How to win competition when users have zero switching costs and code is forkable.

On building moats in web3

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entropy fightoor gillesdc.com ~ /gillesdc

1

Competition is the art of acquiring, managing and leveraging scarce resources to create advantage.

Competition follows scarcity. And when new technology shifts what is scarce, the competition game changes.

2

Industrial firms compete on scarce resources
• oilfields, mines
• intellectual property (Coke's formula)

You win by getting resources, then building structural and legal moats around them.

3

These defensibility principles carry over in web2:
• Google search algorithm is a trade secret
• Craigslist blasting cease-desists when Airbnb piggybacked their user base.

But the new oil (scarce resource) is data.

4

web2's default business model is advertising: attract+engage users with free stuff, then sell the eyeballs for $$.

better+more data → more addictive algorithmic content loops → more ads to sell

(alternatively, you pay longer/more for ad-free subscriptions)

5

the winners extract maximally reap sowed attention as data (tweet, comment, follow, preferences) so to fuel the flywheel

better feeds, but also higher switching costs - you build a social graph you can't take anywhere else

6

so you stay and keep committing data, locking yourself deeper in, training the algorithm

thereby attracting new users and getting others to stay: network effects

7

web2 firms acquire user data through behavioral design (so you get hooked and keep committing) and acquisitions (Google→Waze, FB→IG)

they manage through big data processing

and leverage through AI and machine learning for value creation

9

2. open ecosystems — where Twitter controls who builds what on its code, web3 code is accessible to all:
• anyone can permissionslessly build on it (composability)
• and even completely replicate it (forkability)

10

composability gears towards unbundling

web2 infrastructure is vertically integrated, e.g. eBay bundles onboarding, analytics, buyer support, search, exchange etc.

these unbundle in web3: decentralised agents (e.g. search) competing with each other around a shared protocol

11

instead of a proprietary centralised platform bundling all solutions, you get a decentralised ecosystem of interoperable plug-play solutions coordinated around a protocol

e.g. farapps.farcase.xyz lists dapps built on Farcaster

12

forkability is the other side of the coin

forkability gears towards high competition: the more successful a web3 project, the greater the incentive for forking it

13

the million dollar question:

how to build competitive advantage if users have no switching costs and anyone can fork your code?

what is scarce is the era of open ecosystems?

developer engagement

14

development engagement is the core driver of value web3 infrastructure layer

it is scarce because if a dev works on one ecosystem, they can't be working on another, i.e. they opt out of working for a competitor

15

competitive advantage in web3 is built through enabling composability and incentivizing integrations across the ecosystem

more value built through complements to the protocol → greater the value of using protocol → more difficult for a fork to replicate value prop

16

thriving developer ecosystems build moats:
• token goes up → project attractiveness goes up → more devs join (flywheel)
• defensibility: more difficult to unseat associated protocol

17

to win in web3:
• design for composability to maximize surface area for builders
• build community, culture and engagement — the ultimate non-fungible factor

Thread inspired by @n 

farcaster://casts/0x6bcbaa1f1f38391e9f0b6f7348a4b25c1f43a2b7523e1aa7c624118701e844e2/0x6bcbaa1f1f38391e9f0b6f7348a4b25c1f43a2b7523e1aa7c624118701e844e2

8

web3 flips web2 scarcity on its head

1. portable social graphs — no more lock-in: users own their tweets and followers in wallets and can take it to whatever dapp they want