Web3 business strategy | Scott Kominers

Transcript

[Music] thank you this is you know topic I'm deeply passionate about and I'm really looking forward to talking with you about it um a couple of points of logistics first of all as you can see I am remote I am you know like a Droid on the front of the stage um despite the the virtual hybrid format uh a little bit interactive so they're gonna be places also where I'm going to be asking you questions um and giving you sort of time and space to think about them um great thing to you know sort of sit and think about with your you know with your co-founders for a minute or two I'll I'll cue these up and give the explanations as we go uh if you're watching this on video later like after

crypto startup school when it's posted that's a great moment to pause the video think to yourself you know maybe talk to your your co-founder or friend uh and then come back and watch the review and discussion all right cool so what is intellectually fascinating to me about web3 business like the the thing that first intrigued me about studying web3 as a research topic and field and what makes it sort of different and and very sort of like unusual relative to other Tech business is that every web3 business pretty virtually there are exceptions but there are the exceptions that prove the rule web 3

businesses have fundamental intellectual challenges at their core in addition to technical challenges right like a lot of Technology business historically has been about you know solving some very difficult engineering challenge or figuring out how to make a bunch of different components you know sort of work together technically and all of that carries over we have all of those challenges in web3 but on top of that we have incentive design right so much of web 3 is about balancing incentives between you know various participants in your ecosystem between the platform and your users and your developers and contributors and all these different players in one fashion or another whether you're an infrastructure layer or uh you know or a consumer app

um that you have to sort of build the technology with incentives in mind and that means you have to think really hard about the incentives as well you have to sort of like you know be a little bit of a game theorist or like you sort of bring this like strategic question these strategic questions to the web 3 exercise on top of just solving the technical problem um and of course you know in in startups which are you know you're constantly racked with uncertainty this adds a whole new layer right like it's an additional thing you have to get right and so you know what we're going to be talking about today is like how do you align incentives for Value creation and then how and in parallel

you know how do you build your business uh in a way that enables value capture but like you don't just create a lot of value and not be able to internalize any of it yourself and keep going um and this I think will tie in very nicely um you know when you guys are thinking about this pricing session coming up right like you know pricing is a is a core economic primitive we'll talk about some also this afternoon with auctions that's about value creation you know sort of like you know sort of balancing value creation and value internalized by your participants with the value you capture as the platform um I guess standard disclaimer whenever you're talking about business strategy

write these questions are often things that feel like they're reasonably simple and and often at least to you know at a first pass intuitive but they could be like really subtle and they can be really high stakes um so seemingly similar business models um and you know you you've probably all felt this with like you know two you know two different projects launched the same token model and it works really well in one and it doesn't work in the other right like you know seemingly similar models can have very different success levels um you know as a function of the rest of the aspects of the business um you know what the market context is and so forth but okay so

one more piece of wind up and then you know we'll we'll start getting a little more uh a more granular like what are we doing today I'm gonna like talk you through Frameworks for thinking about value creation and value capture in web3 uh and the two sort of key watchwords or watch topics I guess one of them is about what's called sustainable competitive Advantage this is actually going to be the focus of the second half of the session competitive Advantage is how you manage to maintain differentiation in competitive space you know how you manage to outperform competitors and other platforms um

and again sustainable means you can you can do it not just at the beginning but like over time you know you can you can maintain competitive advantage or hopefully push it even further right you know sort of accelerate your accelerate your lead um and we'll talk a lot about what is you know sort of what carries over from web 2 where are these the old intuitions are still useful and what some of those core intuitions were and like where things change in web3 like what is what is it that is new or different so for example you know when we talk about competitive Advantage we'll of course talk about the possibility of vampire attacks right when you're when all of your data lives on a you know big public infrastructure layer it's easy for other people to see what your data is and and potentially

Target your top customers and incentivize them to switch over to to their product um and that's very different relative to web 2 where everything was about aggregating it was sort of like the biggest data or you know one major business model was about aggregating the biggest data mode you possibly could uh key footnote all of this is still evolving right this is we're in early days uh I'm gonna be teaching sort of how web do what we know about web 2 strategy feeds into and transforms in the context of web 3 strategy um and there's lots more to be discovered right like this this is morphing as what web3 is is morphing and and new business models are being discovered so uh my my strong prior is

that this is going to like help all of you guys figure out how to compete in in this landscape and five years from now we will have like built and stacked much more on top of it and so as you're like as this is as much an exercise in learning how to think about these types of business strategy questions as the individual like you know specific like tactical suggestions are going to be relevant right so it's not just about like tactics do this there'll be a lot of that but it's also about like how do we get to that tactical decision and how do we sort of extrapolate the same type of reasoning to as yet unknown settings so why are we doing this why do we do web3 at all um there are lots of good answers to that question the one that

I particularly like I'm slightly biased you know Chad esper one of my former students who now runs Kudos and I wrote an article about this so I'm biased because you know we wrote it down but but we thought really hard about it and to me like it's fundamentally about a difference in the way we create value so web3 is about giving up some share of surplus you know the value that is created by a by a business at the outset you know you give up some share of of the value you give you know some degree of governance or some degree of ownership or some degree of the returns um to you know or even just you know useful assets right you like you know

you you give away a lot of tokens to your arcade on Day Zero um to the Builder the Creator the platform user and you're sort of making this bet that when you do that those people those agents those companies are going to invest and grow the platform you know grow the pie for everyone so it's like you're saying I'm gonna give up some value today and I'm going to sort of Share value going forward right I'm about trying to share the total value that this creates and the hope is that giving someone ownership and some degree of of shared participation

is going to drive them to like build the brand to build the product to like you know develop additional add-ons what in features and whatever else and the reason to me at least this framing of the problem is important is it makes it clear that it you know sort of the the sharing of ownership is not accidental and the format matters right like what you need to do somehow is provide value in a way that drives people to help make that pie bigger than whatever the than whatever it would have been if you hadn't been sharing and it creates this possibility that we might have like you know web 3 social media platforms that are far more valuable than the web 2 like you know social media Giants and web 3 marketplaces that

are far more valuable than the web 2 Marketplace Giants but that comes and you know if you make the pie big enough you know the fact that you've given up some slices of it you know you can still accrue more value for for yourself in the end but it's not just like you know it's not just about sharing value for the sake of sharing value that's good right like it's also by the way it's good for both like positive like social welfare standpoint you'd like to be sharing value with your participants and you'd like to have your participants in the platform sort of have a you know sort of shared outcomes but from an instrumental standpoint that's because of shared incentives right it aligns the platform in the user both for the user to contribute to the

platform and for the platform to make decisions in ways that reflect the user and their preferences as well okay now I've been using this word platform all the time and I've essentially been saying like you know web3 business you know I've been treating web 3 business and platform as interchangeable um and that's not an accident either so actually let me pause for one second so just on that framing Point any questions thoughts Reflections like so this um first of all thank you for being here this um this principle was what got me most excited by crypto in the first place um I guess it seems though it's quite in

my opinion at tension with um regulatory considerations so I'd love to hear um how you think about that potentially later absolutely and I am not a you know I'm not a regulatory expert um so so I'm not going to speak to specific structure or policy or whatever um but at a high level you know I think it's important to think about it you know there are many ways to Share value and align incentives right like um you know for example my uh my instance of arcade tokens I just sort of used as a throwaway like giving people you know sort of the opportunity to like

play your game as your game expands and like help build the game universe as a way of sharing value and aligning incentives um giving people the opportunity to have characters in your story World um you know and and you know write fiction like you know under you know in their own uh you know in their own voice but about a character who's sort of semi-permeably like sort of passes into the Canon of the actual story world this happened by the way there are precedents for that I I don't know if any of you read the Star Wars expanded universe but like growing up I read all of these Star Wars novels that were basically written by people who had been invited to use characters from sort of obscure parts of the Canon and write stories around them right and those authors did Super well right and especially the ones who wrote

really really good characters and stories some of that material actually even got imported back into the main Star Wars franchise these sorts of shared ownership and and shared involvement you know sort of don't you know like they they don't look like the types of things that are that are alignment through direct you know sort of direct Financial return or something that a lot of the regulatory concern again to my understanding is about and I think you know in in some sense actually this is a really good explanation of like why this principle is important right like if the goal is to find ways of taking your community members and your users or your developers and giving them a component

of the pie like platform by platform we'll come to that platform where in a second there are different shapes of you know what what that pie slice can be and you know even sort of in today's architecture and today's sort of Frameworks I think there are a lot of ways to do it that don't look like things that are that are sort of again to my understanding at the boundaries of the regulatory concerns is that helpful yeah yeah thank you all right on to platforms so as I said I've been using this like platform and and web free business almost interchangeably that's not an accident what is a platform a platform is just you know sort of uh you know something that enables groups of users to interact with each other this is an

extremely high level definition note that I have not said things like must have you know two sides there's a buy side and a sell side although often platforms will I haven't said anything about like what technology they run on like uh you know a credit card or a newspaper as a platform right a credit card is a platform that enables customers to transact with Merchants uh you know a newspaper is a platform that enables like you know advertisers to reach readers weirdly like you know newspapers and search engines or similar businesses in that sense um platforms are characterized by Network effects so a network effect is that you know sort of driven by or it's when you

have an increase in the number of users impacting the value of the good or service provided and again these could be positive or negative so in the case of credit cards the more businesses take a credit card the more valuable it is for a user to have that credit card the more users have a credit card the more valuable it is for a business to take the credit card uh but with newspapers and and you know maybe sponsor you know search advertisers as well um the more users the more valuable it is for the advertisers it's a positive Network effect in One Direction and the more advertisers perhaps the more frustrating it is for users uh negative Network effect in the other direction uh and also by the way Network effects act on the same side too so um if there are many advertisers on a

newspaper or a search platform that raises the price for every individual Advertiser so they actually have a negative Network effect relative to each other um You probably all know this but so apologies I'm I'm gonna because you know you're you're all in some sense platform entrepreneurs um so I'm going to speed through some of these basic you know sort of Concepts and stuff but stop me if there's anything that feels like we should drill down on it um as I said I've been using these interchangeably it's because most crypto products are platforms we don't always like intuitively think of them that way uh so for example Bitcoin I claim is a platform

why is Bitcoin a platform well sort of the same reason that a credit card is a platform right it's a mechanism for people to interact in transactions with each other uh and it's sort of only gain you know not only does it grow in value as number the number of people who use it you know or believe that Bitcoin exists and is Meaningful and and perhaps use it for transactions and creases it sort of only has value when a lot of people agree that it has value right like sort of it's like the most primordial Network effect you could have you know these these bits don't actually mean anything unless a reasonably sized group of people agree that agrees that they do um

similarly like you know the board ape yacht club or like any nft project is also a platform I also apologize you'll see there'll be nft pictures throughout all of my slides I'm really too obsessed with them but uh you know I like platforms um nft projects are platforms right they if only one person is in the project it has no value as the project you already might have value as like either that person you know owns this very unique piece of uh you know art or imagery or whatever but um but the real value comes when lots of people are excited about it and especially especially when like really you know particularly you know interesting people become excited about it right you know they once you have Eminem and Snoop Dogg in the board ape

Yacht Club then you can have them perform at ape Fest and do a music video set in the other side and so again there are these positive Network effects among participants right the more and and there can be like you know sort of escape velocity level Network effects right you can reach a point when there's constrained Supply as there isn't many nft projects where far more people want to join the platform than there actually is space for users um and again this doesn't just have to be about like you know fixed supply for uh you know for an nft Market it could just be like your servers get over taxed right you could have sort of a negative platform externality at larger scales simply because there's not enough space to run everyone at once

so web3 platforms are going to face many of the same conceptual challenges we were used to with the web 2 platforms but there's a lot of new stuff that creates new opportunities and and also sometimes some new challenges so this is incredible oversimplification but in my mind there's sort of three big categories here one of them is standardized infrastructure so the fact this stuff runs on blockchains is important not just for the sake of decentralization which is you know good for for security and so forth um you know which is which is sort of that third one credible commitments but standardization is useful because it means lots of people can build right if you launch you know a new

um a new protocol because the infrastructure is standardized it's easy for everybody else to like reference and interact with your protocol and then you know on top of that bullet point two you know it interoperates and composes right it's easy for people to like build new protocols on top of AZ for them to import them into their platforms same thing if you have like you know a given digital token that's can it be immediately displayed in lots of different token viewing applications um and it's a standardization that does that if you think about like how hard it is if you wanted to say take all of your data from Twitter and move it to Facebook or vice versa right like these are platforms with very similar

structure very similar use cases and yet porting data back and forth almost impossible right it's just like different format different inputs um very very hard to like make them work together whereas crypto by Design everything lives on this substrate the blockchain and the blockchain sort of standardizes everything and that enables it to become very interoperable and composable and then there's other also this trust Point credible commitments so if you as a platform want to say to all of your users like we commit to not raise price it's really hard to do that in web 2 right you can't just sort of say like Hey we're committing like the price is always going to be this or the reward

scheme is always going to be this so like these points will never get devalued when you can put in a smart contract you absolutely can similarly if you decentralize control enough you absolutely can right if you say we want the reward scheme to look like this unless our consumers don't like that and then you give the consumers like you know 65 governance now you have commitment and commitment is good because it means people can trust that your platform is going to behave as promised which makes them more interested in joining and potentially more interested in building on top of it and so again like in my mind like all of this is about breaking down the sort of the components like we know we like credible commitments right we like

smart contracts we like trust we like being able to commit to things the question is what does that mean for your business right it's if people will trust your promises how does that enable you to do things you couldn't do before what types of users does that bring in like what is the value as the platform of being able to make those types of commitments so being able to use this infrastructure to make the incentives better and more aligned all right so Network effects the standard Network effects analysis you care about three different things you want the strength the valence and the source so

strength is like just how much does adding a new person to the platform new user to the platform grow the value for everybody and how much does that vary across users right are there what we call Marquee users people who if you bring them in like suddenly the value goes way up and how quickly do these things grow right like you know do you what where are your thresholds like do you need to get 100 users for the thing to become awesome do you need a thousand users for it to become more awesome do you need like you know a billion users that one might be take a longer time to aggregate and then as we already talked about sometimes these Network effects are positive sometimes they're negative you got to think about their valence like and for which users right like with a lot of K you know there are a lot of

cases where some users generate a lot of value for everybody else but they themselves might be unhappy uh you know you know they're gonna get mobbed right it's like you just added some celebrity to your platform um maybe they're they're a little bit reclusive but everyone's like oh my gosh celebrity like let's hang out like um and then source is really so strength and Valence we think about a lot right those are sort of like the default instincts about what we have to care about but source is also very important and the key here is to think about is this source defensible right like liquidity right if you're a D5 protocol is liquidity defensible sometimes yes sometimes no and and

sometimes you make platform decisions that affect that right if you're if your liquidity providers have to be locked in for a year that's a lot more defensible than if your liquidity providers can just pick up their liquidity and move to a platform with a slightly better rate of return at any moment but on the other hand if you lock people in maybe they're going to be less willing to use your platform and so you have this like balance um a lot of the you know tldr is that a lot of the defensible sources in web 2 are a lot less defensible in web 3. right like a lot of web 2 was about data and user aggregation and as we've already seen you know think about you know the the competition between various nft trading platforms or D5 protocols right user aggregation is not nearly as

defensible at least so far in web3 because people can just switch right when you can when an individual user controls their digital assets it's easier for them to move um similarly data aggregation right if all the data lives on a on a public chain maybe it's harder for that to be a source of defensible competitive Advantage although maybe you have know-how and and tooling built on top of that data that is much more defensible so there we go um just quickly um I think we have time quickly just like to give yourself some examples of like how to do this analysis um I'm gonna show this one and then we're gonna we're gonna do a live

discussion example in a few moments that's sort of similar in style but with a with a second design question so social media platforms you know one big difference is like are your network effects Global versus local social media platforms they're Global they're like you know everywhere you know if if you had a user somewhere they're valuable everywhere except maybe like out of in my language silo or something Rideshare is very local right like having a bunch of drivers in a location is only valuable like for that location and there's a little bit of global like you know if you're if you're a user of a given Rideshare platform and you fly somewhere else maybe that's the app you open up on your phone but like mostly these rely on very dense local networks um valence we already talked about users versus advertisers

um Rideshare is a great example of this like the cross side complementarity but same side substitutability so like every driver it makes the platform more valuable for every writer and vice versa but like Riders crowd each other out drivers crowd each other out and again I mean like you know think about liquidity and we talked about vampire attacks in web 3 like there was for a while a cut through competition between Lyft and Uber where they were both trying to steal each other's drivers right trying to like extract the liquidity from the platform um we'll say more about nft projects later but they have a pretty they and many other web 3 businesses actually have a source of network effect that is to some degree I think unique to the web 3 or web3 like businesses which is community cohesion which sort

of like a an active desire among users to use this platform instead of a competitor for whatever reason right like you know you are you are part of this nft project you're part of the community you are uh you know you are a user on this platform and you self-identify not just as you know somebody who participates in uh you know who who writes manga but is part of this manga Community or somebody who you know isn't just like a develop you know open source developer but an open source developer for this protocol and that's a type of network effect that is is very different and and special and a lot of this like token incentive alignment stuff is about cultivating that

okay launching a platform of chicken and egg so how many of you guys have heard like somebody say like you know if you're like launching a two-sided platform like you got to start by going after Supply or you got to start going by going after demand or something like this yeah so this is like a very common way in which people advise this question um and people have very strong opinions about it right they sort of say like you know oh my gosh you you absolutely must get all of your supply side first and by the way in the context of an individual platform like if they're talking to you about your product specifically this might be the right way to think about it right like Supply or demand might be the the first way to try and

attract but like at a high level like a lot of people just think that they're always one of these is the hard thing right like or or the most essential thing or something and that is not the way to think about it the reason is that like whether Supply or demand is the way you start building your platform even if you're you know it's even just imagine your platform is two-sided which it isn't even necessarily depends tremendously on your Market context and the specific problem you're trying to solve what you really want to think about is who do you subsidize versus who do you charge and this again will factor into the pricing conversation you guys are going to have later as well um

but basically some users of your platform are going to be you know are themselves going to be generating so much value for the other users that you're in effect willing to subsidize them right so so like if you have users who are really price sensitive or really quality sensitive or Marquee right like they're just gonna bring in a ton of other people you're actually like often willing to pay at least at the outset to get them to come in right like you know you'd be willing to and and you see this all the time right like you know you might give away like early token allocations to early adopters or

developers um you know uh an nft Community might give out you know some of their tokens to people who like you know to to strategic Partners who are like helping build you know sort of associated assets or something of the sort and the reason for that is these users are going to add a lot of value for everybody else you know on the margin you want to be subsidizing the users who add the greatest marginal value for others and meanwhile charging the people who like perceives significant platform value and preferably have have the the less elastic demand so they're less price sensitive less quality sensitive they really want this thing whatever it is and note that that changes who that is

by change over time right like someone who's a marquee user of the platform might always be a marquee user but alternatively they might like you know go from being Marquee to being like you know so the platform grows enough that they're actually getting more value out of the thing than they're providing down you know sort of um you know sort of to users and at that point maybe they charge you know maybe you charge them rather um and so it's less about you know sort of do you start with your chicken or egg do you start with your supply side or your demand side or whatever and more it's like you know you need your initial users to be the ones who spin that Network effect you know sort of into existence very quickly and make it really strong right you like have a really high positive valence Network

effect and ideally their engagement becomes defensible so I've got three contexts for you think like an L2 chain an nft project and a D5 trading platform and the question is who do you subsidize and who do you charge like how would you characterize the users that you're going to want to be subsidizing how do you characterize the users that you're on the margin you're going to want to be charging um think to yourself for 20 seconds and talk to a neighbor for like a minute or so a minute and a half and then we'll come back and collect some answers so like a couple groups like be ready to like jump up and like say your thoughts on at the bike cool all right what do we think do I just go through

the first example of the subsidies yeah why did you why don't you give your thoughts on the first row exactly okay so the first row if you're an L2 chain you might subsidize like a big uh Marquee devs or builders in the community via grant program or something charge via Network fees so future projects that are looking to build on your chain you could charge them pricing um I think that bucket would just be like Network fees and protocol fees gas fees things like that I love it there is in fact a you know a copy of the slide with my thoughts on it as though it says the answers to flash that's basically what it says except phrased way better

um so I'm going to call that one like a straight Victory on L2 um the uh and exactly rate right you want to subsidize your early Marquee users um and you know get them to start the ecosystem and spin it up and then like over time you know you're going to be charging eventually you're gonna be charging probably everyone right because at some point you if you're you know if you're lucky get to a large enough scale that like everyone just wants to be on your chain and you're going to charge them in proportion to how much you know how much they're using the system right gas fees some like measurement of usage because that's actually the cost structure right cost scales with utilization love it um even got that pricing point which we hadn't even talked about yet nailed it

all right nft project what do we think so for nft project this subsidization would be for um so I actually like along with my co-founders we launched an nft project ourselves and awesome so we subsidized members of other communities NFC project communities by like saying okay we'll have an allocation of uh five nfts that will go into your community that can go to that you can kind of raffle off to to members um with the idea being that if we can kind of get other communities excited about our project like eventually we'll be able to charge the normal price of of other members similarly the idea of a pre-sale you

actually subsidize the generalized cost as well where you invite like people that are close and and kind of either influential you can do we've also did like one of ones um and and kind of like airdrop them directly to people that you know we believed would be you know pivotal or important to like you know helping to to show the values of the projects but also like uh be like in evangelize the project as well um so yeah the generalized charging is just kind of to once the public launch went live and we were confident that okay now there's enough excitement and a lot of perception of value um

through which a lot of people come in and I guess fomo in you could say or just buy because they're excited they're not following they realize they want to be in the community because you have such a cool initial Community right yeah that that I think is the point and then maybe at the 50 Mark perhaps that's where the fomo layer um kicks in uh you don't want to miss out on being in the awesome Community either right exactly exactly so that's that's well said and um and then for pricing I think in a lot of ways you look at some of the existing market dynamics but one thing I I would say is like the way that we conceived it is okay for the generalized audience that we're looking at what what would be like what what would they spend like on

an annual subscription or like how would what is like a meaningful amount where it's it's valuable to them but you know it's it's within the range of a financial purchase and decision that they can make um for the audience that we were really catering to love it um let me stick with you for one more second let me ask a question about that audience and those initial communities how did you pick them like what was what was the the concept behind who your which communities you're going to partner with so the project that we had specifically um was like a nft project that was targeted towards African and Latin American communities so I think in a lot of ways we looked for other African

communities look for other Latin American communities look for groups of like women we looked for um people that really engage with us like other larger nft projects that really for Life a better term like they really vibed with what we were doing and expressed that so it was just a matter of like not we weren't we weren't guessing it was just like who actually engaged with us and wants to really be a part of this yeah that we then reached out to and and invited to participate in our launch I love it um we're we're two for two now with the like walk-off home runs you know all three bases including the one we hadn't even like talked about the structure for yet um it's exactly it right like you're

subsidizing like who who is it that you're recruiting in that you're you're subsidizing you're giving tokens to or you're like you know really like you know marketing the community to it's communities with you know you know similar goals and and opportunities that are already established and that where you can find people that you know are going to be great Community contributors and yours and then asking the question like you know how do we leverage them to drive that initial value to then open it up and like bring in like you know sort of all the rest of the market right other users you know sort of who have the opportunity to opt in and again it's like the better you do at like curating and calibrating that initial Community

you know the more you know sort of the more the network effect both exists and and is strong and also sort of draws in the right people right like you know it's not fomo you know it's not fomo in the sense of like oh man I just got to get into this project I have no idea what it is it's like oh this is like a project for me that I want to be a part of because I want to be with these people and that's exactly what it's about right it's like you know your your ordinary members uh you know and and pricing wise right like it was the the non-subsidized users they pay they pay more because you know they're they're following these other sort of core contributors in and the hope is that in every layer you bring in that you sort of you select for

the people who really want to be a part of it um you know and price accordingly and this also motivates by the way the idea of Downstream you know like why is it that communities get air drops why is it that they get reduced prices on future mints and Community expansions and things well it's the active core contributors who you you want to like reinforce their activity right it's not an accident that like you know communities have lower pricing for their current you know you know current maybe current active users relative to sort of new users joining that's literally just like subsidy subsidizing the people who are already contributing to reinforce their incentive to contribute nailed it um also like sounds like an incredible project

um cool D5 trading platform should we should we try I don't know the three-peat or something so uh I think subsidization I think Deepa has very strong Network effects so subsidization early is like people um providing supplies so maybe like liquidity providers um that are bringing down slippage and and fees and and giving end users a good price so um charging is users who make use of the D5 trading platform to I don't know swap um and then we had some disagreements about pricing because um some people think maybe the pricing

should go down as as it sort of gets strong Network effects I suggested jokingly that um maybe you should rent extract as much as you can while still being the cheapest um and make use of your network effects to extract as a platform so I'm not sure about that I love it uh you know what what is what do you I guess we've like added an extra base because you covered both the pricing question that was sort of like the setup here and the one that we're talking about right after we come back for the break so so not only did you nail that like straight on every point but like you even previewed where we're going um so so rocking exactly right you're

subsidizing initial liquidity you're charging your retail end user Traders and pricing there is tension right on the one hand you know as the platform grows liquidity becomes easier to come by like the platform is sort of doing less to create value on the other hand as the liquidity is more anchored in this platform now you can maybe extract right your network effect is stronger people like want to trade with you rather than some competitor and so maybe you can push price up totally right and indeed the tension between those two the question of like do we have to like lower the price because you know we're our cost structure has gone down um or can we raise the price because people are are you know sort of coming

to our platform organically now that's totally gonna depend on how defensible your competitive position is and then as I said that is literally the second half of this session so thank you you've rocked it so we are almost at the break let me just quickly Flash the pricing slide and reinforce what the three of you said so price is linked to the value the platform adds and it might change over time as a function of how much value you're adding and its format depends like on the way that value works is it per transaction like in the L2 or in the D5 you know sort of platform where really the value you're adding accrues at the level of the individual transaction or is it like a membership fee is it like an annual

like you know an nft Community or something right like what's really going on is you know the the value comes from being in the organization and so in that sense maybe it makes sense to do a one-off or annual charge or something like that um but price level the platform can charge you know that's that's sort of how you should think about what your price should be like where does it come from how do you even decide like how to price but the level you can actually charge depends on your competitive advantage and that is where we're going next so there are examples here is my uh or here is my slide with with my versions of it which you will see looks very similar to what you guys said but not nearly as eloquent

um you guys really nailed it I will probably be like in the future revising a version of this slide and I should do like citation credit for you guys or something but in the meantime let's take a quick break because we've been going for I don't know 50 minutes or so so uh we can we can check out Pancho sochi's uh beautiful nft art I've uh you know huge fan of his from the subtex community and there's a quick puzzle if anybody's looking for some uh you know some fun during the break um which word doesn't belong and why your options are climbs rustic rabbit youth photo 2 and owl all right so um as we as we ease back in did anybody solve the puzzle so if you drop rabbit

the first letter of all the words together spells crypto and the last letter is spell school people are like oh come on Scott like what the heck like so I've always loved this puzzle this particular puzzle format the first time I ever saw it um you know you have like a word pyramid or something and you know you're you're staring at these words and like they all feel totally different from each other and like there's no meaningful relation between any of them and you do all these things right you try a number of consonants you try you know and and that one was better designed than this one if I if I'd really like done a good job at this you try and like test it against

lots of people to exclude as many of these different like alternate hypotheses as possible to make it even more confusing but eventually you'll learn that like you can see out you know sort of you learn to see outside the frame of the puzzle right like you know the words themselves are not just individual objects but can interact all together which is sort of a metaphor for strategy right seeing outside of the frame and also a metaphor for web three you know seeing how a bunch of individual distinct pieces with their own properties their own characteristics come together to form a unified whole all right so we are here to talk about competitive advantage so what is competitive advantage competitive Advantage fundamentally is

is your source of differentiation and it's really important these ideas go back to Michael Porter um it's really important to think about your differentiation not in terms of features per se but in terms of performance it's like my platform is better than the other platforms and they're at a high level like only two ways you could be better right you can either be higher quality or lower cost and so when you're thinking like what is my source of differentiation how am I competitively differentiated it's like you know how am I either going to be like you know providing the thing at higher quality or providing the thing at lower cost or both um these are measured in terms of value

creation and it's relative it's a relative measurement it's not just like you know again it's differentiation right it's not just like you are a high quality platform but it's like how much higher quality are you than your competitors um that means it can change right so like new competitors can show up um and or can just get eroded in different Fashions as the market changes um and so you need your competitive advantage to not just be you know sort of real and high value you know in large but like also sustainable and defensible many different places that platform competitive Advantage can come from um so of course perhaps most intuitively a platform competitive Advantage can come

from the core Network effect right like you know if your platform has a really strong Network effect we talked about this at the end of part one um you know you have liquidity you have powerful users that other people want to interact with you have data you know all of these can be sources of competitive Advantage because Network effects you know grow by definition they grow as the number of users increases and so if you manage to get your network effect far and out of ahead of your competitors that could be going back up a sec a source of differentiated performance also economies of scale thinking especially about that cost side right if you have a way of doing something with lower friction um or with like higher Insight like some better way of doing whatever they you

know sort of operation is um that is also often a key source of competitive advantage and then an especially relevant to web 3 and was historically relevant in the open source software movement is embeddedness right if you're if everyone's platform runs on your platform like everyone is using your technology in some fashion as a core component um you know then once again right like your position remains very defensible and you are providing the value of sort of connectedness for like everybody everybody is running through you um and often that by the way feeds into these other components right the more embedded you are often the stronger your

network effect and vice versa and the more embedded you are often the more economies of scale right if like everyone's protocol is running on you you can aggregate liquidity from everywhere or you can collect data from everywhere and like build sort of the best version of your product you can by the way you've probably already figured out just like in the first half we're starting like pretty abstract and then we're gonna go like you know heavy specific um there are other sources of competitive advantages sort of like like these ones are all about sort of the core Dynamic of being a platform right like you have Network effects you have economies of scale driven by those Network effects you have embeddedness like you're sort of you become a part of many other platforms and so other people are building on top of you there are other things you can do to

generate competitive advantage and like some of these are very powerful and we forget about them like Standalone value can be an extremely strong source of competitive Advantage right just the fact like people want to join your platform not because of the network effects but because they want to use it right if your platform just does something useful that is hard for other people to do you know if you have the best interface or the best like you know features or something you know you um in web 2 a lot of companies basically launched by providing SAS platforms to whichever side like they're subsidy to one side of the market was a SAS platform right it was like a platform that the other side that one side of the market could use to manage all of their

contractors and suppliers or all of their apartments or whatever and then suddenly like you know you've got a side that just doesn't want to leave right like and suddenly now you can provide you know all of your other services you know to to the other side of the market you know you have this completely locked in you know Supply or demand side as appropriate because they're just using your platform and you do their Standalone Services really well they would use it even just to manage their inventory even if there were no users on the other side um similarly like technical you know technical advantages you know particularly high quality Partners thinking about that cost you know sort of Dimension low-cost suppliers or like you know the best devs or something like

that often and then sometimes although as we'll see perhaps maybe less in web 3 sometimes speed to Market just becomes a competitive advantage or source of competitive Advantage like you you get to Market faster you become better branded everyone thinks of you as real and like you know there are some powerful examples of that in web3 right uh see Bitcoin right like you know if if Bitcoin were preceded by a different I guess Nakamoto blockchain um you know that would probably be the the one that was sort of centrally like identified and branded as as one of the core digital assets um okay so these are many many different sources of competitive advantage

actually quick you know this is this is a good place to pause it you know any any questions about this I just sort of like assumed through like you know both sort of platform intrinsic competitive advantage and then like sort of additional features that I guess in principle like any Tech platform any tech product could have and the platforms very much like you know sort of also borrow from one question as this relates to subsidizing again yeah and charging in terms of like sequencing like uh some of these sources of competitive Advantage looks like more controllable like if you build a better product a better team yes should you go for this first and then from their work out who you can charge and who you can subsidize versus kickstarting a network that may not have

these embedded oh it's such a great question yeah so the question is let me let me say it back and confirm that I've got it right because it's it's really a deep and Rich question but at a high level it's like some source of competitive Advantage like building really good Standalone value are things that you can just build right you have a lot of control you know conditional on your team being awesome which all of you guys are like of the ability to deliver high quality Standalone value for your users whereas things like the size of your network or like the quality of you know or economies of scale for goodness sake don't kick in until the market gets very you know potentially until the marketplace gets large and so those are like a bit more of a Gamble and you know

you're you're subsidizing them for for a long time at least until you get there right the question is like how do you how do you sequence how do you choose among these is that is that a good rephrasing yeah amazing okay first of all so the framework for thinking about this the first thing to do is like think about it as in both cases you're subsidizing something right like you know like subsidizing users by building a you know a lot of really good Standalone features and subsidizing users by you know you know giving them discounts to use the platform are both forms of subsidy um and so in all of these cases it's a question of like you know how much is this going to cost me to execute versus like how much value does it actually

create for my users and and for growing my network and then you know weirdly like the answer is is sort of economically simple but really hard but like but much harder to actually like sort of make practicable the economically simple intuition is you want the high you know the biggest bang for your buck you want to like allocate your your development resources your your marketing efforts whatever to the thing that is the highest return overall right like in terms of like total value creation maybe weighted towards short-term value creation if you're if you're really new um relative to the cost so like if it is easier right if you control the

Standalone value features better and like you know exactly what your customers want and you like know that you can build them really well if that's like you know heavily in control in the sense that it's you you know low cost and you can execute on it and and make sure and you're certain it will work versus you know something where you know it's much more unclear like you're and and the costs are uncertain and probably you know maybe higher like you know you're gonna go after and find you know five Marquee users and you don't really know how much of an impact they're gonna have on other people joining the platform you know and and you're pretty confident that your your Standalone features are gonna you know bring in X number of users in x-way then you're building your Standalone features If instead like you know you find it

really easy to like you know bring in five Marquee users like you know that like some people are like desperate to use your platform irrespective of whether it's like fully built out or not that's your like cheap option then you go after them it's very much about figuring out like how much of an impact each of these different possible interventions will have on your your platform in the short in medium and long term um sorry controlling for defensibility a little bit right if you bring in a bunch of Marquee users and they might leave tomorrow that's also like a much less defensible position than if you build features that are very hard to copy and vice versa if the features are very easy to copy but like you know your community is forever then then maybe you want to build the community um but it's all it's like how much value

is this thing going to create for the platform how much is it going to cost me and how does that ratio compare any further questions uh my question is around these Marquee users like how do you identify and then track the you know impact of them great so first of all all of this is hard right like and especially you know one of the things that's really hard about platform analytics and that thus carries over you know we've virtually all went through businesses or platforms thus they're virtually all going to have this problem is that a lot of the impacts are are second and third order and downstream and like take a long time to kick in right like having some you know like you know having your first five users probably doesn't do very much at

all in the immediate term right and the real question is like you know how do those five help you get 10 to 20 to 30 and then like you start seeing like the real Network effects kick in at 100 or a thousand or something so like there's this you know whether they're Marquee or otherwise right it's like how do you measure like what caused what because a lot of these things are not really randomized experiments right like or some other form of like easily identifiable change right you're not gonna um you're not gonna like systematically sorry actually by the way large platforms do systematically like change the exposure of users to other users all the time right so like once you have like you know hundreds of thousands or millions of users then actually you start running experiments like what happens if I like

drop the amount of content on my platform by 20 and you show half of your users 80 of your content and the other half a hundred percent and then you're like wow like you know what's the what's the elasticity with respect to content generation but like when you have five users not only does that not make any sense but you certainly aren't going to do it right you want everyone to like be enjoying the thing as much as possible um so you want to first of all you want to try and like pair all of these interventions with things that are more measurable right if you're gonna like have a marquee user you know you can't you know you can't split test whether they are or not on the platform but you could certainly split test how you message their existence on the platform right

and you can like have events right if you're um you're an nft project that happens to include a few major celebrities and like it has also a couple of like you know major players in the community and you could design events and check attendance right like do more people sign up for the thing with the two celebrities or the two Community uh you know sort of uh you know the the two Community um leads or or you know one in one right like and you you create three such events you make them sort of otherwise similar or you like you know just check registrations and sign ups right so there are there are things that are like split testable even you know at the level of like you know we have this one user or you know this one like

project that we're launching you can sometimes by the way um smoke test those even before they happen right like um you know before someone joined you know before you like go out of your way to like recruit someone to join the community you could like go out of your way to recruit them to be at one of your events and like see if that drives a lot more participation and then if so go to them and say hey can we give you like five tokens and like you know get you to really be a part of this thing um but at a at a high level which you want to be measuring is how your community or your your community slash user slash whatever growth responds to different changes in what you're producing right and when those are features that's

actually reasonably easy to test when it's people it's harder but it's not impossible right like and again it's like look at how those people interact do those interactions like Drive other participation look at what they create see how much those CR like often those people will be creating features for your community right like you know they might be like you know writing sort of writing protocol supplements or features and things and it's like how much value do those assets create and then the other thing and this is just sort of like a it's like a miscellaneous tip it doesn't come it's it's it doesn't come with a specific tactical execution strategy because it's going to vary from platform from Context to context but the other tip is like a especially your your big players whether they be like you know

individual celebrities in an nft project or like major development shops on an L2 they're often going to want to work with you as as partners right to like think through like what their engagement looks like and like how it gets structured and how it gets built out over time and all of those opportunities like are likely to be measurable right and they're going to want to measure too right they're going to understand like you know how much impact did we generate doing this thing and so it's like as much about like watching as you're like building out their engagement with them for things that you can like test and measure along the way as it is about just like in the high level like wanting to be metric driven is that helpful yeah so it seems more like split tests and working together with the community

yeah exactly so the the really yes and and make sure sorry one more thing gosh this is great we really should do a do a write-up about this or something this is a really really interesting and like pretty deep question and web3 makes it it's one of the only things I'm aware of where like web3 on the margin probably makes it a little bit easier because like so much is observed and recorded right the other thing you want to know is like Downstream it's like you know you can do you can like try and predict different counter factuals right like you can even like just like lock in you know growth projections and like see how far off you are in different ways and there are

there are like fancier statistical ways to do this too right where you basically extrapolate like what the what the community growth would be or like what the expected like user contribution per user would be at a given time and like measure how much that changes after you make a bunch of platform adjustments um and so you're looking at sort of like the almost like the derivative of the derivative right it's like how much how much impact do we have on the rate of change of user engagement or something like that sort of from these different interventions gotcha yeah looking forward to that thank you cool great question further questions on competitive Advantage going once twice got one so I think a lot of us are trying to

build a competitive Advantage because yeah especially uh Venture scale investors particularly like them um and I've heard that and and there have been some events in the space like blur's sort of uh recent growth and that have I guess made me question like which uh competitive advantages can can lead to sort of the long-term moat and which ones might not um and particularly because I'm building a client on top of a social protocol I get this question a lot as well like uh absolutely um so I'd love to hear your thoughts on um moats and which ones uh can be

lasting and which ones may may be harder to defend I don't think I could have generated a better plausible transition to exactly the next topic which is that great this is literally what we're talking about next it's like how do we build defensible competitive advantage in web3 um background fact is like when is like when does this even happen sort of strongly in the first place like what makes a market like winner take all or most um you know we've already talked about Network effects another one and this is going to be super critical in thinking about the web 3 case is how hard it is for users to switch right like that example you just gave of like you know of users switching you

know from from one nft trading platform to another you know that's much much easier to do on a blockchain based platform or in as many social protocols um and then relatedly like you know interestingly and sort of moving the other direction right markets are more likely to take be winner take all when there are fewer Niche users right when there are a few users who like have a unique need they can be sort of supported by a niche platform um but this switching cost thing is going to be utterly essential here okay we're gonna do this one really quickly because this is a good thought exercise We're not gonna have people like you know sort of exposit their answers but we're like think about it we'll do like a poll um so same thing as before our L you know l-star chains winner take all so

like your layer one layer two layer five whatever uh D5 lending platforms nft minting platforms nft communities so same thing think to yourself for like 30 seconds talk to your neighbor for a minute and a half and then we're just gonna like pull and see how many we think is in each one um and then uh and then exactly literally uh uh you know the next you know sort of the the next course or the next like the wrong word the next um layer pun not intended is exactly from how do you go from like this understanding of like when platforms have Marketplace dominance into like web three platforms and web3 competition cool but first are they winner to take all think to yourself talk to a neighbor we'll be back so just quick show of hands winner take

all how many are are bullish on l-star chains being winner take all we got like a third of the room um so like you know let's let's just quickly think it through strong Network effects very likely multi-humming and switching costs hard to know right like you know lots we're seeing lots of applications just like pick up from 1l2 and move to another l1's may be a little different right like you know maybe that's you know there's some more maybe more likelihood of a fixed L1 substrate few users with unique needs what do we think yeah hard to know like maybe yes maybe

no right like you can imagine that like one day there will be a finance only like or development even a development Finance like a developing World Finance only L1 that is like very heavily optimized for that just like there are pricing networks focused just on development you know you know developing countries like you know sort of Agriculture networks and stuff um and so totally possible that we might have like even like proliferation of l1s also possible that the network effects might be so strong that all of that stuff centralizes and happens and you know onto a single L1 with multiple layers I think it's one of the like hardest biggest open questions right now for predicting the blockchain in future D5 lending platforms winner take all yes now how many yes how many now

how many like I don't know that was like do they all end up roughly add up probably depends a lot on how sticky that liquidity is right and like you know those switching costs right like yield farming is taking advantage of low switching costs but like switching costs might get higher over time as like liquidity becomes more different I don't know hard to know nft minting platforms how many yes no yeah a lot of votes for no here right we already see a couple of different nft minting platforms you know accumulating large market shares um worth thinking about is that because the

platform itself doesn't have particularly High Network effects like switching costs near zero for the user at least we're thinking about like is there a way to give it stronger Network effects right is it just a service or is there some way you can turn this platform into a network all right nft communities winner take all at least within the category of uh you know some some category like the the anime nft Community or whatever how many yes how many know yeah a lot of no's people have lots of aspects to their identity um switching costs multi-homing very easy right like I am in I don't know about you guys I'm in the maximum number of discords the Discord allows this is all looking like kind of hard

right this is like reframing David's question right like this is looking a lot harder so web3 platforms store all their data and protocols on public chains you know or you know at least partially public chains and they're controlled by users users have all that data it's it's portable it's interoperable these are the features these are the things that make it so easy for so many people to build on top of a protocol but they also mean your users can walk out the door right they make this competitive Advantage problem much harder right think how much easier it is you know if you're on uh you know if you're on manifold like manifold is is an interface for minting

you know for you know minting contracts in effect and and sort of managing you know sort of all of the data and infrastructure around that but it's different from Redbubble in that you know it manifolds you own your own contract at the end of the day right you create a manifold contract and then you have control of it and Redbubble you upload like all of your art and stuff and like they'll put it on like you know mugs and t-shirts and so forth I don't know if Redbubble is like a sort of like an Etsy but you upload art like imagery and they then print it on stuff you know sort of but but you know if you want to take that and like move it to Cafe Press you actually have to like go and do the upload again right you don't own the

assets Redbubble does much harder same with you know open C versus Etsy accounts and I claim that this is not so much about decentralization but rather about the fact that all the architecture is like on these blockchains right it's really about the public data and the user control of that that data and that content so like you know as David pointed out this is like much harder from a competitive standpoint right there's this like thread of fork there's the possibility of vampire attacks Fork is just like you know people like copy your protocol and and re-implemented them with under their own control uh vampire attack is a platform using unchain data to identify competitors and recruit them

uh and directly incentivize them to switch that's what we've seen happen in a variety of digital asset trading contexts both fungible and non-fungible tokens uh you know to the easy way to remember this is that you know we have we have our goblins shouting when thork holding up a spoon of course uh and our vampires um you know sort of shouting out but what's really happening again like going back to like Classic Market Frameworks uh Michael Porter introduced what are called the five forces you know sort of competitive Advantage you know sort of lives in this framework of you know five forces that shape competition um and here I mean this is this is like a just a classic diagram the version here is is like a cc01 that's that's

used in Wikipedia um industry rivalry so the existing competitors sort of like you know sort of you know compete in a row to weigh each other's competitive advantages potentially um as do the entry of substitutes so like you know alternate products that can do the same thing um you know or replace the need for whatever you do at new entrants who do the same thing that you do right so like you know what you know nft minting tech there could be a new enter who operates their own like nft like minting platform or there could just be like new ways to like produce digital assets that like replace nfts both of those like can erode your competitive advantage and then bargaining power of buyers and and suppliers same thing right like this is about the

vampire attacks this is like are your users like sort of you know is there a way for your users just to walk away that gives them much higher bargaining power with you right why are we seeing intense price competition you know on these nft platform fees well it's because the users are price sensitive it is very easy for them to move from place to place and so that like raises their bargaining power and pushes down price photo by the way a common misconception about this nft price competition and and royalty competition as well is that the only Direction it makes sense for this competition to go in is to like lower price across the board you have to remember the creators or

customers too right and so one of the things that strikes me as very out of equilibrium about the current nft competition and and one of my colleagues Michael blaau will be talking about royalties tomorrow is that somehow the bargaining power of the customer of the user rather you know the buyer has gone up but also you know when when individual creators can choose platforms and vote with their feed and like you know decide which you know whether they're going to like post on their website like you know Buy on openc or or buy an x2y2 or whatever or buy on our private you know sort of a Marketplace exchange as many pla you know nft collections too you know they have some bargaining power that's increased as well

that means that like prices you know maybe go down facing pressure from the buyer they go up facing pressure from the Creator who's getting squeezed in that context it's the platform in the center right no you've got to like you know provide lower prices to your buyer and higher you know higher royalties or Revenue to your creators and so you know there's a lot of pressure right like lower switching costs same thing you know in both the buyer and seller side threat of new entrants potentially much higher because like a new platform can just come in and leverage the existing network of information and assets um you know threat of substitutes and or Fork right you don't have to just worry about substitute products from outside but you can like someone can substitute your product with your product

so a little bit of a gain because you know you can you can create embeddedness or you can incentivize your buyers and suppliers um by by giving them tokens right so there's there's a little bit of you know we're not you know totally doomed here but like seriously like what are we doing here right it sounds kind of awful right why are why are we in web 3 so remember all of that story is sort of a static story right that's that's like you know in economics we talk about

General equilibrium effects and we use that term to mean a lot of things at once like the general equilibrium is like if I change you know consumption patterns in the United States how does that affect people's incentive to like build factories in other countries and stuff that's a general equilibrium effect and um another General equilibrium effect is like you know suppose I change the way you know what's happening today right I like I pay all my workers more today they get more productive like they maybe invest more and and produce more over time because they're they're happier and and you know sort of have fewer six days actually depending better health insurance is easier example I improve my Workers Health Care today they are now healthier their families are healthier there's less chaos in

their lives over time they probably become a little bit more productive and like over time like they become slightly more productive means like in lower prices to customers you know anchor like customers more effectively and like in the end sell more products that's a general equilibrium effect too it's sort of a long run Downstream consequence or or out you know outstream like you know sort of you know across companies or across time and space consequence of a decision I make today okay all of these concerns about you know all these concerns about the web 3 problem being so much harder are against the backdrop of it potentially providing this opportunity

to produce so much more value right one key is that like you don't have to capture as much of it if you're producing twice or 20 times as much right like but you still have to capture some of it um oh and a footnote by the way so remember the one Saving Grace on that like you know sort of five forces change slide was this this green in the upper corner right in lower corner this idea of like tokens and embeddedness as a way of of driving you know sort of competitive you know sort of competitive Advantage they're also what drives the value proposition of web3 this idea that like people are going to like invest in like building out and helping support your platform

and so there's this positive self-reinforcement between these two effects right the same thing that makes you more embedded as a platform and more and like you know ties your user base more closely to you and aligns their incentives with yours is the thing that drives those users to create value right like it's again aligned incentives is both what keeps the users there and what drives them to help make the pie bigger okay so here were all of our competitive advantages for from before David pointed out a lot of these get worse right like these Network effect competitive advantages often get weaker thanks to vampire attacks and potentially Fork um

economy is a scale like you know a little bit unclear what this does for like sort of basically future economies of scale but certainly things that are like Network knowledge and know-how they're just like out there and anyone who like can process the blockchain data can can sort of compete on those um Standalone value technical advantages we talked earlier um there's a question about whether like you should build like sort of the things in your control or not first that are in your control are often more defensible especially early on in a web 3 environment right like you know if you're you know if you have some users who are locked into your product because they really like using your product um you know that may be more defensible um

multi-homing costs if you said these are a disaster these are much worse um embeddedness gets better right once you have composability and so you know the one thing we can learn from this slide alone is that like if your protocol is like easily embedded or your community can become embedded in many things he leverage that opportunity right like that's a you know that if anything has become a stronger source of competitive Advantage well a lot of these others are under threat but the other thing that's really important here and they just sort of knew as I said to web3 is this idea of community cohesion and here I mean like this is the real answer to the question about what's the defensibility of a social protocol if your users are creating content on

your protocol rather than some other one and that protocol is the one that everyone wants to create content on then all the value that other people build on top of it right even if like other platforms are like giving rewards to people who have high status on your platform it drives people to participate in your platform particularly uh easier like perhaps an easier metaphor um so I'm friends with the team at Forum three in fact I'm co-authoring a book with Steve Kozinski this is the group that designed the new Starbucks Odyssey Rewards program and they came to speak in my my MBA course in January and one of the students asked this incredibly astute question which was

look I'm confused like Starbucks rewards used to be private in an app and only Starbucks could see them now you're putting them in on this online platform and like you know anyone who wants to see them on the blockchain what happens if Dunkin Donuts starts airdropping discount coupons to Starbucks reward holders and the team from form three gave this incredible answer which was you know if that's what happens then it becomes all the more important to be a Starbucks Rewards member right like if Dunkin Donuts starts like you know delivering Extra Value to Starbucks to regular Starbucks users and consumers right both we get more value from like you know having the like people who want to be Starbucks you know

rewards members because they get like you know benefits of this coffee company that is even related right like you know it's like if you if you go to Dunkin Donuts a lot you get Duncan rewards if you go to Starbucks a lot you get Starbucks rewards and Duncan rewards that seems better and on top of that the Starbucks rewards program is specifically geared towards like teaching people about coffee teaching people about like what Starbucks does and like reinforcing their brand value and the cohesion of their user community and their excitement about Starbucks right it teaches them like all sorts of stuff they didn't know about like why Starbucks coffee is interesting and cool and like how Starbucks worked with farmers and like you know you know different opportunities for you know they they give their staff and whatever like and so there's this dual feature of like

all the composability stuff all the things people build on top of the Starbucks reward or on top of a given social protocol drives some value to that reward or protocol system and the way you design your protocol is also about getting the community to like really agree and like feel value of being part of this protocol like using this like contributing to this product rather than all the others right if you've invested in building new applets or like a new viewer for you know for a given like you know for forecast or whatever right like you built an app for forecaster like you are a forecaster expert you are in some sense a forecaster Maxi right that's what makes you want to stay you know you're invested in that ecosystem

and like the more people who become invested in that ecosystem the more they stay and then and this is a really powerful source of competitive advantage that web3 brings to the table and I think we just haven't seen it before right like who self-identifies as like I'm super stoked to be a Facebook user like again apologies to like Facebook users or former Facebook employees or whatever in the room like I was a very very very early Facebook user and fun thing is back then actually I did self-identify it was really exciting like you felt like you were like helping build this product now it's kind of a utility right it's like you know it's like I'm a Facebook user I also like you know use use an email platform and and you know use

electricity in my you know you know my apartment or whatever um so this community thing web3 makes it possible to build that sustain it and really make it a source of True Value we are almost done I promise there's a lightning round with two other key points and then we're and then we're gonna wrap key point one in light of everything we've just said seen what's the point of tokens we just said it tokens are about incentivizing users to make high quality contributions and why did they incentivize users to make high quality contributions it's because they internalize some of the gains right it means that if you manage to grow the pie

for one slice into three slices and buy really silly Emoji slide uh you know sort of font then you get like a you know an extra half slice or something of the sort um it supports that Community cohesion Network effect by like driving individuals and groups to to invest in in building it and again that improves your value capture opportunity right the irony here is the thing that makes the community more valuable also makes value capture easier and again it's that it's that like you know web3 grows the pie to give everyone a bigger slice in the end sort of value statement that is the sort of core opportunity here in my view uh sidebar this only works if you've designed the tokens correctly I know

Eddie talked about this and you'll probably hear some you have some other sessions about it um you only get the benefits of shared ownership of token incentives are aligned properly uh goes to the point earlier about getting the tokens to the people who really want to be part of the community um also means the tokens have to reward the value creating activities rather than sort of like nonsense or whatever and again this is a one of the most common mistakes I see is that people launch tokens as a way of giving their community members like a liquidation opportunity right like you don't want to do that you want your value to stay in the ecosystem you don't want people to sort of like just keep mining it excuse me until they get to they're able to cash out and this often means that like you want

your token to accrue later or like you know you know sort of or become liquid later right like it's it's about enabling people to like build the community and like via sort of so engaged in the product that they actually want to keep the value in the system and keep using the product rather than just like immediately exit right if you're designing a game world and like everyone is playing the game and then one day you're like oh hey like by the way you can like sell all your game assets and everyone takes the game assets and sells them your game is over right so you don't want people to really be able to like sell a bunch of their game assets at least not for like large amounts of money until they'd much rather just keep playing the game right your game wants to be fun enough you

know before you give out the like super rare or you got to give them a very small number of people right if you give a tiny number of people like something super rare hopefully they just feel distinguished enough that they're like it's mine otherwise like you know maybe maybe they sell those super rare things but it's a very small amount of liquidity drain you don't want like people to like be liquidating until they have most of them are so invested in your platform they'd rather not which is a really unusual like sort of thing to think about in this context but in like you know classic entrepreneurship we do it all the time right like why do does Equity have a vesting period right like you want people to like invest over time before you give them the opportunity to liquidate second lightning round point

role of decentralization like why is this here why do we like decentralization is great we're like in favor of it but like also lots of like early crypto is about people decentralizing things that didn't have a direct reason to decentralize um fun fact I was on record as a major crypto skeptic for precisely this reason I was like hearing pitch after pitch of like we're gonna decentralize X we're like X was like pretty efficiently provided in a centralized way and decentralizing it was going to be absurdly hard I was just like no like why would you do this like but there are real benefits to decentralization and where do they come from again think about competitive Advantage they come from quality and performance improvements right lower cost or higher quality as a source of differentiation they come from incentives

um there's a there's a fantastic uh student on the economics job market this year Marco reuter who has this paper uh where he shows that he like really shows a very nice elegant argument that giving your users governance tokens can serve as a credible commitment device that you're not going to like raise fees on them dramatically down the line because they they get a governance vote in fees and that means that more platforms join your sorry more users join your platform more platforms join your user that would be interesting more users to join your platform in the first place and that means your platform can be bigger and again literally it's an economic theory model of this like you know growing the pie effect and where does it come from it comes from being able to make a credible commitment to

your users that you're going to make decisions that are in their interest uh there are also legal benefits to decentralization and you're gonna hear from miles a little bit later and then in terms of competitive advantage over and over again we've been saying all day today right like decentralization is like with tokens it's about getting more users invested in your platform's success right if like more people are part of it and especially like people who can contribute they're going to contribute because they share a piece of the pie I feel like I've said that 27 times but I also I can't say it enough footnote on decentralization uh

it's also really hard to do and it can be very costly especially if you're like in your early stages of your startup and you're trying to like move fast so first of all not everything has to be decentralized and second of all not everything has to be decentralized at the beginning right you want to think about which features of these which decentralized features are going to give me these benefits like what like what can I get performance improvements out of by decentralizing content curation yes developing like core platform infrastructure at the start probably no developing platform infrastructure five years in very much possibly and so you can like decentralize over time the components that want to be decentralized

um in a different article uh Jad and I talked about this idea of like a decentralization equalizer like the sort of progressive decentralization is you know you turn your product into like minimum decentralizable units there's like content curation you know core infrastructure Finance like all these different components and think about them as a bunch of Sliders and they don't have to slide together right you can like have a very decentralized like you know content you know strategy while the entire platform is being developed centrally at least for a while and like that can often be like a very effective way to develop right like you know you have people like curating content which is hard for you to do centrally yourself whereas like you know you're doing fast iterations on the

platform and even if your goal is for the whole thing to be fully decentralized down the line like you might flip the content curation switch much faster than you flip the you know sort of the the source code switch source code decentralization switch um in lots and lots of web3 platforms do that and it's it's not an accident um so you don't have to go from zero to 100 all at once and you don't have to do all the dimensions all at once so you can pick your dimension decentralized you know and and do them sort of in scale hopefully ideally if you design it right like you're only moving forwards rather than rather than backwards but like the main the main point is that like you know these are separate like and mostly sort of disjoint verticals that you decentralize as you go

all right so competitive advantage in web 3 in no particular order we've seen a bunch of different components of it first and foremost Community cohesion these are otherwise in no particular order um but incentive alignment embeddedness and decentralization these are all things that if you get right early right you think about decentralization is actually a really interesting one like that is a source of competitive Advantage if something is hard to decentralize and you manage to make it work that can often be much more defensible because everyone joins your platform right like you've decentralized to all of your users a new platform has to figure out how to operate in the same decentralized way and recruit all of those users it's sort of like a doubly

difficult problem so if you figure out how to make your operations more decent effectively decentralizable earlier maybe that's defensible because then you build up this user Community right these I guess it's clear from that contextual example but like to reinforce these are these competitive advantages they're not independent they are interdependent with each other better incentive alignment leads to more Community cohesion more Community cohesion often drives embeddedness and vice versa but so these are like you know my my pull outs for competitive advantages in web 3 is you're thinking about like where can we really differentiate ourselves and then just to wrap like what's the you know what's the tldr value capturing web 3 is

I would say like at least on the margin harder than in web 2 right there's like more competitive pressure and you know you're you're sharing your pie right so like not only do you have to like beat the competitive pressure but you have to like you know give up some of the pie as you go but there's this potential to make the pie dramatically bigger and you know smaller smaller share could still be a bigger slice and the lessons you know sort of like you know a lot of the the history of this and open source software is sort of like think about like Unix and it's like complete proliferation in all of the servers in the universe right like slide over sorry there's a slight oversimplification I'm not an expert on Unix proliferation there's a ton of it

and there are tons of people who built it and built it and embedded it in many many things and like why does that work it's because everyone can like share a bit of the value that accrues to it and web3 just makes that much more explicit and gives you as the platform architect a more direct way to shape that right to like give you know we talked earlier this question about like what are you given as a reward that's like not dollars well you give people like characters in your story universe or like you know governance of your of your platform architecture or whatever like it gives you this fine-grained way to deliver value that is perfectly aligned with what you're trying to build and what actions you want the users to take

and so you have this like incredibly it's not just like you know they also get some of the benefit of the software right it's like you can Target the way you're incentivizing your users to what you actually want the output to be but all this together means that like you really have to think carefully about that like the Strategic decisions are more essential and and often harder than they were back in the day QED thank you for bearing with you know two plus change full hours of business strategy discussion um great questions throughout fantastic contributions and and comments um I really appreciate it and I'll happy to take more questions and or see you later in this afternoon that was great thank you

um oftentimes I see platforms kind of like confuse their product Market fit with people who are just in it for their tokens um how do you find the balance as a platform before launching a token trying to find product Market fit incentivizing product Market fit with a token like what is that what does that look like yeah super hard and it varies a lot by context um so one thing that I recommend actually very much like the idea for the um in the Mt project and apologies I didn't get the name but uh you know um for the nft project like one thing you can do is if you know where to find the right type of users and like recruit them as your core that's one strategy right so like um

a lot of times when I'm advising uh you know web 3 projects that in one fashion or another like have a user type that's repeatable like you know I again sorry I make I use way too many nft examples but I am a total djen right like if you're if you're an anime nft project like you know trying to compose manga you should like go and find the other anime nft projects that are doing the same thing and figure out like who those users are and like try and bring them in or something of the sort um similarly like you know if you're building a you know a team that you know sort of a community of people who are gonna like write various like um reputation signal algorithms and like aggregate them into meta reputation signals or something right you're looking for people who are

you know respected developers and like you know your your initial Community is sort of your initial Community formation is like you you try and curate very hard um but then this question of like how do you avoid this like sort of like liquidity outflow um a bunch of things you can do first of all one like one thing you can just delay right it's like a very simple strategy like with with vesting of equity options or something right you can just like you know have a slow release right if you um you know if you are bringing in like you know core Dev contributors like maybe their tokens Nest over time or maybe they vest immediately but they take a long time to become tradable um another in you know and you can do this lovely entire system right like you know

sometimes like when I talk to crypto gaming companies like I suggest that they should basically have all of the token be an internal point system that only lives in their game for a long time initially like months maybe even a year or two and then at some point like say look okay we've we've gone from we have this game environment like with this internal currency and an internal scoring system or whatever reputation system we're now suddenly gonna like open it up to the outside chain the uh you know this this liquidity event comes uh you know sort of once most people like once the game ecosystem has its own you know sort of internal Network effect and like a lot of people are playing because they want to be there and even if you lose some of those like early users you know who who really built up Stores

um you know new people are there and still actively playing and again remember if there's like these lock-ups or delays there's much less value as the initial user to you know building you know if you're just there to like you know cash out it's just gonna take you a very long time right like you know it's sort of you know and with any with any luck like you know the people who are just there to be extractive you know just stay away right they go and choose something you know something else to do with their time um the other thing I guess is that like you know I've talked about it as if there's a sort of like binary of like people who are there to extract and people who are there to contribute but that's not really true right like you know there are people who are who

might even arrive intending to extract and then discover they like the thing and stay or something of the sort and so you can also shape behavior and you can give people some degree of reputation that's non-transferable So like um actually another article I'm excited I'm studying my jazz is a frequent collaborator he's a super brilliant um one of the best students I've ever taught uh We've written a bunch together we wrote a piece on reputation systems and part of the argument there is that there should be a platform-specific reputation that's non-transferable that accrues to the individual user as a function of their platform contributions and then maybe you later introduced like a fungible token that's something that like liquefies that but you can control it's it's accrual right sort of like

people build up a localized reputation which is permanent and only valuable in this platform and then like later you can say okay look we're gonna like start like you know releasing tokens or something that you can then like start trading but like you control the the distribution of those and you maybe award it to the people who had the higher reputation but at some rate that is like consistent with the uh you're sort of with the scale of the ecosystem and there's reputation accrual points like the things that are like the the core point of value here you know doesn't have an outside use and so again people like have less of an intention to build it up just for the sake of like being able to get that like Downstream sort of like you know later reward it's much more useful and valuable to you especially in the near

term if you want to keep using the platform cool thank you sure thing hey thanks this is great uh thank you a number of us are building more like B2B applications to yeah serve the web3 ecosystem and on top of some protocols do you view that as more of a web 2 type of strategy or a web three like are there yeah give me can you give a give an example that so I can contextualize a little bit which like what you mean because my guess they probably span the Spectrum from like more web to Ali web 2 web 2.5 all the way to like web 3 or web 7 or whatever so so give me give me an example or two please yeah like as a B2B application then we might not well we'll

never launch a token we're not building a decentralized protocol they're centralized elements and some we may decentralize and so you lose hours on someone like the community aspects the like incentive alignment uh and so should we think about it more in a traditional business strategy or are there elements of web strategies that we should be looking to incorporate awesome okay great thank you that's a that I totally Rock the question now I think so first of all remember it you know just alone if you're a service even if you're a web 2 service provider providing services to web3 you're dealing with a lot of these architecture challenges that the web the

purely web 3 platforms face as well right like you know stupid examples include like you know if you optimize only for one blockchain and then like everyone decides they're switching chains or something like you know they're going to be able to switch frictionlessly which means that if you have a lot of face a lot of friction in switching along with them you might be in trouble right like or um you know if you're if you're providing a service that later a tokenized player enters into you're gonna have to think about like do you have sustainable competitive Advantage versus someone who can directly incentivize them to switch even if they don't price precisely know you know maybe not all of your data is Unchained but some of it probably is because like

whatever whatever they're doing is getting stored on chain um and so you're facing a lot of the same strategic challenges even if you're just building entirely in like a sort of like classic web 2 platform frame um but I also think like even if you're purely you know it's funny like anyway teaching you know the other course I teach it excuse me at HBS is about Marketplace businesses and we talk about a lot about b2c and C2C marketplaces because they're just sort of like more many more examples the students are familiar with but then we like to sort of phase into this B2B Marketplace discussion and the funny thing about B2B marketplaces is they're not nearly as different from

consumer marketplaces as you might think in terms of architecture um the differences are often in like the fact like the customers are like of non-trivial size and often like require like new tooling and so forth hopefully this is resonating by the way I've never actually built a B2B Marketplace myself but like this like there's a lot more similarities in terms of the way you think about like platform growth and scaling and network effects but like instead of having like you know every customer sort of being like you know tiny like you know sort of you you can you can run experiments on 40s or whatever like each contract especially the beginning it'd be like you know 10 of your entire business or something like that they're these much larger players and so you're for example much more worried about losing them it's

harder to experiment like um but fundamentally like the the Strategic architecture questions tend to be the same and like I mean particularly if you're thinking like I'm gonna have this customer who is like a a big discreet player I would be wondering like what do I do you sort of what do I do to make it the case that all of these like large customers who themselves are sort of on this periphery of like much harder competitive set due to like feel that they want to embed and like sort of like permanently use my

technology or my service um and probably the way to do that in a web 3 universe is to like try and make try and convince sort of design in a way that makes them more embedded also right you're like you know you're sort of like adjoint to the the web 3 Network effect building even if you yourself are like just building a service like it's like your service has got to be the thing that makes their Network effects and like their Community cohesion stronger which may in fact require in and of itself like more like more web 3 or sort of um strategic thinking in in your context I don't know if that was a good answer I'd love to talk about it more offline and like learn more about the specific products You're Building because like

this is actually like a question that's pretty new I don't feel like I like actually know the answer in in full detail because I don't yet have a good enough concept of like how that layer works awesome thank you cool also hopefully was that like approximately useful yeah definitely awesome great hi there I have a question around um how much time it takes to build those defensible modes and if like because of community decentralization those are kind of like hard to get versus like uh Network effects I like speed asking because if the value capture is hard but

the idea is the pie is gonna be much bigger does that mean it's gonna grow much faster or just gonna be bigger long term and we have to just get ready to like great oh such a good question probably shouldn't ah it's a great question should like draw this chart or something so first of all um the the strength and growth rate of network effects always depends on the context right so um you know the answer is is sometimes yes and sometimes you know sometimes faster sometimes slower but that's not a useful answer so let's think about like what actually differentiates so many web3 platforms by nature of the way their incentive schemes work

actually like can grow faster right like you know and we've seen this right like these platforms pop up very quickly because you know they're they're promising like you know sort of some direct reward to early users um and like maybe that reward a cruise in the you know long future Downstream but but that's okay right like the point of the early incentive alignment is the user started trying to help you grow The Pie as quickly as possible um and so in that sense I think there's a an opportunity for this stuff to accrue faster than in In classical frames um but there is this risk right also that like when the reward is Downstream maybe

people like don't feel it as acutely right like you know if the carrot isn't you know you you get the carrot you know some sort of carrot and um you know some sort of carrot metaphor right like you have this carrot hanging like you know out there to grab and if it like you know moves like you know carrot gets bigger but it moves like you know a mile away now it looks really tiny and you can't see it right and so that's why we end up in these it's often why we see these like models are sort of like you know first of all like embedded Partners initially right like why you have like you know sort of core devs or or whoever who you who you subsidize even if they're actually not part of your organization per se as a way of like you know jump starting the the

flywheel and then some mixture of like early rewards and late Rewards with an attempt to like you know again as much as possible align the users right like you know find find the people who have the longest time Horizon and get them like sort of on board and invested um so I think like in some sense like with the right calibration you know these effect Network effects can accrue faster but the calibration problem is hard and there's not a like General there's at least not yet maybe this I think if there's like a good theory framework for this but I don't know of a good framework for like calibrating that with certainty you know sort of like how to decide like how do you balance like

Downstream rewards with rewards today but like you need some mixture of the two and you you want to be like aiming for people who are willing to contribute a lot you know sounds nice right people can contribute a lot today in exchange for reward like a far off time in the future but that's kind of right right like the more people are willing to contribute today the closer those rewards move because the faster the network effects grow yeah and so like if you find the people who like understand that and like really invest in growing the thing today then the carrot comes closer and everybody wins okay thank you I guess we just turned into like carrot cake instead of the pie but whatever yeah I agree my intuition is they will grow faster it's just we don't we didn't find yet like the Frameworks to do that

efficiently super interesting same thing let's like all of all of these questions honestly today I'd love to talk more about offline that's a really interest like it'll be really interesting to try and characterize precisely what make like what you need to do to make that work like how the relate like the relationship between user the elasticity of user participation and like different reward structures Drive the speed like speed of network accrual because it's you've got these sort of two derivatives working together so interesting that's probably a that's probably an economic theory paper we should probably write it sorry go ahead I love that um hi Scott I have a philosophical question um I've thought a lot about forking in

particular and whether that is a value prop uh that you could sell to a community or a set of users I do think it's a very values aligned value proposition but tactically the question I've been coming up on over the course of many years is when you really think about it has there ever been a successful Fork that has truly kind of incredibly challenged the protocol uh it forked off of for dominance I can only think of one example but I'm curious if you've thought about this a bit I guess it's hard to think of very large platform examples but I think for like smaller communities it happens a lot right you might have like uh

you know you might have like everybody you know sort of like everybody in One Community go and move to a different one with really similar like purpose or Aesthetics but that's just different right like uh or you might imagine yeah it's hard to think of very large instances where this has happened but like I don't know you have user you you have protocols like switch platforms like you have games like switch from like 1l2 to another or you have like you know user communities just like basically like like fire their founder and like you know move and you know sort of restart something with like similar image assets and similar Aesthetics and in my mind like those are Forks those are Forks as well

and there's like another version which is like the copy protocol it embed right like I always I wonder you know whether you know one one source of pressure on like D5 platforms from like against raising fees is the possibility that somebody else might like literally just like release a copy or like embed that copy into their their next wave of their software instead of the using using the existing platform as as a component and so like I think first of all the fact that we don't see tons of forks doesn't mean that like they're not still disciplining Behavior right like it's the case that like the threat of fork is something that like disciplines fees and disciplines governance and like but also like I think it's not surprising that like larger platforms we see fewer of these right because they have stronger

Network effects um and and have often grown in ways that have this discipline feature so there's less incentive for people to want to leave whereas like we see Forks much more in like early protocols as they start out like people are like no never mind I don't like this or I don't like the Founder's attitude or whatever and then they just go and create a new thing that's very similar which is which is like a different type of fork yeah so that helps yeah the example that I've thought about over the years is steam to Hive um but outside of that ah yes right like nice that feels like a a credible uh Fork but outside of that yeah that's like that's like a classic you're right that is a really good example of like a classical Fork exactly and like I have trouble thinking of other classical ones

at that scale you're totally right huh but yeah but again the For Better or For Worse and it's true right like so the the how hard is it to Fork effects like the extent to which a fork actually does discipline right like you know the fact that we see very few could be because everyone's happy or because like actually Network effects are too strong and forking is hard and so it's important for forking to some degree to like be feasible in order to get us into that other equilibrium hey Scott thanks so much for the talk that was uh fascinating um I have a question about kind of um product development so do you think it's smarter to prioritize the needs and requirements of some of the Marquee

customers in the present Market State independent of what you believe the future may be or is it better to Sprint as fast as possible to Future State because some of those problems may not exist oh wow that is such a great question um you will get differences of opinion on this my answer to this everything else pretty much everything else I've said although so something like Border's opinion everything else like sort of it feels like Theory to me this is an opinion I think the best sustainable platforms are built with an eye to the Future I think like that fundamentally like building a building a platform building a Marketplace is about

changing user Behavior and in order to like end up in a in a positive like value-creating equilibrium for everyone it has to be that your long-run state is one in which like you know the equilibrium is really good right it has to be that like you know you you aim for a future that is like value creating for everybody and like you know this like decentralization is a way of disciplining fees is like a perfect example of that it's like why would you decentralize your platform today you're giving up a lot of pie well the reason is that like if users feel more comfortable joining then like you can later like be at much larger scale right like you know fee commitments today means we can be like you know low fee commitments today means we can be

bigger in the long run similarly in terms of like how you architect your platform I mean there are boundaries of course right like if you're building for an ecosystem that doesn't exist at all like you know you you're not gonna be able to get started but like there's a lot of pressure to be short-term to like to be short-term especially in crypto where like so much of the building is done in public right there's a lot of pressure from people that you should like build in this like you know very like midi like you know today me me me like you know I want you know all now focused way but like actually like the more like the more of that that's going on the more important it is that you actually like have to have this long run view in my opinion so so you will get differences of opinion

on this but that's how I feel so it sounds like you may be saying I mean obviously there's some Nuance here but if you can achieve the speed toward future state that is more optimal than trying to achieve some type of strategic position based on the requirements of users today correct that's that but that is opinion and like I really don't think there's a clear answer to this question sounds good thank you High School I really like your talk thanks for all the details and strategy and they saying long from bloggers we are building our website gaming platform so you mentioned that the benefits of building web series all these like Community cohesive uh cohesion and incentivized imbalance um all this stuff so as we see that

right now there's a lot of like open source projects that already have this like Community Network effect people developers are passionate about building on top of it um what's I think the only thing the difference of building like the kind of Open Source platform compared to like a protocol decentralized protocol in webstery way uh is a token that can provide the financial incentivization and with the current sensitive legal environment and then the suggestion is building a reputation system right and then with that what will be the essential difference between building that kind of like open source platform that people can build and contribute and

having like a App Store kind of marketplace compared to this website of like building a protocol and everyone can build up on top of it great um okay first of all so like again reiterating the the comment from much earlier like I don't think that's the only way in which you can share ownership and incentive alignment with your users right like it's it's not just about you know sort of a I don't know like a gold token or whatever that one can one can extract like you know you can give your early users like really cool avatars that are like unique and maybe like you know uh you know or or like extra tokens to you you know sort of like like internal tokens things that are used inside the game universe or something um and so I think first of all like

thinking creatively about like how can I deliver value in a way that isn't sort of just you know purely about being able to liquidate helps to some degree there but then this question of like do you want an app store do you want like a you know very open Universe like I think the open universe is powerful because it enables people to build stuff that you would never have imagined and it's also risky because it enables you to build people to build stuff that you would never imagine right like maybe they're gonna build like a whole separate game that like uses your game assets right if you have like you know um you know really cool like avatars maybe they're gonna like you know take your avatars to space or something and like note that if they do that all that value accrues to your avatars right if

someone else builds like that's actually like sort of a weirdly great state of the world so I'm gonna build an awesome game that like also uses your game elements like that's super cool and like inviting them in to like do that and by making it sort of as open to architecture as possible can be really valuable but indeed you know it also makes you have to build everything much more carefully right like you know you and and you know it means people can build things that might you know bring risk to your ecosystem um whereas an app store is more locked down right you can decide here's what goes in you can like pick your partners very clearly um but again I mean I think like the the real key is that like many successful

you know they said we've seen successful web 3 games so far I think a lot of them start in a frame that is sort of like a web 2 game but like with an open architecture that then people start constructing on like maybe they'll build their own Bots to like play the game more effectively for them or something like and and I think like therefore like these this tension you're setting up maybe isn't like quite as like um binary as as as the question frames it as right that basically like you want to be building a fun game for your users and you want to give them the opportunity to like take those assets and like do other high value stuff with them um inside the game or in other worlds

like you know bring it you know bring bring their your the avatar from your game into some third-party game and then it becomes an advertisement for you like I think the the point of the interoperability is giving people the opportunity to like build around it and and to you know invent new ways to build around it and accrue some of the value from doing so um my guess is you're gonna turn more and more of that on over time but also people's desire to do it is going to you know sort of increase over time right like it's you know unless your avatars are like really really ridiculously cool people aren't going to take them to space until they've already decided they like your game is that helpful I sort of I I did the professor like you know Escape of like you know answer you know rephrasing the

question into a different question and answering that instead which I'm not sure whether it counts um yeah it makes sense but I guess there's maybe some like IP uh related question as a follow-up but we can talk in person hi thank you so much for the chalk always great to talk about business models and pricing I have one potentially very risky comments I want to preface this by saying that it with ask with an open minding curiosity but as an awesome as an entrepreneur throughout your talk it really struck me the the language that you used to describe crypto and business models in web 3 really struck me like with a lot of give share subsidized and yeah um I think it's a theme overall like in in the B2B set of the business we're

building a consumer brand utilizing crypto and then you've already answered some of the questions around what do you think are the user like end user benefits to opting into web3 as opposed to a web to um transaction into a brand and how we can grow Brands through that I wonder if you feel that um centering the like positioning this entire discipline around the fact that your share giving up you're sharing you're giving up you're subsidizing actually can slow down or not make the application of crypto as sort of aggressive as a traditional business could be if it was contextualized like in a like a pure economic benefit to the end user

that is an incredible question I don't have time we don't have time to go like I could we could probably talk about this for half an hour yeah sorry I'll try I'll try and be very quick but this is this is so good I I wanna I wanna say something I want to like really try and like do it a little bit of the question a little bit of Justice first of all something that struck me in the question is this idea of like giving up you know this use of language of like giving up is is even just like a little different with the language of like gaining right like web 2 was like a you know it is still a world of like very extractive platforms um many of them and so

you know just thinking about like the way I teach this stuff right like it's it's in contrast to an equilibrium web 3 is in contrast to an equilibrium where like most of the game was about building a network effect so strong that enabled you to extract but when I talk to brands I think about it somewhat differently right like my co-author Steve Kozinski says that like in web3 you were the customer and web two you were the product and in web3 you are the brand right like a you know a a crypto based brand is very much like about making everyone sort of like the incentive alignment is is Manifest and thought of as like making everyone a

part of the same thing right like you all have the same shared purpose and like this grows the value like just like if you have um you know Bobby hundreds is incredible about this right like you know he was one of the earliest people in you know sort of to you know in In classical branding to realize that like you know attachment to a brand icon like transcends format transcends type right like you know the atom bomb squad collection is about like giving people a sense of like being a part of the Aegis that is the hundreds and in that case the framing is less about sharing than it is about like creating something greater than like any

individual part could have been alone right it's not like there was an entity called The Hundreds that that now is like the end the hundreds has like carved itself up into a bunch of pieces and given some of itself out to everybody but rather the hundreds always was the clothing brand and its community of people and now like people have like it can it can make that sort of complete and bi-directional like the people are now part of the brand and that makes the hundreds like just like a greater like bigger thing so it occurs to me that like the framing this in reference to web 2 platforms like you have this like it feels very like almost adversarial like

it's like it's a shift of like an adversarial shift or something but like that's actually not necessarily like the way you want to have it in your heart right like what it really is is like we are all building a thing together that is greater um and in that model the contrast like you know it feels both a little bit less um I don't know like you know it feels less oppositional to like what has come before and it also feels like you know potentially more powerful right like when you're if you think about it in relation to you know as you say like you know why why would you ever want to like build in

this way it's like well like because you build something greater in the end and like that you know and that's the same statement like the platform has more users it becomes more effective it has more features but like when we all build the platform together we can actually like you know we the platform is more than than its individual parts and and we it added up over alarm and we integrated over a larger set anyway anyhow those were my miscellaneous Reflections off of your extraordinary question um I hope that was like relatively you know relatively responsive rather than just musing but uh but great but great question and I'd love to chat more about it awesome well thank you so much Scott qbd [Music]

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