The concept of Web3 product-market fit is critical to the success of decentralized applications and platforms in the Web3 ecosystem.

As the 2023 bear market unfolds, the market is flooded with tokens and life-sustaining projects fighting to survive or retain value. Many of these projects, products, and platforms are not like Web2 companies. They do not have dedicated teams driving product-market fit (PMF). They use levers like incentives, tokens, and sports-centric approaches to branding.

Web3 platforms can begin their journey to product-market fit by distributing utility tokens through airdrops or bounties, creating a community-run workforce. Permissionless product innovation, leaderless movements (e.g., Bitcoin), and faceless brands are more nuanced than Web2 traditionalists are willing to understand.

The six stages of PMF

There are six broad and overlapping stages to achieving product-market fit, with the key outcomes being desirability, feasibility, and economic viability of the product. These six stages must be properly understood, executed, measured, and incentivized.

Progressive decentralization

This is a term coined by Andreessen Horowitz that discusses three phases: achieving product-market fit by attracting the right initial users even during the period when the product is controlled by the founding team, incentivizing more users by turning them into a community and finally moving to operational control and decision-making over the community.

This is the first phase of PMF. As you continue to attract more of the right people, attract the right community and slowly expand to decentralize. This is the antithesis of communities built through ICOs, where a bunch of speculators bought into a project and community that might be a few degrees off from true fit. A compelling idea must be translated into a compelling vision and execution in the open market for the right people to rally behind it.

Public Utilities

Discovering and building utility takes time, experimentation, and an iterative process. Early community members prototype use cases and dApps and design some utility into the token, driving initial growth. When a platform, product, or protocol emerges from the early stages, the fundamental elements of utility must prove themselves (e.g., locking resources, capital, and throughput into the token ecosystem). This is a critical step in ensuring that the PMF is ongoing.

These can be measured through various KPIs such as total value locked, developer activity, etc. The liquidity and reliability of the base platform are determined through some of these key metrics. Then, more users are attracted to the narrative, liquidity, reliability, growth, and robustness of the base platform, building multiple utilities and ensuring a common goal to enhance it. The utility building phase also solidifies community participation - a critical step without which the token will not be able to gain momentum.

Utility Momentum

Once utility is established, it needs to be accelerated. For example, by adding token programmability vectors, use cases such as staking, flash loans, burning, etc. are expanded. Many protocols and platforms do not enter this momentum phase of PMF. Some have activated various momentum vectors (e.g., DeFi, games, DAOs, etc.), attracting different types of developers who can add multifaceted programmability and utility to increase momentum.

DeFi and dApp building have shown the momentum to drive growth in stablecoins, automated market makers, lending protocols, etc. More composable infrastructure and platform layers must drive momentum. Original protocols rarely emerge, with Ethereum being a notable exception.

Network Effect Alpha (Metcalfe’s Law)

Network effects are the moat of any platform or protocol; they reinforce and accelerate functionality around the thesis and narrative. Network effects (Metcalfe’s Law), such as more users and more usage — more usage leading to more users requires a lot of work. In order for users and usage to flourish, people need additional tools, such as exchanges, wallets, media, and projects built on the base platform or protocol. This enriches the established token momentum and provides value to it.

Network Effect Beta (Reed’s Law)

Strong foundational narratives and functionality will create a thriving ecosystem that embodies Metcalfe’s Law, but if the values ​​of the ecosystem are compelling, they will spawn their own ecosystems — unfolding Reed’s Law. Once Reed’s Law reaches critical mass, it becomes a powerful competitive force that is difficult for competing protocols to displace.

Ethereum generated the basic Metcalfe’s Law, but its ecosystem players, such as Polygon, Optimism, Arbitrum, etc., have generated their own compelling ecosystems and created Reed’s Law. As these ecosystems expand further, we can see the value of the base protocol grow exponentially. As more and more ecosystems lock themselves into the base platform, beta network effects increase the unshakable stickiness - the epitome of PMF in Web3.

Economic Flywheel

Once the forces of Metcalfe’s Law and Reed’s Law combine, it kicks off an economic flywheel that creates exponential growth for a platform or protocol. The more value created by the community and ecosystem (dApp development, marketing, core development, etc.), the greater the demand for platform usage, development, and potentially higher token prices.

All the previous steps must be executed well and the incentives of all participants must be aligned. Once a platform reaches this level of PMF, use cases like trading cards can go viral. They become a powerful mechanism for attracting and retaining capital in the ecosystem while creating more venues to trade and expanding the user base of people who can already play with each other. There are opportunities to launch a use case like this on a platform even in the Network Alpha or Network Beta phases of PMF. You are likely to encounter much less risk when launching in the flywheel phase.

Conclusion

The concept of Web3 product-market fit is critical to the success of decentralized applications and platforms in the Web3 ecosystem. Achieving strong product-market fit means understanding the needs and desires of your target market and delivering a product that effectively meets those needs. This requires a deep understanding of the platform, network effects, participants, their needs, and the right incentives.