Zee Prime Capital How to find the hook to dominate the cryptocurrency market as a new project founder

Zee Prime Capital Unleashing the Power of Cryptocurrency - A Guide for New Project Founders to Stand Out in the Competitive Market

Author: Rapolas, Zee Prime Capital Translation: LianGuaixiaozou

For a founder, there is nothing more damaging than presenting a slide deck with unlimited TAM (Total Addressable Market) potential. Any founder claiming their TAM is “everyone on the internet” or “all smartphone users” doesn’t truly understand their target market.

Every market is made up of more granular markets; if you’re leading an early-stage startup, chances are you identified the niche market your product serves on day one. That’s why we say creating a product that appeals to everyone actually appeals to no one.

Every successful product either benefits from a novel idea or executes a proven idea in a unique way, so most users don’t notice at first.

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Capturing just 1% of a $1 trillion market (which no one has done yet) is a tantalizing $100 billion target, but without a unique value proposition within the submarkets of that massive market, it’s like trying to catch a flight that’s already taken off. You need to find a smaller plane (or a jetpack) – your own wedge.

1. The Wedge of Blockchain

Cryptocurrency (or blockchain), as we know it today, started with the Bitcoin whitepaper. It was a protest against the current banking and monetary system. A decentralized peer-to-peer payment system was an elegant solution to a very specific problem.

Bitcoin has validated its initial payment purpose, but its underlying blockchain technology has sparked a range of broader ideas. If the original whitepaper proposed publishing financial primitives, social networks, games, and art on the blockchain, it wouldn’t have made any progress. The concept of blockchain alone would raise doubts; using blockchain to solve every imaginable problem would raise the bar to unimaginable heights.

If you look at the successful chain applications that have grown and survived to this day, you’ll find they all started by addressing a small problem (or problems that didn’t even seem like problems) that were important to a small group of users. Few people can identify the problems they encounter and come up with a specific solution (otherwise, those problems would have been solved already).

Of course, the mystery lies in how and why these problems transitioned from being relevant to a few people to being relevant to many. In some cases, a remarkable product identifies the problem consumers need solving. You couldn’t imagine driving around everywhere until you saw a car (then your problem becomes How do I buy a car?), or experiencing the perfect use of a touchscreen phone until you actually got one.

This is why building companies (and investing in them) can be so chaotic and often inspired by science fiction. It’s all about navigating through obstacles and betting on a specific outcome based on the founder’s intuition. Without that intuition, people resort to solving abstract problems for a large group of individuals who have very little in common.

Uniswap handles nearly $1 billion in daily trading volume, and it’s rightfully seen as a competitor to centralized exchanges. However, it’s not actually a high-quality trading product. If its claim is to be “trading, but on-chain,” it wouldn’t have succeeded.

The wedge of Uniswap V1 was supporting the launch of liquidity (and trading) for long-tail tokens without permission, something that market makers and centralized exchanges couldn’t offer but was needed by industry founders. Even the term “launching liquidity” is now primarily associated with Uniswap, just like “Google” has become synonymous with search.

Once this wedge issue is resolved and an on-chain usage pattern is established, Uniswap can capture adjacent markets typically transacted on centralized exchanges (like ETH) and solidify its success by maximizing the flaws of the Automated Market Maker (AMM), such as by offering centralized liquidity.

So, it’s not about creating a perfect product for everyone, but rather focusing on solving someone’s problem (or highlighting a problem, as mentioned earlier), and then using that momentum to expand into adjacent areas during product iterations. Now, in 2023, Uniswap’s trading volume has surpassed Coinbase:

While the competition between Blur and Opensea isn’t a hot topic right now, we believe Blur is excelling in two areas that will help them break into the Opensea-dominated market:

· The NFT investor market is not unified. There is a clear distinction between collectors (passive holders accepting illiquidity and fees) and traders (active participants seeking higher liquidity and lower fees). Opensea caters to the former at the expense of the latter, creating an intrinsic conflict between the two;

· Existing participants aren’t leveraging tokens, which is a more native crypto characteristic than anything else.

If Opensea’s target users are artists and collectors, then trading volume may not be the perfect or sole metric to measure market success. However, if Blur’s target users are traders, then trading volume becomes more crucial as it relies on available liquidity. And this is precisely what Blur achieves through token incentives for market-making (placing bids and asks).

Although some people criticize Blur for primarily serving a small group of advanced users – 500 whale users – it is not necessarily a bad thing if these whales are trendsetters. In fact, developing games for a small number of people who truly care about games can validate product ideas, facilitate quick releases, and achieve outstanding marketing results.

With Blur already having the deepest market liquidity, it becomes possible to launch a neighboring but highly relevant product – Blur Lend or Blend – which is a lending market that uses NFTs as collateral.

2. Small markets discover big markets

The above case illustrates how successful companies create their own monopoly markets. They avoid competition by inserting themselves into a niche. Uniswap does not compete with Binance in the same dimension; Blur does not compete with Opensea for the same users; blockchain does not compete with the “internet” or traditional financial institutions – blockchain is self-contained and has unique properties.

Blake Masters further explains this concept in a broader sense:

“The common refrain is that capitalism and perfect competition are synonymous. There is no monopoly. Because companies compete with each other, profits are competed away. But this is odd. A better way to put it is to set capitalism in opposition to perfect competition; capitalism is about capital accumulation, while a world of perfect competition is a world where you can’t make money.”

Paradoxically, in a world of perfect competition, companies start with broad business scopes but immediately narrow down their target markets in pursuit of differentiation. However, if they don’t participate in the realm of perfect competition and instead start from their own (small) market, they will only encounter growth, not contraction.

“Therefore, the best companies are the ones that can tell a compelling future story. These stories can be different, but their form is the same: find a small target market, become the best service in that market in the world, occupy adjacent markets, expand your business scope, and then occupy more and more markets.”

When observing large markets, people often focus on the middle to late stages of the growth cycle, where momentum itself leads to growth and success becomes evident. However, success is only apparent in hindsight, and people cannot appreciate the insight required to go from a small product or service to a market worth billions of dollars.

Newton laid the foundation for classical mechanics, a branch of physics that studies the motion of objects and the forces acting upon them, which is fundamental to all engineering disciplines. But to become a successful engineer, one needs more than just an understanding of classical mechanics – they need to master the secrets of the traditional, well-known field of mechanics.

This is why every successful founder can avoid competition; however, this does not require objective knowledge because it is not their advantage. The company’s understanding of competition is like an engineer’s understanding of Newton’s laws of motion.

Intuitively, we think that every major brand today started from a small wedge:

· Facebook initially specialized in serving Harvard students and later opened up to other universities, high schools, and the general public;

· The listing of LinkedIn relied mainly on employees in the tech industry, which helped it solve the cold-start problem (it’s not a bad thing that tech became popular);

· Nvidia served the gaming industry with its hardware before expanding into data center training models, and thus the CUDA software computing platform was established;

· Google’s unique insight comes from the PageRank algorithm, which delivers higher-quality search results compared to other engines. This ultimately brought not only the most profitable advertising business but also Google Cloud, hardware business, and more;

· Porsche was originally a sports car company, but now it mainly sells SUVs. Since the late 1990s, the production of sporty 911 and Boxster models has not increased significantly.

All these businesses eventually expanded the market size and captured adjacent markets that initially seemed out of reach (advertising, hardware, cloud computing, etc.). But no company illustrates the power of this wedge better than Amazon.

Among all the sellable product categories, Amazon chose books as the perfect category for an online retailer with over 3 million products, while the selection in physical stores is limited to below 100,000 products. In other words, this is a good category that proves the assumption that retail shopping will shift from physical stores to online. Amazon then purchased inventory from several book distributors to fulfill orders.

The existing customer traffic was used to launch other product categories and introduce third-party sellers, further expanding the supply. This is the Amazon marketplace we know today, but it originated from a single category (books) and a transaction model with low scalability (direct sales).

The volume of business Amazon handles required them to establish internal logistics operations – fulfillment centers. Eventually, the logistics and delivery business was greatly improved to the point where it became the primary shipping company providing logistics services to third-party companies outside the Amazon marketplace. Amazon’s delivery business created a value proposition for retail consumers, which in most cases was superior to existing UPS and DHL. While many logistics startups hoped to disrupt traditional companies, most of them failed because they never had any goods to transport. Amazon, on the other hand, brought their own goods.

With the growth in scale and complexity of Amazon’s e-commerce business, the internal team needed a set of universal infrastructure services and enhanced APIs that everyone could access. Amazon’s rapid growth also prompted the engineering team to strengthen its infrastructure.

It seems that several Amazon teams were simultaneously exploring the idea of AWS. Co-author of the concept of Elastic Compute Cloud (AWS’ first product), Ben Black, wrote:

“Chris (manager) always pushed me to update the infrastructure, especially in driving better abstractions and uniformity, which is crucial for efficient scaling. He wanted a fully IP network instead of Amazon’s then messy VLAN, so we designed and built it, working with developers to make their applications run on the new infrastructure.

Chris and I wrote an article describing the vision for Amazon’s infrastructure, which is fully standardized, fully automated, and heavily reliant on web services to achieve storage and other related functions. … In the end of the article, we mentioned the possibility of selling virtual servers as a service.”

The initial internal project eventually led to AWS and a whole new market – cloud services. In 2022, annual spending on cloud services reached $500 billion. However, when AWS was launched in 2006, Amazon employees did not fully grasp its potential; it was their own market, with too many unknowns to quantify.

3. Conclusion

There is no one-size-fits-all approach to finding and executing great ideas. We’re unsure whether secrets are created or discovered, whether your product should address someone’s problem or “create” a problem for someone, and whether the first-mover advantage is more important than the late-mover advantage.

But one thing is clear – success requires progress, and progress is achieved in sequence (although sometimes unexpectedly), with major discoveries preceding the smaller ones. A Wedge is crucial for finding the right users for the right product (product-market fit); a Wedge is not casting the widest net possible, but rather allowing product ideas to be tested with the interested users.

We have seen through countless examples (both in the web2 and crypto domains) that the success stories founders aspire to start from tiny, obscure ideas. Founders cannot predict path dependence on day one; they cannot see all the adjacent markets on the distant horizon in the beginning. It is the “proximate possible” that enables companies to identify and merge new markets during the evolution process.

We hope to see crypto founders start using the Wedge as their default catchphrase from now on (just like they used “super app” this year).

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