Thread by @divine_economy

1/16

"if smart contracts are open-source, won't someone fork them with lower fees to win?"

it's web3's big question.

and web3 also provides the main answer:

tokens.

lemme explain Web3's Fee Issue:

2/

smart contracts' major innovation?

royalties.

now anyone can remix or distribute your work, and you'll get paid.

but that's threatened by smart contracts' *other* major innovation.

they're open-source—so anyone can copy them and change their fees.

https://twitter.com/divine_economy/status/1591134527568908289

3/

so let's say you're using a decentralized exchange that takes a small fee.

or a DAO payment tool that takes a cut of tokens.

why wouldn't you just fork the tool to use for yourself,?

4/

a few reasons *not* to fork smart contracts for yourself:

1) recreating front-end and updating code
2) recreating interface-level network effects, esp in marketplaces
3) looks bad to cut commissions from creators

but these *are* worth it to create a cheaper competitor.

5/

let's say you incur a 1% cut for using a service.

forking it doesn't just save you 1%... it lets you create a competitor to draw people with lower fees, say 0.25%.

so why wouldn't they use it?

why wouldn't you?

6/

tokens.

7/

tokens can let you govern a treasury of collected fees (as long as you're not paying them to yourself).

they not only invest you in the success of a product you use—they let you contribute to its direction as a builder.

tokens make you *want* a platform to succeed.

8/

go back to our earlier example.

you could fork a platform, create a competitor, and try to collect far fewer fees.

or you could collect a fraction of far greater fees by acquiring that platform's token.

which is the better deal?

9/

tokens are expensive to acquire, so it might seem better to fork a platform and just keep 100% of lower fees.

but what if you could *earn* tokens by contributing to building out the platform?

you no longer take on the risk of a new business, but share in this one's success.

10/

or what if a platform took fees from you, but minted you tokens to govern the treasury in exchange?

this is how @juiceboxETH works, and nobody has forked it.

using the protocol lets you own it.

11/

let's repeat that.

in web3, *using a protocol can let you own it.*

users become investors.

and become incentivized to see it collect fees from future users.

12/

the devil is in the details—and we don't have economic models yet for those details.

at what level are lower fees no longer compelling to switch to a new platform?

if token prices fall, does that create opportunities for forking?

13/

ultimately, there is no thing as a smart contract moat.

if opensea creates *the* smart contract standard for royalties used throughout the industry, then it's gotten massive network effects.

at the cost of a moat.

its competitors all use it.

https://twitter.com/divine_economy/status/1590846778567700480

14/

so for tokens to protect against fee compression, smart tokenomics need to be paired with classic interface-level network effects.

in other words, you need to create a marketplace with the greatest supply of unique items.

(i wrote on this below.)

davidphelps.substack.com/p/the-promised…

15/

but tokens can help here too.

because if you pay out your early users with your token, you keep them from forking when it matters most.

and they can build up your marketplace to the point it's the best option for consumers.

with network effects that make it hard to fork.

16/

ultimately, tokens are web3's greatest solution to its own great problem of fee compression.

because they turn users into investors, into contributors, into marketers.

and they align interests between the company and consumer for the first time in business history.

with special thanks to gigabrains @_portersmith @guywuolletjr @janehk @ljin18 and @masonnystrom for inspiring debates around these questions (follow all of them if you don't)