🎓 a16z Crypto School – #6 Business Models & Value Capture


A few jottings from one of the a16z crypto school’s lectures that seemed interesting.

It was short and to be honest not a lot of meat on the bone… but posting anyway in case it comes in handy… expect a few more from the same series!

Youtube Video, Slides

Layers of the ecosystem

  • (Thought this was slightly confusing terminology given L2s refers to eg rollups and sidechains which can also have their own consensus mechanism, eg Polygon)
  • Belief that most of the value accrues in layers 1 and 2
    • It’s been true so far, eg cumulative L1s market caps much bigger than exchanges market cap
    • Will be interesting to see if DeFi wallet players like Zappier and Zerion can create great network effects at layer 3 which
  • The template for value capture for both these layers is a multi-sided platform

Layer 1: Protocols

  • Layer 1 flywheel
  • The L1’s token captures the value
  • What creates the moat / defensibility?
    • Previously (1) secret on how to build something, (2) some IP / licenses, (3) proprietary control of some resources that others don’t have.
    • Note the Internet Protocol had all the parts of the L1 flywheel except the token – the mechanism for value capture – so all the protocols just became standards. Also that they were stateless
    • These don’t apply as much in crypto because everything is open source
    • The moat is the network effect
  • “Cross-side” network effects, multiple types of participants benefit
  • The token is what captures the network effect, you could copy all the code but the token captures the value + network graph, history etc

Layer 2: Smart Contracts

  • Smart contracts (L2 above) are also multi-sided platforms
  • They enable people to interact with eachother with the trust properties of the L1 beneath
  • eg Maker
  • eg Uniswap
  • Their defensibility is also network effects
  • As activity / liquidity increases on Compound, lower interest rates for borrowers, more stable interest rates for lenders
  • Brand is an important factor for smart contracts, it can be a Shelling Point (the solution people default to in absence of communication)

Fat Protocols Thesis

  • Written by Joel at USV.
  • The thesis holds that base blockchain will be more valuable than the sum of the applications built on top of it.
  • During DeFi summer (summer 2020) the market cap of all ERC-20s on Eth was higher than Eth
  • Suspect the thesis is holding up well again now given the 10x Eth rally since… should pull the data again (EIP-1559 will also have helped a lot to accrue more value to Eth)


(Shamefully stolen from the youtube description)

None of the factors that allow companies to build moats in traditional industries — trade secrets, intellectual property, or control of a scarce resource — apply in crypto. This leads to the “value-capture paradox” — how can easy-to-replicate, open-source code be defensible in a competitive landscape?

The answer is that network effects are just as powerful, if not more so, in crypto than in traditional industries. This is due to the economic flywheel enabled by tokens, which incentivize participants and coordinate all economic activities in crypto networks. Combined with the ability of developers to build on each others’ networks using autonomously executing smart contracts, this should result in winner-take-all dynamics, contrary to what might seem intuitive in open source, Yahya says.

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