The current state of onchain business models

Onchain business models are ways in which protocols and teams make money onchain, implemented and enforced through smart contracts that anyone can see and verify.

Many onchain business models are now tried-and-true, with the most popular examples being charging fees (exchanges, royalties, interest) and direct-to-consumer sales (NFT sales, token sales).

Some companies and protocols that have succeeded with these business models in the past are now facing some challenges, such as fee undercutting from competitors, free mints, and users getting critical of high fees (friendtech).

Since onchain business models are smart contracts, they are composable, transparent, programmatic, and can be experimented with permissionlessly.

Near instant settlement, attribution, ownership, and how we “pay” can all be innovated upon–and can open up new avenues of revenue for creators and businesses.

Consumer crypto companies sit at an interesting junction.  When we compare with web2, consumers will pay for certain subscriptions (Netflix, Amazon Prime, Game Pass, Spotify), or they don’t pay directly, but rather with their attention and data (YouTube, TikTok, IG).

What other approaches are being explored today for businesses, and individuals, to generate revenue onchain?

Onchain subscriptions

Subscriptions are a very common place business model across almost every vertical in the web2 world: from streaming, to delivery, to gaming, most of us have at least one consumer subscription in our lives.

For businesses, subscriptions can create a healthier business, provide consistent cash flow, and project more accurate revenue numbers.

That being said, many consumers report subscription fatigue.  How can web3 innovate upon the subscription model, to make it more convenient, flexible, and easy to manage?

Programmable subscriptions

Basepaintbot, created by sammybauch and backseats, is a proof of concept subscription service that mints Basepaint on a users behalf every day.

The subscription is effectively pre-paid and you can cancel any time, getting back all unspent funds.  A soulbound NFT with metadata representing your subscription status is given to the address.

Basepaintbot’s approach can be further extended for any onchain activity that may require a ‘daily transaction grind’.

Programmable subscriptions also allow for renewals at more flexible units of time, in basepaintbot’s example, it is a daily subscription.

Superfluid, a web3 payments startup, has created easy-to-integrate components for subscriptions where payments are streamed as granular as a day, and can be implemented in your products today.

Autopay with yield

With programmable money and payments, we can start thinking of auto-paying for subscriptions in new ways.   Imagine having some capital that generates yield.  That yield can then be redirecting to make outstanding payments on your subscriptions.  SRENS is a service that uses Alchemix and Gelato to accomplish this, specifically using yields to renew ENS names.

NFT-enabled membership with expiration dates

This approach to subscriptions extends the functionality of a regular NFT to include an expiration date.  It has also been described as rentable NFTs, where a user has temporary ownership of an NFT (that would give them access to what the subscription is providing).

One protocol that has taken this approach is Unlock.  With Unlock, the ‘primitive’ is a key (NFT) which can expire.  One use case is event tickets, which, naturally expire, but it can also be extended to support memberships/subscriptions, which can be renewed before the expiration date.  The user pre-approves amounts to be spent in the future, and membership can automatically be renewed multiple times up to that spending approval limit.

A few other protocols that use a similar approach are decent.xyz, double protocol, and Sukuri.  ERC-4907 was created to standardize subscriptions as an extension of ERC-721.

Smart contract wallets and plugins/modules (ERC6900) for subscription management

An under-explored area are modules/plugins built on top of smart contracts wallets using ERC6900.

Since account abstraction wallets are smart contracts, they are programmable, and can do a lot more than the EOA wallets that we are accustomed to today.  By setting up rules and permissions, your wallet can work autonomously, making payments or directing the flow of payments.

ERC6900, standardizes a plugin-interface where actions can be built on top of smart contract wallets.  Some examples, in the context of subscriptions, could include:

• Set up recurring payments, and spending limits

• Auto-deductions

• Natively bake in paying subscriptions with yield

• Manage all of your subscriptions in one interface

ERC6900 is in its earlier stages, and requires wider adoption of smart contract wallets, which is still in progress.

Sukuri protocol, which uses custom ERC721/ERC1155’s for memberships, also has smart accounts that provides functions to manage subscriptions, gasless payments, and autopayments.

Onchain referrals

Affiliate marketing has been a longtime staple of web2 businesses, and have only recently made their way onchain in a more transparent and programmable form.

Web3 referrals are settled instantly, have provable attribution, and are potentially more lucrative due to more dynamic payout structures.  Unlike web2, where referees are given a one-time fixed fee,  web3 enables payouts that are programmable (get a certain % from every transaction).

In the DeFi world, there have been a few forms of onchain referral links that offer rebates and discounts (GMX, Cow, Lido) that have had massive success.

More recently, Zora’s mint referral program has spurred interest in referrals on the NFT side of the house, and has been one of the more successful onchain referral programs.

Many other protocols and projects have implemented some form of referral fees, including frenpet, foundation, rabbithole, sound.xyz.), and paragraph.  It is a key go-to-market strategy for any crypto company.

Some high level metrics for payouts to-date, are in this Dune dashboard.

Interfaces dedicated to referrals

Because so many protocols are now offering referrals, it opens up a new opportunity for referrers to build businesses around driving transactions from their interfaces to attain these commissions.

Some businesses, such as mint.fun, serve as an aggregator UI for NFT mints.  If certain NFT mints are originated from their site, and qualify for referral rewards, they earn affiliate commission.

This opens up the door for new businesses in the forms of aggregators, curators, and discovery platforms.  These businesses will compete to provide better UIs for different onchain actions.  If the action originates from your interface, you get paid.

Similarly, this pattern of “creating the best UI to get rewarded” is also being experimented with in onchain games.  Loaf, creator of Loot Realms, mentions that they plan to implement rewards for user interfaces that players use the most (17:10).  Since onchain games are contracts under-the-hood, anyone can build game interfaces on top of them, and the best ones will be rewarded.

Creating referral programs

Spindl is an attribution and referral platform that lets protocols see who brought upon a desired transaction.  Because the attribution is all done onchain, every entity who brought upon that transaction can be rewarded.

Spindl partnered with Coinbase on their onchain summer campaign to measure efficacy of the growth campaign as well as which contracts drove onchain actions on Base.  Here, Spindl data shows that anotherblock and FWB were the biggest drivers of Base adoption.

Daylight is a protocol where users can submit mints, airdrops, quests, and attach a referral reward to them.  The transaction gets surfaced to daylight users as well as partner publishers (this is discussed further in the next section).

There are several other companies in the referral reward creation space, including: ChainVine, Pass On, fuul, attrace, qwestive, and sharemint.  For a full list see Safary’s report.

Onchain ads

Ads may seem antithetical to the web3 ethos, but their ability to drive growth and generate revenue is undeniable.  There has been a recent wave of innovation in the onchain ad tech space, where the focus is on: driving growth to contracts, generating revenue for publishers, and maintaining the spirit of user privacy in web3.

In web3 their are significant advances in:

• Attribution: you can clearly see the user journey of an onchain action

• Audience targeting: every user’s purchases and transaction history are transparent and onchain, there is no monopoly of user data like web2. Ads can change depending on a wallet’s history.

• Privacy as a default: there is no personal identifying information, such as demographics, psychographics, etc that the consumer may feel is intruding upon their privacy.

• Cost-per-action is the primary metric: we can drive onchain actions that are clearly measurable, instead of relying on awareness campaigns.

• Smart contracts can compete for actions on a UI: let’s say you want to provide a swap ad on your website, when a user executes it on your interface, different swap protocols can bid on this action taking place through their contracts.

• Collecting ads: ads can be minted and owned by users, and serve as a different form of engagement between brands and consumers.

Brian Armstrong, in his startup request for builders, talks about the promise of onchain ads:

Trad ads in web3

There are some “web3”-esque businesses that already make money from ads.  Some examples are media companies (Blockworks, Bankless) and aggregator type sites (DappRadar, CoinGecko).

Web3 native ads

Quests (CPA)

Quests are another way of saying, “incentivized onchain engagement”.  In the ad world, this is usually called a cost-per-action ad.

Quests are: permisionless to create, funded onchain, clearly attributable, can target specific wallets, and can also be transparently measured.

Unlike web2 ads, they also tend to reward the user who is performing the onchain action with an incentive (NFT or token).  Right now, quests are usually created and displayed on the same platform, but some protocols are experimenting with creating partnerships with wallets and publishers to surface quests contextually (more on this in the ad networks section below).

Some teams working on Quests include: Rabbithole, Layer3, Daylight, YGG.  For a full list see Safary’s report.

Minting NFT ads (display ads)

Another emerging option, specifically for awareness campaigns, is minting ads.  Minting ads is an idea that was recently proposed by @dg_goens.  You can imagine ads embedded in your website, as a Zora NFT, and every time they are minted, the publisher earns a referral reward.

nft://1/0xA97D3Eb991303CF3b9B759bD026BaCB55256E9dB/?showBuying=true&showMeta=true

Some early experimentations with this have been surprisingly effective.

As a publisher or an aggregator, you can imagine having these ads as display ads (banners or embedded more natively in the UI) on your website.  Users can directly mint from the ad without leaving your website.  Perhaps you would be paid by impressions and further rewarded if users actually mint it.

Ad Networks: Protocols to connect publishers and advertisers

There are emerging web3 ad networks that are creating marketplaces to connect publishers and advertisers such as Slise and HypeLabs.

Daylight, mentioned earlier, can be considered a type of ad network, but it is more aptly described as a ‘transaction engine’.  Advertisers who want to drive onchain actions integrate with daylight to surface their transactions at the right place to the right user.  Daylight has an integration with wallets and other publishers to surface transactions that are the most relevant to the user.  These can be considered a type of ad or surfacing quests for onchain actions.

Gasless UX sponsored by ads

Account abstraction introduced the idea of paymasters–sponsored gas payments so users can have a gasless UX.  This can be paid for by an advertiser, who makes the user pay with their attention.   A tongue-and-cheek representation of what this could look like was created by @danii_xyz:

https://twitter.com/danii_xyz/status/1729536125616939416

Conclusion

As the world moves onchain, projects are experimenting with new and old monetization strategies.  Since web3 is permisionless, transparent, and programmable, it offers a new way to engage with common business primitives such as subscriptions , advertisements, and referrals.