Author's Note\
Recently, I had some discussions with friends about project research and discovered a common phenomenon. Many people’s understanding of projects is limited to news articles and they have not actually used them, or even visited the project’s official website to read the materials themselves.
However, in many articles written by others, a lot of focus is on token economics, while the project’s solutions are often briefly mentioned in just a few words.
As a result, most people cannot form any expectations about the quality of a project, and ultimately, it comes down to looking at the price. If the price goes up, it’s a good project; if the price goes down, it’s a bad project.
In today’s article, I will share a logic I use to evaluate projects, guiding everyone to understand what I refer to as the “Web3 turning point” in the title. I need to explain that the experience I refer to is a broad concept, which I will elaborate on in detail from various aspects in the main text.
Additionally, I have noticed a subtle point. Web3 is actually a very transparent field, where various technologies and solutions can mostly be found in public channels, so I do not define Web3 as a field filled with information asymmetry. (The behaviors of token price market makers and insider trading are not included here; the context is limited to industry research and project analysis.)
In the Web3 space, the real cause of information asymmetry and barriers is actually the learning ability of individuals. Too many people are only accustomed to reading articles and viewpoints summarized by others, and they only absorb opinions related to whether to invest. In simple terms, many people only think in terms of return rates and do not consider other perspectives in the Web3 field.
I am not smarter than the readers, nor do I have more resources than them. I have simply looked at more materials and spent a bit more time. If readers also take the time to look at more materials and think more, their understanding of Web3 may very well surpass mine.
Main Text#
Many people describe Web3/Crypto with terms like decentralization and transparency, but I believe that terms like “decentralization” and “transparency” merely describe certain characteristics rather than being points of innovation.
In layman's terms, if a project describes itself with “decentralization, transparency, smart contracts,” then that does not count as an innovation point; it is merely listing some characteristics. Such rhetoric is of no use in project analysis.
So what is an innovation point? In this article, I define an innovation point as a part that has disrupted previous functions or concepts. What everyone has does not count as an innovation point.
Based on this, we return to the title of this article: the true turning point of Web3 lies in enhancing the experience.
Definition of Experience and Innovation Points#
The term experience is very familiar in the context of Chinese internet products. Although Chinese internet products may not be the most innovative in functionality, they are certainly among the best in pursuing user experience.
However, the experience referred to in this article will be a broad concept. I will describe it in detail below.
User Experience#
Let’s start with the most familiar term: user experience. The issue of user experience is actually a longstanding problem in the Web3 industry, and to date, I have not seen any project that has solved this problem.
Taking a Chinese user as an example, let’s outline how many steps they need to go through from entering the industry to operating Uniswap:
- Download the Chrome browser and configure a VPN;
- Download the Metamask wallet, learn how to operate the wallet and back up the seed phrase;
- Learn the advanced features of Metamask and configure the RPC for mainstream public chains;
- Find a CEX that allows Chinese users, register, and pass KYC;
- Purchase the most basic cryptocurrency as gas fees for the Web3 wallet;
- Transfer from CEX to Metamask and learn to understand the block confirmation mechanism;
- Open Uniswap and learn to understand the AMM mechanism;
- Use Uniswap for trading.
This is just the most basic interaction in the Web3 world. There are many other functions and concepts such as NFT minting, NFT creation, cross-chain bridges, and over-collateralization, which are very difficult for the general user to understand. Therefore, the cumbersome user experience in Web3 is a significant pain point that needs to be transformed.
Functional Experience#
I will use cloud storage as an example here. Users who frequently use cloud storage products will find that due to content review mechanisms, many contents are deleted. It is easy to understand that content is deleted for violations, but it is worth pondering how they know which content is a violation and which is compliant.
It’s simple: they have to review all the information in the cloud storage. Because of this, distributed storage projects have emerged, and IPFS and Arweave have become the preferred storage methods for many Web3 projects.
Of course, in terms of storage performance and unit price, distributed storage projects are far less advantageous than centralized storage. However, because there are still flaws, it also becomes a significant breakthrough point for future developments.
Product Experience#
In my definition, product experience is not the same as functional experience. Functional experience occurs when the business logic of the product remains unchanged (e.g., both distributed storage and centralized storage are forms of storage), but the technical architecture undergoes a new transformation.
Product experience, on the other hand, refers to an enhancement in experience where the track/field remains unchanged, but the product logic has completely changed.
For example, there were many oracle projects in 2017 and 2018, especially coinciding with the 2018 World Cup, when there were many oracle projects in the crypto space, most of which have since gone bankrupt.
The fundamental difference is that the oracle track back then was essentially a gambling game track. By collecting various score results from sports events, users would predict scores and outcomes in the “oracle” application and win cryptocurrency.
However, after ChainLink emerged, it swept the entire oracle market and became an important cornerstone in the Web3 field. The fundamental reason is that ChainLink directly restructured the original oracle products, becoming a point of transformation in product experience. (You can search for related articles on ChainLink’s product architecture; there are many introductions available.)
Gaming Experience#
This point is more relevant to the GameFi field, which is currently trapped in the “oracle” dilemma I described in the previous paragraph. Almost all GameFi projects use games as a vehicle (at the level of 4399 browser games) to manipulate token economic systems.
All GameFi mechanisms are designed to either increase token prices or control the market, neglecting the most fundamental aspect of games, which is the gaming experience. GameFi subsidies cannot be sustained in the long term; only the playability and interactivity of the game can truly sustain it, encouraging more gamers to spend more attention and money.
I believe many readers have friends who have played World of Warcraft for over ten years. You can consult some friends who have played for over ten years; they play World of Warcraft not because of the return rate of WoW gold, but because of the playability and interactivity of World of Warcraft.
For this reason, the user base in the blockchain gaming track is almost devoid of actual gamers, consisting entirely of speculators and yield farmers. At this point, the GameFi field needs a heavyweight product similar to ChainLink to completely restructure the entire GameFi track.
Turning Point of Financial Paradigms#
Strictly speaking, in the DeFi field, there is currently only one innovation that can truly be called transformative.
x*y=k (AMM Model)#
The constant product formula defined by Uniswap has long become a cornerstone of DeFi. It is not an exaggeration to call it a transformation of financial paradigms.
Since there are already many discussions about the constant product formula online, I will not elaborate on the formula here. We will only discuss its impact.
In the Web3/Crypto field, algorithmic market making is referred to as AMM, or Automated Market Maker. It can automatically calculate buy and sell prices based on simple pricing algorithms; we can think of it as a robot that conducts buy and sell transactions. It solves the cost and efficiency issues that arise when traditional exchanges transition to DEX.
Different AMM models have different consensus on price calculations, which can be roughly divided into constant product market makers (CPMM), constant sum market makers (CSMM), and constant mean market makers (CMMM), among others. The most widely used is the constant product market maker.
The formula x*y=k belongs to the constant product market maker model and is the first AMM algorithm in the DeFi field. This algorithm has influenced over 90% of subsequent DEX projects, and many DEX algorithms are simply forks of Uniswap V2.
Transformation of Financial Paradigms#
In traditional finance, or in many familiar CEXs, the most mainstream trading method is the Order Book model. In the Order Book, there are two roles: the market maker (also called Maker) and the trader (also called Taker).
Professional market makers (Makers) will simultaneously place orders in both buy and sell directions on the exchange and adjust their quotes based on market volatility, providing liquidity to the exchange. In simple terms, market makers are those who provide quotes and liquidity.
In the Order Book model, trading heavily relies on market makers. If the liquidity provided by market makers is low, it becomes very easy for traders to experience slippage. If a black swan event occurs and market makers withdraw from the market, it is also very easy for the market to experience one-sided trends, leading to a sharp decline.
Returning to AMM, the mainstream AMM model based on the constant product formula has brought about a series of innovations in financial paradigms. Among them, the most important and disruptive to traditional finance is the transformation of DeFi composability.
The AMM model allows various parameters of market makers to be quantified into specific code, which has led to the emergence of many DeFi Lego components, including flash loans, over-collateralized lending, liquidity mining, and so on. Other advantages of AMM can be replicated in CeFi, but only DeFi composability is a core feature that CeFi cannot possess.
Experience Enhancement of Uniswap#
When it comes to transformation, Uniswap is an unavoidable case, and it can even be called a classic example.
Uniswap has gone through three major version updates, each of which has been a complete upgrade in product experience. In the earlier Uniswap V1, trading pairs could only be traded as ERC20-ETH, and users could only choose from the preset trading pairs provided by the system.
This is quite similar to today’s CEX, where users cannot freely choose trading pairs and can only trade between the pairs provided by the CEX. For example, you can choose the UNI-USDT trading pair in a CEX, but you cannot choose the UNI-DYDX trading pair because the CEX does not provide that trading pair for you.
However, in Uniswap V2, liquidity pools and trading methods for ERC20-ERC20 were added. This means that users are allowed to extract any ERC20 tokens they want on Uniswap, and after obtaining these tokens, they can perform any operations. This also brought prosperity to DeFi summer.
Version V2 is also the version that most DEXs on the market have copied, with various DEXs making minor innovations based on Uniswap or adding more token functionalities. However, in terms of the swap function, most DEXs have long since stopped at that point.
But Uniswap continued to innovate itself, launching Uniswap V3. Compared to V2, Uniswap V3 focuses on maximizing capital efficiency. The new automated market maker scheme of Uniswap V3 not only retains the core feature of aggregated liquidity but also introduces multi-tier fee control, range orders, historical oracles, and other functions.
Moreover, Uniswap V3 no longer issues ERC20 tokens to represent the positions of liquidity providers. Instead, it provides NFTs to represent the positions of liquidity providers, with the provided liquidity tracked by non-fungible ERC721 tokens. Uniswap V3 has also played a pioneering role in promoting more application scenarios for NFTs.
Conclusion#
It is undoubtedly clear that the current market is in a bear phase, and the development of the Web3 field is also in a bear market. I have observed that most of the new projects recently have stagnated in innovation, generally issuing NFTs and tokens, but in terms of user experience, product experience, and functional experience, there is almost nothing new, and even minor innovations are no longer present.
These new projects are often built on mature tracks and then play with token economics or NFT functionalities in various ways. However, this does not drive the Web3/Crypto industry forward.
The prosperity of token economic subsidies cannot be sustained in the long term. Once the subsidies end or the effects diminish, the project will undoubtedly spiral into death. This is also the core reason why I have rarely discussed new projects lately, as the conversations always revolve around token mechanics, which are rather unremarkable.
I hope that during this bear market cycle, more transformative heavyweight projects like Uniswap and ChainLink can emerge.
Author: Liu Ye Jing Hong
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