Ali Yahya: Crypto Business Models

Andreessen Horowitz crypto partner Ali Yahya discusses “Crypto Business Models.” Yahya explains that the consensus mechanisms of blockchains create trust among independent participants in decentralized networks. At first glance, this may seem at odds with the idea of capturing value, since none of the factors that allow companies to build moats in traditional industries — trade secrets, intellectual property, or control of a scarce resource — apply in crypto. This leads to the “value-capture paradox” — how can easy-to-replicate, open-source code be defensible in a competitive landscape? The answer is that network effects are just as powerful, if not more so, in crypto than in traditional industries. This is due to the economic flywheel enabled by tokens, which incentivize participants and coordinate all economic activities in crypto networks. Combined with the ability of developers to build on each others’ networks using autonomously executing smart contracts, this should result in winner-take-all dynamics, contrary to what might seem intuitive in open source, Yahya says.

Andreessen Horowitz’s Crypto Startup School brought together 45 participants from around the U.S. and overseas in a seven-week course to learn how to build crypto companies. Andreessen Horowitz is partnering with TechCrunch to release the online version of the course over the next few weeks.

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[Music] All right well thank you everyone for Joining my name is Allie Yehia I’m a partner here on the investment Team I work on the on the crypto team I Don’t resent Horowitz and before in Recent horowitz I spent some time at Google I was there for three years two Years was at Google X and then one year At Google brain and I worked on Distributed systems for large scale Machine learning workloads before that I Was a founder of a company called Athena In online education and before that I Was at Stanford studying and doing Research at the intersection of computer Security computer networking and Distributed systems so I’ll offer on Topics and today I want to talk to you About the business models at the heart Of crypto and how to defensively capture Value in a sustainable manner at Equilibrium but before that I’d like to Just recap some of what we’ve already Covered in the course before blockchains Are computers they are computers in the Sense that a network of participants Comes together in via a consensus Algorithm form something that looks very Much like a computer to a developer and We’re going to talk a little bit about The kinds of applications that can be Built on top of these kinds of computers Because they tend to be very different

Than the kinds of applications that that Normally are written for traditional Computational paradigms but before that I’d like to first take a walk up the Stack and start bottom up because Watches are not just computers they are Also entire ecosystems so let’s start From the very bottom in order for Anything to happen we first need Computational hardware so that is the Hardware layer which we call layer zero Which includes like miners and Validators which I’m sure it’s something You’re familiar with with the previous Previous lectures that we’ve already Gone through and it includes some of the Peer-to-peer network networking Protocols that allow the participants at That layer to be able to communicate With one another And and eventually come to an Agreed-upon state for what the network For weather network looks like and That’s where the consensus layer comes In all these people all of the Participants at the hardware layer Communicate via peer-to-peer networking Algorithms and need to come to agreement About what the truth is about the Network that is what is the state of This blockchain computer that they’re Working towards maintaining and that for Example could be like how much Cryptocurrency any one participant in

The network has or it could be like how Many crypto kiddies this person has Bridge to that that person or like Whatever other kind of crypto Collectible or crypto good the Blockchain computer is tracking and so Once all of these participants are able To come to agreement about what the State is they have to be able to compute On top of that state in a way that is Verifiable in a way that is guaranteed By the game theoretical mechanics of the Of the network to be correct and that’s Where the compute layer comes in and It’s worth noting both of these two Layers the consensus layer and the Compute layer tend to be bundled Together almost almost always in almost Every system so both of those together Tend to be known as layer one and these Three layers together layer 0 layer 1 And layer 1.5 combine to make a complete Blockchain computer so on top of it Developers can actually deploy programs That they write and have the computer Run run those programs there are various Different challenges at each level and As you would expect there are multiple Startups that have been started to Address the various challenges at each Subsequent level so for example at the Hardware layer the the key challenges Tend to be challenges of provisioning Computational resources of ensuring that

There is bandwidth and connectivity Between the various different nodes in The network and of managing and Operating large-scale data centers the Key challenges at the lover level above The consensus layer have to do with Making sure that there really is only One true version of the state of the Computer at any point in time and that No one is subverting the truth that that Everyone can agree upon the key Challenges at layer 1.5 To do with making sure that the Computations are executed correctly and That no one sneaks in some some Computation that that happens to steal Like some cryptocurrency from one user Or another so those three layers give You a blockchain computer then on top of That we have layer two which consists it Essentially you can think of layer two As a kind of substrate for as a Computational substrate for the programs That developers write that run on the Blockchain computer and those programs Are known as smart contracts and smart Contracts or the fundamental building Block for everything that ever gets Built on top of a blockchain and then Finally we’ve got layer three the user Interface which is really just made up Of like the code that runs on your Mobile phone or the code that runs on Your web browser and it can include

Things like for example your wallet an Exchange or like the the application That you use to interact with like this The smart contract that manages your Crypto kiddies or whatever whatever else You may be doing with with a blockchain It ends up being the bridge that Connects the world of protocols with the World with the world of people now I Like to think of layers 0 and layer 3 as The periphery of crypto and the the Business models at each of these layers Tend to look more like traditional Business models they tend to be they Tend to simply want to maximize revenue In ways that wouldn’t surprise you Nearly as much now of course don’t get Me wrong there’s still crypto adjacent That still have to interact with the World of crypto so they’re still super Weird in the best of in the best Possible way but they are they’re still Less surprising than was at the heart of Crypto layer 1 and layer 2 which is Really what I want to focus on Throughout this presentation now in Particular I want to focus on layer 1 Which is the consensus layer and on Layer 2 without really talking all that Much about the compute layer because Again the compute layer tends to be Bundled bundled in with a consensus Layer and the reason to focus on both of These two layers is because they end up

Being the points of aggregation The stack where most of the value ends Up ends up being captured now one thing That is truly remarkable is that the Business models at both of these layers End up following the same pattern both The business model the core fundamental Value capture mechanism at layer 1 and At layer 2 are both instances of Multi-sided platforms now what is a Multi-sided platform the definition that I like the most is that a multi-sided Platform is a common ground that creates Value by enabling the direct interaction Between multiple participants multiple Different kinds of participants in a Network so that’s an abstract thought so Let’s make it let’s make it a little bit More concrete one example for example Outside completely outside of the world Of Technology a bazaar is a kind of Multi-sided platform because it enables Merchants to interact directly with say Villagers who might want to buy some of The some of their merchandise another Example might be something like lyft Where drivers directly interact via the Common ground that is the lyft app with Writers on the other side operating Systems are a canonical example of Multi-sided platforms like Microsoft Windows or Mac OS 10 or iOS they connect Developers who build apps for those Platforms with the users of those

Platforms who then who then begin to use Those apps so I would argue that the Multi-sided platform is the core Template for value capture and and for For value provided creation and value Capture in in crypto and and the key is That it this applies to both layer 1 and Layer 2 so let’s go through each of Those I start with layer 1 that the Business model at the heart of layer 1 Is them is by and large the most Important business model in crypto and That’s because it makes all of crypto Possible so the the incentive structure That was pioneered by by Bitcoin in 2008 9 and then generalized by aetherium by Making it fully programmable is Ultimately what makes everything else Conceivable and and and possible so That’s let’s dive in into how that model Works I like to call this the layer 1 Flywheel it starts with the founding Team who might come up with an idea or a Vision for a protocol and with the help Of a sort of core team of developers and The help of outside investors who may Provide some financial capital they are Able to build the protocol and bootstrap Some initial token value Now once the token value exists then That creates a powerful incentive for Minors or validators to provide some of Their computational resources and Hardware that actually give the platform

And security in its functionality once The functionality exists then there’s an Incentive for third-party developers to Build useful applications which in turn Actually offer utility to end-users and Eventually as a result a community Begins to form that reinforces the Original the original vision behind the Protocol and around this flywheel we go The stronger the vision for the protocol Is the more the token is is valued in in In kind of the broader market which Results in an even greater incentive for Minors and validators to provide Security and functionality which Encourages developers to build even more Apps and which in turn creates even more Utility for end users and around we go Now the protocol itself is a kind of Common ground that enables the direct Interaction between all of these kinds Of participants the protocol is a Multi-sided platform and it just happens To have five different sides it has the Founding team the investors miners or Validators developers and end users and Because of the of the enforceable rules That everyone can rely on that the Protocol creates they are able to Directly interact and trust and wanna Trust in one another in ways that they Couldn’t if it weren’t if it weren’t There The token of course is the key mechanism

For value capture and there’s a lot of Nuance with how it is that that it Eventually does actually capture value And there’s a hard question that we have To engage with because you you could Even ask why is it that it captures any Value at all given that it’ll be Inevitably a competitive landscape and Everything everything involved in Getting this flywheel started his open Source so it’s a question of how how This becomes defenses defensible and so That that is there’s an apparent paradox That I call it value capture paradox at The heart of this because everything in The stack is open source you could you Would think that if this model works Then it would be straightforward for Anyone to replicate it and copy it and As a result over time commoditize Whatever value is is captured by by the Intrinsic mechanism and we should very Quickly just sort of define what we mean When we say defensibility the Defensibility just refers to the ability To maintain over a period of time a Positive rate of return for for a Business or in this case a network that Doesn’t somehow get competed away by by Other players in the ecosystem and Another way of phrasing it is is what What is it that creates a moat around The value that’s being created at the Heart of the network so historically

Almost all value capture has relied on On one of three things it has been Either a company that has some kind of Secret that they are able to use to Build something that nobody else could We can build it could be some Intellectual property that gives you Like licenses or write our right to to Fees or something like that that’s Enforced by some legal jurisdiction or It has been proprietary control of some Resource that other people don’t have And as a result you also end up with Defense ability and nothing of this sort Exists at the heart of crypto because Everything is open-source and everything Can be so readily copied every line of Code every technical insight is is open And kind of available to the whole to The whole ecosystem So that’s the question of layer one Defensibility and I would I would I Would want to start with a kind of Thought experiment if you take the Example of lyft and if you are like a Loyal customer of lyft or uber or or at Multi-sided platform like that and we’re To imagine that they they were to go off And make everything about their Technology open-source how defensible Would you imagine it would be then you Imagine that would have a significant Impact and whether or not you’re likely To use –lift versus some other platform

And I would wager it actually might have Less less of an impact then then many May think because of course if someone Were to copy the technology and create a Clone you might not readily switch to it Because there’s no drivers there’s there Are no drivers to provide you with a Service on the clone whereas whereas the Existing version of live does does so There’s another force at play which is Called network effects and the Definition of a network effect is the Phenomenon that the value of a network To a new user tends to increase with Respect to the number of users who are Already in the network and so they the Canonical examples this was first Noticed at the dawn of the Telecommunications industry with just Telephone but like a telephone network Where you have a network that has only One user then it’s not very useful Because if there’s no one you can really Call if there are two two people in that Network then a new user joining can now Call two people so it’s a little bit More useful and the more people that are In the network the more valuable the Network becomes to the next marginal User the same applies with social Networks you want to be on the social Network that has the most users as Opposed to ones that that have have Fewer and even currency has a kind of

Network effect because the more people Accept any one form of currency and the More value that currency offers a new Person who might want to transact in it And might want to to hold it or or use It for as a medium of exchange all of Those are examples of same side network Effects There is another kind of network effect Is known as a cross side network effect That um that is also very relevant in The context of multi-sided platforms and The best examples of cross side network Effects would be things like lyft where You have drivers on one side affecting The usability of the platform for riders So like if you have one more right one More driver join a platform like lyft Then the platform becomes more useful Not the drivers but rather to the riders On the other side and the same applies To something like iOS or an operating System where the more developers exist On one side of the platform and they’re More useful the platform becomes two Users on the other side so with all of That context about network effects let’s Go back to our flywheel every connection In this diagram is an example of a cross Side network effect and you can see this As an example like the more financial Capital enters the ecosystem through Outside investors then the more Attractive the network becomes to minors

And validators because now there’s a Greater token value incentive for them To provide production capital the same If if a developer joins over here on the Bottom left corner then the network Becomes more useful to users because now There’s another application that maybe That developer built that can now be Cannot be leveraged by that user but There are other kinds of network effects As well as we talked about same side Network effects apply here as well and There’s a difference here between Between what crypto offers and what some Of the other examples that we’ve talked About like for example operating systems Offer and that is that applications that Run on top of a generally generally Programmable blockchain are able to Interact with one another so this is the Notion that that smart contracts are Composable with one another it is Seamless and straightforward inserting Blockchains For one smart contract to interoperate With the the other smart contracts that Are already deployed to that platform And so that creates the same side Network effect for third-party Developers who are choosing one Blockchain over another to the to build To build on top of and you you might Want to build on the blockchain that Already has the most important projects

In the ecosystem that has maybe maker And compound and unit swap all of all of Which are currently on aetherium rather Than building on a newcomer that might Not not have that kind of kind of Traction and kind of available Applications to leverage similarly users Also have a same side network effect Because as a user you you also want to Be on the platform on which all of your Friends are on which all the all of the Other interesting engagements are Happening and then there are other Forces as well aside from network Effects that create defensibility Like economies of scale which miners and Validators benefit from as they build Tooling and specialized to sort of Service one particular network over Another and all of the while all the While as this is happening every Component of this gets integrated into Into the ecosystem so you can imagine The token becomes integrated into Wallets and exchanges useful Applications get integrated into like a User interfaces that people use to Interact with everything into browsers And to and so just generally the entire Ecosystem that that the Internet is and And that crypto is becoming a part of And as a result the token value becomes Embedded into the fabric of this broader Ecosystem in a way that is not readily

It’s not readily display scible you Can’t you can’t just readily copy the Technology and take with you the entire Ecosystem that is built around around The token so the the fact that you’ve Got you’ve got these virtuous feedback Loops these network effects the fact That you get defensibility from Integration between a protocol which is Driven economically by the It’s heart and everything else outside Of it tends to result in winner-take-all Dynamics which is the opposite of what You might think given that everything’s Open source and copyable and and as this Happens The winning networks end up having end Up creating a kind of inescapable Gravity well such that you kind of end Up having to join the network that’s Winning as opposed to start a new one or Join join a new one just because the Network effects are so powerful it’s Just very hard to get bootstrapped Elsewhere and as a result the token ends Up kind of kind of taking on this kind Of monetary premium as the form of money That coordinates all economic activity Within the network and as the kind of Store of value and medium of exchange That all of the participants in that Network end up relying on So that was layer one and let’s be let’s Briefly summarize the business model for

Layer one and how value capture happens Layer one protocols are multi-sided Platforms and their defense ability Comes from serving as a kind of common Ground that allows for the 5 different Kind of participants in a layer 1 Ecosystem to interact with one another Directly and to be able to trust in Those interactions such that you end up With this ecosystem that is a blockchain Emerging now before we move on to layer 2 we first have to clarify what is Unique and special about the programs That run on top of layer 1 ball chains So remember that layer 1 block chains Are almost by definition owned and Controlled by a broad and representative Community that is what people mean when They say that they are decentralized and As a result of this property because no One controls them the programs that run On top of them also have a kind of Sovereignty they they obediently execute Themselves immune from the interference Of really really anyone and that Includes the people who originally wrote Them it includes the people who control The physical machine That actually execute their logic and it Includes the people who interact with Those programs while they run and so They have their kind of autonomous Entities that just run out in the world Once they’re deployed by their creators

And those are smart contracts now if you Think about it one very useful thing That you can do with such a building Block is create a kind of common ground That enables the interaction of the Direct interaction between between Different kinds of participants so this This sounds a lot like the business Model for layer one and it happens to Also be the business model for layer two In that smart contracts that the killer Application for a smart contract is also A multi-sided platform in that smart Contracts are able to get people to Trust in one another to be able to Interact with one another in ways that They previously couldn’t because they Because of their sovereignty they’re Able to kind of create this kind of Common ground with enforceable rules That everyone can trust in and so it’s Kind of meta in that smart contracts are Multi-sided platforms that then that Themselves are built on top of layer one Block chains which also are multi-sided Platforms to make this concrete let’s go Through a couple of examples so maker One of the most important projects in The space runs on top of aetherium it’s A multi-sided platform between five Different kinds of participants there Are really two halves to it on one half Maker is a kind of lending platform and There are two sides to the lending

Platform there are the lenders on the Supply side and then there are the Borrowers on the on the demand side but Maker as a result of having this Platform exists also produces on the Side this price table cryptocurrency Called die which has its own kind of set Of use cases and it’s an is it o is its Own kind of side of the market then Additionally there are what are known as Keepers which are kind of the guardians Of the network and that makes sure That in the network is financially sound And then finally there are the holders Of the maker governance token which Serves as both a mechanism for making Sure that all of the parameters of the System are sound and that and that like The risk is being managed properly so They have a governance function but it’s Also a vector for financial capital to Come in to to come in to the network So as one example will cover a number of These fairly quickly and recommend I Recommend that you can go and read read More about about each of these and we’ll Dive deep into one of them at the at the End of the other three examples that I Have Eunice WAP is another another case Where it’s a smart contract again Running on top of etherium and it’s a Three-sided market and that you have on One side the buyers who are trading on This decentralized exchange on the other

Side you’ve got the sellers and then Finally you’ve got the liquidity Providers who who essentially need to be There So that buyers and sellers can match With one another and they have a Different set of incentives namely to Gather fees for their participation and Compound the one that will have a little Bit more in tune is a decentralized Money market you can also think of it as A kind of lending platform that that is Also a smart contract running on Aetherium to which any lender can lend Out crypto assets into and then on the Other side the contract can lend out Some of those assets to borrowers who in Return for that loan pay pay an interest Pay an interest rate again like maker You’ve got keepers who keep the network Safe and make sure that that that loans That are not that whose risk parameters Are not desirable or can liquidate it in Time and so that this way the entire System stays stay sound and you also Have the governance token holders which Similarly end up providing governance Providing a stewardship over the system And also it’s a factor for financial Capital to enter to enter the system so Let’s dive a a little bit more into into Compound kind of as I already mentioned You have on one side lenders who provide The

Into this the compound smart contract And in return for those deposits get a Kind of get a kind of claim token that They’re able to use to redeem their Deposits if they want to ever withdraw Then on the other side of the market You’ve got borrowers who can borrow from That capital from the pool of capital The contract mat manages by first Providing some collateral into the Contract and then taking out a loan Whenever it is that borrowers pay Interest for the loans that they take The lion’s share of that interest Payment goes to the depositors who Originally deposited assets in the Contract and some share of that interest Payment goes back to the to the Governance token holders who originally Potentially were investors early on and Provided financial capital to the system So they were the stake holders of the System and this this is started to Become the kind of playbook and template For business models on layer 2 and we Kind of see this across various Different examples where you end up if You if you just go up a layer a layer of Abstraction you end up with a smart Contract at the center you have a supply Side on one side there’s demand set on The other side the supply side provides Some service the demand side pays for That service and some share of the

Payment then gets captured by the Governance token holders all in a way That’s entirely automatic with a Contract just just divides up the the Fee that’s being paid in and distributes In many there are many ways by which the District distribution happens but it it Ends up being distributed to governance Token holders there’s the question of Given given this how how this is Defensible is the same question that we Were asking for layer one because it is True that the smart contract is entirely Open source it can be readily copied by Anyone and you would think given that There’s a fee that’s being charged by The governance token holders it would be Trivial for someone to take the smart Contract copy it replicate it and then Remove the fee or maybe that make maybe Make the fee smaller so then there’s a Question what what stops that from Happening and that brings us to to kind Of like the question of the Ability for layer two in the answer Again ends up being network effects Though for layer two the kinds of Network effects that emerged into vary Widely between different different Projects and that’s because the design Space is very big and only only the the The projects that are designed with Network effects in mind end up kind of Benefiting from them so for example we

Look at compound there is a kind of Virtuous feedback loop between the Lenders on compound and the borrowers on The other side because as activity Converges on the compound smart contract The assets that are inside of the Protocol increase which results in Better interest rates for borrowers and Better and more stable interest rates For lenders on the other side and Therefore just a better experience Generally for all participants in the Market so this virtuous feedback loop Makes compound a more useful platform to Participate in than say that the the Clone that has no assets inside of the Protocol and has no liquidity and Therefore has very unstable interest Rates and has other kind of risks Associated with it You wouldn’t you wouldn’t want to go to That version instead of the kind of Canonical version and then in the same Way when this will this graph you kind Of illustrates that point that on the X-axis as as the assets inside of the Protocol increase the cost and risk for Users decreases and therefore the Defense ability increases making the Value of compound the protocol itself More valuable to the marginal kind of Next user and then well and well this Here is is a is like a quick exercise to Think about in your own time so if we if

We take we accept this premise that the Usefulness of the contract increases as The amount of capital inside of the Protocol increases then it’s a Worthwhile exercise to think through What happens if for certain projects the Capital inside of the contracts for that Project Happens to be fragmented across various Different projects or say maybe it is it Is not fragmented and it’s a single pool Of capital What is it the distribution of the Assets that are inside of the contract Looked like across users how does that Change the defense ability of the system Or you can also think about like the Rates of churn of the amount of capital That’s that’s inside of the system how Quickly is a cycle in and out and how Does that influence the defense ability Of the system but the the uptake is that Layered to smart contracts are Themselves also multi-sided platforms And they gain defense ability from the Network effects that they build into Their mechanisms and also from getting Integrated into the ecosystems around Them in the same way that a layer 1 Block chains do it’s layer 1 block Chains again there are a multi-sided Platform on top of which smart contracts Run and the final kind of takeaway here Is that the core business model in

Crypto is that of the multi-sided Platform and a defense ability is Offered ultimately by network effects so Thank you and I’ll take any any Questions thanks Howie that was awesome All right so we’ve got questions in the Slack and first one is from Paul and the Question is is there enough empirical Evidence to conclude that most of the Value is captured at layer 1 and layer 2 Yet that’s been the case for Bitcoin Versus coinbase so far but that may not Always be the case for instance forking Of smart contracts might mean that a Equilibrium they end up extracting no Rent that’s right I think that’s a great It’s a great question I don’t think you Can decisively conclude that in the end All value will be captured at or most Value will be captured at the protocol Level as opposed to the edges but I Think there are various arguments that You can make that that really suggests That that’s the direction that things Would head one of them is I think for Layer 1 is simply the fact that in order For any of this to exist the token has To capture some value in order for the Security of the network to to kind of be There And so like there’s like a kind of an Argument that you can make by like an Order for krypter to succeed and Generally that like some of the value

Has to be captured at the protocol level At layer one another argument I think is Is the fact that you do have this is Kind of the strong Network effects that Ultimately bacon the one protocol into Into the entire ecosystem and there’s Really like no choice but to interact With the one token that that drives all Economic value within within that that Particular ecosystem I think that it is An interesting question to think about The balance of power between smart Contracts at layer two and interfaces That exist on top of them it is Conceivable that if one company ends up Controlling most of the end users via Their interface likes a coin base or an Interface that’s built on top of Compound and so on it’s conceivable that They would have a lot of power and They’d be able to kind of redirect People from one smart contract over to Another if they’re able to bootstrap Like the the network effects for that Kind of alternative smart contract and I Think it is kind of an open question Like what what that balance of power Looks like but the forces at play are Undeniable the fact that they’re there Exists strong network effects if these Things get momentum that should become Ever more difficult to displace both Because the service quality increases But also because of the integrations

That exist with everything else um so I Think they’re still open questions but But like I think there are strong Arguments you can make for for defense Ability at the protocol of them great Okay next question from Abhishek do you Do you see having traction on momentum In a protocol or product as a necessary Attribute to capitalize on network Effect driven businesses or how Important are speed and velocity and Gaining traction when not having a Traditional defensible mode well I think That because because network effects and I think this is general this applies Generally to multi-sided platforms as a Whole as a kind of business model Because of the the powerful forces that Network effects create they there tend To be winner-take-all dynamics and so And it is kind of a runaway nonlinear Effect and therefore speed early on To be able to start writing that super Linear like quadratic and in some cases Exponential curve is extremely important In order to to kind of get to escape Velocity after which it becomes very Difficult for any for any competitor to Kind of this place you so I would say I Mean it’s it’s kind of a paramount Importance to move quickly and it may be That that kind of the incumbents or the The block chains that exist already as a Result just have like an unassailable

Kind of position of power that might Only be displace about by like an order Of magnitude improvement in in quality Or in like performance or whatever other Metrics people might care about So how significant is the brand of a Layer 2 protocol in regards to Defensibility each of the mentioned Projects have significant brand effects So one thing to keep in mind is that Because layer two is so diverse This might depend between different Projects mm-hmm and they go to market Strategy for a layer 2 protocol might Also vary so certain go to certain Projects might have a go to market Strategy that targets and users more Directly than others and then for those For those protocols it would make sense That the brand would be more important Than for those whose go to market Strategy is strictly to go after Developers for whom the brand the brand Matters but it matters for different Reasons it matters because developers Might care about how the project is Perceived and what what the what they Believe to be true about the project Matters to developers and so I think it Kind of varies widely but ultimately What you want is for the protocol that You build to become like the the Canonical contract that everybody who Needs the functionality that it offers

Ends up leveraging whether it be any Users who kind of directly use the smart Contract through some very lightweight Interface or whether it be like a Developer who built another smart Contract alongside it that composes with It and builds a more complex thing and Ultimately the end user comes later but The developer who chose to build on top Of your smart contract in a sense is Making your contract defensible and Therefore you kind of have to cater to That kind of that kind of person right And when the brand is kind of like a Showing point right exactly exactly like Which which contract do people choose to Use is is ultimately it’s ultimately the Hybrid that’s What matters what matters most and there Are many things that might might cause People to choose one contractor or not Over another brand being a very Important one right okay cool Next question from guide can you explain Why the fad protocols thesis failed in Web 1.0 and web 2.0 and highlight the Differences for web 3.0 for example why Has no value accrued to IP even though It’s a thin waste of the Internet Yeah well the key reason is that IP and The other core protocols of the Internet Have no mechanism for value capture they Literally are just open source code well Open source specifications that then a

Bunch of people also implemented and the Code bases are also open source that Provide extremely useful functionality And they just act as standards it’s like It’s like asking why is it that like the The socket standard for connecting your Laptop why is that that standard even Though has gained enormous adoption Throughout the world capture doesn’t Capture really very much value like the Standard itself doesn’t capture any Value maybe the people who build the Sockets and sell them capture some value Though also probably not very much so It’s a massively successful standard has Contributed enormous value IP has and Because of the lack of a of a value Capture mechanism there’s just no way by Which it could capture any value and I Think if you think of the flywheel the The flywheel that we talked about with Four layer one the one piece that’s Missing is the token right you can Imagine everything else about the Flywheel works for IP like you have the Initial visionary with Vint Cerf and Bob Kahn coming up with the ideas behind TCP And a whole community of people who were Talking about computer networking back Then that kind of reinforcing some of The people who actually provided that Networking hardware that needed to they Needed to exist in order for this to be A reality which in turn started to

Create an ecosystem for people to build Applications including things like Browsers like Netscape or eventually Things like like websites that end-users Could then access and then that kind of Reinforced tcp/ip as the canonical Standard that everybody should integrate So I think I mean tcp/ip managed to Create this economic flywheel between The supply side which are the People who provide the networking Hardware and infrastructure and in the Man’s side were the people who actually Kind of want to connect and and use the Internet which which was very powerful It just kind of lacked a direct Native-like asset that would capture any Any of that value itself one thing I’d Add to this is the concept of state Right so a lot of the you know IP Protocols and most of the web 1 and 2 Protocols were stateless protocol it’s Right right and so as a result you Needed companies to maintain State and Those companies captured a lot of value Bought chains are stateful protocols and So that that’s another key difference to Completely I think that a yeah the fact That the fact that one blockchain has Specific state makes it distinct from Other block chains who maybe have the Exact same technology but our part are Separate so that that creates ok it Creates a an unbreakable link between

The people who interact with that one Particular blockchain because of the State that’s there and the token value And that’s what kind of makes makes it To go hand-in-hand and and are not kind Of readily separable because if it were Separable then you would have the Problem that people would just copy the Technology again and again to the point At which all prophets or all effective Rate of return would be driven to zero As as you end up kind of with with many Of these kind of all doing the same Thing right Ok great so next one from Paul with Credit cards in web 2 you can charge the Business of fee rather than the user Making the purchase so even though this Is sort of in a more zoomed out sense Somewhat equivalent in web 3 for smart Contract business models would it ever Make sense to take a fee for Transactions on the supply side rather Than the demand side yeah absolutely I Think one thing that’s powerful about a Generally programmable blockchain that Acts as a kind of application platform Is that you do have the entire design Space that you’re disposable and it Could be that the right architecture is For the user to not have to worry about Paying the fees it could be that like You want an advertiser in the loop Want to connect a user to sell my

Content and not have them to care not Have them care at all about kind of the Underlying payment that’s happening and Have someone else for the bill and all Of these architectures are possible you Can you can kind of figure out they like In the case of aetherium there’s this Concept of a meta transaction which Allows you to defer the payment and have It be be kind of taken taken up by Someone else so I think that it’s very Early and the design space is only Really we’ve only really started to Explore it and I’m sure there will be Cases where it would absolutely make Sense for kind of the supply side or Some third party to actually cover that The fees involved is supposed to be kind Of the end user yeah one one sort of Idea I always come back to here is take A platform like SoundCloud forhead SoundCloud is basically an s3 bucket With a bunch of mp3s with an ad network Layered on top and what’s something like Our we’ve you can imagine hosting mp3s On our weave and an advertiser paying For that hosting such that their ad is Adjacent to the song that you want to Access yes and so that’s I think a good Example where you could have a system a Multi-sided market place where the Advertiser is paying for for hosting of The song and a consumer on the other Side is but you know driving the demand

For that yeah absolutely Was just given how successful the Advertising business model has been in Web 2 it’s just hard to conceive that it Would completely go away given in your Paradigm right people still want to pay For people’s attention and that’ll still Be true I think regardless of kind of What the underlying technology looks Like yeah imagine every mp3 has its own Wallet and anyone can pay you can do a Lot with that yes okay cool so last Question Blake West do you see value Capture also happening for any workers Who happen to have unique data or Proprietary algorithms that can operate On data yeah and I think well that that Kind of is a broader question about the Value that data provides any any Business I think crypto because of its openness Because of the fact that everything’s Visible in the fact that everything’s Open source all transactions can be kind Of viewed by anyone who cares cares to Look presents an opportunity for people Who want to kind of catch A large dataset and people to do Something interesting with it I think That I mean there’s there’s like a long Argument to be had about whether or not Data alone provides really significant Competitive advantages like the common Wisdom is that it does you would say

That a company like Google is very Defensible because of all of the data That it has and it ends up being control Over the people who are part of your Ecosystem and being able to prevent them From exiting which actually provide Provides you the core bit of Defensibility the data about them that Is more case-by-case like sometimes data Provides you with with a network effects Because knowing something about your User allows you to create a better Product for your user which then kind of Makes the product more valuable and Encourages a new user to join and that That could be powerful but it’s often Less less is somewhat overstated and it Might may not provide nearly nearly as Much of a kind of a moat as people as People think great well right on time That’s the end of the QA so thanks very Much for the presentation and great job Thank you [Music] You [Music]

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