building crypto platforms

July 2024

Crypto protocols are platforms. They’re different from web2 platforms… duh. But there’s still good web2 intel for how to build them.

Normal companies make something and sell it. But platforms are different. They match people who have an asset with other people who want it so they can exchange.

Platforms get network effects. The holy grail of tech. New users make the platform more valuable for other users. So, as the platform grows, it gets more valuable, which attracts more users.

The internet is the OG digital platform. It lets computers around the world exchange information. And you can build other platforms on top of it. In web2, people built search engines, social networks, app stores, and marketplaces. We liked them for a while. But they’re run by companies you have to trust and they extract all the value.

So now we’re building new crypto platforms (protocols). As a user, you don’t have to trust anyone and keep more value for yourself.

Basically, all web2 platform wisdom boils down to two ideas: density and returns to scale.

Density means users are matching, taking the platform’s core action, and getting loads of value. Without it, your platform’s a leaky bucket because users will churn. Bill Gurley calls it “liquidity quality.”

The hardest part is getting density off the ground. If you don't have any users, there’s no value, which makes it hard to get users. And then you can get trapped in a death spiral. People think the solution is casting a wide net to attract as many users as possible. But actually, you wanna do the opposite.

Pick a tiny niche and focus on a crew of die-hard superusers. Do unscalable stuff so they love your platform. Then, they’ll bring in more users, and you’re off to the races. Rinse and repeat in other niches to keep growing.

Okay, now returns to scale. This is how platforms get that sweet “dEfEnSiBiLiTy.”

At some point, adding more supply doesn’t make the platform better for consumers anymore. But you’ve gotta delay this. As long as the platform keeps getting more valuable with growth, it’s hard for competitors to catch up. They’ve gotta reach the same scale to give users equal value. Once that stops, smaller competitors are more of a threat.

You keep “increasing returns to scale'' going as long as possible through differentiated supply. Meaning each supplier adds unique value to the platform. Then consumers don’t see them as interchangeable. Sometimes this comes naturally from the asset being exchanged. But if the asset’s a commodity, you’ve gotta add ways for suppliers to separate themselves from each other.

Study this.