Web3 Ecosystem Development

Web3 Ecosystem Development: from throwing spaghetti to cohesive strategy

Web3 was historically very tech-focused. All you needed was a compelling white paper and your ecosystem's token would fly. However, the industry is maturing, there’s more competition, it’s harder to cut through the noise, it’s a lot harder to differentiate your ecosystem from others, and it’s expensive to get quality builders to integrate your infrastructure. Web2 SaaS matured from costing easily $5 million to launch a product in the 90s to only a few thousand or even hundreds these days. Throughout this transformation, there was a tipping point where tech slowly became secondary to distribution and network effects. Web3 is now maturing to a point where launching a new rollup or L1 is inexpensive. In this new period, good marketing or partnerships can do a lot for a Web3 ecosystem but are not enough. Success depends on a cohesive, strategic approach to Ecosystem Development.

For clarity, we refer to Web3 ecosystems as platforms with a business model relying on multiple projects building applications on top of their infrastructure. Applications attract users, thus generating platform usage and revenue—for example, all layer 1 or layer 2 blockchains. The proposed framework also applies to Web2 platforms like Amazon Web Services, WordPress, OpenAI, or Shopify with some slight modifications. The underlying assumption is that the platform can serve a large number of applications, and many use cases are yet to be discovered.

We refer to Ecosystem Development as the combination of strategies and methods used to start and accelerate a flywheel to generate network effects - attracting projects, builders, consumers, capital, and revenue.

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When well executed, Ecosystem Development creates resilience:  financial resilience to weather bear markets and community resilience to retain projects and capital during bull markets. When Ecosystem Development is approached poorly, we see short-term spikes in activity that quickly fade out, and resources are rapidly depleted leading to an ecosystem’s death spiral.

Ecosystem Development encompasses the usual community building, partnerships, and grants; and increasingly includes more advanced strategies like M&A, venture studios, funds of funds, targeted incentive programs, developmental venture capital, and more. The key is choosing the right mix of strategies and arenas. The days of haphazardly throwing spaghetti at the wall are over, and those who lack maturity in their Ecosystem Development strategy are unlikely to be around for long as the space matures.

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Ecosystem Development Framework

To support others in strategising Ecosystem Development, we have developed a framework that outlines the key considerations:

• Identity & Vision
• Ecosystem’s Objectives
• Enablers
• Arenas 
• Strategies

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Below we’ll unpack each of the 5 components of the framework and finally bring it all together into our thesis for what a comprehensive approach to Ecosystem Development looks like.

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Identity & Vision

This encompasses an understanding of the key stakeholders and their needs (e.g. in the form of a Guiding Question), and the Vision - the description of what your ecosystem should do and look like in the future. E.g. a thriving community of aligned and democratic AI products.

The identity and vision inform and define the rest of the framework and, as such are the highest leverage strategic decisions. However, the high level of abstraction in Identity or Vision statements can make their importance hard to grasp. This leads many to make the mistake of not clarifying the Identity and Vision, and then paying the price with confusion, poor alignment, and slow decision-making.

Ecosystems will do well to regularly assess the satisfaction of the stakeholders and track progress towards the Vision. If meaningful progress towards the Vision is not improving stakeholder satisfaction, it's time to iterate.

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Ecosystem Objectives

These are the outcomes expected from Ecosystem Development activities. Ecosystem Objectives should chart progress towards the Vision. Frequently, Objectives are key metrics that directly impact token price and market sentiment for a project, however, adding more Vision-specific indicators is key.

Common top-level objectives include:

• Treasury value: sustaining or growing the DAO treasury through sequencer fees, returns on equity/token investments, and treasury management returns.
• Token price: providing utility for the token, encouraging holding, and increasing attention-grabbing metrics such as Total Value Locked, new partnerships, and liquidity (frequency and depth for trading).

Other frequently selected objectives, relate to increasing the number of key stakeholders in the ecosystem:

• Applications: more products on the ecosystem’s platform.
• End Consumer: more users for products on the ecosystem’s platform.
• Capital providers: liquidity providers, investors, etc.
• Active community members: independent contributors, (professional) delegates, and service providers to the DAO or protocol.

Cascade of Objectives

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Enablers

The capabilities and public goods that directly enable Ecosystem growth. 

The critical Capabilities usually are:

• Governance: reliability of the ecosystem’s decision-making capacity and security (capture resistance and exploit resistance).
• Brand: how an ecosystem's vision and strategy translate to a strong and well-communicated positioning i.e. having a clear unique selling point.
• Platform operations: marketing, customer support, and analytics (to understand what’s working and what’s not).
• Tech: quality of the ecosystem’s infrastructure offering, developing of new functionalities.

Network Goods (akin to public goods, these are goods without a direct revenue model but that enable your ecosystem’s growth and ultimately power the ecosystem’s revenue model). Important Network Goods include:

• Research: access to intellectual capital and market insights to derisk entrepreneurship, enable innovation, and inform capital deployment.
• Developer tooling and middleware: tools that facilitate building on the ecosystem’s platform.
• Standards: guidelines and references that are commonly used, enabling interoperability and composability.

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Arenas

The key areas (market verticals, domains, geographies, etc.) where an ecosystem will focus and aim to excel.

Generally, arenas tend to include:

• Verticals: DeFi, Gaming, CollabTech, DeSci, ClimateTech, Media, NFTs & Creative IP, DePin, etc.
• Technology: Account Abstraction, Zero Knowledge Proofs, Crypto x AI, etc.
• Geographies: this tends to focus on East vs West and Developing World vs Developed World.

Strategies

The different approaches that an ecosystem can combine for ecosystem development.

Ecosystem Development Strategies generally include some combination of:

• DAO Governance i.e. proposals made to token holders or delegates (broad mechanism)
• Partnerships i.e. direct negotiation with mature Apps
• M&A: either for Apps, Capabilities, or both.
• Liquidity Provision: direct provision, augmented bonding curves (e.g. Giveth accelerator on Polygon), etc.
• Investments via Fund of Funds, Internal VC, Venture Studios, Accelerators (capital and support), and Incubators (support, no capital), or a mix (Ecosystem Funds).
• Platform Resources Programs: customer access & distribution (co-marketing, app marketplaces, and business development), production & development (procurement services e.g. Arbitrum ADPC, logistics, perks, and R&D), etc.
• Grant programs: Retroactive Funding (e.g. Optimisms Retrop PGF), Generalist Grant Council (e.g. Cosmos Hub’s Atom Accelerator), Specialised Grant Tracks (e.g. Arbitrum’s Questbook tracks), Cyclical community grants (e.g. Project Catalyst), Onboarding Fellowships (e.g. Arbitrum fellowship)
• Community Programs: Contests (Quadratic Funding e.g. Giveth or Gitcoin, Jokerace contest, Hackathons), Events (sponsoring, hosting, and enabling local events), and Ambassador programs.
• Incentive Programs: Airdrops, Direct Incentives (e.g. quests), User Acquisition Incentives via Protocols (e.g. Arbitrum’s STIP or LTIP), Liquidity Mining, and Staking Incentives.‍
• Combined Strategies for Network Effects: Business Clusters deploy targeted strategies for a narrowly defined Arena. The strategy combines grants (for network goods), community programs, marketing and branding, and a Funds of Funds to deploy capital into development VC, incubators and accelerators). Swarms take Business Clusters a step further by increasing collaboration between projects in the cluster through swaps (token or equity, e.g. Japanese Keiretsus, China’s Haier, or in Web3 RnDAO’s approach).

Bringing it all together

The process to define an Ecosystem Development strategy is then:

1. Clarifying the Identity and Vision
2. Prioritising Objectives
3. Choosing Arenas
4. Assessing the state of the Enablers and defining what level of improvement is needed (if any)
5. Defining the mix of Strategies for the selected Objectives, Arenas, and Enabler requirements, 
6. Assessing capacity to deliver on the selected strategies and defining the approach (in-house or contract) or iterating the strategy as needed
7. Defining evaluation methods and contracting capacity as needed
8. Executing (i.e. funding and resourcing the selected initiatives)
9. Periodically evaluating results and reviewing all steps.
   

Now, a sophisticated approach to Ecosystem Development also accounts for the interactions between different strategies. Our research has led us to highlight Swarms as a powerful approach to generate and sustain network effects. Swarms are the Web3 evolution of Business Clusters (cross-ownership networks of modular and composable projects), created through a targeted combination of community, applied research, and investment programs. You can learn more about the thesis for Swarms here.

About Us:

RnDAO is an R&D DAO with a mission to empower humane collaboration. We provide governance and Ecosystem Development advisory (helping you define an ecosystem development strategy), and partner with Web3 ecosystems to deliver Swarming strategies for CollabTech. Contact us to learn more via this form or join our discord.