Thread by @ljin18

Web3 applications lack some traditional sources of defensibility, but have a new powerful one: tokens.

Let’s explore “token network effects” ⬇️

There are roughly two stages in building a new network:

1 - Bootstrapping & attracting new users (the cold start)
2 - Retaining users & maintaining network effects

Tokens are helpful for both stages, but for the purposes of this thread I’ll be focusing on (2).

Defensibility in web2 comes from proprietary data network effects. Each application is a walled garden, and a bigger user base translates into more utility vs. competitors.

The social network with most data, content, users, etc. is more valuable.

In web3, the situation is different.

New marketplaces can aggregate all existing NFTs. New social networks can surface all on-chain activities regardless of whether users ever signed up. How can a moat develop?

A potential answer is tokens.

Distributing tokens to consumers & stakeholders allows them to become *owners,* providing a powerful incentive for retention.

They’re motivated to stay aligned with that platform vs. jumping to competitors.

Tokens helps to dig the moats that @divine_economy and I recently listed:
- liquidity
- community
- composability
- consumer habit
- first-mover advantage

https://twitter.com/divine_economy/status/1463594138822230035

https://twitter.com/ljin18/status/1463686918823100419

Liquidity: Tokens can attract supply to a certain marketplace / protocol.

Community: Tokens can foster a larger engaged community developing by attracting users.

Composability: Tokens can be used to incentivize developers to integrate with a project, turning it into a ‘standard’ (e.g. WalletConnect, POAPs, etc). Once those integrations are in place, there’s switching cost.

Consumer habits: Tokens can incentivize consumer behaviors that turn into habits.

First mover advantage: Protocols that launch a token first can amass resources and attract users that would be challenging for a newcomer to replicate.

For builders, the implications are significant. Tokens can:
1) Jumpstart networks that were previously unviable to start
2) Help beat existing networks w/ previously-insurmountable network effect advantages
3) Further entrench defensibility

Some examples:

PFP projects can be thought of as new social networks that are bootstrapped via a non-fungible token. Blue-chip NFT projects’ defensibility stems from the tokens giving users “skin in the game” to maintain their value.

@AxieInfinity has grown to 2M MAUs by rewarding players with tokens.

It has a treasury of $2.4B which enables funding for guilds & other initiatives, a major head start and source of defensibility against newer games.

@lootproject, the item-based NFTs created by @dhof, attracted a network of developers through token incentives. Months later, developers are still working on projects related to Loot to imbue the NFTs with more value.

Network builders may think: This all sounds amazing. So just add tokens and I’m good?

Unfortunately, it’s more complicated than that.

A few caveats:

Token network effects requires the token adding real value to the application & users valuing the experience of ownership.

Adding a token onto a product isn’t a silver bullet for defensibility: users still care about product experience, liquidity, community, etc

You can see this in the fact that a network w/o a token can beat out one that has a token:

OpenSea (no token) is bigger than Rarible and SuperRare (both have tokens).

While tokens add economic value & have other utility, it’s not a replacement for satisfying the users’ end goal. In OpenSea’s case, liquidity for transactions is more important than what other networks’ tokens confer.

Progressive decentralization describes this playbook: first build a product that solves a problem, then distribute tokens to incentivize participation, govern that product, and solidify defensibility.

jessewalden.com/progressive-de…

There are other examples where that ordering gets inverted, like PFP communities, where the token bootstraps the community, the community is the product, and then the community builds the product bottom-up.

The "tokens as defensibility" playbook is also early with regards to web2 incumbents with very powerful network effects.

Creating a “decentralized Uber with a token” has become a meme, but is it actually viable against the existing network effects of Uber?

And what happens about if the incumbent has a token? How can a new project succeed in that case?

And how do extrinsic motivations interplay with intrinsic motivations and affect loyalty? (a perennial topic of research)

Overall, the playbook for defensibility in web3 is still being written, and I’m excited to see it develop.

What are other examples of tokens boosting defensibility?

Curious to hear others’ thoughts!

Thank you @jessewldn @spencernoon @medhakothari @nir_III @Cooopahtroopa @patrickxrivera for thoughts that informed this!

Related reading - @cdixon has a great thread on tokens for bootstrapping new networks

https://twitter.com/cdixon/status/1444072365822857219