At the beginning of 2020, the well-known venture capital institution a16z held an online video course called "Crypto Startup School", covering the basics of encryption technology and the matters needing attention when establishing a crypto company.
In order to help entrepreneurs in the domestic crypto market to obtain more industry-leading information, Chaincatcher translated a series of courses and made deletions that did not affect the original intention. The presenter of this article is Jesse Walden, product manager of this series of courses and founder of Variant Fund. He was previously a partner of a16z. He mainly shared the precautions and methodology of how an encryption project can achieve progressive decentralization.
Author/Jesse Walden
Compile/Echo
The founders of cryptocurrencies face unique challenges. In addition to building the product that people want, they also need to consider how the product can be successfully operated in a decentralized manner, that is, owned and operated by the user community as a protocol.
This is a daunting challenge because it takes a lot of time to build a successful product from the beginning, such as product leadership, rapid iteration, market development, etc., which complicate the path of community ownership and regulatory compliance to ensure long-term health.
I have talked with some of the founders of cryptocurrency projects who are committed to solving this complex situation. Here, I will propose a three-step process and guidelines for achieving this goal through a progressive decentralization approach.
In this process, the founding team will gradually give up control over time, so that step by step allows the team to focus and create a way to comply with regulations, including issuing tokens that it hopes will not violate securities regulations.
Keep in mind that this process applies to certain cryptocurrency startups building applications on smart contract platforms. For the blockchain computing platform itself, it is not very useful, because it needs sufficient decentralization to be useful from the beginning.
In view of the lack of an uncertain regulatory framework surrounding community-owned networks, the final stage of this handbook only addresses potential solutions, rather than identifying proven successful strategies.
01
Background and reason
Open decentralized protocols such as IMAP, POP, and IP are the foundation of many network services. Today, many of the most valuable companies in the world are based on these neutral protocols. They extend the functions of Internet protocols and provide It provides a rich experience such as search, email and social media.
These types of Internet companies will follow a predictable model at the beginning. They will try their best to recruit users, developers, and companies to join the platform. Every member of the participating community will form the basis of a multilateral network effect. Make the platform more valuable and more defensive.
As the platform grows, they will gradually change their behavior and begin to extract value from the community instead of cooperating with the community. Many Web 2.0 platforms have proven the possibility of this dislocation by stopping innovative applications built on their API Program ecosystem, or profit by sacrificing the privacy or well-being of users.
For example, Twitter received more traffic through third-party clients than their own official applications. But in order to get more value, Twitter changed the rules and restricted API functions. For users and developers, this is a bait. The rich ecosystem that was originally brought about by cooperation was eventually stifled, and innovation was born.
Unlike centralized networks owned by enterprises, encrypted networks provide a new model to build Internet platforms. Encrypted networks aspire to be decentralized and try to become a network platform operated and owned by the community. Cryptocurrency can flow value at the cost of information, with almost zero marginal cost. Encrypted networks can have a more economical mode of operation, which can provide economic rewards based on the contributions of independent users around the world to the network, rather than having to obtain value from users to return it to shareholders.
A well-designed encrypted network can transfer value directly to contributors, which in turn indicates that the encrypted network may be very similar to the early Internet protocols, and it can be expanded to a larger range of use, while achieving a sustainable The innovation ecosystem, which is why decentralization is so important.
Next, let's look at a framework that addresses this as a process, with the goal of building sustainable, compliant, and community-owned products.
I assume that any successful application running on a blockchain computer will have three components, namely product/market fit, community participation, and full decentralization (community ownership).
02
The first step: product/market fit
In the first step of building an encrypted application, all the conditions for a normal start-up are required: an excellent team, lean development, strict execution and fast learning. At this stage, the only important thing is product/market adaptability.
In order to find it quickly, it is important to avoid designing by the committee or the community. Products need to have independent leadership to test hypotheses and quickly update hypotheses. So in practice, this may mean administrator privileges on smart contracts, allowing rapid iteration and product management, including upgrading or shutting down applications.
At this stage, you should not pretend to be decentralized, and it is not recommended to activate the token at this stage because it may deviate the compliance route.
The idea of the core team controlling all aspects of the project may surprise some early users, but founders should not be wary of this. If users complain about the control you have, that is actually a good question, because it means that someone cares about what you build.
It is important to clearly state where the control rights exist. If the project party pretends to be decentralized, it will quickly destroy the trust of users, and transparency is a way to build trust.
Therefore, in the early stage of the product attracting users, the founder should start to invest more time, from thinking about the product to thinking about how to maintain harmony between the core product team and the community. This is the second step stage.
03
The second step: community involvement
First of all, the founding team may have to invest more energy in the best practices of running products like open source projects, such as establishing open source documents, providing bounties and grants to third-party developers, and hiring community leaders to help guide open development , And even further consider how to eliminate the project’s dependence on the core team in order to build more trust with the community.
For example, a compound manager modified the smart contract to delay the upgrade by 48 hours, which gave the community time to review and respond to the upgrade, so it gave up some control and brought the opportunity to invite the community to participate.
For the core team, giving up control will bring an opportunity to start transferring responsibilities to the community. But when interacting with community members, it’s important to reconsider incentives. The question is why do community members continue to contribute to the product?
Economic incentives are a way to promote community contributions. But where does the economic model come from? A practical and familiar encryption service business model is pay-per-use, similar to API microservices such as Twilio or Stripe. Allocating this fee to active contributors allows the community to coordinate around the success of the project.
In other words, charging at the beginning of the project is not always reasonable. In view of the fact that encryption services are open source, fees are only charged when the network effect is strong, so as to improve defense capabilities through excessively high conversion costs.
Uniswap is an example of protecting paid encryption applications through the power of its network effects. In Uniswap, the more users who contribute liquidity to the exchange, the better the pricing for traders. In order to provide the same pricing in the fork, the new project team needs to coordinate all liquidity providers and third-party services integrated with the original currency in order to start using the fork. The cost of reconciling all of these is the switching cost.
Token is a tool to effectively distribute the basic value of the project. Although token distribution can incentivize participation and help build defense capabilities, it is important to consider how to build a fair and effective distribution mechanism.
In the past, many ICOs and airdrop projects developed unsatisfactory conditions, because many speculator-led communities appeared in ICOs, and a large number of regulatory reviews distracted the attention of project parties. By allocating tokens to already active user groups, crypto applications that focus on product/market adaptability have the opportunity to do better.
First, the team can allocate and manage tokens to users who contribute value, helping to eliminate the community's dependence on the work of the founding team.
Secondly, the team needs to plan how to distribute the remaining tokens to participants fairly, taking into account past contributions and effectively incentivizing future continued participants. Doing this correctly is difficult, but some common questions to consider are: What percentage of tokens should be allocated to the initial team and limit table? How to reward different types of contributors to products or services? How will technology leaders be rewarded in the future?
To answer these questions, you need to analyze community behavior, model reasonable results, and discuss suggestions with community members.
04
The third step: full decentralization
If you are a cryptocurrency founder and are ready to enter this stage, it means that you have achieved early product/market adaptability, established a strong community that can successfully maintain the application, and formulated appropriate incentives. A model of continuous operation.
Now is the last step to achieve full decentralization: extensive token distribution. In fact, I imagine that the team will airdrop tokens to users and contributors according to the previous goals, so as to achieve "exit from the community". This will happen when the smart contract is triggered to mint and distribute tokens. Ideally, once this function is triggered, many things will happen:
First, the core team will transfer the control of the product from the company to the community, so the product will be controlled and owned by the community later, and the risk of the platform violating the rules will be reduced.
Second, the company can find a sustainable business model, such as retaining enough tokens and benefiting from the future growth of the product. Similarly, community members are now part of the owners of the product and will begin to receive financial rewards for their contributions. As the product's cooperative economy develops, they will see increasing returns from scale.
Finally, because the product is no longer dependent on the core team, tokens are not considered securities, thereby eliminating the regulatory costs caused by the SEC.
This goal actually commemorates a specific moment. When the user calls this smart contract, the encrypted product completes the sustainable community from traditional product company to user-owned and operated.
05
QA link
Next, I invite Robert Leshner, the founder and CEO of Compound, to share their experience of how to implement progressive decentralization in real time. Compound is a currency market for borrowing and lending digital assets and operates as a smart contract on Ethereum. The company was founded in 2018 and has been implementing progressive decentralization plans ever since.
Q1: Can you talk about how you cooperate with the developer community? What is the relationship between the company and the community?
Robert Leshner: This is about the second goal of decentralization-building a community. We treat developers as users of content and focus 100% of our energy on enabling developers to build content for us, which means treating the product as a whole and everything that the developer needs.
The first thing we have to consider is what is the product of the agreement and the ability to build on this basis, so we spent a lot of time in establishing development documents and building developer communities, through various ways to achieve the concentration of everyone In one place.
When we discussed how to interact with Compound, we focused on developers and created an environment. In this environment, everyone can ask questions, compare comments, share code, exchange ideas, etc. Everyone is very active. This is a way to bring everyone together to enhance the cohesion of each developer.
Q2: Why is community ownership so important for Compound and cryptocurrency?
Robert Leshner: We believe that having a decentralized protocol has two important advantages. One is that it allows the protocol to exist forever and lets developers and users know that the rules will not change; the other is that it enables a wider audience to upgrade and contribute to the protocol. Made a contribution.
Our team is small and headquartered in California. We can only do a lot of things to upgrade the agreement, but it can be open to the entire developer community so that they can upgrade and improve the agreement, then the speed of Compound development can be accelerated .
Q3: You already own the community and are trying to figure out how to transfer ownership to them. I want to know how you can discuss the plan with community members and how to make everyone work in the same direction?
Robert Leshner: Since the first day of establishment, we have been communicating with the community. The ultimate goal is to become a decentralized protocol. Since then, we have taken a series of measures, such as limiting the ability to make sudden changes to the protocol, and surrounding governance Create a large number of public pages in terms of transparency, etc.
Compound's decentralization is divided into three stages. The first stage is that the team that established the agreement is still responsible for changing the code, but they are done publicly; the second stage is to move to a decentralized sandbox experiment, we will use the center This is an intermediate step in the decentralization of the test. The test group is gradually extended from limited stakeholders to the entire user community; once we can ensure that the set variables and parameters are correct, we will take Enter the third stage-hand it over to the community, after which the project will be completely decentralized.
Q4: Have you found that certain jurisdictions are more friendly in terms of decentralized product supervision?
Robert Leshner: The United States may be more difficult than many other jurisdictions. The regulatory pattern in this country is that people only hope that entrepreneurs can create products that can protect the safety of users and comply with established rules. These rules do not inhibit innovation. We Everything that has been done so far has been within the scope permitted by regulations.
But in fact I like the ecosystem that exists here, because we follow the concept of decentralization, and we can build what people want without having to conduct public token sales, without having to make financing that violates securities laws, and using risk capital Financing to obtain uncontroversial profits, and then build a well-functioning community within the existing regulatory structure.
I think the era of wild ICO has passed. The reason is that there are many chaos, and the supervisory authorities have done an excellent job to crack down on some bad behaviors. I think this is a conservative and cautious approach, but it can let users know that only good teams with quality products can perform well.
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