If you’re like me, you remember when Facebook went from something dismissible to something enormous, especially regarding its value. I remember initially wondering: ‘how are they worth SO much?’ After all, using Facebook has always been free, so it doesn’t matter how many billions of people have accounts and use the site: free multiplied by any number is still no profit. What’s the secret? As we now know, it’s ads, of course. Despite its current market turbulence, the company has a market cap greater than $300 billion. Its business model is certainly effective.
The lifeblood of Facebook is targeted ads (selling the ability to reach a specific user based on demographics). Now, we have the gift of hindsight to look back and evaluate the price we paid for their free service. After all, that $300 billion in value is all due to the company selling data and targeted ads that use the data they extract from users - users who see none of that profit and whose privacy and preferences is more exposed than they may know or imagine.
As web3 unlocks new business models, it behooves us to remember this phenomenon. New services, social media platforms, apps, etc., will entice eager users, who will zoom through signing new terms of service - and may end up paying unexpected prices. When a company or brand starts making promises and offerings that sound too good to be true, we should look deeper because there ARE risks. Some we know about, and some we don’t… yet. With the arrival of web3 technologies and services, we will also witness the development and experimentation with new business models, including one that seeks to be a game changer: participate-to-earn.
Participate-to-earn (“P2E”) is the idea of compensating users to interact with a platform. This model is similar to play-to-earn and create-to-earn but differs in one key way. What you are earning from the other two is pretty clear (For more information on these business models, check out this Forbes article.). Still, participate-to-earn compensates users for just using a platform. Imagine getting paid to post on Facebook by Facebook.
This idea (subsidising usage) is not entirely new. Uber and Facebook, while not directly paying users, give discounts or offer something for free until they get to a point where the customer relies on the service, and the company can turn on the money tap. But with participate-to-earn, it is not clear when or how companies will stop subsidising use, and if they continue paying out even as their user base expands, HOW might they be able to generate profit? How can they be sustainable? Participate-to-earn is still in its infancy, but similar to the confusion we may have had in the early 2000s around Facebook’s bafflingly enormous value. We should question how this can work, what aspects we might not be seeing, and what might be some of the unanticipated downsides or risks associated with this business model.
In web3, Participate-to-earn can be beneficial and functional. Some examples include opt-in ads or bug bounty programs. With this latter example, it’s clear how participate-to-earn can outsource tasks to enthusiastic users; tasks which, once accomplished, increase the value of the service and, theoretically, make the company’s financial prospects grow. But when the participate-to-earn aspect is key to the company's growth, it evokes many questions:
“How can they afford to do that? How do they make money if new users cost them more money? How does that make sense? What am I not understanding?”
While the user doesn’t have answers to those questions, we can be sure these companies do.
Answer one: Subsidizing use will trigger enough traction that the platform will have a full-blown economy with enough transactions that a small transaction fee will net much more than the subsidy.
Let’s look at Axie Infinity, the hit play-to-earn game. The game is inspired by pokemon, and you create and collect “Axies:” monsters that you assemble into a team to battle others. The more monsters you create, and the more you win, the more you earn. But how does Sky Mavis, the company that developed the game, make money? One income source is the company selling “land” and requiring users to pay a fee for creating new monsters. But more substantially, their profits come from transaction fees, as people can buy and sell their monsters. Sky Mavis is not required to disclose how much money it made to the public, but it is estimated they made $1.3B in 2021, according to blockchain analytics firm Nansen.
Answer two: Subsidizing use will be a relatively small cost as compared to the revenue opportunities that this use creates.
Well, Facebook didn’t exactly proclaim what they were doing when they began “using” your data. Neither did Gmail. When those of us with Gmail accounts signed up, we AGREED to let Google read our emails, giving Google our data, which was the real product. In a web3 landscape, this type of business model (which hinges on some level of deception and user laziness) poses risks.
When tied to a crypto wallet, a well-crafted user agreement could be a gold mine for first-party data (the data you opt into providing brands). Recently, the often-used wallet MetaMask stated they would start tracking IP addresses for certain transactions. There are concerns that this removes the anonymity of your transaction and allows 3rd party tracking. This information could be enormously valuable to governments, marketers, etc.
Crypto has always been big on anonymity, but Know Your Customer (KYC) processes will be a key part of crypto adoption at scale. KYC removes anonymity but is necessary to prevent money laundering, fraud, corruption, and funding terrorism. It’s a safeguard to ensure the parties - a bank, an exchange, etc. - are operating legally. Suppose you want to use a platform that has some scale and is approved by regulators (which is good for casual crypto dabblers). In that case, you give up your anonymity (not great for users, especially those with oppressive governments).
All of this matters because your data is worth a lot! WebFx reported that data brokering is a $200B industry, with email addresses worth $89 billion alone. The exact value of your data is somewhat hard to determine, and some sources have calculated Facebook user data worth $26, $200, or possibly $2000 per person, depending on how you calculate it. Interestingly, according to Fast Company, the average American shopper would be willing to sell their data for $1452.25. Lastly, we return to Facebook and Google; while they do not actually sell your data, they monetize the data by offering “targeted ads” to brands. This is essentially selling your data, but the brand is paying for access to you through the platform based on the data you input, not collecting your data to form their own analysis.
Answer three: Subsidy payments are actually pretty small
There are “clever” ways in which companies can obfuscate how you will get compensated and how much you get compensated. Look at the TikTok documentation on coins, gifts, and diamonds here. You turn USD into coins, that turn into gifts, that then turn into diamonds, which creators can then turn back into USD. Also coins cost $0.01 to buy, but then diamonds are each worth $0.05, but 1 coin is also worth 2 diamonds,confusing no?
It is possible to send payment in the form of cryptocurrency, but the question is: which currency? If compensation is via a widely held token, you have somewhat de-risked your earnings as the currency is more likely to have some stability than a brand-specific token. However, what if compensation is in a brand-specific token? Will that token have value outside of the platform? Will the platform be exciting enough to keep acquiring users to preserve the token's value? It’s a gamble, which means the user payout is, too.
One relatively new participate-to-earn company is the Indian social media app Chingari. (The app is the Indian version of TikTok, which was banned in India.) Chingari compensates users for posting content, watching, sharing, and liking content. At first glance, this seems like a fabulous arrangement for prospective users. Post content or watch content and earn? It seems too good to be true! But the fine print is far less alluring and also brings potential hazards for users. First, they pay in their own token, and they control its supply - which means they can artificially alter its value. Secondly, if the app never scales, the token becomes worthless.
When we imagine the size a social media platform can expand to, it seems like a financial risk for a company to promise to pay users in perpetuity. Chingari skirts around this liability not by limiting the users they’re willing to compensate but by setting a daily payout cap, which gets split between all users. The company publicly stated that they would be putting up to 50,000 GARI tokens (Chingari’s own cryptocurrency) for user compensation daily. But does all of this get dispersed? And if it does, what is the distribution of disbursement? The company notes that you can buy multipliers that increase your GARI earnings; this only complicates matters, but the lack of transparency leaves one wondering how valuable this incentive can be for users.
GARI allocations scenarios (exchange rates calculated on 12.7.22):
One of the selling points of web3 and cryptocurrency is its supposed increase in user privacy. But to hold cryptocurrency tokens, you must have a crypto wallet, some of which are tracked or have trackable features. Furthermore, users must include their government-issued identification details to sign up for a Chingari user account. Not a problem if you are not in India, but if you are it may subject you to monitoring by a government that has less robust protection of freedom of speech and privacy.
Lastly, while it sits outside of the business model analysis, when a literal payment is incorporated into users’ motivation to engage with content, the algorithm which selects what content gets presented can be skewed to subject viewers to misinformation and propaganda, which can be costly to users in a myriad of ways.
When it’s all boiled down, companies can operate a participate-to-earn business model by using transaction fees, selling your data, or paying out at extremely low levels. Read the fine print and be careful: you may be selling your freedom of speech, data, thoughts, views, political perspective, privacy, and time for pennies. To borrow from The Wizard of Oz, in the era of web3 and the new business models that may be born out of it, do pay attention to the man behind the curtain.