There are many indications that the bubble has burst. As we all know from history, though, a burst bubble isn’t the end of the story. It’s the start of a new one. 

Blockchain has already been through two interesting epochs, and we’re on the cusp of a third. I break these epochs down into three stages: the Crypto era, the Web3 era, and the Abstraction era. As we approach the abstraction era, the role of blockchain technology will continue to morph and evolve in ways that have major implications for consumers and investors alike. As an investor in businesses leveraging the technologies and philosophies of crypto and web3, I’ve never been more excited about the opportunities ahead of us.

Epoch 1: Crypto (2009-2018)

The primary focus of Epoch 1 was cryptocurrencies, predominantly Bitcoin. During the first epoch, there was significant energy around the technological innovation represented by the blockchain. Additionally, if you were serious about crypto during this time, you held Bitcoin in a wallet you created—not on an exchange. 

A defining belief of this epoch was, “Not your keys, not your coins.” That belief persists, but subsequent epochs and the future of the blockchain will challenge it in ways both great and small. 

Tokens existed and trading happened during this epoch, but these were the early days. Most people getting into crypto bought into the philosophy of self-sovereignty and planned to hodl to the moon.  

The idea that we might be building a new internet hadn’t fully taken hold, although some of the signs were emerging. Protocols began springing up and issuing native tokens, promising ambitious technology roadmaps and quick riches. To access the opportunities of what would come to be called Web3, many crypto holders sacrificed security for convenience and got rekt in the process.

This epoch began when the genesis block was minted in 2009 and ended with the ICO boom and bust in 2017-8.

Epoch 2: Web3 (2018-2022)

Then we entered Epoch 2, which was a period of wallets and exchanges, massive speculation, and spectacular financial collapses. This epoch was characterized by the proliferation of decentralized finance (DeFi) and non fungible tokens (NFTs), along with a boom in crypto adoption. 

During this period, real business applications built on the blockchain began to emerge, though were overshadowed by the narratives centered on DeFi and NFT trading. New platforms and ecosystems emerged, with Ethereum as the poster child for programmable blockchains, Uniswap and ConsenSys’s MetaMask as leading examples of decentralized applications (dApps), and a host of centralized exchanges emblazoning sports stadiums and buying Super Bowl ads to bring the masses into Web3. 

However, during this epoch, users had to jump through a ton of hoops to interact with those platforms and ecosystems, creating new risks in addition to the empty promises of sham projects. 

The process we put up with is amazing, and faintly ridiculous when you break it down:

• First, sign up for an exchange account (FTX, Coinbase, Crypto.com, Binance—pick your poison)
• Connect your bank account to your exchange account
• Wait a couple days for your account to be funded
• Purchase a token (ETH, SOL, etc.)
• Install a browser wallet (MetaMask, Phantom)
• Send your token to the address on your wallet. Now, to do this, you have to click on the wallet, get the address, copy and paste it into your exchange, then press “Send” and hope you got it right—because if you didn’t, that money is gone forever. A lot of money was lost to fat finger mistakes during this step (to say nothing of exchange failures, scams, and speculation)
• Refresh over and over until the token shows up in your wallet
• Now you can use Web3: go to a website, hit “connect wallet,” sign a transaction, convert it and stake it, play a game, and so on

If you ever needed to convert that token into currency, you had to reverse this whole process: sending the token back to the exchange (after you find your wallet address in the exchange…which, by the way was never really yours, but commingled with everyone else’s), selling it, eating the fees, and then withdrawing the money—which could take days (if the exchange was allowing withdrawals at all!). 

This—this clunky, unwieldy, error-prone process—this was what we all got so excited about? In some ways Epoch 2 was really built for and by the winners of Epoch 1. It was designed for people who already held crypto in a wallet at a low cost basis. It was funny money, not fiat money.

While the main focus of activity (and media attention) went to NFTs, a long tail of other use cases appeared during Epoch 2, including DeFi and play-to-earn games. It would be easy to say that the constant meltdowns and scams are what caused the end of this epoch, but it’s more than that. The process simply sucked, but it was a necessary part of a technological evolution that will bring us to an epoch of abstraction. 

Epoch 3: Abstraction (2023-?)

The next evolutionary phase of blockchain technology, the third epoch, begins now. Epoch 3 is all about abstraction, and will usher in the next billion users (who will actually be the first billion, seeing as the first two epochs brought in fewer than 100 million people). 

We’re already seeing this shift occur: In the previous phases, much of our energy and attention went to cryptocurrency; we assumed the exciting part about the blockchain was how it enabled self-sovereignty and decentralized finance. 

There are two ways to think about the coming evolution of blockchain technology: as akin to the mobile evolution, or as akin to the cloud revolution. With the mobile evolution, users could only benefit if they had access to a mobile device, some level of technical skill, and a willingness to make behavioral changes. Hardcore crypto types might say that so far, we’ve aligned with the mobile revolution. 

The cloud revolution, on the other hand, was a natural evolution of technology and the internet: Everyone’s on the cloud now, often without even realizing it. The end user doesn’t know or care how the cloud works, and you don’t need a new device, new technical skills, or new behavior to use the cloud. The cloud simply operates in the background, streamlining your experience. 

In Epoch 3, the exciting thing won’t be currency; it will be the underlying technology: The blockchain itself. The fact that we can do things in a fast, secure, decentralized, and resilient way is the true game-changer for the future, and its effects are going to be widespread and largely invisible to the end user. Going forward, most people who use crypto to buy something may not even know it. 

It’s already happening: On OpenSea, you can now buy an NFT with dollars. In fact, that’s becoming their primary call to action. A third-party service cuts all those clunky steps from Epoch 2 so that the end user can make their purchase with a single click, rather than laboring through the whole complex process themselves. That’s the abstraction era in action. 

Another example is Reddit, whose “Collectible Avatars” (notably not called NFTs) have been downloaded by 4.3 million people since September, more than the entire 2.5 million wallets with NFTs prior to September, according to Nansen. 

“It’s not about NFTs. It’s about the use case. A ticket, access, experience, loyalty. The tech and Web3 terms need to fade into the background,” says Mathew Sweezey, Co-founder of Salesforce’s Web3 Studio.

Think of it this way: No provider boasts to their prospective end user about the cloud—the end user doesn’t care where information is stored or what the technological underpinning looks like. They just want a great UI and the knowledge that their information is stored securely. We’re seeing the same type of evolution with blockchain technology. 

The future of the blockchain is one in which the next billion crypto users won’t hold Bitcoin, Ethereum, or any other fungible tokens. They’ll use fiat to purchase goods and services, and that fiat might be exchanged for tokens somewhere on the back end. 

For example, if I’m going to Italy, I don’t start gathering up a bunch of Euros ahead of my trip. When I get there and sit down in a restaurant, all I care about is eating my pasta and drinking my wine. I’ll pay with a credit card and my dollars will get converted to Euros. If the back-end technology uses the Solana blockchain to do the conversion and it converts my fiat to USDC and then to EUROC, saving the merchant forex fees, fantastic. 

I don’t need to know how the technology works: I’m still paying with dollars and the restaurant is still getting paid in Euros. The blockchain technology that enables this seamless transaction doesn’t need my attention, it just works. 

Put simply, the blockchain is going to become infrastructure. Just as no one really talks about “the cloud” anymore, we won’t talk about “the blockchain” either. We won’t need to know or care which blockchain our purchases are stored on. Starbucks announced they will begin issuing customers “stamps” in their Odyssey loyalty program on Polygon, yet no one ordering a PSL will ever need MATIC or care.

Some readers might be hearkening back to Epoch 1 and saying, “Not your keys, not your coins.” There’s still a pervasive belief that if you’re not self-custodying your assets on a hardware wallet, you’re subject to the same centralization risk that’s been at the center of catastrophe after catastrophe. 

Here’s what I have to say to that fear: In the late ‘90s, there were about 30 million AOL users. Currently, MetaMask has about 30 million users. The technology is changing and it will continue to change—and improve. In MetaMask, you already have the option to export your keys if you want to go and play in another sandbox. 

That option won’t disappear in the abstraction era. You’ll be able to export your assets and take them with you, including into self-custody. Most users probably won’t, because most users probably won’t care. 

Predicting the Future

This future has implications for investors as well as consumers. During Epoch 2 and its Web3 focus, venture capital often looked like investing in crypto. In the abstraction era, we’ll be investing in great businesses and technologies, instead—most of those will just happen to be built on the blockchain. 

Many funds used to call themselves “cloud” funds or invest in “mobile;” now, those categories are native to almost any new technology. Similarly, in five years or so, there won’t be a distinction that a fund is a “Web3” fund, because where the technologies or philosophies of cryptocurrency or Web3 make sense, they will be used by the best businesses, and everyone will benefit. Abstraction is coming, so any companies building into the ecosystem of “connect wallet” should take caution and figure out how to make it easier to onboard new users. Huge companies like Stripe and Coinbase are investing heavily in their APIs, and startups like Peaze, Axel, and Biconomy are making it incredibly easy to web3ify any business. The next billion crypto users are coming, and they won’t even know it.

The short history of brand marketing in Web3 is not an auspicious one. While some projects have produced immense success, most have been total flops. Take the case of Warner Bros. and Nifty’s, which partnered to launch Matrix avatar NFTs in December 2021. The launch was, to put it mildly, glitchy: Site crashes, failed purchases, and confusing rules. Community members—some of whom waited in faulty lines for more than a day only to wind up empty-handed—were understandably furious. While Nifty’s responded with great communication and a free “glitch in the Matrix” NFT, their rough start should encourage other brands to think deeply about their own Web3 plans.  

Against this backdrop, how should brands proceed as we look ahead to 2023? Over the last TK months, we worked with some of the leading minds in the brand marketing ecosystem to identify the most important factors brands should consider before entering Web3. Topping the list was customer experience.  

To be sure, Web3 has been a pretty bad experience to date. If marketers plan to build in this space, they have to keep the customer experience front and center. That means the entire customer journey, not just a single moment on it. Based on our work, we identified four imperatives to create exemplary customer experience in Web3. 

1. Make it easy.

As an initial step, brand marketers should focus on ensuring an easy experience to earn consumers’ trust: 

• Allow for payment with both fiat and crypto;
• Allow for purchase with & without a crypto wallet;
• Ask for their email address; most people will give it. (If you’re not collecting emails, clearly state where you will post updates, and where they can go to ask questions);
• Follow up via email post-purchase explaining the benefits and how to activate them; and 
• Ensure there is a way for customers to get support and that those agents are trained to answer crypto-related questions.

Consider custodial wallets. Most consumers don’t have their own wallet, so you need to give them one. If you choose a custodial wallet, make sure you support them if issues arise. Also consider what methods of payments you will accept. 

If you’re looking to sell to your existing market, it’s likely consumers will use fiat currency rather than crypto. You’ll need to ensure you have a solution that allows for that. You’ll need to have clear channels of communication for service. Train your service team on the new product and how to service products before you sell them. Finally, be sure you deliver on your promises. Many projects have large roadmaps with big milestones. Your roadmap’s size doesn’t matter—what matters is: do you deliver on it? 

2. Think beyond commercial projects. 

The new technical landscape has caused a major stir, especially since the radical sums of money and the opportunities they have generated are often confusing for brands, consumers, and the market. Protocols are valued in the trillions, while single NFTs are selling for amounts in the millions. Despite the massive revenue windfall these projects have created, not all projects need to be commercial.  

As Brendan Lynch, global EVP of enterprise & revenue for Ticketmaster said, “Ticketmaster partnered with clients to deploy millions of NFTs to fans. These live-event NFTs enable richer fan experiences and engagement.” Those NFTs weren’t sold. They were given to fans as part of the experience they purchased. This is an important point. While the majority of the brands look at NFTs as a source of quick profit, Ticketmaster is treating them as key to richer customer experiences. 

Free NFTs can also have a significant effect for brands as a data play, rather than treating NFTs solely as a commercial opportunity. Each NFT must be held in a wallet, which means the brand will have access to wallet IDs. Wallet IDs, in turn, will allow brands to see associated metadata, such as other purchases, social graphs, and more. As we move into a post-cookie world, the data consumers carry in their wallets will become a reliable and verifiable source of first-party data that can be used to power brand experiences.

3. Don’t discount product and market fit.  

The market for digital goods is small yet diverse, and it follows many of the same dynamics of any other market. For a product to thrive, there must be a solid product and market fit. To ensure just the right fit, start with the end customer and work backwards into a strategy, says Maaria Bajwa, partner at Sound Ventures. .” Your product and go-to-market methods will vary greatly if your target customer is a well-versed Web3 participant or a general customer who is not a technologist. Both are served by Web3, but in quite different ways. 

Web3 natives, for example, value the technology. These participants want to buy NFTs, join Discord communities, and take an active role in Web3 development. They want the financial gain and ownership possibilities, but they also want to work with a brand to create the future. A general customer might simply want to buy a virtual good they can wear in a metaverse, own a piece of art, or show off a digital collectible. 

Ticketmaster’s Lynch suggests brands keep in mind “what consumers find value in and find valuable.” There is a lot of talk about Web3 primitives, or core foundations of the movement, but general consumers do not care about these. Brands must use Web3 technology to create a product, service, or experience that consumers want, need, or desire. It’s not enough to simply draw on a piece of paper, call it an “NFT,” and sell it.

Ellen Degeneres launched a collection of NFTs which sold 68 total units—in a market where most projects were selling thousands in seconds. The difference was that her NFT collection had no obvious value for potential buyers. In comparison, the other projects had clear roadmaps, vibrant communities, and were more than just a jpeg. 

Many brands are approaching the idea of product/market fit from a different angle and bringing their customers along the journey with them. This provides an enormous advantage over previous web approaches because, by working with their customers from the start, brands can leverage customers to help create and market the product, provide co-ownership to those customers as payment, and ensure that there is a product fit for the market. Brands from Adidas to Gucci are using Discord communities to listen to and get product direction from their super fans, while Web3-native brands like BFF and CPGClub are working with their communities to create brand new consumer products. This new approach makes traditional focus groups—often used to gain similar data—as obsolete as a payphone. 

4. You don’t necessarily have to build a community. 

Community, collaboration, and co-ownership are key elements of the Web3 ethos. This ethos often shows up in Discord communities where a mix of builders, super fans, and regular customers converge. Communities are powerful and working with them to collaborate and co-build your project can be critical for its success. However, there are some caveats to consider.

Building and maintaining a Web3 community is hard, costly, and time-consuming. Communities are always on and require significant investment in moderation and setup. However, not all projects require a community. Projects like Tiffany’s “NFTiff”, for example, simply extend the value of other communities through collaboration, rather than creating an entirely new community. This over-the-top utility allows a brand to leverage an existing community for mutual gain; for many brands, collaboration is an ideal strategy, as it removes the cost of owning and managing a community.

In the case of NFTiff, Tiffany’s didn’t create a new NFT project; instead, they added value to an existing Cryptopunks NFT project. The NFTiff was only offered to Cryptopunk NFT holders, allowing Tiffany’s to create a custom piece of jewelry based on holders’ “Punk.” Their collection of 250 items sold out and netted them over $12 million—without investing time, energy, and resources into building and maintaining an entirely new community.  

Just as airlines extend the value of military service by giving service members early access to board flights, brands can extend the value of communities in similar ways. You can grant special access, privileges, and discounts to projects as a way to engage those communities and add value. One way to think of it is this: a project is just another touchpoint in a broader consumer ecosystem that could drive brand value.

Brands can also simply buy into communities to become a part of an existing project or join a community rather than build one. If you decide your project needs a community, ensure you budget for staff and technology, and have a plan in place for how you want to use them.

“Just like in Web2, ‘community’ has been an overused word with a lack of understanding or definition,” Dan Gardner, founder of Code and Theory, says. “Instead of just assuming you need it or adding it as an arbitrary label, make sure it’s used with intention for the optimal outcome.”

The blockchain is the future. That’s what we’re told, anyway. If you’ve heard of the blockchain, you’ve probably also heard its proponents talking about the utopian ideal of decentralized ownership.

Deep into that darkness peering, long I stood there, wondering, fearing, doubting, dreaming dreams no mortal ever dared to dream before. – Edgar Allan Poe

Decentralized ownership goes way beyond monkey jpegs: some companies are predicting—and promising—ownership of everything from houses to television and media networks, all on the blockchain.

While the future seems exciting, promises like these and the utopian picture many people paint bring me to one central question: What do you actually own in the ownership economy?

The answer is more complicated than you might think.

TL;DR

• Many people assume owning an NFT means you own the associated asset—in reality, all you provably own in many cases is the tokenID and contract address
• The legal right to control the item may or may not be intrinsically part of the NFT
• Copyright law introduces additional complexity: transferring ownership does not inherently transfer copyright
• U.S. copyright law has stringent requirements for transferring copyright, which are not guaranteed to be met by smart contracts

When purchasing an NFT, many people assume they’re buying the work it represents.The reality is a little more complex.

In fact, when you purchase an NFT, what you actually own is the token’s metadata (including its tokenID and the contract address)—not necessarily the work itself.

Furthermore, the token doesn’t actually reside in your wallet, but rather the token’s ledger is updated to reflect that your wallet owns one. This introduces a number of issues related to ownership and copyright.

Physical Objects and Ownership

Say you buy an NFT associated with a physical object. What you have definitely purchased is the tokenID and contract address connected to that physical item. Other assets, like the physical object itself and whether you have the legal right to control the item, may or may not be intrinsically part of the NFT.

Buying an NFT representing a physical object doesn’t guarantee that you will receive the goods. Purchasing the NFT doesn’t trigger a process wherein a robot fulfills and ships an order from a warehouse, for example. There’s a human in the loop.

And if the order isn’t fulfilled, the blockchain remains immutable: you can’t get a chargeback like you could with a purchase you made using a credit card. You’re just SOL (no pun intended).

Copyright Confusion

It gets even more complicated when the NFT is connected to a digital creative work, in part because of rampant confusion about the relationship between NFTs and copyright law—and specifically U.S. copyright law, which sets a high bar for selling copyright.

If you purchase an NFT of a digital creative work—let’s say a piece of visual art that someone else created—you have, once again, definitely purchased the tokenID and contract address for the artwork. What’s murkier is figuring out who has the ability to create (and profit from) derivatives or copies of that art.

Part of the confusion comes from the fact that, under U.S. copyright law, there is a difference between transferring a copy of something (like a piece of art) and transferring copyright (as in, the right to make other copies of that art). Transferring copyright requires that the transfer occurs in writing, with a signature from the copyright owner—something smart contracts can make surprisingly difficult.

Let’s say, as an example, that Person A creates a piece of digital art. Person B buys an NFT, acquiring full ownership of the copyright as part of the original contract. At some point, Person B decides to sell the NFT.

What happens when Person C buys it? Does copyright automatically transfer to them? Not necessarily! If the smart contract does not specifically include mention of copyright transfer, Person B might still legally hold the copyright—even if Person C now has the NFT.

And what happens if Person B created a ton of derivative material around their NFT before they sold it? Do those revenue streams go with the NFT to Person C, or do they remain with Person B, the copyright holder?

There’s no crystal clear answer to those questions, and yet the legal and financial ramifications of those answers are significant.

Legal Ramifications

The promise of NFTs is that of a form of true digital ownership entirely counter to the current model of licensing and streaming (in which buying something like a song, book, or movie online does not mean you truly own that digital item, much less its copyright).

However, the legal landscape of copyright and ownership—especially where digital assets are concerned—has not yet adjusted to NFTs and other Web3-related assets. Nor do all NFT sellers seem to fully abide by the ethos of true digital ownership.

One article on NFTs and digital property notes that while Axie Infinity, for example, sells “axies…on the grounds that they are owned and may be resold for profit,” Axie’s actual license asserts that the company still has copyright control.

As Fairfield points out, the inconsistencies between what buyers are told and what’s in the licensing agreement make for an unstable market and legal environment. The legal issues here are complex and thorny.

Vanishingly few existing NFT projects have been released with explicit copyright terms baked into the smart contract and, as in the case of Axie, there can be conflicts between what the buyer thinks they’re getting and the licensing terms. The potential for expensive, complicated legal issues down the line is real, and it’s likely that many such cases will be litigated in court in the coming years.

What this means in a practical sense now is that when you purchase an NFT, it’s entirely possible that the only things you actually own are the tokenID and contract address. Everything else, unless explicitly spelled out, is very much a gray area.

Governance tokens

TL;DR

• It’s unclear how governance tokens define the relationship of rights and accountability between token holders and organizations
• Governance tokens might be considered securities or equity, but that definition remains murky for many token holders
• Bad actors can manipulate governance tokens and technical loopholes to cause significant financial damage

Let’s look at another complex area: governance tokens. When you receive a governance token, you also gain the right to vote on governance questions—holding the token makes you a decision-maker within the organization that issued it. But does it make you an owner?

In a more typical corporate organization, if you purchased shares of a company in the form of securities or were issued them as stock options, you might be considered a shareholder, depending on the organization’s structure and your connection to it.

Shareholders have certain rights based on state law and common law from years of court precedent, especially in Delaware.While governance tokens are not equity in a literal sense, they are often regarded as being similar to more traditionally understood forms of equity.

However, in the Web3 space, there are no widespread, commonly-agreed upon mechanisms for holding people accountable the way there are in a company with shareholders, a board of directors, and management teams.

Much of the excitement about Web3 is about doing away with unnecessary hierarchy—but in this case, what’s important isn’t that hierarchy. It’s the relationship between ownership (like stock) and accountability.

Shares vs. Governance Tokens

To take just one example, let’s say you own one IBM share. That means you own one share’s worth of IBM and are a shareholder (and likely a shareholder who expects the value to increase).

The more shares you own, the more weight your voice will carry when it comes time for IBM to make decisions. Also, you get one share of dividends. There are also systems in place to ensure IBM’s actions are held accountable to its shareholders.

However, if what you own is a governance token, there are no such guarantees of accountability, no clear indication of whether you can expect your token to be exchangeable for value, and no well-defined sense of what holding that token really means.

This leads to another set of questions, the answers to which are often equally unclear, such as:

• Is a governance token a security?
• Is it a claim on treasury?
• What liquidity is available, and what will continue to be available?
• Does owning a token confer governance of the specific product/project, the whole organization, or both?
• What happens if the organization is “wrapped”—that is, if there’s an LLC or corporate structure on top?
• Is a governance token transferable?

Market Manipulation

Questions about governance tokens and what you own are already complex, and the fun doesn’t stop there. What happens when there’s a run on deposits and no bailout available, as we recently saw with FTX? In that case, as we’ve seen—the answer is sometimes: nothing good.

What happens when bad actors manipulate governance tokens and decentralized structures in harmful ways? Mango Markets, for example, experienced a painful market manipulation of this type.

Exploiters found loopholes in the smart contract that allowed them to dramatically increase the value of their collateral and siphon money from the Mango Markets treasury in the form of loans—to the tune of more than $100M.

Not only that, but one of the exploiters went on to offer to settle bad debt using the stolen funds and used stolen tokens to vote for their own proposal.

While they lacked sufficient tokens to pass the proposal, this type of market manipulation and exploitation makes it imperative to answer questions about what you truly own when you own a governance token.

So, what do you own?

As you think through these issues—and these are just a handful of examples from an increasingly complex landscape—you might find yourself wondering whether the ownership economy is actually a mirage.

What do you actually own? In too many cases, there is no clear answer to that question, and plenty of ambiguity when answers do exist.

The ownership economy is not currently what it’s made out to be. Rather than a utopia of decentralized ownership, we see increasingly complex legal questions with increasingly high financial stakes.

Reversibility

Fortunately, there are ways we can start addressing that complexity. Reversibility, for example, is something to consider.

Right now, the market has a major caveat emptor hanging over it—and while buyers should be aware of what they’re purchasing, too few have real access to the information they need. Although the blockchain’s immutability is one of its selling points, there are proposals for reversibility that work with the blockchain while offering recourse to consumers.

One such proposal focuses on ERC-20 tokens on Ethereum, and suggests a short reversal dispute period during which decentralized panels of judges determine whether or not a transaction should be reversed.

Information Disclosure

Another element to think about is ensuring more information is available for buyers. It should be possible to list information in the transaction to spell out exactly what it is you’re getting when you make a purchase. Easy access to the rights and licensing information associated with a token, for example, will help buyers understand exactly what their token enables them to do.

The ownership economy is a promising space—but right now, those promises are not being fulfilled. Legal and market realities are clashing and high-profile scandals are drawing attention to shortcomings in the system. What’s presented as utopia looks more like a pipe dream, if the headlines are anything to go by.

However, it’s not too late to get closer to that utopian ideal. It will take work, and likely quite a lot of legal wrangling, but there are opportunities to ensure everyone who enters the ownership economy knows exactly what they own.