I’ve been arguing that digital strategy is mostly about developing expertise in 4 areas.
- Digital economics
- Platform business models
- AI and machine learning
Each area has lots of depth and most of the subjects listed in the Concept Library are about the first two. The last two are still emerging. But I think if you can develop expertise in these, you can analyze most digital businesses. As well as traditional businesses that are being digitally disrupted and/or transformed.
I definitely underestimated how important blockchain (the last one) is. And really how different blockchain is as a technology to build businesses on. So, in Part 1 and Part 2, I laid out my short list of the key business concepts for blockchain and web3. In this Part 3, I want to lay out the common business models we are seeing based on blockchain technology. There are clearly some new types now.
So here is my updated list of business model types for web2 and web3.
- Linear business models (i.e., pipelines)
- Protocol networks (i.e., blockchains) as stand-alone businesses
- Platform-protocol hybrids
- Company ecosystems
- Protocol ecosystems (i.e., building blocks)
The first two are web2 models. I’ve written tons about this so let me just cite this quickly.
Linear Business Models (i.e., pipelines) and Platforms
Most traditional businesses are linear business models. And there are lots in digital too, such as Netflix, Adobe, etc. I generally cite 5 types of platform business models.
- Coordination, collaboration, and standardization (CCS) platforms
- Payment platforms
- Innovation and audience builders
- Learning platforms
And each of those have sub-types.
3. Protocol Networks (i.e., blockchains) as Stand-Alone Businesses
This is what most web3 people have been talking about. These are services that exist only on blockchains (i.e., protocol networks). These are referred to as decentralized platforms. This is Bitcoin, a stand-alone service based on the bitcoin blockchain.
I really think of these as protocol networks. Not unlike the first email connections. And the Ethernet. Someone writes code that is then released. Developers, miners, validators, and other individuals load this software on computers around the world and it gives them the ability to interact. It makes separate computers connected and compatible. And this creates a network, in this case a protocol network. And after it is released, its ongoing operations are supported by various incentivized individuals, usually miners and validators. And a Dao or foundation is behind the scenes but has minimal ability to intervene.
This is what so much of the excitement about web3 is about. The idea of a public network that anyone can use. It is permissionless. That anyone can build upon. That nobody can control (i.e., decentralized).
I mostly consider this a public asset that others can build upon. It’s more like the public roads. But I don’t see many cases when a protocol network is a stand-alone service or business in itself.
However, in some cases it can be. Bitcoin is an example. It is a really simple service that exists only on its blockchain. This type of business model does seem to work for services that are simple and static. That don’t really need to evolve. That don’t need innovation.
Ethereum is also a protocol network, but it is much more complicated. It is not trying to be a distributed currency for making payments and storing value. It is trying to be a distributed computer that anyone can write smart contracts and build upon. The Ethereum foundation is pretty active for something that is supposed to be decentralized. It is currently doing a major technology change (proof of work to proof of stake).
Another example is Uniswap, which I have written about here. This is also a business model that is a pure protocol network. In this case, it is a marketplace service that enables buying and selling cryptocurrencies.
But, while blockchains and other protocol networks are becoming very common as networks to be build upon, these are actually quite rare as standalone business models. I think they are more like public infrastructure and part of the new web3 technology stack. But we do see some examples of protocol networks as stand-alone business models.
4. Platform-Protocol Hybrids
To the frustration of decentralization evangelists everywhere, these are the most common web3 business models thus far.
It turns out most products and services require some degree of centralized leadership. Most services require active support. They require continual improvements. They require leaders who can make decisions. As much as developers and engineers wish for a world run on technology and democratic decision-making (i.e., DAOs), most complicated services require aggressive and agile, top-down leadership.
So, most web3 business models (thus far) are a platform business model running on top of public blockchain protocol networks.
Compared to a normal marketplace platform:
- You can see the separation between the platform business model (controlled by the company) and the public protocol network (controlled by a foundation? or not at all?).
- You can also see additional tech capabilities. Instead of just having internal servers and cloud, there is also cryptotech capabilities. This is about building internal web capabilities but also interfacing with the blockchain protocols.
- Note some of the questions on red on the right.
A good example of this is Coinbase, which I wrote about here.
“Coinbase is mostly a marketplace for buying and selling cryptocurrency. And the company has become the primary on-ramp for retail users into cryptocurrency. The user numbers are all big and growing fast. So are the transactions volumes on the platform. The suite of cryptocurrencies offered is also growing. As of March 2021, Coinbase was the largest cryptocurrency exchange in the United States by trading volume. The numbers cited in the 2021 IPO filing were:
- 43M verified users in +100 countries.
- 7,000 institutions.
- 150,000 ecosystem partners.
- $90B in assets on the platform.
- 96% of revenue coming from transaction fees for 15 blockchain protocols for +90 cypto assets.
The critical issue going forward is trust. Coinbase has become the primary on-ramp for retail users because it is trusted. It is the primary financial account in crypto for many users. But cryptocurrency is volatile. There are security breaches. There is lots of speculative behavior and rumors. And there are serious uncertainties in the blockchain technology itself (discussed below). So maintaining trust going forward is going to be critical for Coinbase.”
Most of the successful models look like this. And they often are competing with web2 versions of the same service. For examples:
- Audius vs. YouTube
- Soundcloud vs. Spotify
- Medium vs. Mirror
- Opensea vs. Luxrare
- Ave vs. Blockfi (for lending)
And all the web3 business models look like something between Coinbase (a platform-protocol hybrid) and Uniswap (a pure protocol network).
Ok. That covers most of what we see in web3 today. But let me put two other business models on the table.
5. Company Ecosystems
I’ve talked a bit about ecosystems of companies working together. We see this in the creation and ongoing production of complicated technologies like semiconductors. A series of company (TSMC, Android, Qualcomm, Nvidia, Samsun, ARM, etc.) coordinate on each new iteration of the technology. The launch of a new technology almost always takes an ecosystem of 10-15 companies. And ongoing improvements usually requires ongoing collaboration.
I don’t talk about these “company ecosystems” much because they are quite rare. It’s a lot of business development work. It’s a lot of data sharing and collaboration innovation. But most companies struggle to work together. And it is usually only 10-20 companies.
With more APIs, the idea of company ecosystems is getting more interesting. It is moving from business development to companies having more interactive and interoperable digital cores.
I call these company ecosystems because it is usually companies that are collaborating. Web3 doesn’t really change this. But it tees up the idea of Protocol Ecosystems.
6. Protocol Ecosystems (i.e., Building Blocks)
I think protocol ecosystems and platform-protocol hybrids are the potential web3 game changers. Sangeet Choudary has been writing about “building blocks” as a new type of strategy. This is where protocol networks (i.e., blockchains) solve the value distribution problem of open source. They unleash the value creation juggernaut of composability.
I wrote about this in Parts 1 and 2. But I basically said that the big gun of web2 was network effects. The big gun of web3 is “composability at global scale”. Protocol ecosystems will take advantage of this more than any other business model.
- Big Web3 Concept 1: Protocol Networks (i.e., Blockchains) with Property Rights.
- Big Web3 Concept 2: Composability (i.e., Building Blocks) at Global Scale
Protocols building on top of each other is an ecosystem strategy. Instead of companies working together and collaborating (i.e., company ecosystems). It is protocols that are all coordinating. And the protocols are just the foundation. Smart contracts, digital assets and other items can be built as well. Ethereum and its smart contracts are the protocol ecosystem that everyone is watching.
Ok. Those are my 6 business models for web2 and web3. I hope that helps. Cheers, jeff
- The Big Strategy Concepts for Web 3 (1 of 3) (Tech Strategy – Daily Article)
- Why I Really Like Amazon’s Strategy, Despite the Crap Consumer Experience (US-Asia Tech Strategy – Daily Article)
- 3 Big Questions for GoTo (Gojek + Tokopedia) Going Forward (2 of 2)(Winning Tech Strategy – Daily Article)
From the Concept Library, concepts for this article are:
- Protocol Networks
- Protocol-Platform Hybrids
- Company Ecosystems
- Protocol Ecosystems (building blocks)
From the Company Library, companies for this article are: