Partner of A16Z Cryptocurrency Venture School: Bitcoin and Ethereum are difficult to replace

Note: The original author is Jesse Walden, a partner of Andreessen Horowitz Cryptocurrency Entrepreneurship School. In this article, he explained how open source cryptocurrency projects such as Bitcoin and Ethereum have formed network effects and generated defenses. Eliminate conversion costs, so it is unlikely to capture value.

A16Z加密货币创业学校合伙人:比特币和以太坊难以被替代,分叉币不太可能捕获到价值

(Picture from: tucheng.com)

Many entrepreneurs and investors believe that cryptocurrency projects cannot gain value because they are based on open source code. Their idea is that if you are a project based on open source code, someone will copy it to lure you Users and any potential gains, this does not seem to be a good business foundation.

But the cryptocurrency network does adhere to a sustainable business model, and for those who understand the dynamics behind the valuable Web 2.0 market, it will soon become familiar to people. Like market companies, cryptocurrency projects attempt to create defensiveness through network effects, thereby generating fee streams and discouraging users from switching to competing services.

The main innovation of the cryptocurrency network is that it can expand the network effect by allowing users to share the value they create.

Network effects, switching costs and defense capabilities

It is understandable that people will misunderstand cryptocurrency and related value capture. Open source code enables software companies that use it to generate trillions of dollars in revenue, but the community that develops such code usually has no way to directly obtain most of the value.

This is because there is a significant difference between an easily copyable open source code library and a network formed around running open source code as a service. The open source code base is an empty blueprint. It is initially just lifeless code, and then when it runs as an instance and is full of data and users, it will form a network or service .

Many Internet platforms are built using open source code libraries, which are run by companies as instances or services. For each new database entry or user, the service becomes more valuable to each individual user, resulting in a network effect. This brings inherent costs to users switching to new competitive services. These conversion costs make it more difficult for competitors to break through, thus forming a defensive nature. Imagine a Facebook clone with no friends or a Uber clone without a driver. That's why large platforms will get bigger, but competitors will get stuck.

Once the defense capabilities are established through network effects, the conversion cost becomes the basis for the company to start charging users, advertisers, or both. This model is feasible as long as the cost is lower than the conversion cost of using alternative products.

Why a fork cannot eliminate conversion costs

Like the Web 2.0 platform, a carefully designed cryptocurrency network is a service that runs in real time, and it can also become the basis for a strong network effect that generates conversion costs. Given that cryptocurrency networks rely on open source code, they can indeed be copied (or forked) more easily. However, although the copying of the code may be free, the social cost of coordinating all network participants to move to an empty room is high . Coupled with the trust and familiarity brought by brand, lindy effect, and smart contract integration, you have the secret to consolidate existing services, build their network effects, and generate conversion costs.

The network effect of Bitcoin stems from the fact that more people believe that it is a store of value, which incentivizes miners to protect network security. The network effect of Ethereum comes from developers who deploy applications. Each application becomes a building block, and other developers can combine it into higher-order services to promote more usage and the demand for ETH.

At the application layer, the automatic token exchange Uniswap becomes more useful for every new user, because the extra liquidity in the market will bring better trading prices. Compound, a money market agreement for borrowing, provides more competitive interest rates for loans as borrowing liquidity increases.

In any case, the bifurcation of the original network is initially technically equivalent, but it is not as functional as the standard network. Due to the low liquidity, a forked compound will provide a worse interest rate. For the same reason, Uniswap's fork will also have a lower price. Bitcoin's fork is unlikely to be regarded as a store of value or a medium of exchange, so it is also unlikely to gain value .

This is the same as the defensive principle of the traditional Web 2.0 platform: attract users, establish network effects and improve defensiveness by switching costs. Conversion costs form the basis of profit extraction, usually in the form of expenses:

p4

As long as a service remains minimally extractable (that is, charges a fee lower than the conversion cost), its model is feasible.

Therefore, the new cryptocurrency is not a business model, but who can benefit from it.

The difference: the value distribution capability of cryptocurrencies

Encrypted tokens are an innovation similar to data packets. We can now move value bits in the same way as mobile information: using open standards, with a very elaborate transmission method, it can be immediately transmitted to anyone anywhere in the world. This means that valuable encryption services now have a unique opportunity to directly redistribute value to users who generate value.

With proper design and effective distribution of cost flow, you can further consolidate the network effect by providing users with direct economic incentives, thereby generating greater defense capabilities, which in turn enhances the feasibility of cost flow. This is a virtuous circle, which may lead to a sustainable, user-owned network. Due to its cooperative economic model, the network scale and defense capabilities will increase.

Crypto networks like Bitcoin and Ethereum are precedents for large-scale platforms owned and operated by the community, but if the right tools are available, then more founders may be able to use this new tool to distribute economic value. Establish a network effect and create value for yourself, investors, and user communities.

Economic collaboration with users is a major feature of the product experience, and creators may be able to unlock larger, more competitive and more defensive networks, while enabling more innovation, all thanks to cryptocurrencies Open source foundation.