Fat Protocols and the Known Unknowns of Crypto-Economic Systems

tl;dr: There’s still much debate about where value truly lies in a crypto-token based economic system. For many, however, there is no debate that there is true value that will be discovered.

It’s crypto common knowledge that Joel Monegro’s Fat Protocols blog post was the pebble that started the ICO avalanche.

I know it completely impacted me, but it impacted the thinking of many, many people in trying to understand how crypto-assets could be valued and, more importantly, where the value for those assets would accrue.

The protocol token gold rush began in earnest.

Now, 2 years down the road and with much crypto water under the bridge, it is fairly clear that the “Fat Protocols” thesis is under attack like never before.

The initial wave began, as far as I can recall, as early as last November in two posts highlighted here by Teemu Paivinen and Evan van Ness. Now, the conversation seems to have intensified.

Kyle Samani had a great post recently called Aggregation Theory, Thin Protocols, And Recentralization: Augur Edition where he continues to chip away at the notion that protocols are truly defensible.

He argues that it is, at least theoretically, at the dApp (decentralized application layer) where value will be aggregated and is most defensible.

Making it a bit more real is the argument laid out in The Great DApp Takeover by Leland Lee.

He walks through an example using Axiom Zen’s product, Crypto Kitties, to show how a blockchain-based app, which is decentralized and not in the control of anyone, could be devalued, destroyed, or flat out replicated.

He points out that:

“Since game logic is on-chain, the interface acts as an information gateway where anyone can build their own version, or even interact with the smart contracts directly using JSON RPC through the command line.

Therefore, it is quite foreseeable that a team builds a superior UI to Axiom Zen’s, which ends up attracting more users than the original UI. Sustaining user’s attention is where all the value capture lies.”

Now, we’ve been talking about how the CX layer will become even more important in a world of decentralized protocols for a while, but Leland’s argument that a dominant UI provider (think someone who nails User Experience as well as Apple has) could then have enough market power (in terms of the customer relationship) to effectively port the entire protocol. This would change the balance of power between dApp developers and protocol developers.

Think about it this way:

What if Fortnite’s developers were so able to get people to move to a new phone operating system simply because they didn’t like the rules that Apple had laid down?

Difficult to do in a world where closed protocols/operating systems rule. Not as difficult in a world where open economic systems rule.

Open Economic Systems, where anyone can participate and the value they create is recognized and rewarded are at the heart of another article that inspired me recently, namely, Designing Non-Fungible Tokens as Open Ecosystems by Brian Flynn.

In it, Brian describes a scenario where someone could create a unique asset (like a cool facial gesture on an emoji- see Ethmoji) and then earn royalties every time it is used by someone else.

What all of this about is that we are at a stage in crypto of the “Known Unknowns.”

20 years ago, blockchain-based economic systems were “Unknown Unknowns.” We didn’t know about them and didn’t even know we didn’t know about them.

Today, the fact that crypto-based economic systems are here is known. As Brian writes,

“The primary purpose of a digital economy is to reward referrals and incentivize contributions, while balancing the need to hold attention in an open ecosystem.”

What is unknown, still, is exactly how value will be created, stored, transferred, and measured in these new systems.

Joel did his best to explain it with what he knew at the the time. Teemu and Evan pushed it along. Now, Kyle, Leland, and Brian are picking up the batons.

How it will all work remains to be seen, but the fact that these systems, technologies, and tools are here is not in doubt.

There’s value in them thar crypto hills.

It’s just a question of finding it.