Ali Yahya: Crypto Business Models

Transcript

All right. Well, thank you everyone for joining. My name is Ali Yahya. I'm a partner here on the investment team. I work on the on the crypto team at Andreessen Horowitz. And before Andreessen Horowitz, I spent some time at Google. I was there for 3 years. 2 years was at Google X and then 1 year at Google Brain. And I worked on distributed systems for a 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, all all fun 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 and 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 blockchains 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 it's something you're familiar with with the previous the 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 what the 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 CryptoKitties this person has versus 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 and 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 zero, layer one, 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 the various different nodes in the in the network, and of managing and operating large-scale data centers.

The key challenges at the level 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 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 have 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 It's 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 are 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 um it can include things like, for example, your wallet, an exchange, or like the the application that you use to interact with like this this smart contract that manages your CryptoKitties 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 layer zero and layer three as the periphery of crypto. And the the business models at each of these layers tend to look more like traditional business models. Um 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, they're still crypto-adjacent, they still have to interact with the world of crypto, so they're still super weird in the in the best of in the best possible way. Um, but they're they're still less surprising than what's at the heart of crypto, uh, layer one and layer two, which is really what I want to focus on throughout this presentation.

Now um in particular, I I want to focus on layer one, which is a consensus layer, and on layer two, without really talking all that much about, uh, the compute layer, because again, the compute layer tends to be bundled, uh, bundled in with the consensus layer. And the reason to focus on both of these two layers is because, uh, they end up being the points of aggregation along the stack, where most of the value ends up ends up being, uh, 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 one and at layer two, um, 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 the multiple different kinds of participants in a network. And so, that's an abstract thought, so let's make it let's make it a little bit more concrete.

One example, for ex- for like 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. Uh another example might be something like Lyft where drivers directly interact via the common ground that is the Lyft app with riders on the other side. Operating systems are a canonical example of multi-sided uh 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. Um so I would argue that the multi-sided platform is the core template for value capture and and for for value for value creation and value capture in in crypto. And and the key is that it this applies to both layer one and layer two. So let's go through each of those. Let's start with layer one.

Uh the business model at the heart of layer one is the is by 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 and 2009 and then generalized by Ethereum by making it fully programmable is ultimately what makes everything else uh conceivable and and and possible. So let's let's dive in into how that model works. I like to call this the layer one 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 uh and uh 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 miners or validators to provide some of their computational resources and hardware that actually give the platform its security and 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 uh 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 miners 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're able to directly interact and trust in one 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. Um 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 is open source. So, there's a question of how how this becomes defensible. And so, that that is there's a there's an apparent paradox that I call the value capture paradox at the heart of this. Because everything in the stack is open source, um you could you 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 uh commoditize whatever value is is captured by by the intrinsic mechanism.

And we should we should very quickly uh just sort of uh define what we mean when we say defensibility. So, defensibility just refers to uh the ability to maintain over a period of time a positive rate of return uh for for a business or in this case a network that doesn't somehow get competed away by by other players uh in the ecosystem. And 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 um 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 can can build. It could be uh some intellectual property that gives you like licenses or right a 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 defensibility. And nothing of the sort exists uh at the heart of crypto because everything's open source and everything can be so readily copied. Every line of code, every technical insight is is open and kind of available to to the whole to

the whole ecosystem. So, that's the question of layer one defensibility. And I I would I would I would want to start with a a kind of thought experiment. If you take the example of Lyft um and if you were like a a loyal customer of Lyft or Uber or or a a multi-sided platform like that and were 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? Do you imagine that that would have a significant impact in whether or not you're likely to use Lyft versus some other platform?

Um and I would wager it actually might have less less of an impact uh than than many may think because of course uh if someone were to copy the technology and create a clone uh you might not readily switch to it because there are no drivers. There's There are no drivers to to provide you with a service on the clone. Whereas whereas the existing version of Lyft does does. So there is another force at play which uh 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 uh with respect to the number of users who are already in the network. And so the the canonical example this was first

noticed at the dawn of the telecommunications industry with uh just telephone with a with a like a telephone network where if you have a network that has only one user then it's not very useful because there's no one you can really call. Uh 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 there 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 uh ones that that have have fewer.

Um and even currency has a a kind of network effect because the more people accept any one form of currency then 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. It's known as a cross-side network effect. Um that um that is also very relevant in the context of multi-sided uh platforms. And the best examples of cross-side network effects would be things like Lyft where you have drivers on one side uh

affecting the usability of the platform for riders. So, like if you have one more right one more driver join uh a platform like Lyft, then the platform becomes more useful not to 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, then the more useful the platform becomes to 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 uh as an example, like the more uh financial capital enters the ecosystem through outside investors, then the more attractive the network becomes to miners and validators cuz now there's a greater token value um incentive for them to provide production capital. And same if if uh if a developer joins uh over here on the bottom left corner, uh then the network becomes more useful to users cuz now there's another application that maybe that developer built that can now be can now 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 um 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 uh operating systems uh uh offer and that is that uh applications that run on top of a uh generally generally programmable blockchain are able to interact uh with one another. So this is the notion that that uh smart contracts are composable with one another. It is seamless and straightforward in certain blockchains for one smart contract to

interoperate with the with other smart contracts that are already deployed to that platform. And so that creates a same-side network effect for third-party developers who are choosing one blockchain over another to the to to build uh 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 Uniswap all of all of which are currently on Ethereum 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 of the all of the other interesting engagements um are happening. And then there are other forces as well uh aside from network effects that create defensibility like economies of scale uh which miners and validators uh benefit from as they build tooling and uh specialized to 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 the user interfaces that people use to interact with everything into browsers into into just generally the the entire ecosystem that that the internet uh 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 is not readily displaceable. 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. Uh so the the fact that you've got you've got these virtuous um feedback loops, these network effects, the fact that you get defensibility from integration between a protocol which is driven economically by the token at its 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 um as this happens um the the winning networks end up having end up creating a kind of uh inescapable gravity well such that you kind of end up having to join the network that's winning as opposed to um

start a new one or join a join a new one uh just because the network effects are so powerful. It's 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 um 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 let's briefly summarize the business model for layer one and how value capture happens. Layer one uh protocols are multi-sided platforms and their defensibility comes from serving as a kind of common ground that allows for the five different kind of

participants in a layer one uh 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 two, um we have we first have to to clarify what is unique and special about the programs that run on top of layer one blockchains. So, remember that layer one blockchains are almost by definition uh 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 of really really anyone, and that includes the people who originally wrote them. It includes the people who control the physical machines that actually execute their logic, and it includes the people who interact with those programs while they run. And so, they have a they're kind of autonomous entities that just run um out in the world once they're deployed by their creators.

And those are smart contracts. Now, if you think about it, one very uh 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. And so, this this sounds a lot like the business model for layer one, and it happens to also be the business model uh for layer two. And that's smart contracts the the killer application for a smart contract is also um a multi-sided platform. And that smart contracts are able to get people to trust in one another to be able to

interact with one another uh in ways that they previously couldn't because they 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 them that themselves are built on top of layer one blockchains which also are multi-sided platforms. Uh 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 Ethereum. 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 uh 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 of having this platform exist also produces on the side this price stable cryptocurrency called Dai which uh has its own kind of set sets of use cases and and is an isn't oh 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 make sure that that the the network is financially sound.

And then finally there are the holders of the Maker governance token uh which serves as both uh 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 into to come into the network. So that's one example. We'll cover a number of these fairly quickly and recommend I recommend that you kind of go and read read more about about each of these um and we'll dive deep into one of them at the at the end of of the of the three examples that I have.

Uniswap is another another case uh where it's a smart contract again running on top of Ethereum and it's a it's a three-sided market in that you have on one side the buyers who are 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 we'll delve a little bit more into, is a decentralized money market. You can also think of it as a kind of lending platform uh that that is also a smart contract running on Ethereum 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. Um again like Maker you've got the keepers who keep the network safe and make sure that that the loans that are um not uh that whose risk parameters are not uh desirable are get liquidated in time and so that this way the entire system stays stays sound. And you also have uh the the governance token holders who which similarly end up providing governance providing uh stewardship over the system and also it's a vector for financial capital to enter to enter the

system. So let's dive a a little bit more into into compound. Kind of as as I have as I already mentioned you have on one side lenders who provide deposits 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 uh 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 that contract uh 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 uh investors early on and and provided financial capital to the system. So, they're the stakeholders of the system. And this this is started to become the kind of playbook and template for business models on layer two. Uh and we we kind of see this across uh 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 side 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. Um all in a way that's that's entirely automatic where the contract just just divides up uh the the fee that's being paid and and distributes. In in many There are many ways by which the distri- distribution happens, but it it ends up being distributed to governance uh token holders. There's the question of um given given this, how how this is defensible. It's the same question that we were asking um for layer one.

Because it 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 make maybe make the fee smaller. So, then there's a question, what's what stops that from happening? Um and that brings us to to kind of like the the question of defensibility for layer two. And the answer again ends up being network effects. Though for layer two the kinds of network effects that emerge tend to vary widely between different different projects.

And that's because the design space is very big and only only the 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 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 the 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 um Well this well this graph here kind of illustrates that point of that on the x-axis as as the assets inside of the protocol increase, the cost and risk for users decreases and therefore the defensibility 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 a quick exercise to think about in your own time. So if if we if we take Um, we accept this premise that the usefulness of the contract increases as the amount of capital inside of the protocol increases, then is what is 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. Uh, what does

the distribution of the assets that are inside of the contract look like across users? How does that change the defensibility of the system? Or you could also think about like the rate of churn of the amount of capital that's that's inside of the system. How quickly does it cycle in and out and how does that influence the defensibility of the system? But the the upshot is that um, layer two smart contracts are themselves also a multi-sided platforms. And they they gain defensibility 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 one blockchains uh, do.

So layer one blockchains again, they're 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 the defensibility is offered ultimately by network effects. So thank you and I'll take any any questions. Thanks Ali. That was awesome. Um, all right. So we've got questions in the slack. And um, 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 one and layer two 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 at equilibrium they end up extracting no rent. That's right. I think that's a great it's 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 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 one 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. Um And so like there's like a kind of a an argument that you can make by like in order for crypto to succeed in generally like some of the value has to be captured at the at the protocol level at layer one. Um another argument I think is is the fact that you do have um the kind of the strong network effects that ultimately bake in the one protocol into into the entire ecosystem. 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 um company ends up controlling most of the end users via their interface like say Coinbase or like an interface that's built that's built on top of Compound and so on. Um 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 there there exists strong network

effects. If these things get momentum they just become ever ever more difficult to displace both because the the service quality increases but also because of the integrations that exist with everything else. Um so I think uh there's still open questions, but but like I I think there are strong arguments you can make for for defensibility uh at the protocol level. 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 in 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 uh business model, because of the the powerful forces that network effects create, they they're tend to be uh winner-take-all dynamics. And so and it is kind of a runaway non-linear effect, and therefore speed early on uh to be able to start riding that uh super linear like quadratic and in some cases exponential curve, um 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 displace you.

Uh so I would say I mean it's it's kind of of paramount impo- importance to move quickly. And it may be that that kind of the incumbents or the the blockchains that exist already as a result just have like an unassailable kind of position of power that might only be uh displaceable by like an order of magnitude improvement in in quality uh or in like uh performance or whatever other metrics uh people might care about. So, how significant is the brand of a layer two protocol in regards to defensibility? Each of the mentioned projects have significant brand effects. So, one one thing to keep in mind is that because layer two is so diverse, this might depend between different projects.

Mhm. Uh and the go-to-market strategy for a layer two protocol might also vary. So, certain go-to-mar- certain projects might have a go-to-market uh strategy that targets end 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 for different reasons. It matters because developers might care about how the project is perceived or 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 who needs the functionality that it offers ends up leveraging, whether it be end 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. Therefore, you you kind of have to cater to that kind of that kind of person. Right. In a way, the brand is kind of like a showing point, right? Exactly.

Exactly. Like which which contract do people choose to use is is ultimately is ultimately the the high bid. That's what matters what matters most. And there are many things that might might cause people to choose one contract over over another. Um brand being a very important one. Right. Okay, cool. Next question from Guy. Can you explain why the fat protocol 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 at the thin waist 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 it that standard even though it 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 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 flywheel that that we talked about with for 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 the 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. And 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 the demand 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 um like asset that 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 one and two protocols were stateless protocols. Right? And so as a result you needed companies to maintain state and those companies captured a lot of value. Blockchains are stateful protocols and so that that's another key difference, too. Completely. I I think that Yeah, the fact that um the fact that one blockchain has specific state makes it distinct from other blockchains who maybe have the exact same technology but are but are separate. And so that that creates like it 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 the two 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 profit 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. Okay, great. So next one from Paul. With credit cards in web two, you can charge the business a 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 three 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 at your disposal. 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 and you want to connect a user to to sell my content and not have them to care not have them care at all about the kind of the underlying uh that's happening and have someone else foot the bill. And all of these architectures are possible. You can you can kind of

figure out that like in the case of Ethereum, there's this concept of a meta transaction which allows you to defer the payment and and have it be be kind of uh taken taken up by someone else. Uh 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 uh the the fees involved as opposed to the kind of the end user. Yeah, one one um sort of idea I always come back to here is take a platform like SoundCloud, right? SoundCloud is basically an S3 bucket with a bunch of MP3s with an ad network layered on top.

And with something like Arweave, you can imagine hosting MP3s on Arweave and an advertiser paying for that hosting such that their ad is uh adjacent to the song that you want to access. Yes. And so so that's I think a good example where you could have a system a multi-sided marketplace where the advertiser is paying for for hosting of the song and a consumer on the other side is you know, driving the demand for that ad. Yeah, absolutely. Well, just given how successful the advertising business model has been in Web 2, it's just hard hard to conceive that it would completely go away given a new 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 it. You can do a lot with that. Yes. Okay. Cool. So, last question. Blake West, do you see value capture also happening for any oracles you 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 uh the value that data provides any any business. I think it it crypto because of its openness, because of the fact that everything's visible, um and the fact that everything's open source,

all transactions can be kind of viewed by anyone who cares cares to look, uh presents an opportunity for people who want to kind of capture a large data set and be able to do something interesting with it. Um 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, and 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 prevent 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. Um and that that could be powerful, but it's often less less somewhat overstated. And it may it may not provide nearly nearly as much of of a kind of a moat as as people as people think. Great. Well, right on time, that's the end of the Q&A. So, thanks very much for the presentation, and great job.

Thank you.