Editor’s Note: Andreessen Horowitz Crypto Startup School gathered 45 participants from all over the US and abroad in a seven-week course to learn how to build a crypto company. Andreessen Horowitz partnered with TechCrunch to release an online version of the course over the next few weeks.
The third week of Crypto Startup School a16z focuses on understanding how to capture value and design appropriate incentives within a decentralized framework. We learned how familiar ideas such as network effects and mechanism design can have unique strengths for crypto networks.
In the first presentation, crypto partner Andreessen Horowitz Ali Yahya discussed “the Crypto Business Model.” Yahya explained that the consensus mechanism of the blockchain creates trust among independent participants in a decentralized network.
At first glance, this might seem contrary to the idea of capturing value, because there are no factors that allow companies to build trenches in traditional industries – trade secrets, intellectual property, or control of scarce resources – applicable in crypto.
This leads to a “value-catching paradox” – how can easily duplicated open-source code be maintained in a competitive landscape?
The answer is network effects as strong, if not more than that, in crypto than in traditional industries. This is due to the economic wheels that are activated by tokens, which encourage participants and coordinate all economic activities in the crypto network. Combined with the ability of developers to build networks with each other using smart contracts that run autonomously, this will produce win-take-all dynamics, contrary to what seems intuitive in open source, Yahya said.
In the next lecture, Sam Williams, founder and CEO of a decentralized storage system Arweave, provides an overview of “Design Mechanisms,” a field of study that has become new relevant to the development of Bitcoin and subsequent blockchains that require carefully designed incentives for network participants.
Williams uses examples to show that economic incentives, when properly designed, can persuade interested people to display beneficial behavior at a fair market value with minimal central planning. This provides a new tool for booting decentralized networks.
He warned, however, that a poorly conceived incentive system could defeat the moral framework in ways that could be dangerous. This can be dangerous, he said, in a decentralized protocol, because self-executing code might not be easily changed to reduce unintended consequences.
Williams concludes with a case study of his company, Arweave, and how it creates an endowment-style financial incentive system to build a platform where data can be secured forever. Such a model opens the door to a new type of community-owned network that cannot be manipulated by the central owner.
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