Variant Co-founder: How the FTX Incident Affects Our View on User Ownership?

Original Title: 《The Long View: Web3 and User Ownership》

Written by: Lijin, Jesse Walden, co-founders of Variant

Translated by: Block unicorn

Recent events surrounding the dramatic collapse of FTX have struck a blow to perceptions and trust in the cryptocurrency industry. We are pained for those who have suffered financial losses due to the recklessness and fraud of others, and we are outraged by the collateral damage this event has caused to the industry's reputation. At the same time, the excessively negative media coverage—including claims that this is the end of cryptocurrency and that the industry should be burned—overshadows the potential of cryptocurrency as a tool for positive impact in the world and indicates that external sentiment is often disconnected from the actual progress and fundamentals of Web3.

Reflecting on these events, we turn to our founding argument as a foundation. Variant was launched in 2020, believing that cryptocurrency would be the basis for a user-owned web, where products and services would turn their users into owners. This idea holds tremendous potential for how we build new networks that better serve user needs and for the broader impact on economic fairness.

How do recent events affect our argument for user ownership? We must understand that FTX was a failure of traditional financial institutions, reminding us why we need to push Web3 forward, particularly DeFi. We still believe that cryptocurrency has the potential to create a fairer and more equitable internet, but as an industry, we need to refocus on the core principles of Web3.

Starting from first principles, the foundation of Web3 is open-source software running transparently on decentralized blockchains, such as Ethereum, which minimizes the need for trusted third parties. At the application layer, automated smart contracts eliminate the need for companies and institutions that are managed manually, whose opaque decision-making can lead to systemic failures, as we recently saw with FTX.

Open, automated code opens up a new way to build trustworthy, neutral, user-owned internet platforms. User ownership is realized through tokens—similar to value packets encoded on the blockchain. It is important to clarify that when we say "tokens," we are not referring to speculative meme coins—we are talking about a radical innovation in internet ownership.

Tokens are a native property system of the internet: a way to own a part of the internet itself, representing any type of digital property, from artwork to music, to virtual land, to a portion of the internet products and services a person uses. Like data packets, tokens can be programmatically distributed instantly to anyone, anywhere. One application of tokens is to reward users for participating in projects, incentivizing them to contribute to growth.

This reflects a practice from Silicon Valley decades ago, where employees were incentivized and rewarded through stock options. In early crypto networks like Ethereum and Bitcoin, developers and technologists received token rewards for their contributions. Like most technologies, what developers and technologists do first, the rest of the internet will soon follow.

Today, we are still far from realizing the ideal of an internet dominated by a token-driven, user-owned network. Currently, most token designs fail to adequately align incentives to unleash faster and more sustainable growth than centralized companies. Moreover, in some cases, bad actors exploit tokens to propagate outright scams. However, many experiments have made incredible progress, and to gauge the current state, we find it helpful to explain the tokens in today's market along a spectrum: from those that are essential to the operation of products or protocols, to those that offer legitimate and compelling utility promises, to extreme economic experiments, and finally to outright fraud and scams.

On one end are tokens that are indispensable to user experience, including the operation of products or protocols. For example, ETH, the native token of Ethereum, is used to secure the network and for transaction fees, more broadly serving as a form of internet currency in the ecosystem's native applications. In the middle of the spectrum are projects attempting to gradually decentralize, aiming to allow users to own and control the products and protocols they use (e.g., Uniswap). There are also economic experiments that utilize ownership as a guiding or scaling mechanism (like DIMO), as well as tokens that serve as quasi-equity for fundraising or profit-sharing, but without any investor rights (like Constitution DAO).

At the extreme end of the spectrum, some token designs are so centralized that they can easily be exploited by issuers—this design flaw introduces a single point of failure. FTX's FTT token belongs to the latter category—but it was not the token design that brought down FTX and Alameda Research, but rather the disgraceful actions of those responsible. Like previous waves of new technology, the cycle of innovation hype is characterized by radical experimentation, breakthroughs, and unfortunately, the emergence of opportunists and fraudsters exploiting users' lack of information, until the former ultimately succeed and the industry matures.

As long-term investors, we take the time to work with teams that intentionally utilize tokens to allocate new forms of ownership and control and to realize new product experiences. While many of these projects are iterating toward community ownership and operation of networks, the playbook for optimizing user behavior incentives is still being written, which can lead to long-term sustainability and competitive advantage.

The road to a user-owned network has never been easy or straightforward, but in the wake of the FTX collapse, there are some clear lessons.

For users, the recurring lesson is the adage "invest in what you know." The world of user ownership is still very young, and there is no comprehensive guide to evaluating tokens from a user perspective, so becoming familiar with what you own can be a challenge. However, previous investments in the internet world were limited to professional venture capital firms, while Web3 allows all consumers to invest through tokens. While this comes with risks that require research and responsibility, user ownership aligns with a new trend of internet-native work, coinciding with new opportunities for making money and creating wealth online.

For builders, we hope this moment inspires more first-principles design around tokens as products, focusing on the ownership experience. Token design can unlock new product experiences for end users, addressing a key problem for them. Our belief is that ownership is a vast design space that should be rooted in user needs, whether it be a desire for status, economic alignment, community, or other aspects. If tokens are launched without considering user needs, projects risk confusing users about the role of tokens. Meanwhile, token design needs to be combined with accessible education to help users better understand what they actually own.

To fully realize Web3's potential as the next iteration of the internet, turning users into owners, there is still much work to be done. Building decentralized systems that empower users is challenging, and the rules of the game are still being clarified. But it is clearer now than ever that user ownership is a powerful new tool worth our efforts to harness. Our commitment to true user ownership is the reason Variant was founded and is why we steadfastly conduct research, fund, and promote this vision.