The Future of Protocols: Combining Open Data and Incentives for Success

The Future of Protocols: Combining Open Data and Incentives for Success

In today's ever-evolving digital landscape, the concept of protocols and applications has taken on a new dimension. Traditionally, the internet stack was composed of "thin" protocols and "fat" applications, with the value primarily concentrated at the application layer. However, with the emergence of blockchain technology, this relationship has been reversed. The value now concentrates at the shared protocol layer, while only a fraction of that value is distributed along the applications layer.

So, what has caused this shift in value distribution? One key factor is the combination of shared open data with an incentive system through the use of tokens. When applications begin to emerge and show signs of success, new users are drawn to the protocol, increasing demand for tokens. These tokens are necessary to access the services provided by the protocol. At the same time, existing investors hold onto their tokens, anticipating future price increases, which further constrains supply.

By replicating and storing user data across an open and decentralized network, rather than individual applications controlling access to silos of information, we can reduce barriers to entry for new players. This creates a more vibrant and competitive ecosystem of products and services. However, an open network and shared data layer alone are not enough to incentivize adoption. This is where the protocol token comes into play. The protocol token is used to access the services provided by the network and fills the gap in incentivizing users to participate.

But it doesn't stop there. Some early adopters, perhaps fueled by their profits from getting in at the start, build products and services around the protocol. They recognize that the success of the protocol would further increase the value of their tokens. This creates a feedback loop where interest grows faster than the supply of tokens, leading to a bubble-style appreciation. Speculation becomes the engine of technological adoption, attracting financial capital. The profits from these investments are often reinvested in innovation, further driving the success and adoption of the technology.

It's important to note that the market cap of the protocol always grows faster than the combined value of the applications built on top. The success of the application layer drives further speculation at the protocol layer. This combination of shared open data with an incentive system that prevents "winner-take-all" markets changes the game at the application layer. It creates an entirely new category of companies with fundamentally different business models at the protocol layer.

While the future of protocols and blockchain technology looks promising, startups should not overlook the importance of things that don't scale. In a world where efficiency and scalability are highly valued, there is still a place for activities that may seem unsustainable in the long run.

Startups, like big companies, need to invest in activities that don't scale because they need to listen to their most important assets - their customers. Conducting user interviews and hearings, as well as sending hand-written message cards, are not things that big companies can easily do. These activities allow startups to have a personal connection with their customers, to understand their needs and preferences on a deeper level.

Paul Graham of Y Combinator suggests that startups engage in activities that don't scale to "delight" their customers. This advantage of being a small company should not be underestimated. Startups have the ability to give customers more attention than most big companies can. By investing in these activities, startups can build strong relationships with their customers, which can ultimately lead to long-term success.

In conclusion, the combination of shared open data with an incentive system through the use of tokens is revolutionizing the way value is distributed in the digital landscape. Protocols are now at the forefront, with applications built on top driving further speculation and growth. Startups should take advantage of this shift by investing in activities that don't scale, such as conducting user interviews and engaging with customers on a personal level. By doing so, startups can build strong relationships and gain valuable insights, positioning themselves for long-term success in this new era of protocols and applications.

Actionable Advice:

1. Invest in activities that don't scale: Take the time to engage with your customers on a personal level, conduct user interviews, and show them that you value their feedback. This personal connection can set you apart from big companies and build strong relationships.
2. Embrace the power of shared open data: Consider how you can leverage the benefits of an open and decentralized network to reduce barriers to entry and create a more vibrant ecosystem of products and services.
3. Understand the value of protocol tokens: Recognize the importance of incentivizing users to participate through the use of protocol tokens. Explore how this can drive adoption and create value for both users and investors.

By incorporating these actionable advice into your startup strategy, you can navigate the evolving landscape of protocols and applications, positioning yourself for success in this new era of digital innovation.