ep 25 – Network Effects, Moats, & the Business of web3

Transcript

[Music] welcome to wet 3 with A6 and Z our show about building the next generation of your internet I'm your host Donald foxy and while this show is for anyone working on or interested in blockchains and crypto whether entrepreneur or Creator or policy maker today's all new episode is also relevant to all kinds of Technology businesses because it's a deep dive on the business strategy behind competitive Advantage Network effects moats and more covering both basic foundations as well as the tricky nuances in a new world of Open Source including web3 as a reminder none of the following is investment business legal or tax advice please see accency.com disclosures for more important

information including a link to a list of our investments our expert guest today is Asics and see crypto research partner Scott commoners who is also a professor at Harvard Business School a faculty affiliate in Harvard's Department of economics and advises several companies on Marketplace development incentive design and more as well as advise sizes and is directly involved and several nft communities Scott teaches on these topics both at Harvard and also recently on our crypto startup school so be sure to subscribe to our playlist for those Talks on YouTube under Asics and Zoo crypto to get updates as we release more videos in the first half of this discussion we cover foundational business Concepts and questions such as the nature of competition and how it really changes in web 3 as well as how Network effects

really work and then in the second half in case you want to skip ahead we cover mindsets and general guidance for Builders [Music] so Scott the focus of this episode is all about business strategy for web3 now that is a meaty topic and that's a lot to cover but this episode is really meant to be both for existing Business Leaders seeking to understand new strategies and where the future is going as well as people who are already on web3 and trying to figure things out to start things off like what would you give us as a framing mindset for how to think about business strategy for web3 absolutely so almost every web3 business is an example of a platform and I use a

very broad general definition of platform so a platform isn't just you know a two-sided marketplace where there are sellers on one-sided buyers on the other and the platform is mediating between them rather platforms are any context in which you know a business is engaged in enabling people to interact with each other but it's characterized by Network effects the more people on the pl or users on the platform the more powerful and higher quality the average interact action is and they should emphasize that platforms are not a novel business model to the internet uh credit cards or platforms you know the more people have a credit card the more firms want to use it and vice versa the more firms will accept a

credit card the more people want to use it and very broadly Bitcoin is a platform it's a network for sending you know for for sending value for one person or entity to another you know an nft project like the board Abe Yacht Club is a platform right that's a community right it's a it's a brand as a platform a way to connect people with a similar aesthetic and shared interests and enthusiasm with each other and and it has Network effects the more awesome people are in an nft Community the more valuable it is to be in that community so all of these businesses virtually all of them are in fact platforms and a lot of classical platforms have managed Network Effects by creating walled Gardens but web3 is about doing the

opposite web 3 platforms operate on blockchains which are public and according to technology standards which are interoperable so if you create content on your platform uh it can typically be seen on the blockchain by anyone and then right you know transferred or utilized or referenced by other platforms yeah it is the opposite of a world Garden it is a public garden exactly it's actually like trying to be as open as possible wow I don't think that I've ever heard that term in reference there but we should totally use it the opposite of a Walled Garden is a public garden well it's dangerous though because it has allusions to like my whole history and origin of the tragedy of Commons work back in the day in Central Park so we can get into some weedy areas if we go too far down the analogy but it works

for the purpose of just like you know what we're trying to say here which is great cool and then it's not a wild garden I mean this necessitates a very different thinking about what your platform is and how it's going to work right you typically can't maintain Network Effects by locking in users if most of your platform data is stored publicly and and the users have control over their data assets and can just take them from one platform to another and so on one hand almost every web three businesses is fundamentally building a platform on the other hand we're in an environment where maintaining platform dominance has gotten much harder and so you have to think very carefully about like what your what Your strategy for Value creation is and then also how

you manage value capture how do you actually get value out of your business in the end great so before we dive into specific nuances of network effects in crypto and I do want to go into that for sure I also want to talk about some other classic models and contrast them to web3 so one great example is the classic I mean you know you're a professor at Harvard Business School like of all people you should know all about you know Michael Porter's five forces but that is a common another mental model that comes up often in thinking about strategy in any business actually can you walk us through what that is because what I want to do is set up a lot of the Frameworks that are kind of common foundational thinking and how they contrast in web 2 and web 3 and

then we can dive into others more deeply yeah so Michael Porter's five forces is one of the most influential business Frameworks a condensed way of thinking about how do you find and maintain a competitive advantage and competitive Advantage is a term that gets thrown around casually a lot right people say like oh this is my competitive Advantage my business does this but first let's just be like really clear about what it means in Porter's view of the world competitive Advantage is a distinction of your firm relative to others and it's measured in terms of value creation competitive Advantage isn't like saying I'm you know I I'm really good at

software engineering that's that's my my it's my competitive advantage because the question isn't like are you good at this thing but rather how does it map into the output right the value creation the value creation like our like does the fact that you were good at software engineering enable your firm to deliver a superior product or a lower cost product or both have you expanded the value that is created by your business operation and you know it's about performance right it's not like just are you good at this thing but rather how does that affect your performance and enable you to outperform your competitors in some way right and secondarily it's key that's relative it's all relative to competitors right competitive Advantage is not absolute it

depends on who else is in the market who is competing with you and what their relative expertise and abilities are which means it could change depending on which categories you're you're stacking up your which competitors against and if you're a business that has multiple categories or it can change obviously as a market changes Etc so that makes a lot of sense and then what are the nuances when it comes to thinking about a model like orders five forces and you know sources of competitive advantage and where platforms come in to web3 great question Okay so from competitive Advantage what are the five courses so the five forces shape competition in that industry and affect how easy it is to attain competitive advantage

so first of all there's just like General competition among your Rivals right so there's sort of the static state of like what are all the businesses build you know building similar products competing for the same users sort of how strong is that rivalry how intense is it and and what are those firms oh and I should say this is usually represented with a circle in the center which is competition among current Rivals and then you know the other four forces are are usually oriented around it like a compass rose I guess NorthEast Southwest you get the idea so the circle in the center is the current competitive landscape and then on one side of that is new entrance so if this is a particularly valuable Market or if someone you know invents a new technology that enables them to enter

they might show up and and become a new competitor the new entrance is West uh and East uh is substitute products so not someone who does what you do but someone who does something that the customers want just you know sort of as as a replacement so think about this with the social media Wars one ongoing threat to the competitive advantage of any social media company is the possibility not that like somebody new will come and compete with them directly it's proven in in many contexts to be very hard to compete with the dominant social media platform with a given function because the network effects are so strong but new functions evolve competing for the the usage share of social yeah to me the best example of

this is Facebook as a social network versus Instagram yeah it's a substitute and they could see people engaging actively there in a very different way exact example might be like cable and you could have new entrants in the form of more cable providers but then you have a threat of a substitute like on demand on-demand streaming perfect beautiful illustrations so that's West and East so then North and South think about like a supply chain so above there's the bargaining power of your suppliers and Below there's a the bargaining power of your customers and so if something happens that gives the customers more bargaining power could be a change in law could be like a change in the demand structure like maybe the customer's bargaining power could go

down right if they you know discover they really like absolutely needed something that was previously social becomes a critical work function the other forces that shaped competition are these relative levels of bargaining power right it's like how how well can you bargain relative to your suppliers to whom you're paying and your customers who are paying you right so those are the five forces and they're called forces because each of these forces exert pressure onto that industry exactly and then how does that apply to web3 So blockchain based platforms store their uh you know store their data in public which means that a new platform can leverage a lot of that data by the way this is an oversimplification right a lot of platforms store some of their data in public and some of it in private but but a lot of their critical

information right user user identity reputation you know the the stuff that we think of as most valuable is often stored in in the public uh you know on the blockchain because that's a lot of the advantage that the blockchain's giving web 3 right it creates this Ledger upon which many different things can build and interact but that of course means that it becomes easier for an intern to show up because they can build on the code base that's available they can build on all the content networks and so you know that that West you know point on the compass rose uh it's getting more intense right there's more competitive pressure there meanwhile on East that was our availability of substitutes so suddenly now with decentralized protocols there's

often an immediate substitute available which is just a fork of the original protocol that's true in any open source right any open source context exactly and then meanwhile on bargaining power on both the buy and sell side one thing that we're seeing is that because users of the platform a lot of the critical data and information is stored in their crypto wallet under their control they have more ability to move from place to place they can you know they can freely pick up all of their data assets and just move them to another platform simply by connecting their crypto wallet and so there's more of a threat that people will leave and so in both sides you know North and South for bargaining

power you know the the bargaining power of your users is often getting stronger right because they have more direct control and then finally that Circle in this center right because the users can get up and leave we're seeing lots of strategies whereby platforms try and incentivize users to switch and so there's been more intense competition for users because of this relative low switching cost like flexibility of moving across platforms and so on every one of these Dimensions there's at least one pressure that makes the competitive forces stronger in web series it sounds kind of Bleak but but exactly yeah right it's like you know hang on a second two really important things to keep in mind first of all on the customer and

supplier side there is something really good going on too which is that you have this opportunity to create what my co-author actually several co-authors Jan esper and I have written about this Christian catalini and I've written about this we call Community cohesion There's an opportunity when convert your users into people who have a true preference for your platform they actually want to use your platform over competitors and ironically that comes through the same thing that creates this lack of switching costs right the the giving users a slice of digital ownership you know sort of you know controlling assets that come from their interaction with the platform and and often give them some

degree of governance or or Advanced user privileges or whatever that causes people to want to participate in a given platform it's not that we've you know somehow locked the users in but we've actually given them a preference for staying with the platform through shared ownership that's really powerful right that's the thing that we didn't have a way to do previously you know at least not at the scale that we're talking about in web three yeah but remember I said there were two saving Graces like one of them is that there is this like completely new way to maintain your network effect which is maintaining a network of of personally invested users and the second thing is well competition is maybe getting more

intense in a lot of Dimensions those personally invested users also have you know a strong incentive to create a lot of value the ideal of web 3 is not that you sort of have these platforms that have locked in a bunch of users and are just extracting value from them to the contrary you have engaged users who are sort of in in a real sense like part of the platform like you sort of often often literally right like they're making governance decisions for the platform and that doesn't just make them want to stay with your platform but actually make them want to help it succeed and so there's this possibility of like growing the pie far larger than classical platform design because now

you have this like highly engaged user base everyone who wants to the platform to succeed because they succeed along with it I love that I really do but to take a step back and just kind of pulse check where we are and all this and this broader context of business strategy for web3 what I'm really hearing you say is it's hard it's much more competitive it's it's open source that's the whole point it's a feature and a bug in some ways but absolutely you have a greater potential for a lot of these other things and we'll dive deeper into what you know Builders can do so now let me dive deep on some of these questions and I kind of want to push a little harder on this idea of competition what you painted feels so Bleak to me and to be clear I'm

hopeful just as you are that this is just a beginning and we're going to see a lot of experiments play out and then see what happens but in terms of the value capture piece of it the value creation I have no doubt about that is actually the easy half of the equation but the value capture part however I have to ask is there really such thing as competition in this world like I know that sounds like a really basic question but is it going to be some kind of co-opt Edition or like some kind of you know cross-pollination or whatever you know insert whatever other kind of Buzzy word there I just wonder if there really is such thing as quote competition it's a great question okay first of all it's important to note as we talk about value capture that value capture is also to some degree

about value creation right if there's no way to capture value then people are actually not going to invest in doing the value creating activities so it's not like we're focusing here just on the part how do you extract value from the ecosystem it's actually more it's like no one's going to build the ecosystem if they can't extract at least enough value to keep running that's actually a really important point because that is actually a fundamental mindset shift from web 2 and web3 for sure like that doesn't happen in web 2 as easily because you have no rights to the value you create for the platforms at all you're just you just you're kind of like captured what do they say there's that line that if it's free you're the product yes if it's free you're the product yeah you know in fact my co-author Steve Kaczynski says

in web one you were the consumer in web 2 you were the product and in web3 you were the brand that's so nice framing on to your point though it's funny because I fell into the web 2 trap right there I almost like was like yeah we don't have to think about this half of the equation as if it's separate but a your point reminding that just in general business strategy there's obviously a loop between the two but the Nuance in web 3 that in fact the users can also be the owners and are incentivized to do so et cetera et cetera et cetera so our colleague Tim Sullivan frames it as you know it web 2 was very much about you know the relationship between platforms and users was predominantly extractive whereas in web 3 value is much more shared right platforms and users you

know grow and co-create together and Share value together and then again feeding that into this this value creation and capture loop it's especially important if you're relying on your users to like help build your platform with you that both the platform and the users in the end be able to capture value or else no one actually has the incentive to build so given that how would you answer the question yeah so I think there really is competition I think there's a lot more cooperation than there might have than there might have been in previous iterations of Technology platforms there's very much a sense in which its platforms all the way down it's a little bit like turtles all the way down right every piece of core infrastructure is a platform and so you know if you think about it like uh you

know a wallet like metamask is of course a platform and you know an nft trading platform like you know open C is a platform and you know metamask benefits from the existence of these aft trading platforms and and from all the people who are creating nfts the platforms the nft creators benefit from the availability of metamask and users you know sort of interact with all of these different systems and so all of these things are like cross-pollinating and cross-operating Platforms in a way that like is much less centralized there's always been some degree of cooperation of this form think about like you know payment processing companies right like the invention of a more efficient web-based payment processor fostered you

know growth of lots of different types of consumer web platforms that couldn't have happened without Payment Processing infrastructure and vice versa that's kind of like the relationship I've been describing with metamask and the nft platforms and so forth it reminds me of the early days of the API economy as well yes and the thesis was that like there would be like all these different companies that have like a specific core competence and they would focus on that core competence and then pull in apis for everything else which kind of supersized your powers and to be able to do that it was like this interlocking set of like apis yeah but here the scope of every one of these Innovations is much broader the process of integrating one of these platforms into yours or embedding features or something of the

sort is is much faster and easier it has less friction it's like there's sort of an infinitely public API for for most of the core content and so in that sense there's a lot more composition and collaboration among among different players in an ecosystem you know so going back to that diagram as I mentioned on the West and East it's much easier for new entrants to appear and it's much easier for substitute products to be created in many contexts and so you know if you build something that works really well there's a much greater threat in web 3 that like your entire network could just get like moved to a to a competitor could even be like a copy you know some new entrant can try to capture all of

that activity by you know directly incentivizing users to switch uh this is this is what's you refer to colloquially as a vampire attack and it was like it's a funny name of course because you know vampire tax directly sucking exactly it's like trying to suck the lifeblood out of your competitor and of course that's good from a competition policy perspective a lot of the time right like we actually like want more competition among platforms we'd like users to be less locked in so that competitors can you know can can show up but of course you know a competition policy maker and say we really want to incentivize more vampires in this market right that they'd be like really like you sure you don't mean you want to buy more garlic yeah totally now fun little fact that you don't know Scott is I'm

actually super into vampire lore and fantasy literature which we both have shared an interest in and talked about but like I admit I didn't know that specifically when you asked me how much money I was willing to bet on that fact it would have been a very large amount you know me well but basically um it's funny because one of the things that does come up pretty often in Vampire lore is like that nature balances the powers of the vampires and that's why for instance they come out at night and you know that's why like there's certain things they can't do they can't um procreate like there's all these like funny rules of vampire lore that cuts across many many pieces of vampire literature that's awesome yeah and it's funny because it actually applies here in that if you think about it like a company can do a vampire attack but that

very thing you described earlier that there can be Community cohesion as a defense exactly then that is where the the nature of web3 is providing a check and balance in a way but I think it's yet to be seen how that plays out just to be very precise here because I don't want to Overstock absolutely and I do want to ask you a little bit more about Community cohesion but before we do you have mentioned now Network effects a number of times just to give the listeners context we have covered Network effects a lot at Asics and see crypto and A6 and z and I've worked on all of that content in the past and in particular yep we used to have like a deck that was just explaining Network effects because there's actually so much confusion and misconceptions around it but just super quickly you define

Network effects earlier but to Super simply put it's you know the value of the network becomes more valuable for the participants as more users join and the key idea there is valuable for users right I think people often treat Network effects as more users and forget the other half of it which is that adding value for the rest of the year yeah they forget that it's actually about value creation important footnote on that is that you know the value doesn't have to go up for all users equally and it doesn't even have to be the case that all the users get a positive value boost for more users joining the platform it's it's the net total value going up it's interesting such a good Nuance so if you think about it we use credit cards as an example earlier and with credit cards in general we think of the network effects

as being positive all around right so if there are more you know holders of a given credit card it's more valuable for a merchant to take it if more merchants accept that credit card you know as the individual it's more valuable to get that credit card instead of some other one and you know having more Merchants doesn't really crowd out other Merchants if anything maybe it helps right so mostly the network effect of a credit card is cross platform it goes from holders to Merchants and vice versa and it's strictly positive by contrast with newspapers the more readers the newspaper has the more valuable it is to be an Advertiser the more advertisers the newspaper has the the more annoying it might be is the

reader to read the newspaper because you eventually get to this position where you know every other page is some gigantic ad you really want to finish the article that you're reading and instead you have to flip through three pages of advertisements or something and so there you know there are actually some negative platform externalities as well the advertisers exert a negative externality on users and a negative externality on each other but it can still be the case that the overall Network grows as we add more users and so the net value creation goes up you know as we add you know users on either side of the platform readers and advertisers even if there are actually some negative effects on the margin for for some of them so the point being that you have to look at the value of the

total and not worry so much only about like creating this super pedantic definition of value for all users it's creating value for all users in aggregate yeah not necessarily for each user individually although note that if your platform gets really unpleasant for any given user they might leave and by the way users will leave if they can overcome the switching costs and there's a good enough outside option and so users ability to respond to negative Network externalities to things that make the network potentially Less Pleasant for you as the individual even though it's net value and aggregate might be higher is much harder in web 2 there's a really high barrier to exit it's just hard to exit and that means you know you're kind of locked in which

means you have very little bargaining power and so that's how we get to this extractive equilibrium web3 is as we've been saying it in a lot of ways the opposite right yeah you have all of your your network sort of embedded with you I have lots of nft communities I'm a part of and any platform I connect to you know they can see all the communities I'm part of and anyone who's part of those communities on the platform can find me immediately right like I was totally you know stunned when I joined my first you know web3 enabled social media it was it was forecaster and I could search by community right I could go and find the people who

held there's a network of content I'm really into right these are all people who are a lot like me that's why we're all in the same nft community in the first place and that was sort of wild right I had brought this like external network affiliation directly into a platform and taken all of that connection with me totally just to pause on what you're really saying there because I think this is so profound in web3 you're saying that it's not just that you can take your data with you but you can actually take your reputation history interactions like there's so many other things that kind of embeddedness of that but just the more profound idea here I just wanted to sharpen that Nuance is platforms previously were never portable and you're almost saying that the user

themselves are the platform and that is now portable that's like so fascinating absolutely and this goes directly to this like Community cohesion structure right like Christian catalini in an article we published just about 12 months or so we talk about the network effect now now accruing to the asset rather than to the platform or the portal and that's sort of what's going on here right it's like you know Elite skulls nft or a sub duck or or a board ape or whatever the network is embedded in the collective of people who own these assets and so there's sort of a new game about trying to be the platforms whose assets are the ones that people want to

attach to their identity and like are the thing that they want to use across the internet um and so you think about web3 social media design Paradigm at a very high level forecaster directly encourages the development of many different clients you know different ways of displaying and remixing and serving the information that lives in the protocol in web 2 that like would be dangerous here like that's actually very powerful because it draws more and more activity and value back to the underlying forecaster protocol it becomes more embedded right and it goes back to your way earlier point it's increasing the size of the pie for everyone I just want to also quickly just mention that in that article which I'm just going to link to in the show notes this was the article that you guys

published in competition policy International right that you're referring to can web CPI Tech Red Chronicle yeah can web 3 bring back competition and digital platforms but you do point out that web3 could reduce the fund fundamental cost of verification the cost of interoperability and portability and the cost of composability which is exactly kind of what you're talking about there yeah but it's funny because then it goes going back to my original question I still haven't really heard like it's definitely good in terms of bringing back competition to digital platforms as your guys's article posits in in terms of making them less concentrated and Consolidated among a central few but it doesn't answer the question of who and how those people get the advantage so I

finally understand what you what you meant when you asked about you know is this reducing competition or really like you know creating competition at all so I think it's changing the character of competition oh say more so we've seen over the last year extremely intense competition among nft trading platforms on on fees and on features we've seen intense competition uh in various you know defy trading contexts um literally like you know people writing algorithms that will like move someone's assets from one liquidity pools on one platform to another one you know sort of automatically we've seen aggregators that basically make it easy to like price compare across all the different places you could place a given trade that's what we often think of classically as competition right like

fundamentally if you think about classical competition policy a lot of it was about pricing and or like degradations and quality right they're often asking will this reduce the quality of the customer experience or they're either going to like pay more because you know now prices go up because there are fewer competing companies right you know or or like is the quality going to go down because there's less incentive for the firm to innovate because now they don't have to stay ahead of their competitor that's right that type of competition we see like web 3 is Rife with but the question is where was that go what it really turns into is the platforms having to work to retain consumers to like yeah create an environment in which the customer wants to stay on the platform rather than

switch over to a competitor and so what I think of as particularly virtuous competition right development of features development of rewards and loyalty programs right developments of various infrastructure that improves the customer experience and often that's going to come through mixing and matching it's like aggregating sort of all the best features from all the different platforms I got my answer thank you thank you I didn't know what the answer was by the way I was just like trying to genuinely understand it no no it was a great question the way my listeners you push on a thing and I'm like oh I get it there's your answer one thing we haven't talked about is where does this idea of composability which you know Chris Dixon has a great line how

composability is to crypto what compounding is to finance it's this idea that it's like an exponential Force and that's super interesting to me and you have talked about in your work Scott this idea of compounding Innovation as one of the benefits you know that can yeah come out of web3 and I kind of wanted to dig in on what is it and why does it matter and just also move us a little bit beyond what can come off as platitudes in the public discourse to kind of really understand the value behind that those words because it can be a little dragony totally okay so first of all just what is composability you know it has a technical meaning in the context of software right software you're embedding like existing software components into into other ones you know

into new ones and so you can you know sort of use their operations as inputs to whatever your software is supposed to do but at a business level what it means is that you can build on top of other you know sort of other things that have been created it's not just about software it's not just like about functions that are sitting like in smart contracts on the blockchain or something it's also every other digital asset composition is if you have an nft and somebody else builds a new game that that nft manifests an avatarian there's this massive um nft ecosystem I guess is the the right word around some very very simple nfts glute which

basically are just lists of various Adventure game items you know bag of holding uh you know you know Rod of Wrath or whatever I don't remember any of the actual like loot items but it's stuff like that and people are building entire games that embed the loot assets so if you show up with a given one of these quote unquote loot bags you'll have those assets in the game and now they do things and and this is a form of composition as well but okay so from a business perspective like why do we care that you could even do that well it speeds up Innovation it allows people to innovate in ways that maybe they couldn't before maybe someone is really good at doing one type of

business function and not others and now there's a whole Library they can pull from honestly we saw this as well with all the web 2 infrastructure platforms once there was you know a bunch of out of the box you know uh web platform creators now if you had a really good idea if you maybe didn't need to also be a ridiculously good software engineer at the beginning you could you could integrate a bunch of tools together and launch a pilot you know a minimum viable product with almost no complex software engineering web3 is just that but for everything it's that for the underlying software that runs the platforms it's that for all the brands and identity formation that people are doing it's that for reputation markers it's that for like our personal data it's all of that rolled into one big Snowball right

like you know you can you can combine all of this stuff however you want so we've got this like snowball it's rolling down the hill getting super gigantic and then at the bottom we have a gigantic snowball we can like carve out any little bits of it we want to create our business that's funny the analogy I was trying to think of was a bit like a primordial suit yeah and the reason that came to mind is do you remember back in the day it was like kind of in the early days of Google when halvarian who was the chief Economist there wrote about um combinatorial Innovation and it's so dargony of a phrase yeah the idea is really fascinating you're a mathematician you know combinatorial math yeah permutations and combinations grow quick exactly or derivatives that you can actually extend and and when you mention

loot actually it's really funny that you brought that up it's obviously one of my favorite examples too but what I found so fascinating about the loot example there is it doesn't have to be full featured which is a big difference in the kind of early days versus now because you have literally primordial ingredients that aren't fully bit baked and fleshed out because there is this sort of innate ability for these ingredients and these people and communities to sort of form quickly and bottom up and move around them and put them together in ways with without having to have like this full featuredness to it too that's such a cool Point you're exactly right right you know imagine if 10 years ago anyone ever said you know I'm gonna launch a product which is basically just like the foundational items for an adventure game

and then like some people are gonna build the game around it makes no sense right yeah whereas here you can do that you can say look I've got this cool set of items I want to like enable a game or multiple game ecosystems around them let me put the items out into the world and like invite people to build totally and so it's possible to have these like micro components like people can launch products where the product is basically just like some tiny input that goes into everything else and by the way obviously AI will play a big role in superchargent when you think oh my God creative AI that is exactly totally and even in the early days right it was only meant to be like what you're doing and then the users came up with games like Christmas Cena came up with the hashtag other

people came up with like let's do like so and so on Thursday yep and the community did all that and they got nothing for it in creating that value so kind of coming full circle another difference here it's not like these platforms didn't allow it although to your point to be more precise here we're talking about everything being composable not just one element but two there was no way for the community to capture and participate in that value yeah you're totally right yeah just kind of coming full circle and to the extent that value capture for the user for the community existed it often came through these very Arcane things that were then de-linked from the platform right like how did people capture value from hashtags they came up with other platforms that would have hashtags in

them there was all these disconnects because you you had to go off platform you had to drive people to go to your website and do something whereas web 3 sort of invites everyone to do this stuff actively and makes it all sort of cleanly interlinked yeah totally agree and now let's switch into tactical yeah let's get technical let's get tactical tactical sorry do you guys remember that song from Olivia Newton John Let's Get Physical let's get let's start tactical sorry oh my God that's so good my voice doesn't go that high that was really funny to hear you trying to do that my voice doesn't go that high sorry great so now I want to spend the rest of the time just going now into what does

anybody do with all this information and if we don't have answers let's share if mindsets what to do right you know just all of it so in terms of breaking this down it's a good place to start for the builders and the audience is like how would you help them understand the key aspects of network effects and then how do they sort of think about it what depending on what type of thing they're building in web3 cool so first of all it's really important just a high level I like to think about Network effects in terms of their strength their valence and their Source oh cool so strength is exactly as it sounds it's like how strong is the network effect how much pull do users sort of exert on each other does the platform sort of achieve over time and and note you know there's

absolute strength and then there's marginal it's like how much do when we add a new user like how much does that affect the network effects in general and it might vary by user as well so some users might you know really benefit from there being a lot of people in the network you know if you're an online job search platform people who are looking for jobs benefit a lot from the fact that there are a lot of jobs available on the platform and people who are not actively looking for jobs might also benefit some because think about all those inbounds um you know one gets on on LinkedIn or whatever but they might not benefit as much from having all those jobs on the platform because they're mostly happily situated and so it might there might be dispersion among users uh and another you know key factor in terms of strength

is like are the network effects local or Global if there's a different Bike Share company in like almost every city that has Bike Share it's an exceedingly local network effect you want there to be enough users biking around that the bikes are sort of available at all those pickup and drop-off spots but the fact that you're a bike share customer in Boston has very little implication for whether you have any interest in bike shares in in New York or San Francisco or whatever and it doesn't really matter whether it's the same company that that you use in in your home City like you can buy like a one-week contract or a la carte or something of the sort it has very very strong local network effects but very weak Global Network effects right and

just before we go into the next item can we address the nuances of strength for web3 and how you would advise people to think about it so we've already sort of like implicitly been talking a lot about the strength of network effects and in web 3. there's good news right which is that a lot of network effects have suddenly become Global even like a brand or a fandom can have Network effects right so if you're a huge fan of Taylor Swift and you're wearing a Taylor Swift t-shirt you walk by some other uh Swifty wearing their Taylor Swift shirt you could like connect but you don't have a lot of interaction but default with Taylor Swift fans in other countries despite the fact that there are in fact a lot of Taylor Swift fans all around

the world with web 3 a lot of those like sort of localized Network effects suddenly become Global you can be in part of a brand Community interacting with and making friends with people from everywhere like all of these different nft communities I'm in are fundamentally Global as Brands if they become really popular in South Korea or something I gained some value from that because then there's like people creating cool content that supports the product and like more people at the virtual Meetup and so in a lot of ways by creating This Global Network infrastructure layer like the blockchain is like a big network of networks a lot of network effects have gotten stronger at the sort of core level those fundamental assets that to which the

network effect occurs but on the other hand there's been a lot of network effect dilution as we talked about with platform context that used to be walled Gardens so there might be a stronger core Network effect to the underlying protocol for a web 3 social media platform but there might be a much weaker Network effect than before for any individual app that serves that protocol I need like a bottom line so the bottom line is that web3 has strengthened a lot of classical Network effects but it's also moved where they reside right the strong Network effects are often tied to the digital assets to the sort of you know the networks that's for all across the blockchain rather than to sort of any individual platform that

operates on top of those apps yes this goes back to that point where we're talking about about this profound Insight that web3 often allows these kind of network effects to be portable in that sense or like tied to a different entity okay so the first dimension of network effects that was strength and that was a super helpful um breakdown and then you also mentioned valence which I don't even know what that word means by the way I vaguely remember it from chemistry yeah yeah valence valence is a positive negative um I don't really remember my my chemistry classes either but it's it's about you know it's it's about Direction and sort of positive versus negative orientation relative to strength anyhow so how it applies here is valence is about Direction in web 3 we're seeing a

lot of like new network effects the new opportunities for positive Network effects right this is this goes back to the composability point we were talking about earlier like there's just so many more ways to leverage all the information that info architecture to drive new value to whatever you're building and back to the underlying assets or protocols that you're building on top of so to the extent that we've like created new forms of network effects most of those are our new positive Network effects but when you're thinking about this as an entrepreneur as a builder you have to think about your entire ecosystem and where the positive and negative Network effects are it's not just about how strong your network

effects but it's also like are they going to drive more value for everyone are they going to make some people want to quit your platforms that you actually have to like reward them more in order to get them to stick around that's the important thing to puzzle over there the message on Valence is mostly the same as it was in web 2 and before like you need to understand which network effects are positive and or negative for which users and then the web 3 opportunity the special here is through composability there are many new opportunities for aggregating positive Network effects either yourself or through partners and and future developers who build on top of what you've created okay and then the last one you mentioned Source um talk to me about what that is in this context of of dimensions of network effects for

Builders to think about and then application to web 3. okay Source you know in some sense it's the most self-explanatory of the three source is just where the network effects come from and why do we care about that so the first we talked about strength and Valence are really about value creation they tell you how much value your network will create and how that value will grow as you bring in new users and add new functionality source is about understanding how specifically you Foster that Network effect and relatedly how defensible it is so does your network effect come from liquidity which could be the presence of lots of drivers and riders in a ride hailing platform so they can you know you can ensure that if you're out driving you can you'll have people to pick up and if you're looking

for a ride you'll be able to find a driver or you know an nft or sorry I keep using nft examples because I'm a total d-gen but nft trading platform are you going to be able to find the specific asset that you want when you show up so could be about liquidity could be about data or user know-how lots of different sources for Network effects and those sources Define the pathway that often answers the strength and Valence question how does where the network effect comes from determine how strong it is and and who benefits the most and then segueing back into the competition discussion it also tells you how defensible it is like in a lot of web 2 as we've talked about the network effect defense came from

having aggregated massive amounts of proprietary data and user reputation and user content that was very difficult if not impossible for users to take with them to get a similar quality experience elsewhere and in web 3 we're seeing a lot of those old sources of network effects have become much less defensible awesome and the bottom line the bottom line on source is you have to understand the source you have to actually understand the mechanism of network effects it's not enough to just say like oh we we have a network that's growing in value so like you know you should you should join and invest in our Network like that's not how it works you actually have to be able to understand the pathway through which the network generates that increased value and you have to understand how to protect it and whether it's protectable

again if your network is totally indefensible then you might have the opportunity to create a lot of value but not be able to capture any of it and so you're not just looking for Network effects necessarily but if defensible and and sort of buildable Network effects and question on this one actually people often saying web 3 when you mention modes that the modes that they have are things like design and earlier you mentioned Community cohesion but what's your take on modes Scott I feel like people Bandy that about a little too casually and easily for my satisfaction you know it's funny one of my longest term collaborators on web3 Chad esper he was one of my former students in my MBA class one of the you know one of the strongest students I've ever taught he and I have been trying to

really clearly Express like how we think about moats and web3 and still still work in progress but the core Insight like with our conversation about the five forces earlier is that most things have gotten much harder previous sources of platform competitive Advantage platform modes were the core Network effect might be you have all the liquidity on your platform you know and the competitors don't have nearly as much or you have all this proprietary information it might be economies of scale you know like you're you know you're uh you're a used car platform and you can offer really cheap insurance because you have a lot of know-how about the cars or network insights like Amazon with its Logistics operation it can like move the products to places before the

people place orders because it sort of knows what's going to be ordered when or our platforms can create defensibility through Standalone value technical advantages things that they do that are just Superior this is you asked about design you know possibly even through Partnerships and sometimes also through multi-homing costs all right you might have a defensible competitive Advantage simply because it's hard for users to deal with using multiple platforms at once like maybe it's easier to only have to search on one online restaurant platform or something so those were all core sources of competitive advantaging platforms all of which by and large is often going to be sort of an open book on the blockchain you know similarly technical advantages um so much of the operations of a

platform are public are going to erode faster than they used to although I would argue on that one a counter to that is actually the talent and that the technical Advantage is actually not just the features baked into said protocol but the ability of that team behind it to really innovate and that is going to be I think I think a bit of a mode on that one absolutely no no I totally agree it's totally right that's not platform specific but it is a very important source of competitive Advantage remember we talked about higher quality or lower cost both of those things are influenced by the quality of your talent and talent has always been a competitive Advantage especially in complex and high-tech firms right as web 3 is more complex and often more high-tech than anything that's you know it's come before it in

category the talent mode has widened and deepened yeah totally but like the core platform competitive advantages have mostly weakened there's one though that really stands out as having strengthened tremendously and that is which is embeddedness and say more about that you've mentioned that a few times yeah so another way that platforms achieve dominance is by being embedded into everything if you think about Gmail as the login to so many different web platforms many people they don't know their account credentials for those websites all they do is connect Gmail and it like propagates credentials for them that's embeddedness right that makes Gmail a necessary service even if you didn't have all of your emails stored in Gmail but the network effect

comes from proprietary data and having all of your content stored there in a way that's really difficult to Port but even if you took all of that away like if tomorrow like all of the email became suddenly like flexibly transportable between Gmail and Outlook people would still have so many accounts that were managed through Gmail they'd have to keep logging into it this is where like wallets have a lot more potential for embeddedness absolutely even in fintech we to talk a lot about not only while it's interface But Connie Chan and I did a piece around WeChat and the idea of the payments and Alibaba and everything alipay and this idea it was booked payments and messaging combined that became the interface to everything in the world and granted that was a very locked Walled Garden because obviously it's not open to anybody but the people

on those platforms and it was in China so it's even more walled but the example that does come to mind in web 3 is how identity becomes the interface for a decentralized absolute identity so there's like a lot going across the board on that abandon this point there and indeed and exactly as you say the alipay example is is perfect That's a classic web 2 style platform that maintains a lot of its advantage through embeddedness it's like it's just used in so many different services web3 opens that up and again it opens it up to everything yeah your your crypto wallet can be embedded in many different services but also so can your nfts so can your digital diploma like so can a you know a simple function protocol you

wrote like something like disperse.cash can become part of many different Finance products that software embeddedness which you mentioned open source earlier like this was also true in open source right it's like how do you know how did like individual open source software products become most successful it was people built lots of stuff on top of them so much so that those products became essential totally although one quick Precision note on that one yeah as you know obviously the open source history person yeah you're like you're a literal expert on this a couple of quick notes on that it's really interesting when you compare like Linux foundation and the kind of model based setup and then say something like npn the node packet managers and the node.js community Etc

it's also very interesting when you also think about other little components like um what is it like SSH or whatever it's like three people maintained it and it led to some serious vulnerabilities and like hospital system software because a lot of people began using open source so just a quick contrast Nuance that it is very similar except very different because that lacked the economics of participation yes and therefore no you're totally right somehow now you have that same embeddedness opportunity but with an incentive to build and maintain Etc yes sorry yeah yeah you're right build and maintain spot on and then just one quick other one you've mentioned Community cohesion a bunch of times and that's one of the other things that you you put forth as one of the

stronger benefits of competitive advantage in web3 now I want to also have you answer the second part of that question and you already answered the first part same for community so like what like what what are the nuances there like how much of a moat is it really pulse check it for me great question so first of all I should emphasize that like to me you know embeddedness was a was a classic Model of platform competitive advantage and it's gotten much stronger in web3 this community cohesion thing I tend to think is pretty new you know not that it never existed before but at least in the the classic platforms that I've looked at I've never seen it to my recollection as a central part of the business model in

some sense that's I think because they lacked the ability to do so or like they like good tools to do so web3 makes it possible to turn your consumers and your your or your users into people who are personally invested in the platform success and who often interact and interface with each other towards the goal of the platform success and in the process of using the platform nft communities are a great example of this but we also see it for far less branded platform context think about like everyone who participates in governance uh D5 platform or something to calibrate the protocol and sort of decide how it will run and that comes out of this shared ownership and it

comes also out of the opportunity for for your digital assets to to drive new forms of quality and experience and so a platform can build a moat around a user base that like really wants to attach to it that wants to use its product rather than a competitors or or rather than building their own and even better wants to contribute to making what they do higher value we haven't really seen these things play out as scale yet because it's just too early but we've seen a really powerful examples of it at least in in play already and it reflects a like desire to publicly and personally identify with the brand attached to the nft it's like a sports or a music or whatever fandom

right it's like you see the other people in this group as akin to you and you want to like engage with them and not just like hang out but hang out in reference to and like sort of like more deeply engage with the assets yeah I mean I've been thinking a lot about the nuances while you're sharing all this like how is this different than a fandom how is this different than any other community is it just a more of a matter of degree than kind and I think I've kind of landed on what you from based on what you just said Scott it almost feels good this is really an exaggeration but like a tribe and even a religion where you have artifacts that you engage in and again I don't want to say that with all the negative connotations no it's funny you say this there's this concept

of a shared text yes yes exactly shared artifacts shared symbols exactly yeah and it's like modern meaning making actually if you were to really take it to the next level because when you say cohesion that's like a fabric the way people describe social cohesion and things that tie people together and that's often how people also think about religion so it's not some abstract like concept like strong ties versus weak ties versus like interest graphs and like affiliate interests like it's actually really kind of core meaning at this yeah exactly and it's going to sound absurd but like imagine a universe in which people went around the internet self-identifying as platform users just

like I get up in the morning and I am proud to be on Facebook saying that sounds a little bit hilarious but you know I was a really early Facebook user you know it had launched just before I got to Harvard as an undergraduate and so we were proud to be on Facebook we almost felt like we were building the product we were finding like weird errors and glitches and things and like he would submit like bug reports and like you know they would go and fix the very unusual like bug that you would notice it was a totally different experience of the platform web3 is trying to take that type of experience and make it not just a small platform thing but giving people that sense of Pride and ownership and contribution in

the platforms at every scale okay so let's shift more now into a little bit even more advice for Builders and and how to really think about your strategy design and Market design for web3 and at a high level we're not going to cover everything in this podcast obviously but I'm going to take some questions from Tim Sullivan who's great former editorial director at hbr and he was executive director of UC press and is now on my editorial team here and works with you as well closely so I actually think this is a very interesting question for the second half which is the adoption cycle like consumer demand drives Tech Advance is an investment where are we in the web 3 space with regard to this Dynamic and how does this inform the space and which projects are making strategic decisions I want to

address the second part of Tim's question which I found actually even more interesting which is how this informs projects making strategic decisions and the variation that I'm most fascinated with here is this question which is shark Niche first and then grow oh do they try to go mainstream faster or do they do a bunch of niches and aggregate those like how to think about that strategically do they go in thinking like here's what we should do I just wonder if you have a quick answer yeah it's a great extension with macro question and you're actually asking a micro question so first of all there's a general piece of advice I often give in platform design which is a lot of successful marketplaces uh and platforms more

broadly start with a very broad approach discover a specific vertical or version of the product that works very well narrow to that and optimize it like crazy and then expand out again wow okay so so the the one part of the answer on platforms is you often are in fact neither you know sort of going Niche or broad you're actually sort of doing both but but in sequence and the idea is like you know think about like you know early testing and minimum viable products you might not know precisely who your customer is or what the most viable use case for your product is at the outset like you've launched a crowdfunding platform and you

don't really know whether it's going to be most effective for crowdfunding for art projects or for I don't know like Finance education or like you have no idea what it's going to be useful for and so you might start by trying all those different types of campaigns a small number of them and see which stick and then you discover that it's working really really well for crowdfunding like large-scale like you know theater performances or something like that and they're like okay well let's scope to that now and like really work on this theater vertical and figure out how we can like optimize the product for that and then once you have like a really strong theater vertical that's your Beach head now you have like regular user base regular customers and you can go to the people who are funding the

theater performances and say well you don't just do theater right like like what else would you want to see on the platform and maybe they say oh yes no I don't just like theater I also like various like you know design and Tech and they're like okay great let's do design and Tech and so you start crying to find some some campaigns in design and Tech and you you do user crossover from your theater vertical and so you start broad discover like what fits narrow focus on that and then build out let me let me add one other footnote that's web3 specific the other thing that's like very special about web3 uh in this context is that that build out component becomes much easier right like again because your core users

are invested in the platform success there's a sense in which like you know initial value can be fostered among a very small like initial community and then they help it broaden literally they'll find other people who like you know want the theater vertical and they'll be suggesting stuff like gosh my friends who are into theater are also into design and Tech and they might even help you build that or like recruit that sort of additional community and so the value of a core community of users has grown dramatically relative to before because they're not just your like evangelists but they're also the people who help build and and sort of broaden your your use cases as you go it's also kind of goes ties back to your

community cohesion point because absolutely not building for themselves they're building for all or their their interaction effects which also strengthens and turn their ties to that Community then kind of further feeding it exactly spot on no that's super fascinating okay he has another question which is how do you optimize a platform for growth or some other goal when it doesn't align with your power users desires and your power users actually have voting rights like in direct governance and this is a really interesting question because we we're not going to talk about decentralization because that's too big of a topic and it's a through line through all of this but obviously like no individual can make a decision on behalf of a community or a network that's part of the whole advantage of web3 but the idea being

that at least in the early days or you know before a platform has progressively decentralized there are some early decisions that maybe some of the you know Community early decision makers may make to help set up that platform as it evolves and I guess the real question here is like how do you think about strategy and and growth when you have this like a very unique case of web3 basically you don't have like a classic manager that Porter was talking to back in the back in the day oh absolutely it's a very real issue right like when you have partially your fully decentralized governance um or even when you have centralized governance a platform's short-term incentives are often not aligned with the long-term incentives

and that's honestly why a lot of web 2 has become so extractive you know it in the short run it's always better to like extract more today but in the long run that means that the users leave your platform at the earliest opportunity they actually manage and similarly you think about like a big Community with a treasury or something one thing you could do is you could invest the treasury and like building in the bringing in the next like you know 100 000 users another thing you could do is throw a big party for everyone in the community this week yeah it's not actually like incorrect for people to have a preference for being in a party rather than doing some like very complicated abstract thing for a potential future return so this alignment problem is hard it's been hard in companies historically and it's hard

with with governance in in web 3 platforms as well yeah one advantage of course in web 3 towards this is that token holders you know in effect share some alignment with the overarching platforms goals right like even if all the token is the arcade token that could be used in all the different like mini games the platform is building out those tokens are more useful to you if the platform can build a lot of really cool mini games and so there is a sense in which you at least have some incentive to vote in alignment with the platform's long-term interest but it's still very hard and even just the communication piece is hard right it's not always clear that everyone agrees on what the platform's best blog

ready interest is right so even if you didn't have the incentive challenge of like people wanting to extract value today you might have the issue that people still don't know what the right direction is Right startups are in a haze of massive uncertainty right and then you add web three exactly exactly but but then on top of that as you say there's this like incentive to vote your own your own private Optimum rather than what is what is best for everyone yep we're gonna have to see how this plays out but the strongest Technique we have for this is is shared ownership that strengthens their incentive to want the platform to succeed not just in terms of their creating and contributing to it but also trying to guide the platform in what they at least believe is the best Direction yeah totally so a couple more

quick things so when you're launching a Marketplace or a particular platform do you go after Supply first or go after demand first that's like a common question there's also this common question about like the bootstrapping problem the chicken egg problem what advice would you give to web 3 builders for how they should think about launching their platform so you know you hear all this all the time like you know the chicken and egg problem of platform launches and this again not specific to web 3 at all uh it's just it's a general principle or platform business that you have to figure out how to get your initial users and start creating that Network effect people frequently talk about platform launching and you know in these sort of like vague like you know and very Doctrine air like go after Supply first go after demand first right

like and I want to emphasize for an individual platform right if someone is advising you on an individual platform that you are launching going after Supply first or going after demand first like this actually might be like the correct instruction but there are people that just tell you like it's always harder to get supply you should always get supply first like just you know make that work and if no one's going to supply in your platform like you know forget it but but like fundamentally like it's not what economics has taught us rather and this Harkens back to a lot of like Tom eisenmann's work a lot of like classical economics and strategy research on how to grow two-sided and multi-sided platforms the real question to ask is who do you have to subsidize and who is going to like you know pay you to use the

platform and it's really about recruiting users who create the most value for everybody else right to launch your platform you want to bring in some some users who will kick-start a really strong Network effect maybe go to your initial developers or your initial liquidity providers and say look we need you for this platform to succeed we're gonna like you know give you like tons of you know discounts or Early Access or even yeah to develop for us initially yeah and then meanwhile that activity draws in users right that kickstarts the network effect now there's a way for for users to actually use the platform uh and so you might then charge users but the key is that these are these roles don't necessarily stay static over

time like once you're like a thriving ecosystem maybe you only subsidize certain Marquee developers whereas everybody else actually pays to use the platform or pays to have access so chicken and egg is not a rigid like oh it's always the suppliers it's always the developers it's always the demand side it's it's who creates value for others who like grows that Network effect as quickly as possible and how much value do they put on using the platform right if if you have to like convince them to use it you're subsidizing them if they have intrinsic demand for it then maybe you don't need to and and quick bottom line on this like where this is really kind of different or new more nuanced in web3 well the way I think about the big

change here in web3 is you have many new ways to subsidize it used to be that the like form of subsidization was usually giving discounts right or or literally paying somebody to show up right I was thinking of like paying celebrities to show up and that feels very um not really sustainable because they pretty much leave after that exactly it's super unsustainable here there's this opportunity at least in principle where you could subsidize people by giving them tokens that sort of like give them more value you know that's aligned with the activity either conducted you if you give your initial like you know developers or liquidity providers or whomever say you know a bunch of tokens then not only does this you know sort of you know drive them to participate right now but it actually gives them much more of a reason to stay on the platform and

keep participating in the future and the value of those tokens goes up if they provide liquidity or develop software or features that attract a lot of users and if it's successful because obviously it could also go down it could go both directions to be really clear but the key point is that there is a mechanism for that alignment now exactly there's alignment with the activity that they're undertaking and hopeful success of the platform and value creation and then another quick tactical question this is based on your paper with John William Hatfield it's a working paper and it's a simple theory of vampire attacks and the point that you made that not only do vampire attacks facilitate price competition we obviously know that but the most interesting part is that the web 3 platforms face even more

competitive pressures when they have loyalty programs we're like a classic traditional platform there would not face that same type great so what would like be your one kind of key advice for how Builders and web3 should think about this particular Nuance great question so we talked about vampire attacks earlier and I mentioned that vampire attacks leverage on-chain data and often involve a new entrant or an existing platform directly incentivizing an incumbent's top users to switch if you think about it like with Airline points or something an airline keeps you locked in by giving you status on that Airline you get perks you get the cheaper seats you get fancier seats and that's a form of lock-in but it's actually not quite as locked in as we might expect because

Airlines also have a thing called status match if you have high status on United say and you call up Delta and say hi I'm a you know I'm a platinum user on United and I'd like to switch to Delta Delta might say great and send you a contract like ask you to you know provide proof that you're a United Platinum member it's very hard to verify most people it's a lot of work to do this most people don't web 3 makes that type of status immediately verifiable if I'm a new competitor I'm watching a new nft Marketplace I can just see who all the big nft Traders were because it's all on the blockchain and I can tell all of them like look come to my platform instead I'm going to give you Platinum tier status where you get to use all the fancy features

full stop you don't have to like fax me a copy of your United ID card or whatever like like I can see it I know your high status I want you to be high status on my platform and so it's strengthened the vampire attack strategy like because now there are much lower cost to doing it but ironically like loyalty is still to some degree the defense it just takes this different form right loyalty is not just about like giving people stuff right it's easy to replicate loyalty now becomes integrating people into the brand yeah it takes on purpose and like identity for you an nft trading platform wants their users to like want to use them and to feel attached to the platform and it can do that in part through giving them

premium features sure but it mostly has to do that by leveraging them as a group together and forming identity around the platform that's fantastic Scott that is so interesting thank you but I do want to take a step back and say it sounds to me like what you're also saying is it's kind of still early days for business strategy for web three absolutely there's this unbounded web3 value in theory but to make it practicable we actually like have to solve these strategy questions to figure out how value capture is going to work yeah even though if we have like ideas of how maybe they may play out it feels like at some point we may have to even abandon a lot of these old Frameworks and models and come up with entirely new first principles based ones because I think

it's unprecedented in human history that we have ever built businesses in this manner at this scale ever I don't know I mean you can technically check me if I'm wrong I mean even past open source projects like they've never monetized and like the way that you know the type of composability and interoperability and all these things we're talking about I don't think we've seen that before no I don't think we have I think you're right I mean you say early days I mean it's it's really early days yeah right you know the Michael Porter's thinking was a reflection on you know sort of the history of modern business you know to date and even most of the things we know about various eras of the web and web platforms are still relatively recent and still transforming

and morphing all the time right like yeah a lot of our early understanding of platforms and platform Dynamics did not foresee the modern you know Tech and media Giants and so absolutely I think we're going to need completely new business Frameworks it's like how do you even start to Define general principles for Value creation and capture in web 3 and and how do they relate to what we understood about previous incarnations of the web and and other related product movements like open source software but this is a super interesting space and general calls of people who hear this podcast please think about it and if you have cool ideas please let me know I did have one last kind of crazy question you know one of the people I've

worked with at Xerox Park was Brian Arthur and and he wrote that seminal paper back in like 1996 on increasing Returns on the new world of business he began his paper saying how his under you know our understanding of markets and business was like based on stuff from like over centuries ago and then the shift occurred where the underlying mechanisms that determine economic behavior shifted from diminishing to increasing returns and that was a very seminal moment yeah I feel like in economics especially for actually more precisely economics applied to technology behaviors and software in particular because absolutely that's where things really get kind of jiggered up and I feel like we're in a similar moment in web 3 and and particularly when it comes to this question because

by the way the other thing Brian we've had him on the podcast because I had him talk with me and Mark a few years ago and he actually talked about how like increasing returns can also stop after time and you have to think about the long-term sustainability and I was wondering like what would the analog be for you if you were to kind of come up with the frame or just even a phrase that you would think about for capturing whatever the effect is in web3 I mean this is all very rough and I don't have a I don't have what I would call like a coherent or complete economic theory around this like you know the next theorist I I've always wary of like declaring a theory that I can't at least like visualize the theorem but my my rough instinct is that what we see in web 3 is what you

might call like expanding returns that like every new thing that's created sort of creates a new like ecosystem of possibilities which is a little bit like Loosely like what's called an expander graph and graph yes but stay tuned maybe we'll do that in a future episode oh my God I love that that's the perfect note to end on awesome well Scott thank you so much for joining this episode that was so much fun thank you no it was so much fun for me too [Music] thank you for listening to web3 with A6 and Z you can find show notes with links to resources books or papers discussed transcripts and more at asicsandccrypto.com this episode was produced and edited by sonotoxy that's

me this episode was technically edited by our audio editor seven Morris credit also to moonshot design for the art and all thanks to support from Asics and Z crypto to follow more of our work and get updates resources from us and from others be sure to subscribe to our web 3 Weekly Newsletter you can find it on our website at asicsnzcrypto.com thank you for listening and for subscribing let's go [Music] foreign [Music]