Why Protocols Will Replace Platforms

It’s not the technology that wins, it’s the business models. But business models emerge and scale with the technology. Web3 scales to billions of users (and will do it very quickly) precisely because of the uniqueness of the business model, which became possible thanks to blockchain, open-source business models, and token engineering.

A few examples to support the thesis:

1. The Internet has become a new technological wave. For the first 10 years, people tried to come up with effective business models for online business. The ad-based model was discovered. Thanks to this model, Google, Facebook, and Twitter brought 1–2 billion of users to the Internet.
2. Mobile has become a new technology wave. In-app and freemium were discovered. Thanks to free games and applications, 2–3 billion of users came to mobile.
3. Blockchain has become a new technological wave. Tokens and NTF were discovered. This is bringing 100s millions of users to web3.

The business model of the platform is to create a tool that effectively connects different sides of the market: buyers and sellers, taxi drivers and passengers, landlords and tourists, freelancers and customers, developers and users, etc. The service itself is always conducted outside the platform, and the role of the platform is to connect, bill, and manage the reputation of market participants.

Thanks to the invention of cryptoeconomic protocols, we have the tools to organize the same process, but with much lower costs. The immutability of data in the blockchain allows to guarantee the history of transactions, and the mechanism design (token engineering) allows to program the expected behavior of the participants in the protocol. In decentralized systems, even when each agent seeks to maximize personal gain, we can now guarantee predictability and trust in the system as a whole.

Existing platforms have fairly high take rate (fees) and their business strategy is to retain the user by creating high switching costs. For example, Apple takes 30% and developers have no choice if they want to get iPhone users. Facebook takes 100% of ad revenue, and it’s extremely difficult for users to take their content, their friends, and their message history to another platform. Uber charges 25% of the fare, and taxi drivers have no way of transferring their rating and “class” to another service.

Decentralized protocols are capable of providing a comparable level of service, but they do not require such high fees (due to the open-source, community-driven operating model), and the switching costs trend to zero (due to network effects coming from the interoperability between the protocols). These 10–20–50–100% of platform take rate are released to the market and go towards (1) reducing the cost of the service for the buyer, (2) increasing the reward for the seller and/or (3) grants, compensation, and investments in improving the protocol.

As we discussed at the beginning, more cost-effective business models with comparable or superior product quality will inevitably win the market. Protocols will replace platforms in the same way that platforms have replaced 1:1 interaction between market participants.