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Exploring the Decentralized Business Potential of XMTP Behind the New Features of Coinbase Wallet.

LeftOfCenter

2023-07-25 11:00

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Author: LeftOfCenter, BlockBeats

Developing a high-quality Web3 product is not difficult, but creating a sustainable Web3 business model is challenging. When it comes to Web3 business models, it is not just about copying traditional internet user growth and customer acquisition paths. Instead, it requires a shift in mindset and the adoption of a new business paradigm that comes with the underlying infrastructure revolution. Only in this way can a strong moat be built to occupy a favorable position when facing the massive internet giants.

This article starts with the built-in chat function in Coinbase Wallet and analyzes the commercial potential of the Web3 communication protocol XMTP that supports it. The fundamental support for this decentralized business possibility is "only Web3 products can provide, and corresponding Internet products cannot provide the Web3 native experience." 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 function is supported by the underlying protocol XMTP and integrated into the application by Coinbase Wallet for users.

As XMTP is a protocol layer targeting developer users, the number of customers is not high, but in absolute terms, the adoption of XMTP is still good. Taking the above case as an example, after integrating XMTP, Coinbase Wallet users directly become XMTP users. Unlike targeting consumer users, the protocol layer relies on attracting developers to achieve large-scale user conversion. A large-scale integration can often obtain thousands of new users. However, the end consumer users cannot directly perceive the existence of the XMTP underlying protocol.

Finally, as more markets adopt XMTP and network effects take hold, consumer users will gradually realize the tangible benefits brought by Web3. The decoupling of functionality resulting from the underlying architecture of Web3 will reduce the importance of front-end services, which will only compete with each other to provide high-quality user experiences. As a result, future application markets such as Opensea and Blur will become less important.

Web3 and Open Internet

On the Threads user interface newly launched by Meta, the parent company of Facebook, there is a message that reads, "Future versions will incorporate a new type of social media network called the Federated Universe, allowing users to follow and interact with each other on different platforms such as Mastodon."

Simply put, the Fediverse refers to an interconnected server network used for online publishing and file hosting, where these servers communicate with each other using an open standard. The most well-known service in the Fediverse is Mastodon, a social network and communication system similar to Twitter, which uses a standardized protocol called ActivityPub for communication. Anyone who joins this Fediverse can communicate with each other. If Threads joins the Fediverse, it means that Threads may be able to connect with many other services based on the ActivityPub protocol, such as Mastodon, to achieve cross-server tracking, @mentions, searching, and more.

This is a noteworthy but easily overlooked point, which means that Web2 internet giants like Facebook are also embracing open networks.

If you still don't understand its meaning, you can simply understand that in the future, users can achieve cross-application interaction between Threads and Mastodon, just like WeChat users and Alipay users can achieve cross-application chat. For Internet mobile users who are accustomed to walled gardens, it can be said to be a magical existence. However, in the early days of the Internet, openness and interoperability were a natural way of working between applications.

In fact, compared to Web2, Web3, which originated from blockchain technology, has less historical burden of the Internet, and has modular architecture technology stack and programmable financial infrastructure, which gives it inherent advantages in building an open Internet ecosystem and subsequent monetization.

Just as Web2 companies like Facebook began actively embracing the open internet, Web3 teams were not idle, and Coinbase's wallet is a noteworthy example.

Coinbase Wallet adds communication function

Recently, the cryptocurrency exchange Coinbase announced that its wallet, Coinbase Wallet, has introduced encrypted communication functionality.

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

Interestingly, the new wallet has an embedded chat function that is not limited to the Coinbase Wallet application, and can even achieve real-time chat with applications such as Lensterxyz, orb, or Converse outside of the application. You can even search for Lens handle directly in the Coinbase wallet, and send messages and encrypted assets to the other party.

Use wallet to pay for coffee and communicate with the seller

By integrating chat functionality into the cryptocurrency wallet, Coinbase Wallet aims to provide a holistic experience for cryptocurrency users. Prior to this, due to the lack of native chat tools, cryptocurrency users often use multiple different communication and community chat applications for fragmented communication, from Twitter, Discord, Telegram, Signal to WhatsApp, etc. By combining chat and transactions, Coinbase Wallet will provide a unified platform for cryptocurrency users to connect with others and communities.

XMTP: Web3 Communication Protocol and Network

Whether it's the end-to-end security and privacy features of Coinbase Wallet or the implementation of cross-application conversations, they all point to an underlying protocol called XMTP.

According to the official website introduction, 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 achieve in-app DM and notification functions.

In the XMTP protocol, the message inbox (DM) is bound to the user's Ethereum address, which means that users can send and receive their notifications through multiple different front-end applications, carry them with them (so-called portable), and migrate all interaction data (including follow-up, content publishing, and DM) to other applications at any time, provided that 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 Lens user and Coinbase Wallet real-time interactive chat showcased on the official website

As long as an application is integrated with XMTP, they can communicate with each other. As a protocol layer, XMTP connects users from different applications (even between different blockchains) to provide a seamless conversation experience, even if both parties are in different applications. In other words, XMTP provides protocol-level message transmission, which is completely independent of the frontend it belongs to.

Web3 needs encrypted native communication tools

For a long time, crypto users have lacked a unified communication platform. Crypto users and Web3 players often have to navigate through multiple communication and community channels to view messages and notifications, from Twitter, Discord, Telegram, Signal to WhatsApp, etc. These internet platform tools not only heavily rely on centralized services (which is ironic for Web3, which claims to be decentralized), but also scatter users across multiple channels, resulting in a fragmented experience. It is easy to miss important messages and notifications, and users often need to switch back and forth to keep up with the pace.

Web3 needs a native encryption communication tool, and XMTP is a new infrastructure that builds such native encryption communication services, mainly solving the communication problems at the bottom of Web3.

History tells us that every paradigm shift will generate new infrastructure, and fundamentally, it is the change of new identity systems.

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

As a new foundational layer for Web3 communication, XMTP is built around wallet addresses, and all user interactions (such as following, posting, and DMs) are tied to specific user addresses.

Based on the wallet address, a series of native encryption user scenarios can be derived:

1) The chat between users is wallet-to-wallet, meaning that it occurs directly between their wallets. User chats are no longer limited to within a single application, but can now occur in real-time across applications and even across different blockchains.

2) The notification retrieval process is also very flexible. Since the messages are directly bound to the wallet instead of a specific client, theoretically, they can be accessed through applications built on different XMTP protocols. Users can directly obtain community notifications from any relevant application using their wallet address, without having to manually check tools like Discord one by one.

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

This scenario has nothing to do with the front-end. When users receive notifications, it becomes uncertain how and where the subsequent transactions will take place, which is an important transformation of the decentralized business model.

For NFT collectors and communities, the conversations surrounding NFTs clearly hold special significance. Owners of the same NFTs and POAPs can send messages to each other to establish connections, and online communities can be formed based on specific NFTs and VIBEs, thus creating social needs.

The author of this article once received a special collection hobby offer request from a user in a certain community, and it must have been a lot of trouble to find me.

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

When such scenarios are adopted by the market and the network effect becomes prominent, secondary markets such as Opensea and Blur will become less important. This is where the true magic of Web3's decentralized business path transformation occurs.

Web3 Decentralized Business Journey

When we talk about Web2 and Web3, a core difference is the difference in their underlying architecture.

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

The changes in underlying technology and architecture will inevitably bring about the evolution of Web3 business logic.

Web2 platform provides great convenience for Internet users with the "all-inclusive" model, while also controlling user data and having supreme power. At this point, the platform is the winner-takes-all situation, making it impossible to shake the monopoly once it is established in the Internet industry.

Compared with that, users deeply bound with wallets in Web3 can easily migrate from one application to another. When the migration cost is so low, Web3 users will be scattered among various applications, presenting a fragmented feature compared with Web2 platforms. We believe that most Web3 consumer applications will be much smaller in user volume and unable to compete with social media giants in the short term.

This is also why products like Status have never been truly adopted and ultimately failed to materialize.

In fact, as early as 2017, Status launched a wallet-based communication application, which had a smooth experience and was a good wallet communication application. Basically, it is a blockchain version of WeChat, providing chat, wallet payment, and a matching web3 mobile browser. In addition, the team has sufficient financial support, and the 2018 ICO raised more than $100 million in funding.

Although the general functions of Status and XMTP are similar, Status does not provide an interoperable inbox. In other words, Status essentially follows the same conversion path as traditional internet, targeting consumer users and aiming to obtain consumer user conversion ideas.

Unlike consumer-facing users, the protocol layer relies on attracting developers to achieve large-scale user conversion. A large-scale integration can often gain thousands of new users. For XMTP, as a neutral protocol layer, it provides unified, standardized, end-to-end encrypted communication functions for applications. This is a real need, as long as the developer experience is good enough, theoretically it will attract more application developers to develop applications on it, and continuously attract developers to develop applications on it, accelerating expansion.

For communication protocols like XMTP, the key to attracting developers lies in enhancing the product's competitive advantage, 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, in order to protect user privacy and sovereignty; 4) providing powerful tools to facilitate integration and third-party development, enhancing the developer experience.

XMTP currently only supports DM and reminder functions for Ethereum and EVM-compatible blockchains. In the future, it will provide more functions such as reply, reaction, and payment, and will also support cross-chain, even communication with applications outside of the blockchain, including Discord and Mailchimp. This means that not only can it aggregate existing Web3 users, but also has the potential to bring incremental users to the encryption industry and expand new users on the Internet.

In terms of data, the number of developers and users of XMTP is not high, but in absolute numbers, the adoption of XMTP is still good. So far, the integration of Lens alone has brought XMTP 116,000 personal accounts according to The Block. Since its launch in early 2022, nearly one million XMTP inboxes have been generated in the XMTP network, and more than 300,000 DMs have been sent. Once Lens is fully open for registration, this number will increase sharply. The integration of Coinbase Wallet will also bring in a large number of early seed users.

With the integration of more projects by XMTP, its user base will grow exponentially. Once accumulated network effects are achieved, it will occupy a market advantage that competitors will find difficult to shake. It can be said that in Web3, the competition for users is at the level of underlying protocols, while front-end services are responsible for providing high-quality user experiences.

Conclusion

It is worth noting that Coinbase Ventures, the capital behind Coinbase Wallet, participated in XMTP's Series A $20 million financing completed in August 2021. This also explains why the relatively unknown XMTP is strongly tied to mainstream wallets like Coinbase Wallet as soon as it appears in the public eye. By integrating XMTP, Coinbase Wallet has added encrypted communication functions for wallet users and also introduced the first batch of seed users required for XMTP protocol cold start.

Native crypto users are currently the scarcest resource in the industry, and acquiring them is also the most difficult task for Web3 projects. As the official wallet of Coinbase, the world's top exchange, Coinbase Wallet has over 100 million crypto users from more than 100 countries/regions, and integrating XMTP will enable its seed users to promote more developer cooperation resources for XMTP expansion. After all, as long as XMTP is accessed, this early user base can be shared, which is a great attraction for other protocol or application developers, and joining the XMTP ecosystem to share users will also become a "must" choice for developers.

The Coinbase wallet is available in over 100 countries/regions and is one of the largest cryptocurrency 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 also use its wallet. It's similar to how I use Google products for email, browsing, and other purposes. Sometimes you just stick with brands and companies you know.