The typical application of cryptocurrencies in the market is as a mechanism to drive growth: using tokens to incentivize the inflow of supply and/or demand. Various DePIN networks and other market tokenization have successfully applied this model to overcome the cold start problem.
In analyzing market tokenization, we have developed a framework for thinking about various market tokenization methods and the advantages and disadvantages of each method.
At its most basic level, markets facilitate transactions between supply and demand. Over the past few decades, we have witnessed various evolutions of the market. These evolutions have either unlocked new sources of supply and demand, or summarized excellent experiences for existing supply and demand in the market.
In short, markets can be divided based on whether they are targeting new supply or existing supply, and whether they are meeting new demand or existing demand.
First, let’s look at specific definitions:
New Demand: Turning non-consumers into consumers
Markets that satisfy new demand expand the market for products or services by turning previous non-consumers into consumers. For example, UberX essentially turned previous users of other transportation methods (public transport, private cars, etc.) into ride-sharing users.
New Supply: Turning non-suppliers into suppliers
Markets targeting new supply are expanding the market for products or services by turning non-suppliers who previously did not provide services or products into suppliers. For example, Airbnb increased the new supply on the host side in the form of more bedrooms or sofas.
Existing Demand: Getting existing consumers to use a new market
Markets tapping into existing demand attract existing product or service users to new markets. Think about it: Angie’s List’s superior vertical experience might draw existing demand away from more comprehensive markets like Craigslist.
Existing Supply: Getting existing suppliers to use a new market
Similar to the previous point, but targeting suppliers. For example, Faire is a B2B wholesale market that connects brands and retailers.
1. Web2 Markets
Borrowing from the market methods of Web2 can be helpful. By observing the history of market development and how the greatest successes are achieved, we can better understand market dynamics.
The biggest disruption—hence the biggest success—in Web2 market innovation occurred in the “new supply + new demand” quadrant. When you open up new supply and new demand, you expand the entire market. This is in line with Clay Christensen’s theory of disruptive innovation: Christensen believes that focusing on previous non-consumers can unlock a larger market than locking in existing consumers.
Compared to the “existing supply + existing demand” quadrant, markets in this quadrant typically use existing transaction methods (Whitepages, travel agencies, etc.) and build better products to serve these transactions. Examples include Priceline for travel booking services and OpenTable for restaurant reservation services. The convenience and ease of digital discovery and booking enable them to create experiences 10 times better than offline markets, allowing them to gain market share.
Two quadrants remain: one where supply is still there but demand is new, and the other where demand is still there but new supply has emerged. In both cases, growth may come from the conversion of new consumers or suppliers. A large amount of business comes from these quadrants. For example, DoorDash created a new demand source for existing restaurant supply (consumers wanting on-demand delivery). By converting non-consumers into consumers, they opened up a new revenue stream for restaurants—DoorDash’s revenue last year was $2.3 billion.
Clearly, there is overlap in these quadrants, and markets typically start from one quadrant and then migrate or expand into other quadrants. However, this framework helps to quantify the potential scale of potential markets based on existing market dynamics and potential supply and demand situations.
2. Web3 Market Matrix
Similar to Web2 markets, market tokenization has four common classification methods.
Occupying the “existing supply + existing demand” quadrant are markets seeking to improve existing platforms— for example, by providing better products or better economic benefits to participants. For example, Braintrust is a freelance market that shares ownership with users through tokens and charges lower commission rates, beating the industry standard commission rate of 40% for human resource agencies. Blackbird is a restaurant loyalty platform that offers lower commission rates for using cryptocurrency payments for existing restaurants.
In the “new demand + new supply” quadrant, businesses can create entirely new markets. For example, DIMO allows drivers to earn tokens by transmitting their vehicle data, unlocking a new supply and demand pool in the car data field. Drivers who would not otherwise provide vehicle data are attracted by token incentives, and this new data supply unlocks new demand. Helium is another example: individuals set up hotspots at home and create a decentralized wireless IoT network using the LoRaWan system to earn rewards.
Market tokenization is particularly suitable for the “new demand + new supply” quadrant, as token incentives can orderly develop the market by subsidizing one party to join the market before the other. Compared to the web2 paradigm, this is a new capability, where markets must expand supply and demand simultaneously.
The risk of building the “new supply + new demand” quadrant is that supply or demand may not be sufficient as a basis for substantial revenue opportunities, or the appearance of new suppliers and/or new demand may take longer than expected. However, founders may also underestimate the scale of emerging markets. For example, Uber’s founders estimated in their seed round pitch deck that their annual revenue should be $1 billion in the most optimistic scenario. It turned out that this greatly underestimated the potential transportation demand—Uber’s revenue last year reached $8.7 billion. Founders must be prepared for both possibilities, and develop flexible business models to rapidly scale up in the event of stronger-than-expected market response, as well as contingency plans for growth lower than expected.
3. The Impact on Builders
Understanding whether the new market is for new supply and demand or existing supply and demand is crucial, as it determines the entry strategy into the market and where builders need to excel to win market supply and demand share.
For new supply
To activate new supply, builders must educate potential suppliers on why they should participate in this new market and provide an attractive value proposition. This often requires convincing them that they will receive monetary or other benefits.
If the value proposition is money, builders must ensure that their solution is competitive in a broader revenue opportunity market. For example, GPU resource suppliers can choose to rent to different GPU markets, so the revenue potential of the new platform must be attractive enough. Whether to participate as active suppliers or passive suppliers affects retention rates and scalability.
For existing supply
Finding existing suppliers and convincing them to switch to a new platform requires the development of strong products and market entry activities, depending on the nature of the supply. If existing supply includes enterprises (B2B), founders build relationships with these suppliers and benefit from them. If existing supply is made up of individuals (B2C), then founders need strong storytelling and marketing skills, as well as the ability to translate deep user insights into products.
For new demand
Creating new demand requires builders to excel in creating new markets. Founders must effectively convey why this new product or service is valuable and worthy of user attention. This requires skilled storytelling and narrative construction, as well as a strong set of customer acquisition skills. In the crypto field, token incentives can also help drive new demand for the market.
For existing demand
To win existing demand, founders need to be good at customer acquisition, meet the needs of potential users, and persuade them to switch to a different platform. This requires understanding their current needs and providing a clearly superior solution. For example, disruptors in the new vertical on-demand market convert users from Craigslist and other general platforms with a 10 times better user experience. In the crypto world, using token incentives to persuade end users to switch to a new platform is an effective strategy, as demonstrated by various vampire attacks and token incentive programs.
4. Prospects for Market Tokenization
Market tokenization is unique in the crypto world, as they not only face competition from other crypto projects but also from all other web2 markets in vertical fields. This is because Web3 markets deploy token incentives as a guiding mechanism, but the core of the market still depends on the success of transactions. For example, GPU tokenized computing markets like Ionet, Akash, Render compete with traditional computing services like Lambda, Coreweave, and AWS.
The lifeblood of any market lies in liquidity—the ability to find counterparties for target transactions. While token incentives can drive initial growth and help overcome the cold start problem, long-term success still depends on the core utility of the market: supply and demand matching. Ultimately, market tokenization must build a strong enough market with an outstanding experience to attract and retain participants.
