A Casual Talk on Web 2.5: Advancing by Retreating, the Glorious "Compromise" of Web 3

Author: Kiro & 0xRan, Deep Tide TechFlow

Do you remember the peak of the bull market, the wave of "All in Web3"? Whether it was dropping out of school to "go all in" or leaving a big internet company to work and start a business in Web3, migrating from WEB2 to WEB3 seemed like a natural thing to do.

However, there are exceptions. A partner at a certain Crypto Fund who entered the space in 2017 has this year reversed course, jumping from WEB3 to a major internet company.

When asked why, he believes that WEB3 is still too niche, ultimately driven by trading and wealth utility, lacking real adoption.

Even as the entire Crypto market once exceeded a market size of $2 trillion, it faces a common question: where to find growth?

Crypto Native is a label that seems very attractive, but it can also be blinding.

A primary market investor stated that he hasn't looked at DeFi projects for over a year, acknowledging that while DeFi is the future, the valuations are high, few people use it, and hackers frequently steal…

Compared to the high barriers of DeFi, NFTs and GameFi, or even Memes, are clearly much easier to capture new users. Thus, investing in WEB3 consumer applications that can break out and attract new traffic has become a hot investment theme.

How can WEB3 break out on a large scale and gain real users?

In a casual conversation, we coincidentally mentioned a concept: WEB2.5.

We believe that WEB2.5 is a midway station to WEB3, even a necessary path, and there are investment opportunities.

What is WEB2.5?

For example, if DEX is WEB3, then CEX is WEB2.5.

On Coinbase, people can trade WEB3 assets using credit cards and other Web2 infrastructure like apps. This combination of using WEB3 assets with Web2 infrastructure simply defines WEB2.5.

Centralized exchanges rely on Web2 elements to build and grow. Whether in development, product, or marketing growth strategies, they can be entirely unrelated to WEB3. However, these companies contribute to the global popularity and adoption of Crypto, as ordinary people need an easy entry point to acquire WEB3 assets.

This entry point is WEB2.5; it is a forward direction on the navigation path, but not the final destination.

If we distinguish Web3 into assets and infrastructure, then the two represent different growth and adoption curves. Both Crypto and NFTs have already gained a considerable level of recognition and usage globally. One statistic is that by the end of 2021, 16% of Americans owned or had used Crypto in some form.

However, the adoption of Web3 infrastructure is still insufficient, or to put it bluntly, it remains high barrier and difficult to use. In this case, wrapping WEB3 assets with user-friendly, lower-barrier WEB2 applications has become a compromise. Centralized exchanges, custodial wallets, and others bridge the gap between infrastructure and assets, giving rise to the form of WEB2.5.

For brands with a strong foundation in WEB2, it is impossible to completely overturn their existing WEB2 architecture and fully adopt the WEB3 stack. Thus, they tend to combine WEB3 assets (like NFTs) and advantages (digital IP and composability) with mature WEB2 development, product, growth, and promotion models.

WEB2.5 has become a common model for many traditional brands exploring the transformation to WEB3.

In the art field, in 2021, Christie's and Sotheby's, two traditional auction houses, collectively auctioned $250 million worth of NFTs, with $69.3 million coming from Beeple's work "Everydays: The First 5000 Days." This auction made NFTs a news focal point, quickly breaking out.

Later, Sotheby's also accepted payments in Crypto, although it was BTC and ETH from KYC wallets via Coinbase, Gemini, Fidelity, or Paxos, still very WEB2.5.

In the social media realm, Twitter is a representative of WEB2.5.

On June 30, 2021, Twitter launched "The 140 Collection," marking the beginning of its entry into WEB2.5.

In January 2022, Twitter announced that users could set NFTs as their account profile pictures, provided they became Twitter Blue members.

In traditional media, the most WEB2.5 is undoubtedly Time Magazine. In September 2021, Time announced the issuance of the TIMEPiece series of NFTs, collecting 4,676 works from 40 artists, a quarter of which had previously been featured on Time's magazine covers.

Holders of TIMEPiece can access all content on TIME.COM without restrictions and enjoy exclusive privileges, such as invitations to physical or online events.

In March 2022, TIME took a further step by releasing the first fully decentralized magazine NFT in history.

Traditional IP giants also choose to enter WEB3 using WEB2.5 methods, such as collaborating with a digital collectibles platform VEVE to issue Marvel series NFTs.

On VEVE, you need to input your birth date, gender, and email; KYC is required; you can pay with fiat or Crypto; there is a self-built secondary trading market; and AR displays are available… Although it is not WEB3 at all, it greatly simplifies the barriers for user participation and creates its own NFT ecosystem.

In the gaming field, the representative of WEB2.5 projects is Mir4, which continues the gameplay of the classic game but incorporates blockchain, Crypto, and NFTs, establishing a P2E mechanism, essentially combining WEB2 gaming with WEB3 asset categories.

Despite the controversies surrounding Mir4, it did not prevent it from exploding in the market upon launch, achieving the top popularity ranking in Korea's four major app stores within a day, causing its parent company WeMade's stock price to triple, and making founder Park Kwan-ho one of Korea's seven gaming billionaires.

The form of WEB3 games has always been a hot topic in the industry. There is an inherent conflict between Play and Fi; whether to focus more on gaming or finance always requires a trade-off. One faction believes that truly successful WEB3 games can only be Crypto Native, and that WEB2 gaming giants' WEB3 games will ultimately please neither side, while blockchain AAA titles will be disproven. WEB3 games should carve out an independent path.

Another faction insists that the primary essence of games is "fun." Whether NFT or Crypto, they are tools and means, not the ultimate goal. Truly enjoyable games still require professional gaming teams to create and need to seek out real "players," not investors.

Regarding this topic, a friend briefly envisioned WEB2.5 gaming.

Speculation on WEB2.5 Games

Currently, the Fi (financial) attribute of GameFi is overly heavy, far exceeding Game. The fundamental reason is that the business model for profit in Web3 games is different; it relies on early NFT/FT sales for financing, obtaining funds for subsequent product development. However, once a team earns hundreds of millions of dollars from NFT sales, they may lose the motivation to create truly good games.

Play to Earn front-loads marketing costs, essentially increasing the network's liabilities. From the perspective of sustainable development of the economic system, continuous blood transfusions into the network are needed.

• In Web3, GameFi players' demand for profit dominates, making them a parasitic group on the economic system;
• Traditional Web2 game players are Play users, with gaming demand dominating, making them a blood supply group for the economic system.

A user group that only sucks blood without supplying it results in an average GameFi lifecycle of only 2-3 months, with token prices peaking and lasting less than a week, purely a Ponzi model.

The current decline of GameFi into pure Ponzi is due to: on the surface, the lack of Web2 users, but at a deeper level, the lack of quality product supply, meaning there is a shortage of high-quality game products that possess self-sustaining capabilities and do not rely on the token market for development funds.

To achieve the original profit goals of game products and 100% compliance, studios capable of developing high-quality games currently need to make a binary choice between "traditional gaming business paths" and "GameFi token issuance paths."

Currently, tail-end studios cannot survive under traditional paths and are more willing to use GameFi to survive. For mid-to-high-level studios that are doing well under the original path, there is insufficient motivation to develop WEB3 games, as they have to bear compliance risks and significant opportunity costs.

So, can traditional gaming and GameFi forms coexist within a single game, rather than being mutually exclusive, allowing studios to retain their original profit paths?

For example, in an inclusive game, let "Play/Game users, Earn/Fi seekers, NFT spenders" coexist, forming a healthy blood supply system. Then, part of the profits that previously went entirely to centralized companies + profits from NFT spending users can be shared with X2E users, integrating old and new distribution channels, continuously breaking out while remaining sustainable.

According to Folius Ventures' mapping, game users are divided into Crypto users and traditional game users. Among Crypto users, they can be further segmented by value outflow degree into gold farming users, investment-type users, etc. Traditional game users can be segmented by value input degree into casual players, heavy spenders, etc.

Here, we simply categorize players into three types: "Play/Game users, X2E/Fi seekers, NFT spenders":

NFT spenders are few in number, their function is to consume/spend, providing blood supply to the system, leveraging the Ponzi model for cold starts, forming high-value NFT consensus assets, and from a technical perspective, all NFT assets need to be fully on-chain.

Play users are numerous, their function is to spend time, inputting consensus into consensus assets. From a technical perspective, identity needs to be on-chain, and top players can obtain NFTs that symbolize their identity through high skills, which can be interoperable across multiple GameFi scenarios. The product is fundamentally consistent with traditional games in terms of business model, distribution channels, and quality.

X2E seekers are of moderate number, earning standard tokens, and can choose to rent NFTs from spenders to play, with low barriers. From a technical perspective, rewards need to be on-chain, and from a product perspective, they mimic Stepn with a built-in account system and on-chain wallet addresses.

Assets can also be divided into "gold farming assets FT and consensus assets NFT," which have vastly different values and operational methods:

The advantage of Opensea is its clear asset positioning, with consensus asset products like blue-chip NFTs. For example, Yuga Labs' avatar NFTs on ETH can coalesce high value, but there are currently few products and application scenarios that can carry IP, and users are currently few but all possess high value.

Stepn's problem is that it has not formed a "consensus asset" NFT that can coalesce value; shoes have not become assets with long-term collectible value like BAYC. However, the "gold farming assets + X2E model" offers valuable insights on how to attract "gold farming users" through growth engines, making it easy for ordinary users outside the circle to get involved.

As a friend in the Web2 gaming industry said, "Currently, traditional game developers most look forward to the transparency brought by blockchain in asset generation and trading, meaning users enjoy asset ownership and achieve decentralization; the second layer is the value and scarcity of NFTs, where the decentralized value is that the future business model is user-centric, with NFTs at its core."

If the aforementioned business model and user stratification can be realized, the distribution channels can integrate traditional gaming user acquisition/distribution methods. Theoretically, through traditional advertising methods, we can acquire "NFT spenders and Play users," who overlap significantly with collectors/game items and gamers. Web3 projects can obtain "X2E seekers" through airdrops and other means.

Of course, the above are just some superficial and immature ideas.

In summary, WEB2.5 is an intermediate station from WEB2 to WEB3, a compromise, and also a form of progress.

For B-end, they need a fast and low-cost channel to WEB3, leveraging their accumulated product and IP advantages in WEB2.

For C-end, they need a more friendly, lower-barrier front end to quickly acquire WEB3 assets or related experiences.

The root of all this still comes from the mismatch in the development stages of WEB3 assets and infrastructure. When WEB3 infrastructure is sufficient to support large-scale consumer applications, perhaps WEB2.5 will eventually be thrown into the historical dustbin.

But for now, WEB2.5 is still worth paying attention to; where there are people, there is wealth.