Progressive Decentralization: A Playbook for Building Crypto Applications and How Pinterest Became the Web's Next Big Thing

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Sep 13, 2023

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Progressive Decentralization: A Playbook for Building Crypto Applications and How Pinterest Became the Web's Next Big Thing

Crypto founders face a unique challenge in building a product that not only meets market demand but also operates in a decentralized manner. Building a protocol owned and operated by a community of users adds complexity to the process. However, achieving decentralized community control has several benefits, including limited platform risk and regulatory compliance.

One of the main reasons for decentralized community control is the limited platform risk. When users have ownership and control over a platform, they have a say in the rules and can ensure they align with their needs and preferences. In contrast, centralized platforms can change their rules, affecting users without their consent. By allowing users to own and operate the network, crypto applications can benefit from a cooperative economic model that keeps services aligned with their users as they scale.

Regulatory compliance is another crucial factor in achieving decentralized community control. Tokens are often considered securities before the network launches, given their reliance on the efforts of others. However, once the network becomes sufficiently decentralized, the nature of the token can change from security to non-security. This shift occurs because token holders are no longer relying on the efforts of a single entity. It is important for crypto founders to navigate this transition to ensure compliance and maintain the long-term health of their applications.

To effectively build a decentralized crypto application, there are three key objectives to consider.

Objective 1: Product/Market Fit

Achieving product/market fit is the first step towards building a successful crypto application. At this stage, it is crucial to avoid design by committee or community. A core team should drive all product decisions to swiftly find product/market fit. Launching a token during this phase can complicate compliance, so it is advisable to focus on product development and user adoption.

Objective 2: Community Participation

Once there are signs of product traction, such as a growing user base and network effects, it is time to foster community participation. Founders should invest in best practices for running the product as an open-source project. Token distribution plays a crucial role in incentivizing participation and building defensibility. Teams can distribute tokens to an active user base and plan for future incentives. It is essential to design a fair and effective distribution that considers both the core team and the users who contribute to the project's success.

Objective 3: Sufficient Decentralization

Once a crypto founder achieves early product/market fit and builds a robust community, they can focus on achieving sufficient decentralization. This stage involves "exiting to the community" by airdropping tokens to users and contributors based on a predetermined plan. The core team cedes majority ownership and control of the application, mitigating platform risk. The token may transition from a security to a non-security, as the service becomes sufficiently decentralized. The company becomes sustainable, benefiting from fees and growth, while user-owners realize increasing returns to scale.

While these objectives provide a roadmap for progressive decentralization, there are risks to be aware of. Skipping objective 2, community participation, can lead to an uncanny valley of decentralization theater, where the community lacks participation, and the project remains heavily dependent on the founding team. Lack of focus can also hinder progress, so it is crucial to prioritize each objective in the right sequence.

Pinterest's journey to becoming the web's next big thing offers valuable insights into building a successful product. Ben Silbermann, the CEO, shares his experience and key lessons learned along the way.

Silbermann was inspired to move to California by the movie "Pirates of Silicon Valley," which depicted the rise of Steve Jobs and Bill Gates. Being close to inspiring people was crucial for Silbermann, and he took the leap to pursue his vision. Despite facing rejections from investors, he persisted and convinced them that Pinterest was the hot deal they couldn't afford to miss out on.

The core idea behind Pinterest was the belief that the things people collect say a lot about who they are. Silbermann's childhood bug collection was the initial inspiration for Pinterest's concept. However, when Pinterest first launched, it didn't resonate with users in California. It wasn't until a program called "Pin It Forward" was organized, where bloggers exchanged pinboards about what home meant to them, that Pinterest started gaining momentum.

This event was a turning point for Pinterest, as it showcased the power of community and user engagement. Ben Silbermann realized that they had something special and that they were onto the right track. Pinterest's mission is to inspire users to get offline and do the things they love. By curating collections of interests and ideas, Pinterest enables users to explore and pursue their passions.

In conclusion, building a successful crypto application requires progressive decentralization, community participation, and a focus on product/market fit. By following these objectives and learning from the experiences of successful companies like Pinterest, crypto founders can navigate the challenges of building decentralized applications and create products that truly resonate with their users.

Actionable Advice:

  • 1. Prioritize finding product/market fit before focusing on decentralization. Build a core team that drives product decisions and iterate rapidly to meet market demands.
  • 2. Foster community participation by investing in best practices for running the product as an open-source project. Design a fair and effective token distribution that incentivizes ongoing participation.
  • 3. Plan for sufficient decentralization once early product/market fit is achieved. Develop a roadmap for "exiting to the community" and ensure compliance with regulatory requirements.

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