Welcome to the special edition of the Variant Newsletter, dedicated to marketplaces. I’ve been analyzing and writing about marketplaces for years. Six years ago I asked what was next for marketplace startups, and today we are seeing this future through tokenized marketplaces. Using tokens to jumpstart network effects is a natural fit and evolves the growth playbook beyond what was possible in web2.

I’ve written a new piece, A Framework for Thinking About Opportunities in Tokenized Marketplaces, which unpacks our internal thinking on the most interesting opportunities—and how you might win in your market. I also included some of my favorite pieces on marketplaces from me, the rest of the Variant team, and others.

Enjoy reading,

Li Jin

A Framework for Thinking About Opportunities in Tokenized Marketplaces

Li Jin 

A prototypical application of crypto for marketplaces is as a growth mechanism: utilize tokens to incentivize supply and/or demand to join. Various DePIN networks and other tokenized marketplaces have successfully applied this model to overcome the cold start problem.

As we’ve been analyzing tokenized marketplaces, we’ve developed a framework for thinking about their various approaches and the pros and cons of each. 

At their most fundamental level, marketplaces facilitate transactions between supply and demand. We’ve seen various evolutions in marketplaces over the past several decades. These evolutions have either unlocked new sources of supply or demand, or they have developed superior experiences for existing supply and demand participating in the market.

In short, marketplaces can be categorized by quadrants based on whether they’re tapping into new vs. existing supply and whether they’re serving new vs. existing demand. 

First, definitionally:

• New demand: converting non-consumers into consumers 

  Marketplaces that address new demand are expanding the market for a product or service by turning people who previously weren’t consuming anything into consumers. For example, UberX largely converted consumers who previously used other transportation methods (public transportation, car ownership, etc.) into rideshare customers.

• New supply: converting non-suppliers into suppliers

  Marketplaces that address new supply are expanding the market for a product or service by activating suppliers who previously weren’t providing a service or product. For example, Airbnb tapped into new supply in the form of homeowners with extra bedrooms or couches. The idea of converting non-suppliers into suppliers is elaborated in this post I wrote a few years ago.

• Existing demand: converting existing consumers to use a new marketplace

  Marketplaces that tap into existing demand are drawing existing customers of a product or service to a new marketplace. Think: Angie’s List’s superior verticalized experience likely pulled existing demand away from more generalist marketplaces like Craigslist.

• Existing supply: converting existing suppliers to use a new marketplace 

  Similar to the above, but for suppliers. An example is Faire, the B2B wholesale marketplace that connects brands to retailers. 

Marketplaces in Web2 

It’s helpful to consider marketplace approaches in web2. By looking at the history of marketplaces and how the biggest outcomes have been generated, we can learn about the dynamics of marketplaces. 

The biggest disruptions in web2 marketplace innovation—and therefore the biggest outcomes—have emerged from the “new supply + new demand” quadrant. When you open up new supply and new demand, you expand the size of the overall pie. This echoes Clay Christensen’s idea of disruptive innovation: Christensen posited that targeting previous non-consumption unlocks larger markets than targeting existing consumers.

Contrast that with the “existing supply + existing demand” quadrant: marketplaces in this quadrant often take existing transaction methods (Whitepages, travel agents, etc.) and build better products to service those transactions. Think of examples like Priceline for travel booking or OpenTable for restaurant reservations. The added convenience and ease of digital discovery and booking allowed them to create a 10x better experience than offline marketplaces, enabling them to build market share.

This leaves two quadrants: 1) where supply exists but demand is new, and 2) where demand exists and there is new supply. In both of these cases, growth could come from converting new consumers or suppliers. Substantial businesses have come from these quadrants. For example, DoorDash created a new source of demand (consumers wanting on-demand food delivery) for an existing supply of restaurants. This opened a new revenue channel for restaurants by converting non-consumers into consumers—and DoorDash did $2.3 billion in revenue last year. 

Obviously, there’s overlap in these quadrants, and marketplaces often start in one quadrant and migrate or expand to others. This framework, however, can be helpful in quantifying the size of potential markets, based on existing market dynamics and latent supply and demand. 

The Web3 Marketplace Matrix

In parallel with web2 marketplaces, there are four broad approaches within tokenized marketplaces.

The “existing supply + existing demand” quadrant is occupied by marketplaces that seek to improve on existing platforms—for instance, by offering better products or improved economics for participants. Braintrust, for example, is a freelance marketplace that shares ownership with users via tokens and charges a lower take rate, beating the industry norm of staffing agency take rates that can be upwards of 40%. Blackbird, a platform for restaurant loyalty, targets existing restaurants by offering a lower take rate on restaurant payments using crypto for payment rails. 

In the “new demand + new supply” quadrant, businesses can create entirely new markets. For example, DIMO unlocks new pools of supply and demand in the car data space by allowing drivers to stream their vehicle data in exchange for tokens. Drivers who otherwise wouldn’t contribute vehicle data are attracted to the network by token incentives, and the existence of this new supply of data unlocks new demand in the form of businesses who become customers for that data. Helium is another example: Individuals place hotspots in their homes and get rewarded for creating a decentralized wireless IoT network using the LoRaWan system. 

Tokenized marketplaces are uniquely suited to tackle the “new demand + new supply” quadrant because token incentives can grow marketplaces sequentially by subsidizing one side to join before the other. That’s a new capability vs. the web2 paradigm, where marketplaces must scale both sides simultaneously.

The risk of building in the “new supply + new demand” quadrant is that the supply or demand isn’t large enough to serve as a basis for a huge revenue opportunity, or that the new suppliers and/or new demand take longer to emerge than anticipated. However, founders can also underestimate the size of an emergent market. For example, in their seed pitch deck, the Uber founders estimated their annual revenue in the best case scenario at $1 billion. This turned out to significantly underestimate the latent demand for transportation—Uber saw $8.7 billion in revenues just last year. Founders must be prepared for both possibilities, developing flexible business models that can scale rapidly if the market response is stronger than anticipated and establishing contingency plans for slower-than-expected growth.

Implications for Builders

Understanding whether a new marketplace is targeting new or existing supply and demand is crucial, as it determines go-to-market strategy and where builders need to excel in order to win supply and demand for their marketplace.

For New Supply

To activate new supply, builders must educate potential suppliers on why they should participate in this new market and offer a compelling value proposition. This often involves convincing them of the benefits they will receive, monetary or otherwise.

If the value proposition is monetary, builders must ensure their solution is competitive in the broader market of earning opportunities. For example, GPU resource providers could choose to rent to various GPU marketplaces, so the earning potential from a new platform must be attractive enough to draw them in. Whether participating as an active or passive supplier is another factor that influences retention and scalability.

For Existing Supply

Approaching existing suppliers and persuading them to switch over to a new platform requires developing a strong product and GTM motion, which differs based on the nature of the supply. If the existing supply comprises businesses (B2B), founders benefit from having established relationships with those suppliers. If the existing supply consists of individuals (B2C), founders need strong storytelling and marketing skills, along with the ability to translate deep user insights into products.

For New Demand

Creating new demand requires builders to be excellent at new market creation. Founders must effectively communicate why this new product or service is valuable and worth the user’s attention. This requires skillful storytelling and narrative-building, along with a skill set in customer acquisition. In crypto, token incentives can also help drive new demand to the market.

For Existing Demand

To win over existing demand, founders need to be adept at user acquisition, meeting potential users where they are and convincing them to switch to a different platform. This involves understanding their current needs and offering a solution that is demonstrably better. For example, new verticalized and on-demand marketplace disruptors transitioned users away from Craigslist and other generalized platforms through a 10x better user experience. In the crypto world, using token incentives to convince end users to switch over to a new platform has been an effective strategy, as demonstrated by various vampire attacks and token incentive programs.

The Landscape for Tokenized Marketplaces

Tokenized marketplaces are unique in the crypto world because they face competition not only among other crypto projects, but from all other web2 marketplaces operating in that vertical. That’s because token incentives are deployed by these marketplaces as a bootstrapping mechanism, and the core of the marketplace still hinges on the successful facilitation of a transaction. For example, tokenized GPU compute marketplaces like Ionet, Akash, Render, etc. compete with traditional compute services like Lambda, Coreweave, and AWS.

The lifeblood of any marketplace is liquidity—the ability to find the counterparty for a desired transaction. While token incentives can drive initial growth and help overcome the cold start problem, long-term success hinges on the marketplace's core utility: matching supply and demand. Ultimately, tokenized marketplaces must build great marketplaces, with superior experiences that attract and retain participants.

I’m curious: where do you see the greatest opportunities for tokenized marketplace innovation? My DMs/DCs are open—would love to hear from you.

From the Archive

Li Jin: Crypto and Net-New Marketplaces

While there are many marketplaces today, there are more that should exist but don’t. Here, Li explains the obstacles standing in the way of these marketplaces’ formation — and how crypto can help overcome the hurdles.

Jesse Walden: Headless Marketplaces: Go Where the Wallets Are

Headless marketplaces leverage global, onchain identity, money, and data while distributing locally—wherever a user’s wallet already is. According to Jesse, builders don’t need to create a new marketplace from scratch but can tap directly into existing user engagement when going to market.

Li Jin: What Is the Future of NFT Marketplaces?

In March 2022, Li wrote: “In the future, the best NFT marketplaces may not even look like marketplaces at all.” We think her prediction is starting to look pretty accurate. After all, take a look at Jesse’s post this January…

Li Jin: Memecoins as the New GTM Strategy

Speaking of going where users are…New marketplaces face the cold-start problem because they rely on network effects to really function. One creative way to overcome this, says Li, is by piggybacking off of memecoins to bootstrap growth.

Mason Nystrom: Tokenized Marketplaces: Bootstrapping and Scaling Active vs. Passive Supply

But which do you need to scale — supply or demand? Token incentives help marketplaces overcome the cold start problem by allowing them to onboard supply-side participants. But, writes Mason, not all supply is the same.

Other Recommended Reading

• D'Arcy Coolican and Li Jin (a16z): The Dynamics of Network Effects

• NFX: The Network Effects Manual: 16 Different Network Effects (and counting)

• Li Jin and Andrew Chen (a16z): What’s Next for Marketplace Startups

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