One of the incredible innovations of web3 companies is how easily they can bootstrap new networks from scratch using token or NFT incentives and more easily solve their cold start problem.
But that’s also their main burden. All web3 companies face the same challenge. You have a vision, you start executing it, and your first stop is building your community of early adopters.
The next tactic fallacy
So you do what web3 companies do. You work on your first NFT drop. You craft your vision, identify your audience, define the utilities and the brand, develop your smart contract, and design your marketing campaign. You launch.
If you’re not in the top 1%, you, unfortunately, don’t mint out. But even if you’re in the top 1%, after a few weeks, you notice that the activity slows down, and some people are trying to sell. The spread is significant, and the liquidity is small. So sellers start lowering their prices to find an exit, and the floor drops, but you think they are just a few short-term speculators, and you don’t care about them. Also, the floor is not the end goal. But still, you want to improve the situation.
Your product won’t be ready for the next couple of years. But you could still hype your project with some announcements. You announce a nice partnership and get high-level profiles to mention your project. You hire a Discord manager to make sure your community is alive.
It works. It stabilizes the price and stops the bleeding as new people discover your project and buy NFTs.
But then, a few weeks later, prices start crashing again. No way! You’re back at your initial point.
What is happening here is that you are in the pre-product-market fit stage. You sold a vision to early adopters, but you also sold them assets. People can trade your assets, so they do. And without a systematic way to manage it, your project suffers from it. Finding your product-market fit is a long and complex process with many variables. And 99% of projects forget an important one.
We met many projects in this situation. After a couple of years of working with clients, trading NFTs, and building in web3, here are two big misconceptions from first-time web3 builders.
« Floor price doesn’t matter! »
The reality is that if you’re selling NFTs, price stability and appreciation are important. Of course, it’s not about building a Ponzi, where anyone will always win money until the show ends. But it’s about finding the right parameters for your economy. People don’t like to lose money - whatever the investment is. That’s nothing to do with whether people love your project or if they are pure speculators. So they should be able to believe that they could sometimes win, or they won’t buy into the project.
If you buy music NFTs, you should dream of buying the next big hit NFT and making profits. If you’re buying in-game NFTs, you should believe you can be rewarded by playing well in the game and investing time and money into it. If you’re buying land in a virtual world, you believe that, at some point, it could be worth more. If you’re buying a piece of art, you expect somehow it would appreciate over time, especially if it’s expensive, etc.
But if you don’t manage liquidity properly from day 1, what ever you’re trying to optimize on the side, prices will go down.
« First the product, then the liquidity »
Finding the product-market fit is the toughest challenge for entrepreneurs or companies launching a new product. Especially in web3, where usages are new. You could tweak many variables to make it work: product positioning, features, marketing messages, distribution channels, target, etc.
Chatting with a few teams in the space, we realized they had forgotten an important variable: managing liquidity. There’s a misconception that if you do your job correctly on the product and marketing side, your liquidity problems will disappear.
Liquidity is a feature of your product. By using NFTs, you attach a value proposition of liquidity to it. For a game, what’s the point of minting NFTs rather than selling in-game assets the web2 way? For a piece of digital artwork, what’s the point of minting it as an NFT? For a brand, what’s the point of selling loyalty NFTs instead of just distributing VIP cards with perks? What’s the point of bringing real estate or collectibles on-chain? Because NFTs create global, 24/7, decentralized markets where people can transact. By acquiring your NFTs, your users believe they will be able to resell them in the future.
By the way, we’re not inventing anything. The most successful web3 companies had a way of managing their liquidity from the start.
Long story short, if you’re developing an economy with NFTs, liquidity is a core feature of your product. And managing it should be a daily endeavor like product development.
Building, adjusting, and managing liquidity in the long term is tough. And that’s exactly why we built Gekko - to bring Wall Street-level algorithmic trading to the hands of any web3 team in the world.
PS: if your market is dead, don’t worry, there is a solution 😉