Rohan Handa 7/12/23 Rohan Handa 7/12/23

Thoughts On Competing in web3

Competition

Competition in web2 operates very differently as compared to web3. In established web2 platforms data and assets are locked within “walled gardens,” and thus require significant cost and effort to move. It’s difficult to extract even the content you yourself have created on platforms like Twitter and Facebook, and once you’ve done so, it arrives in a file format that isn’t easily transferred onto some other platform. And meanwhile, people perceive significant switching costs in search, banking, healthcare, etc., and as a result, very few seek out better products.

By contrast, crypto and web3 make it easy and intuitive to move a user’s assets from one place to another, because those assets are stored and managed on public, interoperable blockchains. This makes the cost of switching platforms incredibly low — users have control over their assets and often do not even need to notify a platform when they leave for a competitor. As a result, platforms have to compete fiercely not just to win users but also to keep users. This in effect is a win for the users/consumers, as this virtuous platform competition drives down the prices. But there is a catch (and there always is).

Cost of competition: web2 vs. web3

Extreme competition driven by the low cost of switching has its own unique costs and side effects.

Users/Consumers: Via increased competition they face what I’d call, “option fatigue”. This fatigue leads users to turn on the auto-pilot mode, and pick options that look deceptively simple, but end up costing a lot more.
Product/Companies: Given the low barrier to entry, finding an edge over the competition becomes hard, and it typically leads to a price war (mostly, to the bottom). And as competition intensifies, companies may tend more and more to offer attractive product features while hiding increasing underlying costs and risks.

And as such, it’s neither the users nor the products that win over a sustained period of time. We have seen this play-out throughout history. For example, deregulation in the banking sector in the 1970s and 1980s increased competition lowered profit margins, and magnified banks’ risk-taking activities and bank failures. 2008 was a classic example of companies increasing the headline interest rate all the while lowering the quality of the product by increasing the product’s complexity, opaqueness, and risk.

One could argue that competitive markets can and should drive unproductive companies out of the market. But the lack of transparency often allows unproductive companies to compete by offering products that appear attractive in the short run but are unsustainable in the long run. Unfortunately, as we’ve seen, companies like Celsius, 3AC, and FTX, can amass significant assets before their business models eventually unravel. But to be clear, these are not web3 plays, but centralized (web2) financial firms caught committing fraud.

And that’s where web3 differs, providing transparency and aligned incentives.

Ultimately, what any business/product/project is vying for is its’ users’ attention/loyalty and $$$.

If you are not top of mind, you are not top of wallet. As such, firms find it valuable to lock in repeat (and/or high-spend) consumers, and they often do so via loyalty/rewards programs such as frequent-flyer miles or discounts for returning consumers. Amazon’s $35Bn (approx. 7% of Amazon’s total revenue) loyalty program aka Prime Membership for instance is based on repeat consumers and yes, a mind-bogglingly streamlined experience.

However, competitors may also find it valuable to identify repeat consumers (often the higher paying) of other firms and convince them to switch; such efforts are called “vampire attacks” — and are particularly easy to execute in the context of web3 platforms (vs. web2) that record their transactions on a public blockchain ledger. As such, web3 platforms face higher competitive pressures where more traditional firms with loyalty programs may not, and as a result, can create attractive scenarios for price-sensitive consumers. Take a look at Sushiswap attacking Uniswap.

And a user/consumer in web3 will provide loyalty and $$$, assuming you solve their problem through your product, if the business provides transparency and aligned incentives.

In heavily competitive markets like DeFi for instance, radical transparency may be a difficult strategy in the short run precisely because it prevents platforms from offering seemingly attractive but unsustainable deals. But in the long run, transparency is advantageous, and there’s a real sense in which DeFi (and other decentralized platforms) platforms could be more value accruing for everyone, including their creators. Indeed, especially to the extent that these platforms share some degree of ownership with their users, the value proposition for consumers can be higher, which has the potential to lead to added growth down the line.

Conclusion

The past year has been a tumultuous journey for crypto businesses and users alike, as they have encountered numerous challenges and learned valuable lessons along the way. However, amid these struggles, one positive outcome has emerged: repeated stress tests that have highlighted what truly works within the cryptocurrency sphere.

These trials and tribulations have played an instrumental role in showcasing the immense potential of the web3 ecosystem's maturation process. As this technological landscape evolves further, everyday users will find themselves presented with increasingly abundant opportunities to leverage its extreme transparency and aligned incentives. This development is particularly exciting because it equips individuals with the enhanced knowledge and tools necessary to extract maximal benefits from blockchain architecture-driven intense platform competition.

By embracing this progressive shift towards decentralized systems powered by blockchain technology, users become empowered participants who can actively navigate through various platforms while making informed decisions based on their personal goals or preferences. Moreover, such exposure encourages sustainable growth within the industry as both developers strive to create innovative solutions that cater directly to user needs.

As we look ahead into the future of cryptocurrencies unfolding before us like an intricate tapestry woven together by collaboration between different stakeholders — users included — I remain optimistic about paving new paths toward economic empowerment driven by cutting-edge technologies built upon principles of trustworthiness and fairness inherent in distributed ledger systems.

Rohan Handa 7/5/23 Rohan Handa 7/5/23

Crypto Networks: The Voting Systems

Introduction

Voting systems are an essential part of any democratic society, and they play a vital role in ensuring that the ‘governing entity’ is accountable to the people/community. In crypto networks and protocols, DAOs (Decentralized Autonomous Organizations) are used to make decisions about the network or protocol itself. This could include things like:

Changes to the protocol: Voting systems can be used to decide whether to make changes to the protocol, such as adding new features or fixing bugs.
Funding of projects: Voting systems can be used to decide how to allocate funding for different projects, such as the development of new features or marketing campaigns.
Election of leaders: Voting systems can be used to elect leaders of the network or protocol, such as the members of the governing council.
Changes to the rules: Voting systems can be used to decide whether to make changes to the rules of the network or protocol, such as the fees charged for transactions or the way that blocks are mined.

While the benefits of voting systems often outweigh the drawbacks, what often goes unnoticed, are the types of voting systems that are available to implement.

Voting Systems

One person one vote (1P1V).
This is the democratic ideal (and self-explanatory). It’s also how some executive teams function, including at foundations, DAOs, and major corporations.
- Challenge 1: People who are less informed have the same influence as those who are more knowledgeable and informed. This can happen in practice when there are many issues to vote on, and busy people don’t have the bandwidth to get sufficiently educated.
- Challenge 2: People with little skin in the game may have undue influence.
One person one vote (1P1V), with delegation.
Someone with a vote can delegate their vote to others. This is a representative democracy, like the US. This retains the democratic ideal while letting busy people defer to better-informed people. The action of delegation may be rare and wide-spanning, like we see in nations (one choice every four years, for many topics at once).
- Challenge 1: Delegation could be fine-grained in time and issues, where for example a person has delegated to someone else for most issues but retains the right to withdraw that delegation for any given issue. This is the realm of liquid democracy.
One token one vote (1T1V).
This accounts for skin in the game akin to ApeCoin DAO. It’s the “shareholder” ideal. The more skin in the game, the more influence a person has.
- Challenge 1: This has the opposite problem of democracy i.e. a handful of token whales can unduly influence the whole system.
Quadratic voting (QV) and Quadratic Funding (QF).
This is an approach trying to balance “1P1V” with “1T1V”. QV gives people a “votes” budget that they then can apply across several polls. For instance, a person can spend 0, 1, or more votes on a given poll, where the person’s influence on that issue is the square root of the votes they spent. This allows the person to emphasize the polls (issues) that they care most about, without getting unreasonable influence anywhere.

Note, Quadratic Funding (QF) is a variant of QV explicitly for payments scenarios like funding. A person contributes tokens to fund a proposed project or team. Then, there is “matching funding” that takes the square root of each person’s spend and adds the spend. Gitcoin is been using QF, with promising results.

So, for example, if both Project X and Project Y get $100K in contributions, but Project X has way more individual donors, then Project X will get way more matching funding.

Signal on “Utility”.
People (or bots) voting on code-based projects need the information to identify what projects might add value. Traditionally this is subjective, or a using measurement not designed for this purpose. Colony also uses an algorithm (Google’s page-rank equivalent) but has more emphasis on DAOs.
Rough consensus.
Here, one or more leaders conduct an informal survey among the broader community, then make the final judgment call on what to implement. For example, this is how new Ethereum functionality gets chosen by core developers.
- Challenge 1: It’s a slow process, and often has a single point of failure from a decision-making standpoint.

Conclusion

Of course, voting systems have some potential drawbacks, especially in DAOs. For example, voting systems can be complex, challenging to understand and implement. Additionally, voting systems can be vulnerable to fraud or manipulation. However, Voting systems are an essential part of any governance structure, centralized or decentralized, and they play a vital role in ensuring that the DAO is run transparent, accountable, and efficient.