The 5 Important Concepts of Web3 (133)

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Welcome, welcome everybody. My name is Jeff Tausen and this is the Tech Strategy Podcast where we dissect the strategies of the best digital companies of the US, China and Asia. And the topic for today, the five important concepts in Web 3. And this is, I mean, this has gotta be the result of about six months worth of work, this one. I have been going through a crazy amount. of podcasts and articles and research on all the whole web three thing blockchain, crypto, new business models, everything is decentralized, which is a lot of chaos and it's a lot of innovation and you know, it's nobody really knows what's going on yet. And I think there's a lot of concepts and ideas there that are half baked, not important, ideological, almost quasi religious, maybe. But I think within all of that, from a strategy perspective, from a business model perspective, I think there's really five big ideas that are cutting across everything. And I think when the dust settles three, four, five years, most of what people talk about right now is not going to be talked about anymore. NFTs and decentralize this and permissionless that, blah, blah, blah. I think these are the five things that are going to be the foundations of really interesting new types of business models. So this is my summary. After about six months of burning through, I don't know, two or three hundred hours worth of podcasts and articles, I mean it's crazy. I've been doing this almost on a daily basis. Okay, so I'm going to give you my take on that and that will be the topic for today. And let's see, standard disclaimer, nothing in this podcast or in my writing or on my website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And let's see, anything? That's pretty much it. My book number four, Motes and Marathons, is off to the. sort of publisher right now. So hopefully that should be up in, I don't know, five, six days. So parts one and three are up there. Amazon and Barnes and Noble and part four should be up in a week. So that's pretty fun. And for those of you who are subscribers, I'm gonna be sending you two web three articles this week. One, which is somewhat about what I'm talking now, but also sort of business models that are emerging and how to take them apart. So it's kind of going to be a lot of web 3 strategy thinking this week. I'm trying to get ahead of the curve on this one because it's a big new subject. I think I actually kind of am not to pat myself on the back too much, but I think I am. It turns out, you know, a lot of the stuff we've been talking about the last couple years, you can really apply that over and it makes a lot of this more understandable, in my opinion. Okay, that's it. Let's get into the topic. Now as always, there's a couple key concepts for today. These are going to be in the concept library on the web page. These are mostly new. I mean, we're sort of going into a new area. So there's going to be a decent number of new concepts. A lot of what I've been talking about is really web 2 stuff. We did some old school software companies. We did some AI. But a lot of the business models were platform this, platform that. But that's kind of in web 2. So we're going to sort of create another probably 5 to 10 important concepts. that'll underpin a lot of the web 3 discussion. The concepts for today, which are obviously in the show notes, protocol networks, which I've talked about before as one of three types of networks, physical networks, people and company networks, protocol networks. This is basically how do you make a bunch of machines become connected and compatible, your laptop to my laptop to, that's TCP, ICP, that's fax machines. That's ethernet, that's email. A lot of that was a big deal back in the 80s and 90s, and then it kind of, people stopped talking about it. So in his protocol networks, well, that's what blockchain is. It's a protocol network. Number two, composability. Hugely important idea. Some people, there's a guy who I've talked about before, Sanji, I always say Chodari. I think it's Chowdhury. God, I gotta learn how to say that right. He's a big platform thinker. He's been talking about this, but he uses the phrase building blocks, not composability. We'll talk about both, but the idea is it's open source. It's somebody writes some code. They put it up on GitHub. They put it as part of Red Hat. It's now open source. Now anyone can take it and can write on top of it. So it's like one building block. Then someone else can take another building block, and they can put that on top, and then another person. And it's an incredibly powerful form of innovation. When you're talking about tens of thousands, hundreds of thousands of developers around the world, all writing code that builds and adds to each other, no company can do that. But it's kind of been half broken within open source. I'll talk about that. Number three, tokenomics, which is a whole subject. We'll go into that. And the fourth is probably the biggest takeaway for today. which is this idea of value creation versus value distribution. And I've actually written quite a lot about this with regards to Huawei, because they are masters at doing this. And I think that's probably the best way to look at Web3. Anyways, those are the four ideas. I'm gonna go through these in the five big concepts for today, so I'll cover them. Okay, so we start with Web 3, which people kind of say Web 1 was the 90s, the 80s, part of the 2000s, then Web 2 took over, Google, Facebook, all of these centralized platforms, very powerful business models. And then Web 3 is idea, we're going to start to rebuild a technology paradigm, a technology stack that people can use and build on. we'll use blockchain as the foundational technology, which is just a dip. Basically, it's a protocol network, but within all of that, you're gonna hear a lot of ideas and a lot of concepts, and it's very confusing, and you listen to people talk about it, and it takes them 30 seconds to explain one idea, and it's like, that didn't make any sense to me. And often, that's what happens when the ideas aren't well thought out and clear. you get these long rambling explanations. That usually tells you that the ideas are not quite right yet. But within all that, blockchain's OK. The big one, obviously, Bitcoin, the Bitcoin blockchain, very good. We'll talk about that. Ethereum's the other one. If Bitcoin is the distributed ledger where you can put money everywhere, it's a big database, basically. Ethereum is the distributed computer. It's the one where you can write programs that run on this, smart contracts. Those are the two, but there's quite a few major L1 platforms, sorry, L1 blockchains out there. People are talking about Solana right now. There's this idea of private networks. There's these L1s, layer one, level one, and then on top of those, you can build protocols that run on top of those protocols. So the one... everyone talks about right now is Polygon. Because Ethereum has very high gas fees, it's hard to get anything done. Polygon runs on top of that. But everything done within Polygon ends up in the Ethereum blockchain. So those are layer 2s. And then there's rollups and sharding and all this. Don't worry about all this. But there's just a whole sea of sort of these contradictory and somewhat confusing ideas. The one you'll hear a lot is decentralized versus centralized systems. I think that idea is going to go away. I don't really think it's that important. I'll talk about it a bit. There's DAOs, Decentralized Autonomous Organizations, as a new form of governance for owning things, for making managerial decisions, and even for operations, as a contrast to traditional corporate hierarchies. Andreessen Horowitz talks a lot about progressive decentralization. A lot of talk about transparency and permissionless. One of the reasons people like blockchain is it's permissionless. Anyone can do it. Anyone can go up and write a smart contract right now and put it on Ethereum. Anyone can buy a Bitcoin. There's no centralized authority. Transparency, everything is open, which is a big deal in open source. You need to know what you're building on. That sounds really cool when you're writing code, but then when you say, hey, you should have a decentralized bank account, everything you ever use this bank account for will be totally transparent and everyone can see everything you've ever done forever, which the IRS loves that. Most people are like, I don't want a bank account like that. And then there's, you know, the last year was like the NFT craziness, this idea of digital assets and that takes up, you know, brings up tokenomics. token economics, and then we had ICO. It's just been a lot of crazy stuff, and that's just sort of business thinking and tech thinking. Then it starts to sort of merge into really what is ideology, and that's not necessarily a bad thing. A lot of what's undergirding Bitcoin and Ethereum is something close to a religion that we don't want people to be able to control us. That. Google was about don't be evil, that was their motto. And the answer to Web3's answer to that is that's not enough. It turns out don't be evil isn't enough. What we need is can't be evil. So there's a lot, and that's actually kind of a good thing because those things are evolving so fast that you want people who have very firm value beliefs in how this is gonna be developed and go down the right path. Plus, it does add a lot of energy and dedication. People are very motivating for people. So there's some good aspects to that. All right, within all of this sort of sea of ideas, we'll jump to the so what. What are the big five concepts that I think really matter for strategy and business models and that I think are going to play out? OK, number one, protocol networks with property rights. I kind of talked about protocol networks, what they are. You make compatible, connected machines. Could be fax machines, it could be servers in people's houses, it could be laptops. And once you do that, they can start to operate together and ethernet, blah, blah, blah. This could be a general just database. And that's what blockchain was described as for a long time, is a distributed database, a distributed ledger. Instead of the database being on your server at a company, it's spread out over thousands of computers and they all have a copy of it. That would be sort of a general function, but you could also have a protocol network that doesn't just store and able to sort of send files back and forth, which is really all that Bitcoin does. But it could be a specialized computer that does a couple key functions. So it's not just the database, kind of got like a CPU and you know it could be specialized for certain things or you can go all the way to a Turing like computer where you can program the computer to do anything and that's Ethereum right it's a distributed computer that anyone can write programs that run on it which are smart contracts and then you can do NFTs and other things okay So you can kind of have, those are all technically protocol networks, but some of them just look like databases and some of them look a lot like computers and some of them look like currency. So they can kind of specialize according to their function. And Bitcoin, the beauty of Bitcoin, is it's so simple. It only does one thing. You can buy a Bitcoin, it sits on the computer, and you can send it somewhere. That's all it does. It's the simplest thing and they've maximized for security and to be non inflationary. Turns out that's a pretty smart strategy. The other end of the spectrum is Ethereum, where it is so broad in its ambition that it's very hard to build a protocol that can be used for everything. Because there's so many variables that are going to emerge over time that you're going to have to change the protocol. Well, that's a problem. Because if a person has the ability to change the protocol, it's not really distributed. Someone has control. Nobody can change Bitcoin really. That's not 100% but mostly. So if you need to innovate and you need to adapt and you need to improve over time, it's hard to be totally decentralized such that nobody has control of this thing. So there's a spectrum. So one way I heard it described, which I thought was good. level one, layer one protocols as like different cities. Ethereum is New York. It's the most stuff is going on. That's where everyone wants to be. There's a ton there. Let's say Salon is like Boston or Chicago. It's more specialized to certain functions like let's say commodities trading in Chicago. And maybe Salon, you know, you can kind of break them up that way. and you can build things on these platforms, these protocols, but they're going to have different characteristics that enable them to be better at certain things because each of these ultimately is like an iPhone. It's going to be a full tech stack that all has to work and it's good for the user, you can build on it, but it's not going to be one iPhone, it's going to be like five different types of iPhones. Or if you want to use the city example, it's going to be like a New York and a Chicago and whatever. Now the problem with all of that is when the iPhone was released, Apple did everything. They had the semiconductors, they had the operating system, they had the hardware, they had the camera, they had the touch screen, it was all done. And they released it and it all worked. Okay, most of these blockchains are only half built because they're all kind of being built in pieces. So it's like here you should buy our iPhone and build... programs for our iPhone. Oh, by the way, we don't have a touch screen yet. And the battery only works for an hour. And the camera, yeah, we don't know how to make a camera. It's not the... We don't even know how to make it work. Like, it's half built and it's half not built. And it's not totally obvious how to make all the other pieces. That's kind of where most of these blockchains are right now. They're kind of half functional. Okay. But that's the basic... technology, let's call it paradigm that's emerging in its early days. Okay, so big concept number one, protocol networks with property rights. And I'm adding that second bit, property rights. This is a huge, huge deal and I'll get to why. If you own something in the real world, it's usually one of two ways. Number one, you have physical custody. I bought the sofa. It's in my house, I have it, I don't have a contract, self is in my house. Physical custody. Well, there's no way to have physical custody of digital assets that are on computers. You know, your videos that you uploaded to YouTube, YouTube could say these belong to you, which they don't. Even if they did, you can't take physical custody of them, you can't get all your stuff, I mean it's pretty hard. For the most part, by nature, it's intangible. So physical custody doesn't really exist. So what you're really basing it on is sort of terms and conditions published by companies. I buy a song on iTunes, not a Spotify, not a rental. I buy it. Do I really have it? I can't take custody of it. It's still within the iTunes ecosystem. And the only thing that really secures my ownership is the terms and conditions, and I guarantee you there's a clause in there that says they can change them. So you don't really have that, but in the real world what we do is if we can't get physical custody of something like I own shares of that company or I own that laundromat, that's where the rule of law comes in, and property rights. Property rights within the rule of law or physical custody. That's how you technically own something. Okay. How do you do that in the digital world? How do you do that on assets on a blockchain? NFTs, tokens, Bitcoin, whatever. What blockchain does is what Web2 never did, is they give you ownership rights with the rule of law. Although it's not technically the rule of law, I would call it the rule of protocol. On Bitcoin, you have ownership rights within the rule of the protocol. which is fixed. That's very much like having property rights in the United States within the rule of law. Same idea. But for all effective purposes, you can own stuff. You can own Bitcoin, you can own NFT. I bought my domain name, like jefferytowson.crypto. You know, I have a domain name that I get from like GoDaddy or something, right? jefftowson.com. I don't really own it. I have to pay them a fee every year. I'm basically renting it. When I bought my Jeff Towson.crypto, it was a one-time payment, it's mine. That's it, we're done. I don't have to deal with this company ever again. If you go up on Ethereum and you search for it, you'll find my public key, basically. So I own it and it can't be replicated. So that's a big deal. I mean, this is really a fundamental change that's gonna play out in lots and lots of ways. And obviously the big place it played out is decentralized finance. Let's buy and sell tokens, let's buy and sell fiat currency, turn it into Bitcoin, then trade it into Ethereum, then stake it into Ethereum 2.0, which is, when they say staking, it just basically means like a bank account and you get a return, like pretty good return actually, several percent. Let's do yield farming. I mean, there's all these games going on in decentralized finance, Binance, Coinbase, SFX, and this is all people buying and selling digital assets, which they actually own for the first time. Now it's a little different because if you have a decentralized wallet, a non-custodial wallet like a Metamask, you own your Ethereum. If you have it on Coinbase, technically Coinbase owns it. I mean, they have the private key and you're under their terms and conditions. The joke is if it's not your key, not your money. Anyways, okay, so that was sort of the first big use case and then we quickly moved into sort of NFTs. which is a terrible term that's going to go away. It's just a token, non-fungible token. It's just a digital asset. That's it. Forget this token, non-fungible, fungible. It's just a digital asset. Bitcoin's a digital asset. A picture of a cat on Ethereum is a digital asset. And that was kind of another new use case. And we saw OpenSea become a marketplace for this. And they kind of... Domain names, people started buying domain names, people started buying art, artists started to put their stuff up. Virtual lands, and the central land, and all these, where you can buy land in this virtual world and be down the street from Nike, and they bought a bunch of land. Collectibles, tokenized physical assets. But it's all the same thing. You're buying digital assets on a protocol network where there is property rights, and you can own it. That's a huge idea. That's big concept number one. It's playing out all over the place. It's pretty confusing, but it's actually pretty cool when you start buying stuff. I mean, I've minted some NFTs. I've bought some bonus. I'm just playing around. But you can go into video games and buy your character and buy the swords and buy some crypto kiddies. I mean, you can own all this, and it'll end up in your non-custodial wallet if you want it to. So that's kind of big idea number one. Now, big idea number two is global composability, which you could also call building blocks. That's Sanjit's term. This is a superpower. Like if you have a business and it's built on web three and it has global composability, this thing is like having network effects. This is an incredibly powerful phenomenon that a company can have. Now, It's kind of a vague concept right now. People talk about composability. I'll explain what these are. You'll also hear them sort of talk about complements as a type of composability, kind of get mixed together. The conversation kind of drifts into crowdsourcing, into innovation. You'll hear the term modularity every now and then. It's basically the idea of, well, let's talk about, like, when you're online, you can work with other people. And this is all about value creation. We're gonna create something, build something, and it's gonna be valuable for the customer. That's compliments. You know, one person invents electricity, they sell you the service, then another company invests washing machines. You can now plug the washing machine into your socket in your home. That made your electricity more valuable. It's a compliment. It adds value to the other product. The electricity adds value to that. Hot dogs are better with hot dog buns. Okay. In the digital world, one of the things that's so powerful about this is you can have millions of compliments. That's what the iPhone is. It's a phone that has some basic functions, and then you open the app store and you realize you have millions and millions of mostly free compliments that make your iPhone more valuable. Okay. So Compliments sort of gets tied in with this idea of modularity. If something is modular, we can stack things on top of each other. That's a little bit like building blocks. The extreme, let me give you a simple, less powerful example. Crowdsourcing. A company like Wikipedia, a company like Quora, Juhu, they are heavily dependent, almost entirely dependent on... on people writing content for them and putting up all these Wikipedia pages. So they sort of benefit. You could call that sort of compliments, you could call it part of the operations, but basically there's a lot of people who aren't the company that contribute stuff that makes the product, Wikipedia, more valuable. Value creation. And you know, that's pretty good. You could say YouTube kind of does the same thing. People upload videos. So it's this sort of cooperation model. OK, and generally speaking, YouTube works really well. There's a nice clean business model centralized. Wikipedia, Quora, Juhu, they don't work very well. The editors come and go. You can't really pay them, but if you make them angry, they leave. And the version of this, that brings us to composability, global composability. Open source. I mean, that's the big example that everyone's been looking at for 30 years. Open source, Red Hat, GitHub, this thing, Android, this is incredibly powerful. I mean, there's no way around it. It's incredibly powerful that tens of thousands of developers, encoders work on this and add to it and build and someone creates one type of code and then they put it out there into the open source. someone else builds on top of that and puts their building block on top and it's just building block after building block, composability. It's arguably the most powerful form of innovation in the digital world, but it's never really worked because it's kind of broken. And I'll talk about this in concept number three. The value creation works, but the value distribution, people getting paid for their work doesn't work. So there's all these sort of funny workarounds where, you end up doing a lot of stuff for free, companies publish content but they don't get paid for it, but they know they make money in somewhere else. Android open source is given away for free, but they charge you for the private license. Red Hat is sort of free for everybody, but then they also get donations and the big corporations donate projects to them. I mean, it's just this broken value. distribution, we could call it funding mechanism. But the value creation mechanism is incredibly powerful, especially when it's global. Think of all the developers all over the world in every country working on Ethereum. Not the Layer 1 protocol, but building stuff that sits on top of it, adding NFTs, adding CADs, that make it more valuable for everybody. That's an unbelievable phenomenon. So... You can think about global composability as a technology platform, an infinite canvas that everyone can paint on. They can build dApps. They can build NFTs. So let me give you an example. So let's say Ethereum blockchain. Vitalik publishes the blockchain. He's unbelievably smart. Crazy how smart that young kid is. OK, it's a blockchain, and people are starting to do stuff with it and trade. And then. someone figures out NFTs. In this case, the first one was crypto punks, right? Lots of pictures of these sort of punk, cyberpunk guys. They create 10,000 of these things, which are just JPEGs, but they release them as digital assets on the blockchain. They gave them away for free and people start sort of collecting them like baseball cards. So it wasn't like Bitcoin, where it was a directly financial use case. It was more like a collectibles use case, although though people were speculating. Okay, did that make Ethereum more valuable? Kinda. And then shortly after that, we get CryptoKitties, which is the same thing a lot of JPEGs pictures, but this time they're Kitties. And because it's a global blockchain with ownership rights, you can buy them and own them. You can trade them. So people start buying CryptoKitties. Well, then along comes OpenSea. OpenSea is a marketplace that was basically founded so you could trade your crypto kitties with somebody else. So the marketplace got built on top of that. And then someone else comes along and launches cats with hats. Well, now I can buy hats, which are digital assets, and I can stick them on top of the crypto kitties. So now I have crypto kitty whatever, and now I can buy a hat and put it on it. And then someone else says, let's... create a video game that you can play and you can put your cats with their hats in the video game. So that's composability. People just start building and building and building and yeah, maybe a lot, most of it's stupid, but you can see what a powerful mechanism that is for creating value for let's say the player of the game, as opposed to waiting for Microsoft and their whatever, 50,000, 100,000 people to release the next update every year. This is a global engine for creation. OK. So that's kind of the second big idea, global composability. But as I said, the big weakness of open source thus far has been what they call the tragedy of the commons. When you create a public infrastructure, it's very hard to fund it, which is usually where governments come in. Plus, there's a problem with governance. And so I mean, open source, Red Hat, they've always been half broken. So that's concept number two. I'm going to answer that question in concept number three. But concept number two, global composability is the big superpower. It's a massive form of value creation, but it's kind of half broken. And that brings me to concept number three, which is value creation versus value distribution. Concepts four and five are really short. So these are the big three. And Sean Geet has been talking about this. I was writing about this exact same thing about Huawei a couple years ago, which is companies that are really effective, particularly at scale and particularly when they have to be innovative, have a very specific linkage between those who create the value and where the value goes. So value creation is tightly linked to value distribution. And I sat down with the Huawei HR people when I was there. And this is really what I wanted to talk about. I mean, you've got 194,000 employees, the vast majority whom are engineers. You have no real assets that last. The only resource Huawei has is its brain power. Because in five to 10 years, all of their current products are gonna be obsolete and they're gonna have to have created the next generation. And they have an incredibly well thought out system for... How is value created within the company? And they really specifically measure individuals and teams that create value from the perspective of the customer. So that's sales. They really tie it to customers are buying this product. That's value created. Who did it? And then they look at sort of engineer managers, and they look at teams, and they focus A lot of younger people who they think are the current engine for value creation and they make sure that they're very incentivized. Then they talk about value distribution. Okay, this money, this wealth, this economic value has been created, who gets it? And the number they use is usually three out of four or four out of five where for every dollar that comes in. 75 or 80% of it goes to the people that directly created it. So who is that? It's current staff that they've identified as the people that make all the difference. So they get a salary, they get bonuses, they can buy in and buy shares. And then outside of that, there's another 20% that goes to everybody else, like shareholders. Now, they can have internal shareholders, but let's say alumni. people who used to work there and have retired? Well, they may have added a lot of value 10 years ago, but they're not adding value today, so they are forced to sell back their shares. How much is the CEO getting? Do we have a bunch of rich CEOs that are billionaires? No, no. They basically ask those people to leave. They really want a tight linkage between those who are actively creating and those who get the benefits. And it's usually about When we look at web 2 and web 3, we actually have usually four to five user groups. And we can look at each user group and say, who's creating the value and who's getting the value? So group number one, customers. Fine. They're receiving value. They're not creating it. They're on the receiving end, but they're paying for it. OK, customers. Number two, developers. Now developers tend to be valuable to create a lot of value when something is innovating, when you're building, as opposed to we have a stable software that's working quite well and we're just maintaining it. Well, you don't really have very powerful developers just to maintain something that's pretty stagnant. So that's when you're building something new. You're building an ecosystem. You're going from version one to version two of the product. You're launching five complementary products to the core product. That's when developers have a powerful thing. Most everything in your app store on your phone was created by developers. OK, group number three, user group number three, content creators. I'm a content creator. They create a decent amount of value on a company like TikTok and YouTube. the sea of content that's constantly changing with trends and memes and you know that's mostly coming from the content creators it can be pretty powerful group number four will call those the operators these are people that just maintain the current system now in a company like YouTube we know that's just the network engineers and the staff and the human resources and the customer service but when you start looking at operators on web three You're talking about miners and validators, because most of these protocols, the software lives out there on computers, and you need other parties to make it function. And then the last group would be investors. Who are an important part of this? Now, just to cut to the chase, who were the big winners of Web2? Who got most of the value distribution at the end of the day? And it was really two groups. It was customers. Web2 was a tremendous win for customers. Everything on our phones is awesome. And investors, they got all the money. You know, if you're posting anything on YouTube, YouTube takes virtually all of the revenue for itself. The content creators get nothing. Facebook has a 100% take rate when you post stuff. You know, the big investors, the big invoners, get most of the economic value, the customers get the product. The developers don't get very much. Usually the content creators, they get status, they get reach, but they don't make a lot of money. And then the operators, they get some salaries. That's not bad. But overwhelmingly, this has kind of been what's happening, which is why a lot of developers, they're not willing to write and put their effort into Android or iTunes or to build stuff on Twitter. or to build stuff on Facebook because they know they're going to get taken advantage of. They've kind of walked away, which I think is why a lot of these platforms are very stagnant. And even content creators, they're not willing to post on YouTube and Facebook and Twitter anymore because they don't get any money and they know that they can be banned any day of the week and they don't trust these people. Why would you spend all your time and effort to build something you care about on a platform that can pull the rug out from under you, which they do, and doesn't give you any of the money. Why would you build for them? So what Web 3, you could rename Web 3 Revenge of the Developers. Web 3 more than anything else is being driven by angry developers who are sick of building for others, and they want to build for themselves, and that's why they talk about the decentralized web. Nobody owns it. We get money. When we build something, we get the tokens. When we build the NFTs as a content creator, we get the money. They're not dealing with the centralized web 2 platforms anymore. That's a big part of the ethos. And generally, that is what's happening. Web 3 is being driven by developers. Content creators like to sort of complain, but they're not going anywhere. They're on web 2 every day of the week, because they get status and reach and recognition and marketing, even if they don't get money. But it's the developers that have pretty much walked away. So you could argue that what Web 3 is really about with its ownership of assets, right? That's what I described it as, a protocol network with property rights. That is an attempt to fix the broken value distribution of Web 2. We know the value creation works, but value distribution has been broken. And they want to reset that. so that the people who create content creators, developers, some operators, they get more of the distribution. And it turns out a good solution to that problem is a protocol network with property rights. Now that said, you don't necessarily have to switch from one type of business model like a YouTube or Facebook, a Web 2.0 business model, to an entirely Web 3 to access this situation. You can just do part of it. You can have a Twitter and you can have one space that's your traditional centralized platform and then you can also have certain functions that are on the blockchain. So you can... kind of mix and match these ideas and get developers more involved on that side, but keep your centralized platform as well. So it's not kind of an all or nothing thing. So in the article I'll send out later this week, I'll basically outline what I think are the five business models we're going to see. Platforms, linear business models, platform protocol, hybrids, which are often called Web 2.5. And I think we're going to see a lot of mixing and matching. Okay. So this idea of value creation versus value distribution, it's a really good way to look at it. And I'll give you what I think is happening. Let's say there's a couple conclusions from this. I think the most powerful form of value creation that we may have ever seen is distributed global innovation, which is the open source idea. I mean, it is such a powerful phenomenon. tens of thousands of developers working on something where everything adds to each other. And that tends to really work in two scenarios. One is when you have a highly innovative thing that needs to keep evolving. Or two, you're really building an ecosystem. You're building hundreds of companies that all link together. And that's really what Ethereum is. It's an ecosystem. It's the blockchain. It's the L2s. It's the NFTs. It's the marketplaces that use it. I mean, so this sort of global composability, it's really good for rapid innovation. It's also really good for sort of building ecosystems. That is on my very short list of big things to watch for. And that's mostly a story of developers. OK, number two, content creators are very good at value creation. YouTube is a lot better than Netflix, just the breadth of content, the long tail, its ability to adapt. to changing trends. I would put that as another example of fairly powerful value creation. A lot of the other situations that you'll hear about. What you'll hear is you'll hear why this is so good for developers. That's value distribution. But then you look at the numbers and consumers aren't using it because it's not that valuable for them. And a lot of what they're doing in Web 3, you know, it's we have tokens and developers are going to get rich from this and they're very highly incentivized to do this and consumers don't use it because it's not that big a deal for them. So you got to have value creation and value distribution. You need both. When you actually look at Web 3 and you look at the usage numbers, they're very small. I mean, Bitcoin is the exception. Financial products are doing well, but outside of that, when you look at the numbers of people doing this stuff, you're talking about millions globally. It's very small because it's very difficult to use this stuff if you've done these sort of things. Okay. These are short. Big concept number four, points of control. This is when people get into centralized and decentralized. None of that matters. I think it's just the wrong way to think about it. In a connected system, there are always gonna be points of control. And you wanna know, does someone have control of that? Because if they do, they're gonna basically be able to do what YouTube does and Facebook does and all of these companies. They can ban you, they can do what you want, they can change the rules. And that's pretty much in any connected system. Like if you look at global trade, ships come, ships go, barges go across the Pacific, then they go onto trucks and then they go into middle America and then they go on rail lines. But you know who has a point of control is the Los Angeles pork. It's unionized. And if they go on strike, they basically shut off the flow of goods from Asia into the US. Then you got to go through the Gulf of Mexico or down through Mexico. That port in Los Angeles is a point of control, and it happens to be unionized, which is very smart of them. So when you talk about centralized, in this new system, Web3, there will be points of control. And you just have to understand who has them. Is it a point of control where really the Ethereum foundation is pretty much in charge there, or not? Who is this person? There's always going to be a degree of trust. So this idea that there's not going to be that, it's going to be totally decentralized, and no one's ever going to have any power in this situation, I don't think the world looks that way. I think that's how engineers view the world, and I don't think that's how things actually work. OK, but that's an evolving thing. Keep an eye out. There are points of control in Android. There are points of control in Facebook. There are points of control everywhere. You just got to know what they are. OK, last concept, token economics, tokenization. This is a huge complicated subject that is changing every week. Now in theory, tokens are supposed to be how you distribute value. If I'm launching the new Jeff NFT exchange, so marketplace, I need people to build it for me. I could raise money, I could hire a bunch of engineers, we could code it, or I could just put out a call and say if any developers kind of want to work on this because they believe in me. We'll pay you in tokens for the thing you're building. And you can get thousands of people working on your project very, very quickly. So it can be a very powerful financial incentive. Now maybe the developers are doing it because they believe and they want to be an owner of a Solana or whatever. Or maybe they're just speculating and they're going to pop the token and make some money and then dump it and move. There's a lot of speculating going on. But then you get into things like utility tokens and access tokens and governance tokens. And it is just a sea of complexity, and everyone's playing with them right now. I'm going to have to dig into that a lot more. Anyway, so those are sort of the five big ideas. And I'll give you the simple version, the two sentence version. But those are kind of the big five ideas that I'm really digging into a lot. Just to review, number one. Protocol networks, another name for blockchains, with property rights, ownership of digital, that's hugely important, which I call it property rights within the rule of protocol as opposed to the rule of law. Big concept number two, global composability. Not just that it's composable, it's a building block type phenomena, but it's global. That makes it startlingly powerful. value creation versus value distribution. And you really gotta look at that within every company, within every protocol, within every feature. You need to look at that and you've gotta sort of weed out the short term financial gamesmanship that's been going on, all this speculation. You kinda gotta weed that out because that's gonna fade away. And I can give you an example of that. There's Axie Infinity, which is a... There's this idea floating around, we're gonna make video games. and we're going to pay people to play. So they call it Play to Earn. And huge numbers of people in the Philippines started playing this video game, and they would make money. And they would make more money than their jobs. And by them playing in the game, it created sort of the operating environment for other people to play. And they made money. So you could say, well, that's the value creation. Them playing makes the game more fun for others. and the value distribution, they get some tokens and they can redeem them. Well, that all worked really well for a while and then it pretty much collapsed, where now they're playing and they're not making any money. Well, OK, you didn't quite figure out the value creation versus value distribution equation long term. And a lot of these companies, they pop like this and then the economics, the tokenomics sort of fall apart. Wait, yeah, so value creation, value distribution, number four, points of control, number five, token economics, tokenomics. All right, here's the cheat sheet. This is the simplest way to look at all this thing. Just ask yourself two questions. What is the use case and what is its value creation in the eyes of the customer? Question number two. What are the short and long-term incentives? for builders and operators, does the value distribution align with the value creation? Basically, we've got to create a tremendous amount of value for customers to get them to use this. And then two, we have to distribute that value to basically builders and operators in a way that creates a stable, long-term, robust environment. And if you ask those two questions for something like, a lot of these games, it's clear they don't make sense. If you ask these questions about a lot of things like central, decentralized land and virtual land, I think they don't make sense. But if you ask this about Bitcoin, it makes perfect sense. What is the use case? The use case is digital gold. It was going to be payments that didn't work. It's digital gold. Put your money here. It's safe, it's secure, you can store your wealth here, and it's non-inflationary. That's a very compelling use case for a lot of people. That's a great use case, and because it's a protocol network with property rights, you own it. You have absolute, well not absolute, but you have a really secure ownership. It's yours. It's gold in your vault. Okay. What, second question, what are the short term and long term incentives for the builders and operators of the system? Well, you don't really need to build Bitcoin, it's sort of a utility. You built it once and then you pretty much just maintain it. It hasn't been changing very much, so you don't need lots of developers coming in and redoing the whole thing every two years like Ethereum. You just need miners who are going to keep the transactions moving. And it looks like that's okay, but there might be some questions with the incentives of miners long term when there's fewer and fewer bitcoin to mine and you can't make as much money as before. I'm going to have to look at the long term incentives of the miners who keep the thing operating and you have to worry about miner consolidation that like basically five to six companies of miners now control all of bitcoin if they want to do. But it's a very good use case and it's a very clear answer for why that worked. are without doubt that has got the greatest adoption. And I think it's a great Web 3 solution. Now when you move into things like Ethereum, NFT, all this other stuff, you can see other wins. And I think decentralized finance, you can see a lot of very compelling cases. When you move to other things like I'm going to create the Web 3 version of Uber. It doesn't really pass the first question. There's not enough value creation that your average consumer would be like, why would I use this? Why don't I just use Uber? Well, Uber's centralized. Why do I care about that? You're the developer. I can see why you would care about that. Why would I, as the customer, care about that? Well, it's privacy. Well, it turns out most consumers don't care about centralization. Most consumers don't care about privacy. Certain subset do, but it's not most of them. Anyways, I think that's a good way to sort of take this apart. Okay, that was a lot of me talking about theory, but I'm going to send out more. So you got two articles coming to you this week if you're a subscriber, and I'm going to detail this out a lot more, and I'm going to give you what I think are the five common business models we're going to see. And I think I can already point to them. I'm pretty confident in them. So hopefully that will be valuable to you. But that is it for today in terms of content. And as for me, I am just back to Istanbul. I spent about a week down in the south, sort of on the southwestern coast, which is, I guess, the famous region of the coast. Bodrum, Fethiye, you know, really pretty. I mean, I'm not that much of a beach person. It's probably because I burn almost immediately. But I find it a nice place to go for a couple days. So yeah, it was real pleasant, but I was pretty eager to get back to... Istanbul. I mean it's kind of crazy here and you know I'm back in the Katakoy neighborhood which I think is really kind of my place. Not the crazy downtown with like millions of little restaurants all jammed together but sort of like you know in the suburbs around Katakoy you know these quiet streets, Treeline streets. It's kind of my area. I think this is my neighborhood. I really do like it here so anyways I just got back I'm standing in the neighborhood sitting down at the local restaurant. eating way too many. I've been eating a ridiculous amount of cherries and fruits. We don't really have that in Thailand. You don't get boysenberries and strawberries and cherries and raspberries. Not really. We get mangoes and pineapples forever. They're everywhere. I've been eating a ridiculous amount of those. Anyways, it's been a pretty great week. So having fun. Anyways, that's it for me. I hope everyone is doing well, I hope this is helpful, and I will talk to you next week. Bye bye.