Understanding Your Circle of Competence and the Value of Fat Protocols

Understanding Your Circle of Competence and the Value of Fat Protocols

In the world of investing, Warren Buffett is a legend. His success can be attributed, in part, to his ability to understand and operate within his circle of competence. The concept of the Circle of Competence is simple: each of us, through experience or study, has built up useful knowledge in certain areas of the world. By focusing on these areas, we can avoid problems, identify opportunities for improvement, and learn from others.

For Buffett, the size of his circle of competence is not as important as knowing its boundaries. As he famously said, "I'm no genius. I'm smart in spots - but I stay around those spots." By recognizing his strengths and playing within his circle of competence, Buffett has been able to achieve remarkable success.

But what does this have to do with the value of fat protocols? In the world of blockchain technology, the relationship between protocols and applications is reversed compared to the traditional internet stack. While the internet is composed of "thin" protocols and "fat" applications, the blockchain application stack sees value concentrate at the shared protocol layer.

The combination of shared open data with an incentive system in the form of tokens is a key aspect of fat protocols. Tokens are used to access the services provided by the network, whether it be transactions in the case of Bitcoin or file storage in the case of Sia and Storj. By incorporating a token system, a feedback loop is created where new users are drawn to the protocol, increasing demand for tokens, while existing investors hold onto their tokens, anticipating future price increases.

This feedback loop, driven in part by speculation, can lead to bubble-style appreciation. However, it also attracts financial capital and supports long-term adoption of the technology. The success of the application layer drives further speculation at the protocol layer, leading to the growth of the market cap of the protocol.

The value of fat protocols lies in their ability to replicate and store user data across an open and decentralized network. This reduces the barriers to entry for new players and creates a more vibrant and competitive ecosystem of products and services on top. However, an open network and shared data layer alone are not enough to promote adoption. The protocol token fills that gap by providing an incentive for users to access the services provided by the network.

So what can we learn from the combination of understanding our circle of competence and the value of fat protocols? Here are three actionable pieces of advice: