Observation | Is the open source of the blockchain the biggest flaw in the business model or the strongest defense?

Encrypted networks such as Bitcoin and Ethereum have become a platform based on community ownership and operation. People use tools to distribute economic value through the network and build network effects.

Foreword: Open source (Open Source) is a concept proposed on February 3, 1998. It is open source code and software that can be freely distributed under an open source license. The so-called free communication refers to free distribution, free copy, free modification, free use. Different open source licenses stipulate that different open source software has different degrees of freedom. Free software (Free Software) has the greatest degree of freedom. Open source software has a business model, while free software has no business model.

"Many entrepreneurs and investors believe that crypto projects cannot gain value because they are based on open source code. It is normal to have such an idea. After all, open source code can be easily copied by your users and your users and other potential income Diversion-From this perspective, open source does not seem to be business friendly.

But in reality, the business model of the encrypted network is indeed sustainable. For those who are well versed in the Web 2.0 platform, they will soon understand the encrypted network model. Like many platform-based companies, encryption projects attempt to create "defense" through network effects, thereby generating a fee stream and ensuring that users will not switch to other competing services.

What makes cryptocurrencies different?

I think that in fact, the biggest potential of the encryption project is to be able to further expand on the framework we are familiar with. The biggest innovation of the encrypted network is that users can share the value created by themselves. At this time, the encrypted network itself also has the ability to enhance the network effect.

Network influence, switching costs, and defense

In fact, it is easy to cause misunderstandings about encryption and value acquisition. Software companies that use open source code have generated trillions of dollars in revenue, but in the community that builds open source code, there is no direct way to get most of the value.

Why can't the old-school open source community make a profit?

The reason is that copying open source code is easy, but building services around open source code and forming a network is not easy. The open source library is an empty blueprint. The code is "dead". To make the code "live", you need to run it as an actual use case, and inject data and / or users into it, thus eventually forming a network or a kind of network. service.

Many Internet platforms are built using open source libraries, which are run by enterprises and provide users with practical use cases and services. For each new database entry, or each new user, services based on open source libraries become more valuable, which can produce network effects. At this time, if the user wants to switch to a new competitive service, there will be a certain inherent cost. Since competitors often have a hard time to break through this conversion cost, the network effect actually provides a "defense" for the service.

Imagine if you copied Facebook, but there was no friend on it; Uber was copied, but there was no driver on it. This can also explain why big platforms will become bigger and bigger, and competitors will be more and more in trouble.

Once the "defense" is determined through network effects, the conversion cost becomes the basis for companies to charge users, advertisers, or both. As long as the fees charged are lower than the conversion costs of alternative products, this model is feasible.

Forking cannot eliminate switching costs

Similar to the Web 2.0 platform, a well-designed encrypted network is actually a service that runs in real time. They can also form a powerful network effect and turn it into a basis for generating conversion costs. Since encrypted networks rely on open source code, encrypted networks can be copied (or forked) more easily. However, despite the low cost of copying open source code (which may sometimes be free), you need to coordinate all network participants and allow them to move to a new, forked network, and the resulting social costs are usually relatively high . Not only that, you also need to strengthen brand promotion, make people familiar with and trust the new network, plus the lindy effect (lindy effect) and smart contract integration. This is actually the reason why existing services can be consolidated, and it is also the secret to building network effects and generating conversion costs.

Translated into vernacular: it means that for something that will die on its own, the expected value of the remaining time will decrease for each additional day; and for the thing that does not die by itself, the remaining time for each additional day The expected value of will increase.

The network effect of Bitcoin stems from the fact that more and more people believe that it is a value store, which incentivizes miners to protect the network security; the network effect of Ethereum comes from developers who deploy applications-every developer can use Ether As a building block of products, other developers can also build higher-order services based on Ethereum, thereby promoting the growth of Ethereum usage and the demand for ETH tokens.

At the application level, the automated token exchange Uniswap is becoming more and more useful for every new user. There is additional liquidity in the market that can bring better transaction prices; Compound is a currency used for lending business Market agreements can provide loans with more competitive interest rates as borrowing liquidity increases.

As far as the above two examples are concerned, if the original network is to be forked, it is equivalent from a technical point of view, but the newly forked network in function may be difficult to match the original network. Taking Compound as an example, the new fork network will have lower liquidity, so it will not be able to provide more attractive interest rates. For the same reason, Uniswap's forked network cannot provide users with better transaction prices. After Bitcoin is forked, people usually don't think of the forked cryptocurrency as a store of value or a medium of exchange, so it's unlikely to gain value.

This is the same as the basic principle of "defense" of the traditional Web 2.0 platform, namely: attracting users, establishing network effects, and improving defense by generating conversion costs. For cryptocurrency platforms, the conversion cost is the basis for margin withdrawal, which usually exists in the form of fees:

As long as a service keeps the "extractability" at a minimum level-that is, the fee charged to users is lower than the conversion cost, then this model is feasible.

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

Differentiating factors: the value distribution capability of cryptocurrencies

 

Cryptocurrency is an innovation similar to data packets.

Now we can move value bits by moving information bits: using an open standard, with a very elaborate transmission method, value can be transmitted to anyone anywhere in the world-this means that encryption services that can transmit value are now It has a unique opportunity to distribute value directly to users of production value.

If the cost flow can be properly designed, the value distribution will also become more effective, and encryption projects can provide users with direct incentives to encourage everyone to contribute and enhance network resilience, thereby further strengthening the network effect. In turn, this approach will also enhance the cost flow's own viability and form a virtuous circle. Based on the economic model of cooperation, this virtuous cycle also enables sustainable, simultaneous growth of the network size and defense capabilities owned by users.

From a scale perspective, encrypted networks like Bitcoin and Ethereum have actually become a platform based on community ownership and community operation. But with the right tools, others can create similar networks, and they can distribute economic value through the network, build network effects, and generate value for themselves, investors, and user communities.

Creating an economic cooperation model with users is the main feature of the encryption product experience. For the founder of the encryption project, it can actually unlock a larger, more competitive and defensive network and achieve more innovations-but please do not Forget, all this is due to the open source foundation of the encryption industry. "

Original by: Jesse Walden

https://a16z.com/2020/04/08/crypto-network-effects/

Tip: Qiangan believes that open source is a future trend. Good open source and usage methods will empower people. The creativity of more blockchain companies will be placed on the level of service and business expansion, but I think the underlying innovation is still The prospects are unlimited.