State of Web2.5

What is Web2.5?

There are two primary perspectives on what “web2.5” means. One view is web2 and non-crypto companies experimenting with web3 technologies. Think Gucci Metaverse, NBA Top Shot, and Starbucks Odyseey. The other view is products that aren’t blockchain-based, but have a “crypto ethos.” So things that value open access, users owning their own data, and other crypto principles. Some examples of this are Substack, which allows writers to own their audience, and AT Protocol by Bluesky, a social protocol that lets users keep control over their identity and social graph.

However, the underlying principle here is that web3 is not an end. Rather, it is a point along a spectrum of closed ecosystems to open ecosystems. Web2.5 is best thought of as a transition state—an umbrella term we can give to products that aren’t crypto-native, but are moving towards a crypto future whether it be ideologically, technologically, or both.

Why Study Web2.5?

You might think web2.5 is boring and most of the cutting-edge, exciting developments are being done be web3-native companies. While web3 is is ripe with exciting experiments and indexing highly on the risk curve, there are clear constraints to mainstream adoption across broad challenges in onboarding, education, and user experience. This is especially true in the consumer space.

Crypto has an adoption problem

Yes, we are still early. But the space right now is full of early adopters building for other early adopters. For the vast majority of people, web3 solutions just aren’t compelling. Many products center around speculation or our clearly intended for developers and technical users. The industry is still figuring out what uses cases make sense and this uncertain period isn’t very accommodating for regular users.

Despite having huge name recognition, most people haven’t used crypto. If you have used crypto, think back to your first experience. Managing seed phrases, buggy wallets, scam websites are just some of the challenges that users can expect to encounter. How can we expect people to use web3 products and protocols if the onboarding process is so frustrating?

Crypto has a trust problem

The not very user-friendly environment has also contributed to a trust problem. Crypto jargon such as NFTs and DAOs give pause and increase skepticism from users.

Clearly, there is a long way to go and a lot to learn if we want to onboard the next billion users onto web3. This is where web2.5 plays a role. Web2.5 is a bridge and an olive branch to users on more usable, trusting, and accessible experiences that are powered with crypto rails.

While crypto-native builders continue to push the boundaries for other crypto-native users, web2.5 can provide us with valuable lessons on how to increase usage and adoption.

The last era of the internet was defined by closed platforms and that created walled gardens and kept control of user data. Centralized platforms offered a convenient place for people to congregate—buyers and sellers, creators and consumers, etc—and accrued massive data moats in the process.

The brands of web2 mastered the art of getting attention, acquiring users, and onboarding customers onto new products. Web2.5 is the perfect place to study how mainstream users might use web3 tech.

Web2.5 is here and will shape the future

The brands and businesses with the most cultural capital have not yet adopted fully-fledged consumer experiences powered by blockchain technology. Companies such as Apple, Coca-Cola, Nike, and Starbucks have tremendous influence on consumer behavior and our culture. How these companies approach blockchain-based user experiences will end up shaping the future. Within crypto, there is a huge opportunity for larger, established companies to coordinate resources, reclaim public trust in crypto, and embed blockchain-based technology into internet culture.

Web2.5 can afford to take a longer-term approach to crypto. None of the web2 giants or legacy brands rely on crypto for any meaningful parts of their businesses (yet), so they can take their time top focus on concrete use cases and intuitive user experience rather than following the latest hype cycle. Their initial approaches might not be what we end up with, but they have the advantage of experimenting with and learning from a huge base of users.

In making the case for web2.5 applications, this section will focus on case studies for large, institutional organizations that are already experimenting with blockchain-powered user experiences.

Case Study: Starbucks Odyssey

Overview

Starbucks Odyssey is the next-generation of the company’s loyalty program announced in September 2022. Details that Starbucks has announced outline a few key points:

• It will be an extension of the existing loyalty program that incorporates games/challenges (called “journeys”) and digital collectibles (called “journey stamps”)—users will login with their existing Starbucks credentials, no wallet required

• Users can collect stamps by completing challenges. Stamps have point values associated with them that can be redeemed for benefits and experiences such as “a virtual espresso martini-making class” or “invitations to exclusive events at Starbucks Reserve Roasteries”

• Users can also trade stamps with one another on a marketplace

But why?

A pessimistic view would be that Odyssey is a solution without a problem. Starbuck’s loyalty program in its current form is widely loved and a highly effective cash cow. It has over 27 million active members and drives 53% of the company’s revenue.

What’s the incentive to overhaul something that’s working great? Here are some theories:

Starbucks is trying to gain exposure to web3. Maybe they believe the metaverse and digital collectibles will be important in the future. In that case, Odyssey is a way for Starbucks to gain exposure to the technology and experiment with different strategies.

Even if Odyssey fails, the risk is relatively low. It is an optional enhancement to the existing program and shouldn’t interfere with any functionality that customers are used to.

Another possibility is that Odyssey is a data play. Onboarding millions of users with crypto wallets could be game-changing. Not only can Starbucks see how people are trading stamps, but what dApps they are interacting with, what NFTs they are buying, and more.

Combine this with the interactive games and challenges, Odyssey could provide deep and novel insights into a customer’s personality and preferences. However, as compelling as these theories are, the most interesting has to do with the future of loyalty systems.

An evolution in loyalty

Traditional loyalty programs are largely transaction based. Users get benefits, but only as long as they keep buying. Think about most clothing brands with rewards programs—you earn points for every dollar you spend. Every once in a while, you’ll get some perk like free shipping or 10% off because it’s your birthday. The current Starbucks loyalty program roughly follows this model as well.

What if the future of loyalty is not just transaction based? What if it incorporates experiences, in the form of everything from games to interacting with other customers, in addition to buying things?

The 2022 Merkle report on loyalty found that younger generations want experiences and “surprise and delight” to be part of their loyalty programs. NFTs are a potential intersection of these two values. The novelty of digital assets, combined with the ownership and identity they provide, could offer a new type of loyalty experience that appeals to the next generation of customers.

The Odyssey program shows signs of conviction in this new model of loyalty. Users are no longer limited to buying drinks to earn rewards. Instead, completing experiences and games can unlock utility. Imagine going through a “history of coffee” journey or playing a Starbucks trivia game to earn drinks.

Experience also extends to interacting with other users. Among already-announced functionality, Odyssey users will be able to trade stamps with each other. It’s not hard to see how digital collectibles could support a transition to a Starbucks metaverse, fulfilling the company’s goal of extending its status as a Third Place to the digital world.

Introducing experiences and ownership into loyalty programs could be a way to level up engagement. Web3 has already proven that ownership, in the form of NFTs, can increase connection to a product or platform. Think of all the proud Nouns or Doodles owners. Similarly, good art and interesting experiences can build brand cultural capital in the web3 world.

Open and composable

Another shift that Odyssey may be betting on is the transition to open, composable loyalty programs. On-chain loyalty unlocks novel and useful utility in the form of “exit with interoperability” for loyalty points.

The internet brought a profound shift in the ways loyalty programs operate. This Mastercard whitepaper outlines three pillars that have guided the design of traditional loyalty programs—contained costs, dedicated interactions, and broad offerings. In practice, this translates to loyalty programs with expiration dates and tightly defined redemption conditions, separate award/redemption userflows, and a wide range of methods to redeem.

While this is a step up from the simple digital punch-card, it leaves a lot to be desired. Customers want clear values attached to their loyalty, and for redemption to be as easy as just spending money. Think of all the guides and how-to’s for redeeming airline miles—the value of a point is volatile and uncertain, and customers are overwhelmed with the endless (but complex) ways to redeem points.

A fully open and composable loyalty ecosystem would drastically increase freedom and value for the customer. Imagine a loyalty ecosystem that allows users to borrow against Starbucks points, swap one brand’s points for another, and plug points into all sorts of defi protocols.

The proof of concept for this already exists. Many credit card points can be “swapped” for airline or hotel points. The next generation of loyalty could supercharge this idea by expanding the network of rewards programs that users have access to.

Currently, the networked approach to rewards consists of many centralized and siloed networks. For example, the Chase Ultimate Rewards network has partnerships United, Marriot, Hyatt, and others, but the value proposition of these networks is still limited. The value of points is volatile depending on which network partner you redeem on. Adding new partners is not a trivial ask and companies take on significant risk (time and money) when joining.

Web3 can provide the infrastructure for a global, open, and composable loyalty program. Open data and on-chain activity can deepen the offerings of rewards programs to the most loyal customers. For instance, customers can be rewarded based on their on-chain activity, or whether they own a certain token.

Integrating loyalty programs with marketplaces and defi protocols can provide more transparent pricing, more options for redeeming points, and make points more versatile. For example, companies will no longer need to enter formal partnerships or create networks for points to be transferred. Instead, users can just swap them on something like Uniswap, or brands can permissionlessly build redemption options for other brands’ points.

More and more, companies are realizing that ecosystem lock-in isn’t valuable when attempting to create loyalty. Transfer partners were the industry’s first steps, but Starbucks and Odyssey may be trying to take a leap forward.

Case Study: Reddit NFTs

Overview

Reddit has been in the avatar game for a while now and has been experimenting with NFTs since 2021. The first ever NFT avatars were released in June 2021. The collection consisted of four 1-of-1 “CryptoSnoos” on Ethereum.

However, Reddit’s NFTs truly took off late in 2022 with the release of the second generation of collectible avatars. Reddit made the interesting decision of airdropping avatars to certain power users. This sparked a wave of hype and speculation in October and trading volume soared. During this time, Reddit helped onboard over 3 million users with wallets on Polygon.

Reddit’s NFT project is a huge opportunity to test web3 on mainstream users. Reddit is the 5th most visited website in the US with over 400 million monthly active users. It also has massive cultural influence, and has been responsible for the rise and virality of many projects.

What’s special about Reddit’s NFTs?

We are finally beginning to see novel implementations of NFTs. Previously, most web2.5 NFT projects were just art/digital collectibles. However, Reddit has introduced a unique personalization mechanism. Owning multiple non 1-of-1 avatars allows you to create a unique, personalized avatar using traits from the avatars you own.

Reddit has also successfully onboarded millions of non crypto-native users with wallets, something no other web2.5 project has done. Reddit achieved this by through hiding and abstracting away elements of crypto that are confusing and potentially off-putting:

• The term “NFT” is rarely used—Reddit has branded their NFTs as ”collectible avatars”. For many people, terms like “crypto” or “NFT” are associated with scams.

• Wallet = Reddit Vault—wallet creation flow is similar to signing up for Reddit with the option to back up your seed phrase with Reddit which allows for recovery with a password.

• No gas—Reddit is paying for gas fees when users mint. In addition, users can buy collectible avatars with credit/debit cards, rather than crypto-only.

Communities of the future

While collectible avatars generated the most hype in 2022, it is arguably not the most important web3 initiative Reddit is pursuing.

Community Points is an ongoing experiment that launched in 2020. It is an attempt to take Reddit’s karma system and put it on-chain. Governance is a hot topic in web3, but communities and DAOs continue to face a host of challenges. Increasing participation, improving security, and making the user experience better are all issues that need continued work.

Reddit is in the unique position of being a platform with a huge and diverse range of engaged communities. The karma system for curating content and developing reputation has been tested over many years and has shown its effectiveness at surfacing valuable content. These are some of the ideas Reddit is building out with community points:

Community Points is interesting because it’s Reddit’s bet on the future of community. The company seems to believe that web3 will be key to building engaging and resilient communities of the future. In particular, Reddit is focusing on portable identity and collective ownership.

Global reputation

2022 saw the rise of pseudonymity—Balaji published The Network State, social apps like Poaster debuted, and people are beginning to build the infrastructure for a pseudonymous economy.

Reddit has long been the oft-cited example of a pseudonymous social network. Users interact under names that are detached from their legal names, but are still persistent and can accrue reputation.

Reddit uses “karma,” points earned from other users’ upvoting/downvoting posts and comments. However, karma in its current state is limited. Karma isn’t visible without going into a user’s profile, it’s difficult to find karma broken down by subreddit, and (most disappointingly) karma doesn’t really do anything. Community Points is the first step to injecting utility into karma.

From first principles, the purpose of karma, or reputation systems in general, is to create incentives for positive behavior. If you behave in a way that the community deems bad, your reputation goes down and their are (in theory) consequences associated with that. Similarly, positive behavior builds reputation which can unlock new opportunities.

And just like open loyalty systems, a blockchain based reputation system allows for portability. Community Points won’t be limited to the Reddit platform, rather they can be used in any number of ways permissionlessly.

The more utility users can derive from points, the greater the incentive to earn them. This supercharges the effect of reputational rewards. The future might be one where your Reddit reputation dictates what DAOs you can join.

Tokens and flywheels

The second important aspect of Community Points is collective ownership. For many people, a subreddit is their second home—a place to hang out with like-minded people that you can’t find in the physical world. As online communities become a greater part of people’s lives, structures to share the benefits of growth will become increasingly valuable.

Tokenizing a community allows members to have a stake in the success of the community. When members hold tokens, they can capture some of the upside they help create. In the case of Reddit communities, and social communities more broadly, the value of a community is a combination of its network of members, its content, and its governance. A token can buy access to a community’s network, the ability to read/write content, and the chance to participate in decision-making.

In web2 communities, incentives aren’t always aligned to add value to these three verticals. But with tokens, a new social community model is created:

In other words, now karma actually means something and users have a greater incentive to do the behaviors that will earn them more karma. As users contribute to the three value verticals, they earn tokens that reflect the value of the community. Create value → community becomes more valuable → token appreciates → more incentive to create value. This is the flywheel at work.

Case Study: Shopify

Overview

Shopify is an e-commerce platform, building tools for merchants to sell their products online. In the past, Shopify pioneered the concept of building apps and plug-ins for online stores. Today, they are looking towards tokengated commerce.

• Shopify launched support for tokengated commerce in June of 2022. The beta program was active in 2021 when the Chicago Bulls launched their first NFT project on Shopify.

• Shopify allows users to sell and mint NFTs on their Shopify stores. Tokengating is not a Shopify-native solution, rather Shopify has third-party partners create plug-ins that can be installed through the Shopify app store.

  • List of app partners here

Focus on tokengating

In addition to just allowing businesses to sell NFTs on their Shopify stores, the company has put a lot of focus on tokengating. Most of Shopify’s featured blockchain app partners are tokengating services, and it’s looking like Shopify believes tokengating will be key to the online shopping experience of the future.

The fundamental value proposition of Shopify’s service is curating a better experience for the buyer. Absent Shopify, marketplaces are the place most people turn to if they want to sell NFTs. Marketplaces can provide great distribution, but there is no way to customize the buying experience. Shopify offers businesses this flexibility—Shopify provides the tools for selling, and the brand can control the rest.

Tokengated e-commerce is taking this a step further. Blockchain-based primitives—NFTs and wallets in particular—have the potential to dramatically shift consumer behavior online.

Your wallet is you

The things we own through our wallets mean something. When we show up with our wallet, we show up as us. And when we connect our wallets, and feel that magic moment where suddenly the world changes - it sees us, and opens up - that’s a pretty awesome feeling.

The go-to piece to read about the future of tokengated commerce is this piece with Packy McCormick and Alex Danco. For the uninitiated, Alex Danco heads Shopify’s blockchain team and his self-proclaimed goal is “making Shopify wallet aware.” Danco’s thesis for the future revolves around wallets and how they will change user behavior.

The concept of connecting a wallet and being able to read information about what that wallet owns and has done in the past is a novel primitive. It is not just a new stream of data for businesses to use, it also changes how we think about interacting with software and services. It is a completely new dimension of how we use the internet.

Okay, so wallets will be a bigger part of one’s online identity—but why is this important? The answer lies in the ability for online stores to craft moments of recognition. Shopify’s conviction for tokengated commerce lies in the belief that delivering moments of recognition is what customers seek and value.

NFTs turn you into a non-fungible buyer—the tokens you hold tell a story about who you are. Danco, and by extension Shopify, are looking for ways to enable businesses to create moments of recognition by tailoring the shopping experience to the individual.

Imagine this type of treatment, but for every brand and shopping experience. The atomic use case of the wallet is making it easier to create moments of recognition online. This is possible because wallets (and the NFTs in the wallet) are a portable and universally readable way of sharing identity.

Collaborative commerce

As wallets become more personal, they become better signals of identity. Your wallet paints a picture of the type of user, or buyer in the context of Shopify, you are. With this new context, online stores can develop special experiences based on who you are.

To be clear, personalized shopping experiences aren’t unique to web3. It’s possible to achieve the equivalent effect of tokengating without tokens. However, NFTs help alleviate many of the technical challenges, especially when multiple layers of gating are involved.

Danco noted that current methods for gating commerce are complex and have too many dependencies for the experience to be seamless.

Tokengated commerce offers the “10x” solution to this problem. Reading from wallets is universally compatible and can be easily implemented by any brand or store. This opens the door for collaborative shopping experiences.

Some of the most hyped and loved drops of the last few years were collabs. Think of legendary collaborations like Comme des Garçons x Converse and Off-White x Nike. The intersection of multiple interests and identities, combined with the scarcity aspect of a limited-time collaboration, make the shopping experience more fun and exciting.

Tokengated commerce can increase the depth of this personalization. The intersection of identity can become more and more specific, and brands can provide unique collaborations with little additional work on the technical side.

TL;DR for Builders

Building in loyalty

1. Create positive-sum systems

The crux of all loyalty systems has always been how to best create positive-sum systems for both the business and the customer. However, brands have traditionally trended towards closed systems where they can control the experience and value accrual of users. As Jon Wu points out, loyalty as a concept is non-transferable:

When customers have the freedom to exit from one brand’s ecosystem to another, the companies offering the most valued products will experience massive upside.

Think about it—if you could transfer all your loyalty points freely among brands, you would probably spend most of your points on a select few places you love the most. You would likely love the brand even more, and its influence on your behavior would grow. An open system is clearly valuable for customers, but it’s also valuable for brands, as long as they are making things that people love.

Loyalty programs alone cannot engineer brand reputation and customer loyalty, but when consumers have more freedom, the best products rise to the top. Make a product people love, and use loyalty programs to make it as easy and fun as possible for people to get that product.

1. Embrace composability and permissionless innovation

For brands, a scary aspect of loyalty in web3 is that anyone can build on top of what you create. But this may be one of the most compelling value props for the next gen of loyalty programs.

For example, third parties can host tokengated events for certain Starbucks stamp holders. This expands the use-case of rewards and makes them valuable in more contexts.

Another potential innovation could be creating online communities around rewards programs that aren’t necessarily run by the brand itself. All of these can work to increase the reputation and social capital of a brand and are made possible through an open ecosystem. In fact, this might be one of the biggest trends in web3 for the coming decade. NFTs and other blockchain-based primitives derive a huge amount of utility from their ability to be accessed by other people.

Create a loyalty ecosystem that encourages and leverages composability. Done right, this will expand the reach of your product and the contexts that customers use your brand.

Building in community

1. Create value along the 3 verticals—members, content, and governance

Tokenizing communities is intended to solve the problem of how to monetize and capture the value communities provide. A priori to this is that a community has value. Before tokenizing, create value of community members by cultivating the network, creating good content, and developing effective governance systems.

1. Reputation as an incentive

In addition to tokens, reputation can be leveraged as a way to incentive behavior in communities. In the physical world, reputation is a persistent trait that people use to interpret others.

In the digital world, reputation has a similar role, but is often contained to individual communities and platforms. Web2.5 is moving towards more universal and composable reputation.

Build around the new concept of being able to access an user’s “global internet reputation.” What could you do if you knew the edginess/dankness/wholesomeness of a user? What use cases are developed from understanding how someone behaves on other parts of the web?

Building in e-commerce

1. Collaboration is the most salient technological unlock (for now)

In terms of things that tokengating enables, collaboration is top of mind. Previously, collaborative shopping experiences had a very high technical barrier. But now, we have wallets—a universally readable and portable representation of identity. Scaling the complexity of collaborative tokengating is trivial compared to traditional web2 solutions.

When a technological development makes something 10x easier, the alpha is in dreaming up use cases that were previously not in the realm of realistic possibility. Reimagine what is possible in collaboration—everything from storefronts to memberships and beyond.

1. Think personalized, not exclusive

It’s tempting to use tokengating for its most obvious use case—restricting items and features to certain people. The more powerful way think about tokengating is as a way to create hyper-personalized shopping experiences.

People want to feel recognized when they enter a store. They want the experience of being a regular, where all the employees know their name and order, but in the digital world. Exclusivity has its place—it can be valuable to reward dedicated customers with experiences only they can access (this is a way to recognize the most loyal fans).

However, for everyone else, tokengating allows brands to demonstrate recognition even if the user is a first-time customer.

Recommended Reading

Here are the best essays, blog posts, reports, and threads to read if you want to learn more about trends in loyalty, community, and e-commerce.

Web3 loyalty

Building the ultimate loyalty rewards program

Jon Wu on Starbuck's Polygon

Do Rewards Really Create Loyalty?

Tokenized communities

Web3 - Tokenised Communities vs. Tokenised Economies

Tokenized Communities

Creators, Communities, and Crypto - Fred Ehrsam

Tokengated commerce

Tokengated Commerce

Other

Hyperstructures

Big thank you to the Chapter One team for support in writing this report