This is the fourth article in the DApp Building Guide series. The previous articles provided an overview of the necessary preparations, business product analysis, and ecosystem evaluation before building a DApp. They discussed how developers in the Web3 industry can establish a thinking framework. This article will explore how developers can better leverage technology and product leverage to build Web3 DApps from the perspective of niche markets.
Introduction#
First, let's take a look at the definition of a niche market:
A niche market is a small and specific market segment typically composed of a group of individuals with common interests and needs. Niche markets often involve a unique product, service, or specialized field, and they have a strong positioning and focus. Compared to broader markets, niche markets have a much smaller target customer base, but they have a high level of specific demand and interest in the product or service, which is enough to support small businesses or communities as successful business models. The advantage of niche markets is that they can more effectively meet the specific needs of customers, reduce price sensitivity to competing products or services, and create opportunities for manufacturers and service providers to generate profits. — ChatGPT
Niche Markets#
Compared to the internet, the blockchain industry is still in its very early stages. If the internet is a luxurious modern metropolis, then the blockchain industry is a wild west full of opportunities and imagination.
According to statistics, the global internet user population is expected to reach 5.16 billion by 2023, while the estimated scale of blockchain users is 420 million, a difference of 12 times. This shows that the blockchain industry still has a lot of room for improvement.
In terms of scale and future development space, the blockchain industry itself is a niche market in the virtual space. However, due to its rapid development, new, more segmented markets will continue to emerge in the market. This process is similar to the development of a technology tree, starting from a seed, sprouting branches and leaves, from Bitcoin to smart contracts, and then developing into DeFi and NFT. With the rapid iteration of technology, new niche markets appear in each cycle, creating new opportunities.
So why should we pay attention to niche markets? Here are a few points to consider:
- Focus on specific business scenarios and value.
- Get through the cold start phase.
- Establish positive externalities.
Business Scenarios#
Specific business scenarios originate from the real needs of users. For example, the trading demand in the blockchain industry's early days was a typical example of a niche market. Centralized exchanges or AMM swap DeFi protocols acted as intermediaries and earned commissions. Currently, exchanges have entered a stage of intense competition and are no longer considered niche markets.
However, we can see that compared to the established homogeneous token market, there have been more opportunities in 2021-2022. For example, OpenSea focuses on the trading demand for non-fungible tokens (NFTs), promotes metadata standards, and increases adoption rates, thereby creating a niche market for NFT assets. Similarly, products such as Gem and Blur, which focus on NFT trading experience and gas optimization, have gained growth opportunities. Tools that provide data on the rarity of various NFT assets have also benefited from the wave of PFP prosperity.
Another example is user acquisition and activity products that address pain points in blockchain operations. These products have formed specific market demands during the rapid growth of projects and users. This is the core of product-market fit (PMF). If specific business scenarios are not clearly defined, the logic of the project cannot be established, and it cannot smoothly complete the cold start and gain positive externalities.
Cold Start#
The cold start is a stage that every project needs to consider, and it is also a threshold that many projects find difficult to overcome. Once we have clearly identified and addressed the specific business scenario needs, the next step is how to grow.
If a project can effectively address user needs in a niche market, its cold start phase will often be completed quickly, and it may even directly enter a mature stage, becoming the biggest beneficiary of market growth and forming a leading position.
As mentioned earlier, exchanges were able to acquire a large number of valuable users at a very low cost in the early stages of the industry. In a competitive landscape with a few competitors, they quickly passed the cold start phase and built more business scenarios based on this. Another typical example is Lido, which only addresses the liquidity needs of Ethereum staking assets and became a leading protocol in the LSD track in less than two years.
Of course, we have also seen some projects using token issuance to drive growth. This became a common operational growth method for DeFi protocols during the DeFi summer. However, the actual effect still depends on whether it can serve specific business scenarios and solve valuable problems. Tokens are accelerators—they can only accelerate growth on the premise that the project has business value. They are not a panacea—skipping business value to directly promote growth. In this case, let's take a look at the third point—positive externalities.
Positive Externalities#
Positive externality refers to the benefits and returns brought by blockchain projects that are not limited to the project itself but spread to the entire blockchain industry and community. These benefits and returns are extensive and can promote the development and maturity of the entire blockchain technology. — ChatGPT
In simple terms, positive externalities mean that blockchain projects can generate benefits and returns through the problems they solve. If a project addresses specific needs and has a certain user base, it should consider how to maintain the long-term development of the project through service fees.
ENS is a good example worth discussing. After years of accumulation in the Ethereum community, the project has become a leader in a niche market. Its income from registration fees comes from renting the right to use domain names, which is a typical leverage of niche markets to obtain substantial positive externalities. In addition, it not only solves the need for name resolution in the Ethereum ecosystem but also serves as a standard in the wave of development in EVM-compatible chains. It has achieved considerable growth and has also become an important infrastructure for decentralized identity.
However, the issuance of $ENS tokens has sparked discussions within the community about the value of the tokens. I believe that the issuance of tokens has not increased its ability to obtain positive externalities or solved the bottleneck problem of user growth in the existing niche market. However, from the perspective of DAO governance, protocols that have positive externalities and issue governance tokens will have more room for trial and innovation.
Returning to positive externalities, not all protocols have the conditions to obtain positive externalities. This will depend on the specific situation of the niche market. For example, Gem, an NFT trading aggregator, was eventually acquired by Uniswap and became part of a larger ecosystem. Etherscan has obtained decent revenue through free tool products, advertisements, and software licenses.
Of course, these are relatively successful cases. Projects that reach this stage often meet the prerequisites; otherwise, they cannot become a long-term and healthy business form.
Conclusion#
This article explores the elements required for Web3 products to go from zero to one in niche markets. Starting from specific product needs, by providing valuable services, accumulating users, and successfully achieving user growth, positive externalities can be obtained.
As developers, we should explore the potential niche markets in Web3 and use technology and products to solve valuable problems. We should try to complete the cold start in a more cost-effective way and build positive externalities for projects. I understand that it is difficult to discover potential niche markets and even more challenging to build products with positive externalities. However, this does not prevent us from making it a long-term goal and guiding us to continue exploring and trying, constantly learning and adjusting in this process, understanding the market's business logic, and honing our skills and understanding.
Blockchain has given us a potentially limitless global market. By building DApps, we can create a machine that provides uninterrupted service to users worldwide, 24/7. If this machine can earn $1 from each person, when the blockchain industry develops to the scale of the current internet, we will receive greater returns.
2023-04-09