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Posted on Dec 07, 2021Read on Mirror.xyz

Watch Out, Your Optimism is Showing

I used to be the cynical guy.

“That will never work.”

“That’s ridiculous!”

“No chance!”

“Why would anyone change the way they do that?”

The cynical guy sounds smart when he dismisses bold new ideas and makes readily available comparisons to past failures.

“Ever heard of Tulip Mania?”

“This is just like the dot com bubble.”

“I can just download that JPEG for free”

The cynical guy can point to historical precedents, the way things have always been, and use cognitive dissonance to reimagine how he felt during previous times of change. It’s easy now to say the internet changed the world, but in the moment (especially the earliest moments), the cynical guy was dismissing it as a novel toy.

Over the past few years – and especially over the last 12-18 months – I made a conscious decision to stop being the cynical guy, and instead challenge myself to lean into optimism. There’s plenty more to say on the difficulties of this transformation but for now I’ll simply say, optimism has been the healthier choice.

When I stopped dismissing new technologies, ideas, and concepts I was quickly drawn to the people building in the blockchain space. The further I’ve dug into blockchain, crypto and the communities around it the more optimistic I’ve become about our future. My hope is that some of you reading this piece will become a little more intrigued – and a little less cynical – about blockchain technology and join me in building out this ecosystem.

Quick primer reading for those interested (not required):

https://www.oecd.org/finance/OECD-Blockchain-Primer.pdf

https://bitcoin.org/bitcoin.pdf

https://ethereum.org/en/whitepaper/

Blockchains and crypto eliminate the need for central platforms because the code makes hard commitments to how it will behave in the future. Having central platforms only serves to siphon off economic incentives for producers & consumers. I would encourage anyone who hasn’t heard this, to check out Chris Dixon’s high-level thesis on blockchain’s potential.

One of the misconceptions is that bitcoin, crypto and blockchain relate exclusively to finance and fintech. But as Chris notes, “at it’s core it’s a computing movement”. It allows for new capabilities, better security & governance systems, and an ownership model that better aligns incentives.

Quick background on Web2

Open protocols are what lead to the development of Web2. That’s what made it so successful. There were implicit commitments made to developers who built on these open protocols. It’s not a coincidence that there was a massive innovation & investment boom during this time because developers all knew they were building from a level playing field with consistent rules and community-wide expectations around those rules. A great parallel Chris gives is that you’re more likely to invest in a place like the United States where there’s a consistent rule of law versus an emerging country that’s led by a dictator who could change the rules and pull the rug on you at any moment. Same goes for web development.

So, we got this great wave of innovation & investment during the early stages of open-source protocols with developers building incredible tools and companies. This was great! But over the past 10-15 years, we’ve seen giant tech companies increasingly flex their platform muscle by moving the goalposts. It’s been well documented that these platforms change developer take-rates, change the rules, & arbitrarily ban apps from their app stores. The list goes on, and no doubt you’ve read about this and have formed your own opinions on who’s to blame. I’m not interested in those specific Web2 issues right now. All the servers that run at Facebook, Google, Amazon, Microsoft, etc. are servers that ultimately are controlled by humans. As we’ve seen in the past, humans change their minds. They especially like to change their minds when their incentive structures change. More on this in a future piece.

While I’m not here to debate what Apple’s take-rate in the App Store should be, I am here to point out that blockchain solves a lot of the issues people are concerned with around society’s dependence on a few giant tech companies. It enables a return to the type of environment that led to Web2’s innovation & investment boom. The technology allows for the network architecture to make guarantees from inception. The most concrete example that people are familiar with is that there will only ever be 21 million Bitcoin. Satoshi can’t change that. Developers can’t change that. Google can’t change that. If Mark Zuckerberg came out tomorrow with $FBOOK coin and tells us there’s only going to be 1 million of them ever created, he can simply decide the next day that actually there’s going to be 2 million, or 10 million, or 100 million. Decades from now, assuming Mark’s no longer running whatever Facebook has become (if it still exists), the new team there may decide to create even more $FBOOK coin. Or completely wipe it from existence.

Blockchain technology solves this issue.

The laws are baked into the code. The governance is baked in. What that means is there’s once again a consistent set of rules that developers know to be true and cannot be changed because the creator or lead developer says so. What often gets lost in this discussion is that it’s not all about cryptocurrency. The blockchain is a far broader technology that allows for baking in rules about take-rates, governance, voting power, interest rates and any other application use-case you can think of (and certainly ones that haven’t been thought of yet). It should come as no surprise then that supremely talented people are flocking to build on this technology.

So, we have a little bit of a background now on Web2 and why there was this great boom of innovation & investment from open protocols. But what about Web3? What are the tangible examples of how blockchain moves us into the Web3 world and how do consumers benefit from it?

from Packy's incredible newsletter of course

I love this graphic from Packy McCormick’s Not Boring newsletter. It’s such a simple but clear representation of the internet value-chain as it exists today (Web2) compared to where we’re heading (Web3). As it stands today, there are central platforms that stand in between suppliers and consumers – the platforms set & enforce the rules and in doing so, reap the financial benefits. As of this morning (Sept 16th), Apple is closing in on a $2.5 trillion market cap. Microsoft is just shy of $2.3 trillion. Google is approaching $2 trillion, Amazon is ~$1.75 trillion & Facebook recently joined the $1 trillion club. There are clearly massive financial implications for a computing movement that flips this dynamic on its head. In Web3, the aggregator in Packy’s example (the Googles, Apples, Facebook’s of the world) just creates “economic drag” while the creators & consumers reap more of the financial benefit.

How do creators & consumers reap these benefits without a central platform?

For one, the distinction between these two groups really blurs in Web3, along with the traditional “investor” profile. Projects & protocols can pay all these groups directly (via code & the rules baked in) or via tokens, which may or may not accrue additional value over time. If early adopters, creators, investors, and community-builders for different protocols are compensated for participation, then there’s an incredible collective energy that builds.

“Tokens” are not nearly as mystifying as many would have you believe – the simplest way to think of them is as a type of incentive/equity in the project that gives you:

  1. Financial upside as the project gains momentum
  2. Access to other projects
  3. Other privileges (voting power for example)

All these incentives accrue from your participation/investment/creation within that project’s ecosystem. I will certainly write more detailed pieces about tokens, NFTs, DeFi and further applications of blockchain in the future, but for now let’s stick to high-level, easily understood use-case examples.

How & why are the most interesting startups using blockchain to build companies?

Blockchain and crypto leverage one of the most important components of any successful modern business: scale.

Here are just some of the challenges startups used to face when building their business:

  • Transaction flow & payments (i.e. how money moves, security of that money, bank integration, settlement terms, etc.)
  • Marketing
  • Customer service
  • Data management & scrubbing

Each of these issues is easily handled by the blockchain or existing protocols. The blockchain already inherently handles the meat & potatoes – transaction flow & payments – which frees up considerable resources for crypto-native startups. Marketing is often done far more organically because early users are investors and frequently the most active community-builders. Customer service – unfairly the bud of many jokes to begin with – becomes an almost unnecessary function; crypto-native consumers understand the inherent agreement that if they send crypto to the wrong place, it’s their error. Customer service can’t do anything about this anyway. That’s a difficult concept for my parents to wrap their heads around, but not for crypto-native users. Data management & scrubbing can be handled now with APIs. Projects built on the same protocol are referred to as legos that can easily be snapped onto new products/services to add functionality quickly.

All of this is to say – Web3 startups not only have inherent scale from day 1, but the resources freed up by building on-chain leads to more rapid innovation.

Take a look at the implications of this, as highlighted by Packy…

If it would have taken 100 employees to build a customer-ready product before and today it only takes 10, then those 90 extra employees can go start nine more companies.

Even better, since many of the 90 employees in the only company would have been working on things like payments, bank integrations, authentication, scheduling, background checks, data labeling, and more, all of which was non-core and can now be plugged via API, it unleashes energy that can be used on innovation instead of execution.

The compounding effect of this cannot be overstated. Talent is already leaving big tech and traditional finance to pursue the blockchain white space. This is only the beginning, though. The exciting part is that we are still so early.

Hope you enjoyed and would love to hear from you — feel free to reach out on Twitter (@0xsmac). DMs are always open!

Follow-on reading for those looking to dig deeper:

https://makerdao.com/en/whitepaper/

https://a16z.com/2018/02/10/crypto-readings-resources/

https://www.lopp.net/bitcoin-information.html