s investor base to include over 100 of the brightest minds and builders in web3, crypto, and technology, including builders from Uniswap, Compound, Foundation, Zora, Yield Guild Games, Mirror, and more. This enables us to take a decentralized approach to scaling our operations. The Variant Community will take an active role in shaping the fund's success and supporting projects in our portfolio. We aim to build a firm that adds value by turning our network into a product that founders can use and own.

If you believe in a more equitable internet and are building a crypto project in the ownership economy, we’d love to hear from you.

Variant Fund II: $110 million fund built for the ownership economy - Variant

Variant Fund II: $110 million fund built for the ownership economy

Scott Kominers

Lila Shroff

A Labor Movement for the Platform Economy

The Creator Economy is in Crisis. Now Let’s Fix It.

Leah Callon-Butler

Gabby Dizon

Richerd Chan

Jason Li

The Leaping Corgi Scholarship sponsors players to start earning in the metaverse

Jon Itzler

I’m thrilled to announce I’ve joined Variant, where I’ll be helping entrepreneurs build the future of finance & culture alongside Jesse Walden, Spencer

Joining Variant: pseudotheos

The Ownership Economy 2022

Recent Trends in Token Distribution

Derek Walkush - Joining Variant

Education to accelerate the ownership economy

Joining Variant

Product vs. Protocol: Finding a Balance in Web3

Atelier Ventures and Variant Fund are joining forces

Variant Fund II: $110 million fund built for the ownership economy

A Labor Movement for the Platform Economy

The Creator Economy is in Crisis. Now Let’s Fix It.

The Leaping Corgi Scholarship sponsors players to start earning in the metaverse

Joining Variant

Podcast: Bankless: The Creator Economy | Jesse Walden, Li Jin, Cooper Turley

Podcast: Fred Ehrsam: Creators, Communities, and Crypto Part II

Apple is Holding Back the Creator Economy

The Case for Universal Creative Income

Podcast: a16z Podcast: The Creator Economy: NFTs and Beyond

NFTs make the internet ownable

Podcast: Indie Hackers: Indie Hacking in the Passion Economy with Li Jin of Atelier

We studied 50+ startups on TikTok and here’s what we found

The Creator Economy Needs a Middle Class

Leadership in The Ownership Economy—Scaling Decision Making while Minimizing Securities Risk

Podcast: The Pomp Podcast: Li Jin on the Passion Economy

Podcast: Bankless: The Ownership Economy | Jesse Walden

Unbundling Work from Employment

The Ownership Economy: Crypto & The Next Frontier of Consumer Software

How does DeFi cross the chasm?

Podcast: Unchained: How to Decentralize a Crypto Project Without Harming Security

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How the Passion Economy will disrupt media, education, and countless other industries (Part 1)

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