3 takeaways on market design for web3 builders
We recently launched this fall’s cohort of our Crypto Startup Accelerator (CSX). The Research Team met with the founders to go over the basics of what we do, and to answer questions and workshop answers.
Here are three market design takeaways from my part of the conversation.
1. With marketplaces and protocols alike, the optimal strategy is often to start broad, then narrow, and then broaden again. Starting broad gives you the space to find product-market fit — identifying the users who have the strongest demand for the category of transaction you enable (measured in terms of value creation). But then once you find those early adopters, focusing on them lets you optimize the business model, after which you can scale by expanding scope to adjacent use cases.
2. Web 2 platforms and web3 protocols leverage network effects in different ways. Platforms have historically benefited from creating “walled gardens” to lock in their advantage over competitors. Protocols, by contrast, establish competitive advantage by becoming embedded in as many applications as possible — and that means they should explicitly support third-party development.
3. With token design, monetary policy evolving over time should be the default. Owing in part to the Bitcoin precedent, many projects try to fix their entire tokenomic design (e.g., token supply, emission schedule, and so forth) up front. But that’s rarely the right path. Not only is it really hard to fully calibrate an economic system before you’ve seen it in use, but in practice token supply and the associated design parameters should generally evolve along with the project ecosystem, as new uses and users change the dynamics of money demand.
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Scott Duke Kominers is the Sarofim-Rock Professor of Business Administration at Harvard Business School, a Faculty Affiliate of the Harvard Department of Economics, and a Research Partner at a16z crypto. He also advises a number of companies on web3 strategy, as well as marketplace and incentive design; for further disclosures, see his website. Kominers’s first book — The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create, co-authored with Steve Kaczynski — is now available.
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