"app teams that pursue community ownership first (starting with a wide token distribution) risk engendering a community of speculators, rather than real users. Without a working product, ownership is worthless, and the community won’t stick."

"Launching a token at this stage is not advisable because it could trip compliance wires. Dependence on the core team’s efforts is one way a token might be deemed a security under the Howey Test, and thinking about this is a distraction from product development."

"Product/market fit Community participation Sufficient decentralization (community ownership)"

"any successful application running on a blockchain computer will feature these three components:"

"user-owned networks can benefit from a cooperative economic model that helps ensure crypto services remain better aligned with their users, even as they scale."

"Crypto tokens that facilitate economic alignment can be deemed securities under the Howey Test, a regulatory framework used by the SEC."

"“In the pre-network stage, tokens will generally be characterized as securities in light of the ‘reliance on the efforts of others’ prong of the Howey Test. However, post-network launch — provided that the network is sufficiently decentralized — the nature of the token can change from security to non-security, owing to the fact that the holder of the token is no longer relying on the efforts of others.”"

"The earliest stage of building a crypto application requires all the ingredients of a normal startup: a great team, lean development, tight execution, and quick learning."

"If users are complaining about the control you’ve got, that’s actually a good problem to have! It means someone cares about what you’ve built. That said, it’s important to communicate clearly about where control exists."

"Objective 1: Product/Market Fit"

"Objective 2: Community Participation"

"An economic incentive is one way to engender community contribution."

"A pragmatic and familiar business model for crypto services is a fee-per-call, similar to an API micro-service like Twilio or Stripe. Distributing this fee stream to active contributors can align the community around the project’s success."

"it may be better to introduce fees only once there are strong network effects, resulting in defensibility through switching costs."

"In crypto, however, protocols must remain minimally extractive (in other words, they cover relevant costs rather than seek to maximize profit) in order to incentivize community contribution."

"Objective 3: Sufficient Decentralization"

"The core team will have ceded majority ownership of the application (fees and control) and mitigated platform risk by ensuring the product is community-owned and operated."

"The company is sustainable, having retained enough tokens to benefit from fees and growth."

"Failing to formalize real community participation can land projects in an uncanny valley of decentralization theater. A symptom of being caught here is an apathetic community with low participation rates, and a heavy dependency on founding teams."

"The protocol innovation of tokens is akin to packets for value, but the disruption is in the way new software platforms can be built and gain adoption."

"As the role of the individual in value creation becomes more commonplace, the next evolutionary step is towards software that is not only built, operated, and funded by individual users—but owned by users too."

"the economic interests of the biggest internet platforms are concentrated and often poorly aligned with their most valuable contributors, their users."

"Ownership is a powerful motivator for users to contribute to products in deeper ways, be it with ideas, computing resources, code, or community building. This more cooperative economic model helps ensure better alignment with users over time, resulting in platforms that can be larger, more resilient, and more innovative."

"The history of protocol adoption fits a pattern: first, early-adopters use new protocols to do things that were impossible before the new technology empowered them to do so."

"a winning strategy for founders is to build products that make these new models more accessible to a wider audience."

"The idea of user ownership is at the core of the success of Bitcoin and Ethereum, the first user-owned and operated networks at scale."

"Rather than a platform’s inner circle of founders and investors taking home the value, users are able to earn the majority of value generated from their collective contributions."

"Needless to say, one of the most challenging problems any startup or new technology faces is adoption, especially where network effects are necessary"

"Now, the opportunity is to follow the pattern, and build more accessible products (and protocols) that bootstrap adoption & participation through better economic alignment with users."

"We call this composability. A platform is composable if its existing resources can be used as building blocks and programmed into higher order applications. Composability is important because it allows developers to do more with less, which in turn, can lead to more rapid and compounding innovation."

"Calculator era"

"Many argue that that the most important property of a decentralized money system is security, not programmability, and that a limited scripting language is thus a feature, not a bug."

"Through that lens, we can view Bitcoin as more of a calculator than a computer"

"The mainframe era"

"Built upon the key ideas pioneered by Bitcoin, Ethereum generalized the blockchain computer by including a turing-complete virtual machine. This means developers can deploy and run any program across a decentralized network of machines."

"Today, for veracity, each node in the network must execute every program function. This makes it slow and expensive to use, but Ethereum is unrivaled on one dimension: its computations are trustless."

"“The API has been arguably the most important, or maybe even inarguably, the most important thing we’ve done with Twitter. It has allowed us, first of all, to keep the service very simple and create a simple API so that developers can build on top of our infrastructure and come up with ideas that are way better than our ideas, and build things like Twitterrific, which is just a beautiful elegant way to use Twitter that we wouldn’t have been able to get to, being a very small team. So, the API which has easily 10 times more traffic than the website, has been really very important to us.”"

"Unfortunately, composability didn’t last on the Web 2.0 scene. One problem was that there was no way to “send money through the API”, nor an effective and fair means to govern the rules of the platform, such as ad display."

"This created an incentive misalignment between developers and platforms that resulted in the re-centralization of data and the loss of third-party innovation."

"While there are no doubt early network effects due to composability—pooled security, userbase, data, and running code—this comes with diminishing marginal returns as adoption pushes against the throughput limitations of the mainframe."

"Due to resource constraints, the marginal cost per user increases and eventually exceeds the marginal value of composability (shared resources and developer network effects)"

"Enter the “server era”"

"In search of scalability, some developers are foregoing composability and shared network effects, and are instead reverting to application-specific architectures."

"Going full-stack is a lot more work than composing atop existing network resources."

"But historically, full-stack strategies have proven successful at pulling the future forward and bringing early technologies to market."

"In the early days of the web, each website had a custom-built server running in a closet somewhere. In order to own the experience end-to-end, developers needed to own a slice of the infrastructure too. The same may be true for the next era in blockchain computing. This is what I’ve been calling “the server era.”"

"“Server era” blockchains explicitly trade off composability for control. And this plays out on two-dimensions: control over the end-user experience, and more granular control over the economics of the supply-side resources of the network."

"An assumption of “server era” architectures is that network resources, such-as security, storage, and compute are demand constrained. That is, they can be scaled up, on demand, as the application gains adoption."

"“Server era” blockchains are different from their full-stack platform predecessors in that they’re still blockchains!"

"This means that even “server era” blockchains are still composable, but on a different dimension than “mainframe era” blockchains."

"Rather than running a single virtual machine, these blockchain computers require new standards for communicating with one another in order to enable composition across applications."

"The “cloud era”"

"The “cloud era” is meant to invoke a scalable, generalized substrate for trustless computation. This is the promised land, where composition is only bounded by creativity, not scale or communication complexity, and where innovation can compound without hitting diminishing returns."

"And still others are researching entirely new architectures that move computation off-chain."

"Given the size of the research community, and the potential prize for such a solution, I would not be surprised if “cloud era” blockchain computing is hot on the tails of the so-called “server era.”"

"Ownership accelerates network effects, resulting in platforms that grow bigger, faster."

"This is the Ownership Economy, and beyond being a positive social endeavor, the platforms building it are able to leverage the strongest form of market incentives to grow network effects."

"Ownership is a powerful motivator for users to contribute to products in deeper ways, be it with ideas, computing resources, code, or community building. This more cooperative economic model helps ensure better alignment with users over time, resulting in platforms that can be larger, more resilient, and more innovative."

"Another example is BitTorrent, a protocol innovation of packet distribution, but a disruption that underpinned the streaming revolution."

"Consumers’ passion for torrenting signaled that they wanted to access the world’s media at their fingertips, but for many, BitTorrent wasn’t a user-friendly experience"

"One person who saw an opportunity through the noise was Daniel Ek, founder of Spotify."

"The breakthrough of early crypto networks is a new model for market-driven networks, where users build, operate and own a piece of the products and services that they use everyday."

"Rather than a platform’s inner circle of founders and investors taking home the value, users are able to earn the majority of value generated from their collective contributions."

"Needless to say, one of the most challenging problems any startup or new technology faces is adoption, especially where network effects are necessary—and even more-so when competing against the existing network effects of today’s dominant platforms."

"As the early Bitcoin and Ethereum communities came to realize, ownership is a tool to help surmount this problem. Those early communities were largely composed of technologists, developers, and enthusiasts who were naturally among the first to recognize the power of tokens as direct economic incentives."

"But rather than the company capturing that fee, it’s instead distributed to the market-making traders that provide liquidity and make the product useful."

"Reddit recently announced that 300 million users will have access to tokenized community currencies through their mobile app."

"Consumer marketplace Foundation is transforming the Kickstarter model by allowing creators to tokenize their projects in a marketplace where tokens can be bought, sold or redeemed for goods or services."

"Their marketplace transacts in USD but uses an Ethereum-based token as its core incentive and governance system to distribute value to contributors."

"In fact, cooperatives tend to be most successful where there’s alignment on other values such as: 1) a communal benefit to pooling resources, for economies of scale; and 2) an attendant desire to avoid anti-competitive or extractive behavior."

"Network effects are innocuous at first, but can cause concern at scale if platforms enter an “extractive” phase in their lifecycle."

"The key phenomenon to note above is that these platforms shift from cooperating with their users (“complements”/ complimentary businesses in economic terms), to competing with them."

"we believe that cryptonetworks — what we call  “community owned and operated networks” — could unlock a new paradigm for continued cooperation, while still sustaining strong network effects."

"Cooperatives differ from traditional companies in that they are typically funded by direct member investment, rather than investment from third-party shareholders."

"In terms of success, perhaps the most famous example of a cooperative is Visa, given its origin story."

"Originally part of Bank of America (and called BankAmericard), the credit card network struggled to gain the ubiquity required for widespread consumer adoption. So BankAmericard (later Visa) was spun out into a member-owned consortium that incentivized competitive banks to join. This grew the network effects of the platform, while protecting the individual members from fees that could be extracted had a centralized third party aggregated them instead."

"when it comes to innovation, there are some structural issues that have worked against cooperative enterprises, from coordination costs to growth to governance."

"For instance, cooperatives are more difficult to bootstrap than corporations because they don’t have access to the same capital markets."

"Then, even once over the bootstrap hump, cooperatives can struggle to compete with more traditional entrants, who are often better funded."

"Finally, cooperatives tend to have more complex governance processes than companies with simple top-down management structures."

"Another dimension on which cryptonetworks can compete is growth: Networks that treat their users equitably may be easier and cheaper to grow, as early participants are incentivized to drive network effects, because they can participate in the value they help create."

"cryptonetworks open new territory to explore how cooperative governance can be both efficient andrepresentative."

"An institution of rules A credible commitment to follow them (generally, the ability to punish) And collective monitoring to ensure rules are upheld and commitments actioned upon."

"A credible commitment to follow them (generally, the ability to punish)"

"And collective monitoring to ensure rules are upheld and commitments actioned upon."

"Rules are programmatic (open source code);"

"Credible commitments are economic, pledged in the form electricity in Proof-of-Work mining, or deposited bonds in Proof-of-Stake systems, plus rewards for following the rules;"

"Collective monitoring is performed by nodes that can verify that the rules have been followed, deterministically."

"Crypto founders have a unique challenge in front of them. In addition to building a product that people want, they also need to consider how that product can successfully run in a decentralized manner — that is, as a protocol owned and operated by a community of users."

"This is a difficult challenge because much of what it takes to build a successful product at the outset — product leadership, rapid iteration, a managed go-to-market — complicates the path to community ownership and regulatory compliance, which guarantee long-term health."

"The Three Components of Crypto Success"

"that community participation and control results in limited platform risk — the risk that the rules of a platform will change against the will of its users."

"In contrast, user-owned networks can benefit from a cooperative economic model that helps ensure crypto services remain better aligned with their users, even as they scale."

"Another important reason for achieving decentralized community control is regulatory compliance."

"As Scott Kupor, managing partner at Andreessen Horowitz, has previously written: “In the pre-network stage, tokens will generally be characterized as securities in light of the ‘reliance on the efforts of others’ prong of the Howey Test."

"However, post-network launch — provided that the network is sufficiently decentralized — the nature of the token can change from security to non-security, owing to the fact that the holder of the token is no longer relying on the efforts of others.”"

"To move fast toward finding it, it’s important to avoid design by committee (or community!)"

"At this stage, there should be no pretense of decentralization — a core team is driving all product decisions by necessity, in the interest of finding product/market fit. Launching a token at this stage is not advisable because it could trip compliance wires."

"At early signs of product traction — a growing user base, developer ecosystem and network effects — it’s time to start devoting more cycles to fostering harmony between passive users, more-active contributors and the core team."

"To start, founders might invest more heavily in best practices for running the product like an open source project:"

"Distribution (Tokens)"

"Tokens are an instrument for effectively distributing the fundamental value of a project, including a fee stream. While token distribution can incent participation and help build defensibility, it’s important to consider how to construct a distribution that is both fair and effective."

"Crypto applications that focus on product/market fit have an opportunity to do better, by distributing tokens to an already active user base."

"To start, teams might test a distribution with a managed and permissioned group of community members."

"Next, teams need to plan how remaining tokens will be distributed to participants, both fairly for past contributions, and effectively as a future incentive for ongoing participation."

"The distribution design needs to consider the core team that built the product, as well as the users that make it useful."

"modeling of rational outcomes and workshopping proposals with community members."

"Objective 3: Sufficient Decentralization"

"If you’re a crypto founder and are ready for this stage, that means you have achieved early product/market fit, built a robust community capable of successfully maintaining the application, and mapped out a model that properly incentivizes sustainable operations."

"In practice, I imagine teams will “exit to the community” by airdropping tokens to users and contributors based on the plan mapped out in the prior objective. This would happen the moment a smart contract is triggered to mint and distribute tokens."

"The token may have transmuted to a non-security, given that the service is now sufficiently decentralized — that is, independent of the efforts of a single entity that might have asymmetric information."

"The company is sustainable, having retained enough tokens to benefit from fees and growth."

"User-owners realize increasing returns to scale, as the cooperative economics of the service allow for better alignment and growing value (as defined by users rather than shareholders.)"

"For instance, app teams that pursue community ownership first (starting with a wide token distribution) risk engendering a community of speculators, rather than real users. Without a working product, ownership is worthless, and the community won’t stick."

"How to Avoid Getting Stuck"

"Another sequencing risk is jumping straight from early signs of product/market fit to decentralized community ownership (skipping objective 2, community participation.) Failing to formalize real community participation can land projects in an uncanny valley of decentralization theater. A symptom of being caught here is an apathetic community with low participation rates, and a heavy dependency on founding teams."

"Lack of focus is the death of most startups, and the same is true for crypto applications."

"Finally, it’s worth noting that even if you do the steps in order, once you flip the switch to full community ownership, you’re in fairly uncharted territory in terms of governing the application."