#13: The inevitability of a protocol economy

Hello again.

It has been a while. A lot has happened.

I was thinking about writing about the BTC spot ETF, I was thinking about writing about BTC hitting all time high, about ETH's Dencun upgrade, and about the crypto market cap surpassing the $US 3bn mark.

I decided not to.

Instead, I want to focus this edition of the newsletter to look back, and forward, and emphasize one thing above all.

First principles. Why? because they matter.

What I mean is the inevitability of a decentralized protocol economy. This episode will discuss facts, numbers, and the mother of invention, necessity.

The more time passes, the more I realize that comparing Web3 with the appearence of the early internet feels intuitive, but can also be misleading. That is because of entirely varying value propositions, which entail entirely different economic and psychological fundamentals.

Here is what holds true from this paralellity:

1. When we say Web3 is important, then we do so because every fundamental change to the internet infrastructure is important.
2. Web3 is the next iteration of the internet.
3. The adoption of Web3 technologies follows a similar pattern compared to the adoption of the early internet.

But honestly, that's about it. The mechanisms and logics are fundamentally different. And we can explain that by looking at how revenues are distributed in the internet.

There is literally only two ways of making money in the internet.

1. Serving as a trusted intermediary that facilitates, enables and/or settles transactions
2. Building a plattform that accumulates user data and sells them to advertisers

Sounds very unspectecular, but almost all digital business models ultimately fall into either of these two realms. And more importantly, this accounts for ~45% of all revenue generated in the internet.

That means if future value can accrue to infrastructure, we are freeing up revenues and reallocate from captured value to value creators.

Nevertheless, the value propositions of Web2 and Web3 are different, and so are the underlying business fundamentals.

In Web2, we centralize for efficiency.

In Web3, we decentralize to enhance efficiency facilitated by attractively and - optimally - sustainably aligned incentives.

In Web2, network effects position our businesses in a way that allows to extract maximum value to shareholders.

In Web3, value creation is aspirational and there is no such thing as traditional shareholders, meaning that the utility of the token can surpass its monetary value as a tradeable asset class.

In Web2, platforms increase in value the higher their transaction fees are (to the point where they are not canibalizing traction, of course).

In Web3, protocols increase in value the lower their transaction fees are.

Think of a Wikipedia - is it not valuable because it is Open Source and free to use? Certainly it is, but it completely lacks an infrastructure of value to this day.

The traditional world still seems to heavily underestimate the value of Web3, and every single time it tries to unlock it (most of the time in a desultory way), the emphasis is put on using the technology, without changing the mechanisms.

We are talking Web3 Spotify, Web3 Youtube, Web3 LinkedIn, I fell for this trap myself. But I understood that this does not make sense.

Neither I, nor most of you, want to pay per song, minute, album, or whatever. We want to pay 9,99$ and access the entire world of music. But on certain occasions, we want to be more than just consumers. We want to co-own, co-create, support, and benefit from the yield we are generating for others and ourselves. On some occasions, we want to put quality over quantity.

My LinkedIn inbox is a perfect example for this. If people would pay 30$ every time they send me a pitch, boy would LinkedIn be a great deal-sourcing channel.

I haven't used any dating apps for almost a decade now, but I am 100% sure people would be much more selective with their swipes to the right if they would pay 2 bucks every single time.

Imagine you could recommend someone in such an environment and benefit monetarily if someone finds their perfect match (or to make it more applicable to my personal situation, a great founder / startup).

The world could be a better place. And for that, we need a protocol economy, facilitating entirely new approaches to business, incentivizing all parties involved and putting the main acts in the center of the stage. The creators.

And here, crypto makes so much sense.

It is time to understand that there is no Web3 without crypto, and no crypto without Web3. The future is a protocol economy. And here is why.

We commonly make the mistake to confuse blockchain with a technological revolution. We do so because we appreciate the fact that it solves the digital double spending problem without the need for a centralized intermediary. What we seemingly do not understand, however, is that blockchain fundamentally is much more.

Blockchain is an economic revolution, and here is why.

I put in the words of Jamiel Sheikh , who perfectly summarizes it.

Bitcoin has proven that blockchain is an economic revolution because it is a chalkboard everyone can access to design their own economy on top of it. For a long time, the BTC blockchain had the problem that the data structue only allowed to design economic mechanisms on top of three excel columns (of course not excel) - "From", "to", "amount".

Ethereum has changed this. It allowed us to define our own data structures freely, and conditionalize them with smart, self-executing contracts. We can now add behaviour to economies and automize that.

Once people started to realize that they could literally take any asset, physical or digital, put it with a custodian and issue a token against it, the economic revolution has transcended closed, niche microeconomies with allegedly no tangible value. The fact that we can do these things does not only bring liquidity, enhanced tradability and borderlessnes to capital, it allows for entirely novel ways to monetize and do business on virtually everything.

This is why Web3 sparks a revolution in creativity, allowing us to solve some of the inherent challenges that come along with the inflationary nature of data without provenance.

Progress rarely happens in silos, and so the breakthrough in the application of AI is also affecting the narratives of Web3.

How can we provide trustless and attested AI applications?

How can we ensure provenance and verifiability of content?

How do we cope with the massively increased demand for compute?

How do we meet the massively increased demand for storage?

These questions are far from being theoretical, and here is why:

Centralized storage is expensive and we have a massive growth scaling issue associated with the development of AI. The projected hardware spend associated with AI will reach $1.7tn by 2030, most of it is compute. The demand for storage and compute requires decentralized solutions that are cheaper than their centralized competitiors.

What does that mean? Instead of centralizing for efficiency, we are now forced to decentralize in order to create a supply that can match the demand for these scarce ressources. Compute is a consequence of hardware, and yes, hardware is physical infrastructure. Believe it or not, even that can be decentralized, and that is DePin.

Consider this:

Centralized storage costs ~23$/TB, decentralized alternatives, like Filecoin, can ALREADY offer storage at a price point below 0.19$/TB.

If that is not enough, here is more.

The supply of storage grows at 5x p.a, the demand for storage grows at 10x p.a, and the market size will reach $472bn by 2030.

The same is true for CPU and GPU, with the US visualization software and 3D rendering market growing at 29% CAGR until 2030.

New, highly digitized mega projects are being built at the moment. I'm talking things the world has never seen before, like the Mukaab project in Saudi Arabia, a ginormous cube, designed to be 400m long and 400m high. The inside is supposed to be a even more mindblowing 3D experiences, achieved by covering the entire thing with gigantic, high-resolution screens (congrats NVIDIA). This is part of a project called New Muraaba, expanding the city of Ryiadh to add more than 19km2.

The world does not stand still, and the strive for growth will never stop. I perosnally doubt that any centralized institution is even close to being capable of satisfying this demand, let alone the fact that these single points of leverage and failure are highly undesirable. Here, Web3 does not only provide a more equitable solution, it will prove to be more efficient as well.

DePIN will allow us to use excess compute we all have. We can use ressoruces that are sleeping. We can leverage capacities that were non-existent. We can incentivize people and AI agents alike to enhance efficiency through decentralization.

Protocols are what facilitates that. They will be the backbone of the economy of things. The future will rely on collaboration, and it will undoubtably and inevitably come, because necessity is the mother of invention, and never before has the necessity for Web3 been more obvious.

Understand this: DePIN does not provide an option to use Web3, it forces us to do so.

Today more than ever, the protocol economy is alive. And it has just begun to unfold.

#Web3 #crypto #Blockchain #Depin #nvidia