I recently wrote a post about the trade offs of decentralization. This was a practical piece, exclusively unpacking the impact of decentralized infrastructure on objective measures of consumer experience (i.e. UI/UX). What it did not do was unpack the other side of the trade off space; where decentralization nullifies implicit trade offs in the holistic consumer experience (i.e. access, incentives, permeability, etc.)
Where the first post focused on what trade offs we make at a micro, product level; this post will focus on what trade offs are abstracted at the macro, socio-economic level.
State of the world today
People are spending an increasing amount of time online . The online experience has evolved from single-player mode, where the core value prop of being online was access to information (hence Google’s seminal mission to “organize the world’s information”), to multi-player mode, where the value prop is connection. New businesses have emerged on the foundation of the social graph. Today, nine of the top ten most downloaded apps are multi-player platforms.
Humans are naturally social creatures, so it makes sense that the most used apps are social in nature. The online experience has evolved from digital nomads punching queries into search engines to digital citizens connecting across communities. The evolution of hardware and software has empowered a new class of creators. It is no longer just developers — anyone armed with a smartphone and an internet connection has the opportunity to create value in the digital world, regardless of where they were born or their socio-economic status.
We, as humans, are also hedonistic in nature. The people building the most popular platforms recognize this and build products to exploit this, building products that addict users to their platforms through social feedback loops (filters, likes, comments) and algorithms designed to keep users on the treadmill of ephemeral affirmations.
Social capital is the currency and Facebook is the central bank.
If we revisit the list of most downloaded apps, you will notice a consolidation of incumbent power at the top. Four of the top five most downloaded apps are all Facebook owned properties (FB, Messenger, Instagram, and WhatsApp). By extension, Facebook is able to establish a well defined moat in a free public utility like WhatsApp by funding it with revenue machines like Instagram and Facebook.com. That leaves an app like Snapchat trying to eloquently balance a great product experience with the demands of running a profitable business — not an easy feat when your competitors are bankrolled by the mothership.
The problem isn’t exclusively with these companies in and of themselves, the problem is how the game is set up. In a world of centralized companies competing for a finite amount of users’ time and attention it is a zero sum game. These incumbents have reached a level of scale where they (1) have consumer lock-in from network effects, and (2) have moats in the form of free services (G Suite), funded by cash cows (Google Search). This enables these monopolies to stop building products for users and start treating users as the product — finding ways to addict users to their service and exploit that addiction to monetize their time, attention, and data. This is extractive to the user, and makes it increasingly difficult for other developers to compete.
In this game, two fundamental trade offs exist (1) what’s better for me vs. what’s better for my user, and (2) what’s better for me vs. what’s better for other developers.
Developers are faced with a spectrum of altruism vs. capitalism. These have traditionally be in tension, but crypto unlocks a new paradigm where these two dimension are no longer at odds, they reinforce each other. The more altruistic you are, the higher the economic payoff.
The game today (sans crypto) is a no-holds-barred street fight
Given the current landscape in consumer tech. Every developer is faced with the same challenge: (1) find a novel consumer experience, (2) achieve some modicum of success (3) fend off all of the other new entrants competing for user attention, and (4) if you manage to do all three of these (unlikely) — finish your ascent to the top of the mountain to face the entrenched incumbent. It’s like a saga of Mortal Kombat and Facebook is the final boss.
This is a game that has played itself out time and time again. We are witnessing the final blows in the latest battle where the challenger (Evan Spiegel) is an earnings call or two away from hearing the ominous “Finish Him” from Shao Kahn (Mark Zuckerberg).
However, if you don’t want to play this game there is another way! You can sell your soul up front to skip the line on steps 1,2, and 3 to join the gods (the big 4) at the top of Mount Olympus. This is a playbook we’ve seen many times: build a novel experience for an existing platform and leverage their distribution; a win-win, right? This is additive and a net positive for everyone. Except ask Zynga how the story ends. You’re going to get drop kicked off the mountain while the monopolies keep your product for their loyal subjects.
As a dog returns to his vomit, so does a fool repeat his folly — Proverbs 26:11
We play these impossible games because it’s the only game you can play. The incentives are set up such that any rational actor follows the same playbook, even though everyone knows how it ends.
Logically, we know that the only way to forge a path to prosperity is through collaboration. The problem is that incentives are misaligned in the current system. The exogenous environment forces challengers to into game-theoretic competition, making endogenous trade offs in two arenas:
Arena 1: best for me vs. best for my users
Developers are tasked with optimizing for either (1) user experience or (2) monetization. Given the means of monetization available to developers today, these are fundamentally at odds with each other, and thus plot as variables with trade offs.
Arena 2: best for me vs. best for other developers
Developers are tasked with either (1) collaborating with other developers or (2) building in silos and competing with other developers. Outside of the incumbents who are piecing together a holistic end-to-end user experience, the apps being built today are spokes in the bigger picture of the digital experience.
“Welcome to the desert of the real” — Morpheus
There is another way. Crypto unlocks a new arena, unbounded from the constraints of the zero-sum game we play today.
A key property of cryptoeconomics is its inherent scarcity. By underpinning consumer apps with a common currency of which there is a finite supply, stakeholder incentives are aligned to work together to grow demand for the currency, by extension growing the value of the currency.
Keynesian economic theory would suggest that a healthy economy is one that experiences moderate inflation to hold relatively stable purchasing power (with a slight devaluation over time). This is achieved through a dynamic monetary base where the central bank engages in activities like quantitative easing. For producers, this is a zero sum game. With no way to directly affect the appreciation of the currency — given exogenous forces will restabilize — a rational actor will always maximize their their expected payoff by optimizing for incremental accumulation.
Cryptoeconomics introduces a new dimension where, given the absence of a stabilization mechanism in the monetary base, producers can affect the value of the underlying currency. A new variable is introduced to the expected payoff equation: appreciation. Producers now have a choice to optimize for appreciation or accumulation. This turns the zero-sum game into a positive sum game. Assuming some level of existing accumulation (not completely broke), a rational actor will collaborate if the expected incremental appreciation of the currency exceeds the expected incremental accumulation that would come with not collaborating.
This key property changes the dynamic of our two arenas above. The game is no longer one of collection and extraction, it is collection and empowerment. So the “best for me or best for them” becomes arenas of “best for me and best for them”
A new game unlocks new outcomes
For developers, all roads lead to one of three outcomes: (1) IPO, (2) acquisition, or (3) death.
Most die. And this isn’t a heroic, swift death — this is lost in the dessert, clinging to life, realizing no one remembers you exist and is coming to save you, death. For the few that do survive, the other options are not as sexy as they appear. Acquisitions are less — Rush Hour, two funny, charming agents teaming up and kicking ass together — and more Get Out, crazy white girl and her family brainwashing and hijacking the body of the well intentioned protagonist. And like Liam Neeson is the only actor capable of playing a vengeful father, Mark Zuckerberg is typecast as the crazy white girl. Which leaves us with IPOing. On the surface this seems great: on stage, ringing the bell at the NYSE; press, money, fame. Except as soon as that bell stops reverberating, your new shareholders turn into an insecure girlfriend/boyfriend that you have to reassure of your “future together” at every earnings call and press briefing.
All of these sound terrible. Wandering the desert, forgotten and weak actually sounds like a pretty good option! The problem is until crypto there was no way to incentivize all the desert wanderers to work together and build their own village. The consolidation of the internet has evolved to winner-take-all race to vertical integration. The only way to compete is to vertically integrate (and eventually IPO) or hope you fit into someone else’s vertical development (and get acquired)
But crypto uniquely enables the desert people to sustainably and cooperatively horizontally integrate. With a common currency of which no one controls and no one can make more of — developers have aligned incentive to work together without the risk of being de-platformed or debased. Following the principles or Peter Drucker: this allows developers to lean into their strengths and not try to be the solution to all problems. There is now not only an incentive to collaborate, it is in everyone’s best interest to collaborate.
Prisoner’s dilemma would suggest that the utilitarian outcome is to collaborate but if one player acts in self interest and the other does not, the self interested party has an even better outcome than collaboration. With crypto, acting in purely self interest produces the highest utilitarian outcome. Everyone is aligned to the same goal: grow demand.
It is important to note that this does not eliminate the game, it increases the options within the game. Competition is good. Competition incentivizes optimal producer output, which is net positive for the economy as a whole. Producers will build products with the intent of accumulating and compete with others in the same category. What this does do is create an incentive to collaborate with complementary services. This was never possible in the current paradigm that disincentivizes collaboration, given the monetization equation today is: # of users x time spent in app = eyes on ads = ad dollars. The threat of losing users to another service is a debit on the balance sheet. But with this new paradigm complementary services have a way to work together and break down the walled-garden of siloed users.
For example, video streaming services will compete to be the best video streaming service — and that will produce the best user experience. But rather than face the pressure of becoming increasingly vertically integrated to further silo their users, one category leader in video streaming could send their users to the category leader in messaging if their users will get the best possible experience there and ultimately increase the demand for the currency that the video service owns a piece of.
The pressure to become more vertically integrated is alleviated by opening up a new option on the monetization option tree. No longer is a developer constrained to optimize eyeballs on ads by virtue time spent in app. With crypto, the rational actor will optimize for user experience and share that user with a complementary service. Producer incentives are aligned across the services to grow demand for the currency.
But what about consumer incentives?
Good question! Monetary theorists and central bankers are smart people. There is a reason they set an inflation target, and that is to maintain consumer spending activity. If the value of the currency a consumer holds is always going up, the opportunity cost of spending increases in lockstep. This presents a challenge to grow a thriving economy. If everyone is in deadlock on spending — demand for the currency becomes inherently speculative (which is where most cryptocurrencies stand today).
There is a lot that developers of consumer products can learn from economists, but there is conversely a lot that economists can learn from developers. Getting consumers to spend a deflationary currency is an exercise in psychology first and foremost and the best product managers are masters of psychology.
The biggest challenge facing crypto today is not an economic challenge or even a technology challenge, it is a product challenge. How do you get a consumer spending a volatile currency? Any good product manager will tell you that in order to displace an incumbent your product needs to be a 10x improvement, not a marginal improvement. If we look at crypto, there are a lot of ways that there are marginal improvements and for some (unbanked, sensitive to censorship, etc.) it is a seismic improvement, but for the majority of the world the dollar works pretty well — so displacing the dollar in our current daily habits is a tall order.
However, there is a new economy emerging that doesn’t have a currency with incumbent status — the digital economy, where, as we unpacked previously, is currently running on weak social currency. This presents an opportunity to build a new world — more on that here. Without an incumbent currency of which there is an established value, volatility is irrelevant in the minds of the consumer who earned it. There is no anchoring effect to the relative value of the digital currency to things denominated in physical world currencies, rendering the opportunity cost null.
At Kik we ran a two year experiment to see if we could build a digital economy on this premise. The answer: yes. Millions of consumers earned and spent every day — more on that here.
The next step was to decentralize that beyond just Kik. Check. In 2017 Kin was launched, and today users are earning and spending across 40 apps on iOS and Android .
“Show me the money!” — Jerry Maguire
This all sounds great. Developers collaborating, users capturing the value they create, the Death Star (Facebook) exploding. Wins all around. But where does the real value come from?
Meltem Demirors said it well:
She’s right, it can’t just come from the sky. For the currency to become valuable there needs to be a source of real demand i.e. someone needs to buy it. And buy it to use it, not speculate on it.
One obvious source is the users of the network. In an environment where airdrops seem to be the norm, buying to use almost seems contrarian, but in reality we see this manifest in non-crypto communities all the time today. Gaming communities are on pace to have $32bn of in-game currencies purchased next year ; but even more interestingly (in my opinion) is what we’ve seen where social communities have emerged in digital native platforms like Musical.ly (now TikTok), where users buy in-app currencies for the sole purpose of rewarding creators on the network.
The other is to reimagine how brands and advertisers interact with these networks. Advertising doesn’t need to be a dirty word. Today, advertising is a tax on the user experience (e.g. watch these ads before watching this video) — and the developer takes a cut of that transaction. No one is truly happy: users pay the tax with their time, advertisers are force feeding content to consumers who may or may not be interested, and developers are diluting the experience for users. With crypto, where an app developer is incentivized to facilitate as opposed to extract — the advertising model can be flipped on its head. Now a developer doesn’t need to take a cut, their incentive is to grow demand for the currency, so they can focus on connecting users and advertisers where the user is paid for their time and attention. It’s a win for users because it converts what has traditionally been a toll into a source of income, and it’s better for advertisers who have users choosing to engage rather than being forced to engage. We ran a two year experiment at Kik based on this premise and had millions of consumers participating every day, and loving it.
“If you build it they will come” — Ray Kinsella
Although Kevin Costner was compelling in his delivery, it is not as simple as just building it.
For developers this is a new way to organize and compete as one. For consumers, this is a way to get off the engineered social capital treadmill. The former is a challenge because developers have grown so accustomed to competing; the latter is even more challenging because the platforms we use today are more addicting than crack (although crack is probably better for your health).
For both stakeholder groups the challenge is an asynchronous feedback loop. Collaborating to increase the value of a scarce asset will have the longest term benefit, but the signals are less parabolic than the competition arena that gives immediate feedback (good and bad). For consumers, exchanging real value will immediately feel good, but it also means an alternative to what they are used to.
But, we’re seeing more developers and more consumers recognize they need another way. As a developer it is becoming increasingly difficult to compete and as a consumer it is becoming increasingly difficult to remain sane.
Innovation comes from a need, not an observation. The world needs this, and more people are waking up to that.