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Smol thoughts on business models with a crypto component

Crypto has a relentless tendency to push intermediary margins to 0. Important to remember that this is a feature, not a bug.

Crypto’s main contribution to business model innovation is a mathematically provable way of avoiding double spending, maintained on a decentralized ledger. What this implies for business models is that any sectors that rely on intermediation will face new competition from smart contracts that can essentially perform their role transparently and without human intervention.

On a centralized web platform, the intermediary, or network administrator, owns the customer relationships and transaction history. These platforms race up the adoption curve until they plateau and value accretion becomes zero-sum. To continue growing or more accurately accruing value, they need to turn to extracting and monetizing their users. A search engine could, for instance, start tracking its users in an endlessly escalating arms race against privacy. A retail bank checking account, for example, could charge a quarterly fee. What for? Exactly.

However, in decentralized platforms, ownership is distributed among users, so there is no investor pressure to monetize user interactions. In fact, the most successful platforms will be those that either allow their users to own the marketplace completely or those that maximize value accretion from the platform to all of their users.

The best way of avoiding a buzzword trap is to evaluate businesses with a crypto claim through this disintermediation lens. Disintermediation makes scaling much easier, quicker and cheaper. You can reach far more people for far less with a smart contract than with data centers. However, it also has a relentless tendency to push intermediary margins to 0. Important to remember that this is a feature, not a bug. Some businesses have no business being a business (thank grammarly). For tokens in sectors that are attacking these legacy businesses, the only value creation possible is if residual profits are left over from some variety of scale through, for example, network effects, that allow temporary above-average profits. These network effects will have next to no stickiness, and large platforms can win and lose existential levels of share in a matter of hours.

Concretely: a fiat-backed stablecoin could be a replacement for a retail bank checking account. There is no good reason why this commodity business should be charging anything at all from its users. There are many good reasons why this product should probably be public infrastructure rather than private business. Therefore, an attacking stablecoin project needs to be ready to exist at the scale of millions as much as it could at the scale of trillions. Circle and USDC is not it. The winning model probably looks more like a robot managing fiat backing at one or many custodians. The ‘token’ for this project, in time, likely shouldn’t exist at all. Done well, the project should make use of enough legal and code constructs to become uninterruptible over time. Ideally, it would be uncensorable and un-upgradable.

Thank you for coming to my TED talk.