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“The Web3 Sustainability Loop: A system design for long-term growth of Web3 projects, with application to Ocean Protocol”

New blog post, and a thread 👇
blog.oceanprotocol.com/the-web3-susta…
If you’re a founder, you may be asking:
“How do we grow the ecosystem and make it truly self-sustaining?”

A common answer is grants programs. But:
What if grants are a black hole? Or, if grants end, will the ecosystem survive?
I believe this should be a genuine concern for every Web3 project. If it isn't, then it might be worth becoming a concern, lest the project fades into oblivion.
I believe there's a way. As inspiration, we can look to organizations that have survived for decades and even centuries. That is, successful companies and nations.

This growth / sustainability loop can be used for Web3 projects: the Web3 Sustainability Loop.
Let's talk about companies first. Every business needs a means to sustain itself. If they don't, they die.

Evolution filters, mercilessly.

Web1 and Web2 companies explored many business models. Successful companies point to the successful models.
For Web1, Amazon's model worked particularly well. Better customer experience begets more traffic --> more sellers --> more selection --> better experience, and the loop repeats. Here's that famous image:
For Web2, business models include:
-have paid subscriptions for apps (SalesForce) and for content (NYT)
-tx fees for payment (Paypal), transit (Uber), etc
-affiliate programs (Kayak)
-and, ads (Google, FB) :/
A business model is the design for a business machine, in the sense of Andy Grove's breakfast factory (below) or Ray Dalio's Principles.
Let's draw out the machine. At the center are the Workers: company employees who do *work* to grow company revenue by bringing the company's product or service to market.
The company's management allocates (curates) the company revenue to get more resources (e.g. hire more workers) to grow the company even further.

It's a *loop*: revenue put into growth, allocated well, begets more revenue yet.
However, this is an incomplete picture of Amazon's story and of other businesses...
Why incomplete? Revenue alone did not solve for cash at critical junctures:
1. Amazon needed funds to get going in the first place.
2. It needed more funds to grow aggressively
How did it get the cash? It issued more stock, and sold that stock.
Issuing stock is a superpower for businesses. It pulls capital from the future into the present.

Individuals can't do this, families can't do this, and cities can't do this.

But businesses can, and do.
Here's how the company machine looks, when we include STOCK issuance (left).

Companies work to grow revenue and STOCK (middle right). The company's products / services are designed such that as usage increases, STOCK does too (top right).
Finally, stocks give the company optionality to give shareholders some lower-bound of reward such as dividends or buybacks (bottom left). This helps keep investors happy over the longer term when there is less revenue growth.
* * *
That was for companies. Let's move on to dynamics of national economies.
Nations take in revenue from taxes. They use that revenue to create and grow an ecosystem of laws, public infrastructure, defense, etc. so that citizens can thrive and conduct commerce.
When citizen and business well-being goes up, tax revenues go up, and the nation becomes more successful. GDP measures the amount of commerce. And so the loop goes.

It's a *machine* too, as MIT's Jay Forrester eloquently modeled.
The picture above assumes that the only source of funds is tax revenue. But this is an incomplete picture. We must also account for printing fiat.
The issuance of currency, "fiat" brings privileges and risks. In times of economic need, governments have the ability to "print more money" with the hope that the injection of cash into the economy helps to boost consumption, until equilibrium is restored.
This is rife with risks. If too much money is printed, demand can outstrip supply, leading to price inflation because the excess money needs to flow somewhere.

If poorly allocated, it can lead to economic inequality, societal unrest and more for society's most vulnerable.
Used sparingly and with good judgment, printing fiat is a *tool* in a nation's toolbox to spur economic growth and improve citizen well-being.
Here's "machine" for a well-designed national economy. The government prints FIAT(left), which is then used as income alongside tax, to be curated and spent by the government. The nation performs *work* to grow not just GDP (and tax base) but also the value of FIAT.
* * *
OK. We've talked about companies and nations, and how they sustain themselves. Recall that our goal here is to use that as *inspiration* for designing sustainability / growth models for Web3 projects.

So let's talk more about Web3 directly...
This image shows status quo for many Web3 projects. Founders generate tokens, get some initial cash by selling some tokens, build the product, then ship it to power a nascent ecosystem. Then the aim is to grow the $ TOKEN value.
To help this, the dynamics should be designed for $ TOKEN to increase as usage goes up.

The founding team sustains itself by selling down more tokens for fiat over time, as they do work to improve the product.
The main problem?

The founding team needs to continually dip into its supply of tokens to fund itself.

That has problems:
-it's a finite supply
-each time they sell their $ TOKENs, their incentive to make the project succeed is further diminished
Can we do better? Here's improvement, which some Web3 projects are doing.

Taking a cue from businesses and nations, it introduces revenue generation (bottom right). Revenue is then looped back to Workers, in a curated fashion (middle-left).
Projects are chosen based on growth potential and alignment with the project’s mission.

Funding can go to the founding team and other project teams. They all perform *work* to grow the $ TOKEN value and network revenue.

And the loop continues.
The token must be designed such that its value rises as usage rises.

But there’s still one big problem: too little revenue, too late.
-rates too high --> project gets forke
-rates too low --> insufficient funding
To cope, the team will will stoically keep going for a while, until they can’t.

Some may pull through. And most will be forced to stop, at which point the project begins its fade into oblivion.

We can overcome this! 😀😀😀

Don't:
-disburse all the tokens at the beginning of the project

Do:
-disburse a large fraction over a longer period of time
-to the workers that are adding value to the project.
This gives teams a longer runway to iterate towards product-market fit (PMF), and more funds to catalyze growth once PMF is achieved.
It's the Web3 Sustainability Loop.

The Workers (center) do *work* to help grow the Web3 Project Ecosystem (right). Apps and services generate revenue, using the Web3 project’s tools. A non-extractive fraction of that revenue is looped back (arrow looping from right to left).
That "Network Revenue" goes to the Web3 community:
-to Buy & Burn $TOKEN (bottom left) and
-back to workers curated by the community according (center-left).

To catalyze growth and ensure decent funding in early days, "Network Rewards" (left) also feed into Workers.
How projects get funded is critical. There are two key criteria:

Criterion 1. Each project must add sufficient value to the ecosystem. This means ROI > 1.0, to achieve snowball-effect growth.
Criterion 2: it must help to promote the Web3 project’s mission & values (or at least not work against them).

Without this, the proposed project might as well be a Web2 project (!).
***
What I just described is not just theory. We're using it as basis of Ocean's design for long-term growth and sustainability.
The Web3 Sustainability Loop for @oceanprotocol:
-Community funding comes from 51% of OCEAN dedicated to Network Rewards and from Network Revenue
-funding is curated by OceanDAO
-it goes to teams who do *work* to grow the Data Ecosystem
-$ OCEAN is designed to grow with usage
In Ocean’s case, the Web3 ecosystem (right) is a Data Ecosystem of data marketplaces, data custodians, etc. powered by Ocean tools.
Workers get funded to improve Ocean core software, build applications using Ocean, spread awareness, grow data supply, and more.
Project selection criteria are (1) expected ROI > 1.0, and (2) aligned with Ocean Mission and Values (including long-term thinking).
blog.oceanprotocol.com/mission-values…
We envision a "Data Supply Mining" program to kickstart growth of data supply.

(We'll share more details of that in coming weeks.)
The Ocean token is designed such that as usage of Ocean grows, it grows $OCEAN.

More usage of Ocean tools leads to:
-more OCEAN being staked, leading to more OCEAN demand, growing $OCEAN.
-more Network Revenue, which goes to burning and to OceanDAO, both which drive value.
We have verified this design with two computer simulations:
1. a spreadsheet model
2. an agent-based simulator written from scratch in Python specifically for this project called TokenSPICE

The computer models align with the theory, and each other.
***
And with that, I conclude the description of the Web3 Sustainability Loop, and its application to @oceanprotocol.

The core idea is to direct both Network Revenue and Network Rewards to *work* that’s used for growth in a community-oriented fashion.
Thanks very much for @BrucePon, @JulienThevenard, @simondlr, and @mZargham for the thinking that led to this piece!

And, thanks to my excellent colleagues at Ocean Protocol for the collaboration as we build towards this:)
***
The ideas here started gestating in late 2019. I modeled them explicitly in TokenSPICE from Jan-Mar 2020.

Just as I was putting finishing touches on this piece, @ali01 posted an excellent tweetstorm describing a "Network Flywheel".
It was heartening to see similarities. And, to see that each model has unique strengths where they each stand on their own. (My medium post elaborates.)
It's my hope that the Web3 Sustainability Loop will be a useful tool for Web3 builders aiming to build systems that last the ages.

I conclude with a link to the blog post itself. Cheers!
/fin
blog.oceanprotocol.com/the-web3-susta…
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