Original author: LeftOfCenter, BlockBeats

It's not difficult to develop a high-quality Web3 product, but what's difficult is to build a sustainable Web3 business model. When it comes to Web3 business models, it's not just about replicating the user growth and customer acquisition path of traditional Internet, but requires a change in mindset, adopting a new business paradigm brought by the underlying infrastructure revolution. Only in this way can we build a strong moat and occupy a favorable position when facing the huge Internet giants.

This article starts from the built-in chat feature in Coinbase Wallet, and then analyzes the potential of the Web3 communication protocol XMTP that supports it. The fundamental supporting this decentralized business possibility is the "Web3 native experience" that only Web3 products can provide and corresponding Internet products cannot provide. For XMTP users, this most intuitive "encrypted native experience" is "real-time cross-application chat with friends", which is equivalent to connecting WeChat and Alipay accounts for chat/payment. This magical feature is supported by the XMTP underlying protocol and integrated into Coinbase Wallet to provide to users.

Because it targets developer users, XMTP as a protocol layer currently has a relatively small number of customers. However, in absolute numbers, the adoption of XMTP is still good. In the case mentioned above, after integrating XMTP, Coinbase Wallet users directly become XMTP users. Unlike consumer users, the protocol layer relies on attracting developers to achieve large-scale user conversion. A large integration can often obtain thousands of new users. However, the final consumer users cannot directly perceive the existence of the underlying XMTP protocol.

Finally, as XMTP is adopted by more markets and network effects form, consumer users will gradually realize the tangible benefits brought by Web3. The decoupling of functionality caused by the Web3 underlying architecture will reduce the importance of front-end services. They will only compete with each other to provide a high-quality user experience. The resulting change is that future application markets like Opensea or Blur will become less important.

Web3 and the Open Internet

In Meta's newly released Threads user interface, which is the parent company of Facebook, there is a statement that says, "Future versions will incorporate a federation of universes for a new type of social media network, allowing users to follow and interact with each other across platforms like Mastodon."

Simply put, the Fediverse refers to an interconnected server network used for web publishing and file hosting. These servers communicate with each other using an open standard. The most famous service in the Fediverse is Mastodon, a social network and communication system similar to Twitter. It uses a standardized protocol called ActivityPub for communication, allowing any platform connected to the Fediverse to communicate with each other. If Threads integrates with the Fediverse, it means Threads will be able to connect with numerous services based on the ActivityPub protocol, such as Mastodon, enabling cross-server tracking, mentions, searching, and more.

This is an important but often overlooked aspect, as it signifies that web giants like Facebook are also embracing the open web.

If you still don't understand its significance, you can think of it as the ability for users to interact between Threads and Mastodon, similar to how WeChat and Alipay users can chat across apps. For internet users accustomed to closed ecosystems, this can be seen as a magical existence. However, in the early days of the internet, openness and interoperability were natural ways for applications to work together.

In fact, compared to Web 2.0, Web 3.0, which originates from blockchain technology, carries less historical baggage of the internet and possesses modular architecture and programmable financial infrastructure, giving it inherent advantages in building an open internet ecosystem and subsequent monetization.

While Web 2.0 companies like Facebook are actively embracing the open internet, Web 3.0 teams are also making progress. Coinbase Wallet, a wallet platform under Coinbase, is worth paying attention to.

Coinbase Wallet Introduces Communication Feature

Recently, cryptocurrency exchange Coinbase announced that its wallet platform, Coinbase Wallet, is introducing encrypted communication capabilities. Learn more here.

Thus, in addition to asset trading, the official wallet of the second largest exchange in the world will also support in-wallet chat sessions, with all conversations being end-to-end encrypted and privacy-friendly. Except for owning the private keys, there is no other way to access this information, truly achieving the same level of security protection as encrypted assets with "your keys, your conversations."

Interestingly, the new wallet's built-in chat function is not limited to the Coinbase Wallet application itself, but can even achieve real-time chat with applications outside of Coinbase Wallet such as Lensterxyz, orb, or Converse. It can even directly search for a Lens handle in the Coinbase Wallet and send messages and encrypted assets to the other party.

Pay for coffee using the wallet and communicate with the seller

By integrating the chat session functionality into the encrypted wallet, Coinbase Wallet is attempting to provide a holistic experience for crypto users. Previously, due to the lack of native chat tools, crypto users often used multiple different communication and chat apps and communities for fragmented communication, from Twitter, Discord, Telegram, Signal to WhatsApp, and more. By combining chat and transactions, Coinbase Wallet will provide a unified platform for crypto users to connect with others and communities.

XMTP: Web3 Communication Protocol and Network

Both the end-to-end security and privacy features of Coinbase Wallet and the implementation of cross-app conversations point to an underlying protocol called XMTP.

According to the official website, XMTP is a universal Web3 communication protocol and network that supports end-to-end encrypted communication between on-chain addresses. Developers can integrate the XMTP SDK into dApps without permission to implement in-app direct messaging (DM) and notification functions.

In the XMTP protocol, the message inbox (DM) is bound to the user's Ethereum address. This means that users can send and receive their own notifications through multiple different front-end applications, carry them with them (hence the term portable), and migrate all interaction data (including follows, content publishing, and DM) to other applications at any time, as long as these applications also integrate the XMTP protocol. For example, the scenario of real-time chat between Coinbase Wallet and Lens Protocol users is implemented by the XMTP protocol.

The real-time interaction chat between Lens users and Coinbase Wallet showcased on the official website

Any application that integrates XMTP can communicate with each other. As a protocol layer, it connects users from different applications (even different blockchains) for seamless conversation experiences, even if both parties are in different applications. In other words, XMTP provides protocol layer message transmission, and it is independent of any specific front-end.

Web3 Needs Native Encrypted Communication Tools

For a long time, encrypted users have lacked a unified communication platform. Encrypted users and Web3 players often move between various messaging and community applications to check messages and notifications. From Twitter, Discord, Telegram, Signal to WhatsApp, these internet platform tools are not only heavily reliant on centralized services (which is ironic for Web3 that claims to be decentralized), but also users are scattered across multiple different channels, resulting in a fragmented experience. It is easy to miss important messages and notifications, often requiring constant switching to keep up with the pace.

Web3 needs native encrypted communication tools, and XMTP is building this native encrypted communication service as new infrastructure, primarily addressing the underlying communication problems of Web3.

History tells us that each paradigm shift will generate new infrastructure, fundamentally, it is the change of a new identity system.

In the traditional communication era, Short Message Service (SMS) was built based on mobile phone numbers. With the rise of Web2, the identity system gradually evolved into social accounts of platforms like Facebook and Instagram. Fast forward to today, Web3 provides a new identity system - wallet addresses. This means that native crypto applications need to be built around on-chain addresses.

As a new underlying layer for Web3 communication, XMTP is built around wallet addresses, where all user interactions (e.g., following, posts, and direct messages) are tied to specific user addresses.

Based on wallet addresses, a series of native crypto user scenarios can be derived:

1) Chats that occur between users are wallet-to-wallet, and user conversations are no longer limited to within a single application but can be real-time chats across applications and even across chains;

2) Notifications can also be received flexibly. Since messages are directly bound to wallets rather than specific clients, theoretically, messages can be accessed through different XMTP-built applications. Users can directly receive community notifications published by wallet addresses from any related application without having to check them one by one in tools like Discord.

When NFT markets integrate protocols like XMTP, secondary markets will become less important. A typical user scenario based on this is when a user sees a desirable NFT on a secondary market, they can make an offer to the owner through the market. The user may check relevant messages through the corresponding application (such as Coinbase Wallet or any other XMTP-compatible application), and the buyer and seller can negotiate and complete the transaction based on a mutually satisfactory price.

Implementing this scenario has nothing to do with the frontend. When users receive notifications, it becomes uncertain how and where the subsequent transactions will take place. This represents an important shift in decentralized business models.

For NFT collectors and communities, conversations revolving around NFTs obviously have special significance. Owners of the same NFT and POAP can send messages to establish connections, form online communities based on specific NFTs and VIBE, and thereby create social needs.

The author of this article has received special collection offers from a user in a certain community, and finding the author must have been quite an effort.

Such dialogues and communication, especially for NFT series with community attributes, have special significance. For members, it is much more convenient to communicate through wallet-to-wallet DMs than to track/search NFT holders through other tools.

When such scenarios are adopted by the market and the network effect becomes prominent, platforms like Opensea and Blur will become less important. This shift in decentralized business models is where the true magic of Web3 happens.

The Path to Web3 Decentralized Commerce

When we talk about Web2 and Web3, a core difference lies in their underlying architectures.

Web2 is the era of platforms, where code, databases hosting user profiles, and user communication information are all hosted by the same entity. The underlying architecture of Web3 is completely different, where all these functionalities are decoupled and supported by different protocols for user profiles, data storage, and DMs.

The changes in underlying technologies and architectural differences inevitably result in the evolution of Web3's business logic.

While Web2 platforms offer great convenience with their "all-in-one" approach, they also control user data and hold supreme power. This creates a situation where platform owners have a monopolistic advantage that is hard to dismantle.

In contrast, Web3 users deeply integrated with wallets can freely move from one application to another with low migration costs. As a result, Web3 users are fragmented across different applications. Compared to Web2 platforms, Web3 consumer applications are likely to have a smaller user base.

This is also the reason why products like Status have not been widely adopted and ultimately failed.

In fact, as early as 2017, Status launched a wallet-based messaging application. It had a smooth user experience and could be considered a good wallet communication application. It was essentially a blockchain version of WeChat, providing chat, wallet payments, and a companion web3 mobile browser. Additionally, the team had sufficient funding and raised over $100 million in an ICO in 2018.

Although Status and XMTP have similar functionalities, Status does not provide an interoperable inbox. In other words, Status essentially follows the conversion path of traditional internet, targeting consumer users and aiming to obtain their conversions.

Unlike consumer users, at the protocol layer, large-scale user conversions are achieved by attracting developers. A single large integration can attract thousands of new users. For XMTP, as a neutral protocol layer, it provides unified, standardized, end-to-end encrypted communication capabilities for applications. This is a real need, and as long as the developer experience is good enough, theoretically it can attract more application developers to develop on top of it, continuously attracting developers to develop applications on top, and accelerating expansion.

For communication protocols like XMTP, the key to attracting developers lies in enhancing the competitive advantage of products, which includes: 1) providing an intuitive and seamless Web3 integration experience that is not only cheap but also high-performance, in order to comply with existing communication standards; 2) providing interoperability to ensure cross-platform compatibility and communication; 3) scalability and privacy to ensure efficient, encrypted communication and data protection to safeguard user privacy and sovereignty; and 4) providing powerful tools to facilitate integration and third-party development, improving the developer experience.

Currently, XMTP only supports DM and notification functions for Ethereum and EVM-compatible blockchains. In the future, it will provide more features such as replies, reactions, and payments. Moreover, it will no longer be limited to EVM compatibility and will support cross-chain communication. It may even support applications outside of blockchain, including Discord and Mailchimp, meaning that it can not only aggregate existing Web3 users but also potentially bring incremental users to the crypto industry, expanding the user base of the Internet.

In terms of data, although XMTP does not have many developer users, its adoption rate is still quite good in absolute numbers. So far, the integration of Lens alone has brought XMTP 116,000 individual accounts. Since its launch in early 2022, nearly one million XMTP mailboxes have been generated in the XMTP network, with over 300,000 DMs sent. Once Lens is fully open for registration, these numbers will grow rapidly. The integration with Coinbase Wallet will also bring in a large number of early seed users.

As XMTP integrates more projects, its user base will experience exponential growth. Once cumulative network effects are achieved, it will occupy a market advantage that competitors will find difficult to shake. In Web3, the competition lies in the underlying protocols, while frontend services are responsible for providing a high-quality user experience.

Conclusion

It is worth noting that Coinbase Ventures, the capital behind Coinbase Wallet, participated in XMTP's Series A funding round of $20 million in August 2021. This explains why the relatively unknown XMTP is closely tied to mainstream wallets like Coinbase Wallet. By integrating XMTP, Coinbase Wallet adds encrypted communication functionality for wallet users and also provides the initial seed users required for XMTP's cold start.

Encrypted native users are currently the most scarce resource in the industry, and customer acquisition is also the most difficult task for Web3 projects. Coinbase Wallet, as the official wallet of the global top exchange Coinbase, has over 100 million encrypted user resources from more than 100 countries/regions. The integration of XMTP into its wallet seed users will promote XMTP to expand more developer cooperation resources. After all, as long as you access XMTP, you can share this batch of early users, which is very attractive to other protocol or application developers, and joining the XMTP ecosystem to share users will also become a "must" choice for developers.

Coinbase Wallet is available in over 100 countries/regions and is one of the largest encrypted wallets. Given that its parent company Coinbase is the second largest cryptocurrency exchange in the world, it makes sense for users of the exchange to use its wallet. Similar to how I use Google products in email, browsers, etc. Sometimes you just stick with brands and companies you know.

Reference:

https://www.coinbase.com/blog/say-gm-with-messaging-on-coinbase-wallet

https://xmtp.org/docs/introduction

https://mirror.xyz/lensprotocol.eth/6TgzB9YDTXk0vm8JVnQ3UY5Hp0LHgF_zthdBumSUSUQ

https://techcrunch.com/2023/07/12/slide-into-coinbase-wallets-dm/

https://www.eff.org/deeplinks/2022/11/leaving-twitters-walled-garden