The internet enabled the Passion Economy. It gave creators the ability to monetize their 100 true fans. But in doing so, it had some inevitable side effects. First, it gave platforms significant power and influence over the lives of countless individuals. Second, a lot of the financial upside derived from the massive success of these platforms accrued to a small group of individuals.
Our guest today had a front row seat to this. Working for a16z back then, she saw exactly how it happened and who benefited from the wild success of these platforms.
Of course we’re talking about Every’s very own Li Jin.
If you’ve been a longtime reader of Means of Creation, you’ve probably noticed this philosophical shift. From initially being excited about the potential of the Passion Economy, Li has been spending a lot of her time reading, thinking, and writing about what a fair internet could look like. An internet where network participants (creators, users, moderators, and so on) own a part of the network they add value to; and derive the financial upside from their success.
Our conversation with Li gave us a lot to think about. We hope you enjoy it as much as we did!
Full Transcript
Sari: Hi everyone. I'm Sari Azout and I'm joined here by Joey DeBruin. This is "Token's But How?” a show where we dive into the messy details of building token-based products. If you care about the ownership economy but have lots of questions, join us. This show is made possible by Every, a writer's collective focused on business, and Seed Club, a DAO that builds and invests in communities. Today, we're super excited to be joined by Li Jin. Li is so many things: an investor in Web3 and creator-focused companies, a creator herself, and a tech humanist. Over the past year, Li has advocated for Web3 as our chance to make a better internet and shift power and ownership into the hands of users and creators. Li, we're super excited to have you on the podcast.
Li: Thanks for having me guys. It's really nice to be here.
Sari: Awesome. Li, I thought maybe a good place to start would be unpacking what it means to you for platform participants to become owners of the platforms themselves. When you think about a world where participants own the platform, what does this mean to you?
Li: Yeah, absolutely. We just published a blog post about this topic earlier this year called "The State of the Ownership Economy, 2022," exploring the question of what does user ownership actually entail? Long story short, there are a lot of different flavors of ownership. We call ownership this vast design space that builders can explore. There's the individual experience of ownership. There's collective experiences of ownership. There's passive ownership. There's active ownership. But when I talk about user ownership of platforms, usually it's to mean two things. One is users being owners of the future economic cash flows of that particular platform and being economic beneficiaries of it. And secondly, having governance powers to influence the direction of the product, both things that are missing in the Web2 world. And we believe that crypto tokens make it possible to basically bundle both forms of ownership and grant them to users.
Joey: I think a lot of the examples that people often bring up in terms of what we're trying to fix…our kind of major Web2 platforms: Uber, Lyft, Instagram, Facebook... can you just articulate...what do you think is the problem with these platforms now? Principally is it that, at this point, the lock-in is too high and then they're no longer aligned toward their user? Or is it the people that help them grow actually aren't the ones that benefit? When you think about building a better internet, what are the big problems that we're really solving?
Li: Yeah. I think there are a bunch of different issues and ways in which they can be improved. And obviously, it's not black or white…where the current situation is bad, per se, and there's a way to make it good. I think of all of these different changes and improvements as steps on a path to user empowerment. So starting with the issues of the Web2 platform today, specifically around gig economy platforms, as you asked, I think people have talked about the issues of the gig economy for a really long time. They often talk about the really strong network effects of these gig platforms as being coercive towards their participants. That's not necessarily something that Web3 can alleviate, but network effects themselves are a form of implicit coercion where users have a desire to join the biggest network because that's where they'll be most likely to find the other side of the marketplace. And furthermore, this is exacerbated by the fact that in Web2, all of these platforms hold very close to their chest all of the user data contact information of one's customers, algorithms for determining pricing, et cetera...such that if you're a driver or a gig worker, you can't actually go independent and still be able to connect to all of the customers that you have been working with before. So there's a real lack of leverage that is present today where the platforms really intermediate all of the participants' ability to even earn a living and to make any income at all, both through the ownership of the data, but also through network effects. And then I think there's another secondary issue, which is that...going back to ownership...the value of these platforms has really accrued to equity holders, a really small group of individuals who founded or invested in or were early employees of these companies and who got exposure to the equity value of these businesses versus to the participants who are just using them to earn income on top of them. And there's a story that I often tell about work as an investor where years ago I was working at a big VC firm, a16z and I think this contrast between what investors own versus what participants own became really stark anytime there was a portfolio company exit... where anytime one of these companies exited, say Lyft or Airbnb, it was cause for celebration in the office. Everyone obviously was economically rewarded in those moments. And I would often think: what about the actual workers or hosts or drivers on those days…the IPO days? What were they getting? Most likely they were not actually getting anything. And that felt really fundamentally unfair to me, that the workers who had actually contributed the value and made these platforms worthwhile to use were not exposed to the equity value of these businesses. And so I think when people talk about the ills of Web2 platforms, as it pertains to multi-sided networks, I think they're referring to any combination thereof of the issues that I just mentioned.
Sari: There are a couple of follow-up questions here, Li...because I also had a similar path to you where the equity should be owned by the community. But there are two questions that I have here: say a company like Uber gave, I don't know, maybe 25% of their equity to its drivers. And there are millions of drivers. Is there enough money to go around that it's gonna really incentivize people or move the needle, right? Because people use these products for the utility. And when you combine that utility with financial incentives, is it primarily used as a tool to drive adoption? Because the fairness piece is really interesting. But I guess in practice when you are incentivizing people to use products beyond the utility that they receive, can you create stable networks when the usage is driven beyond the utility?
Li: So I think in the case of networks like Uber, or even Facebook or Instagram or any of these multi-sided platforms, the sheer number of participants that we're talking about is tremendous. And if you were just to naively take the company's enterprise value divided by all of the participants, it's very easy to say "oh, this would actually amount to not very much." That calculation would be accurate today, but I think what's not captured in that is the fact that there's all of these complex downstream effects of making users owners... on their incentives to join the network, on their incentives to be retained and engaged and have long term participation in them. As an example of this, Uber, Lyft... like all of these products have to spend tremendous amounts of money acquiring both users and drivers. And furthermore, spend even more money trying to retain them... trying to make sure that they don't leak off of the platform or churn or go elsewhere. And I think a lot of that kind of spending could be alleviated by making users aligned with the success of the platforms. So perhaps these networks can actually grow. Our thesis is that networks can grow to be bigger than their Web2 counterparts through that inherent incentive alignment with their participants. And I think it's hard to tell what the counterfactual would be because none of these networks were built in that way. I think some of them explored that or thought about it, but it wasn't viable given how they were legally regulated to make users into equity holders. But I think it's not that far of a stretch to imagine that these networks could be much more thriving businesses if users were actually owners.
Joey: Yeah, I think that's really a good point around the emotional side of it, too, something that I feel like is generally undervalued. I'm a part owner of REI; I love REI. I'm always buying gear and outdoor clothing. They have this mechanism where if you're a member in the co-op, you can theoretically vote on stuff and you also get some dividend, every year. And I never really pay attention to those things, but there is an emotional difference in how I interact with that brand, just because of the feeling. And I do think there is a non-zero value to that. But the other aspect, which I definitely wanted to ask you about, is that it does feel like one area where this huge number of drivers makes it so that the money is very small. One area where that's different is obviously in very early platforms. And I think about this in terms of: where are their market failures here? Looking at Lyft is always maybe a bad example. That was a great success. And so in some ways, all the participants there were properly incentivized. The investors would've never given money if they didn't have some way to participate in the upside eventually. And so they have this equity thing. Drivers get money for driving and maybe they are incentivized early on by these special deals that are basically coming out of the VC money. But the point is that it takes a lot of cash to do that. The reason Lyft and Uber have been such capital-intensive companies is that they have to manage all these incentives. And so maybe the stories that we don't hear about aren't necessarily the Ubers and Lyfts and the tragedies there, but actually all of the companies that can't be built because it takes so much money to actually build them. And so it seems like at the early stages this incentive alignment can be much more powerful. One of the things that you wrote about in "building a more fair internet" was that we shouldn't just build platforms for early adopters because that means that we're just building for the people that have the privilege to be early adopters. So can you talk a little bit more about that? Like how do you think about those early moments for platforms?
Li: Yeah, that's a really great point. I do think that the most exciting opportunity in Web3 is to build networks that could not have existed without tokens. And I think we're at the early stages of scratching the surface of what tokens can bring to the table in terms of network building and network bootstrapping. But just from my six years of being a consumer investor, there were so many different network ideas that were never able to get off the ground and were attempted so many times by different founders, that, in theory, sound great, but for various different reasons, those networks just never we're able to go from zero to one, perhaps because user acquisition costs were too high or there needed to be such high network density for the network to even be valuable to anyone that no one was able to overcome that cold start problem. Yeah. I think there's a whole host of different networks that don't currently exist today that could exist. If we were to create that incentive alignment, especially with early users to get the network off the ground. So I think that's really exciting. And that sounds pretty abstract, so one example that we often talked about was how there still is no social network that shows you what's going on within a two or five-mile radius of you. If you want to know what's going on down the street or what's that thing that I just heard today, we could maybe go onto Twitter or Nextdoor. Those aren't really perfect solutions to this problem. Many founders have tried to create this kind of hyper-local social network, but you need such a high density of user adoption to get this network off the ground, that it just hasn't been viable to create this kind of social network to date. And I think that's where the financial incentives offered by a token, especially early on with the speculative value, can really be a powerful tool to build this type of new network. With regards to the intersection between this idea of tokens as a tool for bootstrapping new networks versus the idea of making these networks fair to anyone? I think fairness doesn't necessarily mean that we can't create incentives that reward early adopters across the board. I'm reminded of a quote by John Rawls, who I cite a lot in this blog that I publish called "A Theory of Justice for Web3," which is itself a play on his book's title, "A Theory of Justice." He says, "A fair society is one that you would be willing to enter at any position." And I think that is a really succinct summary of his ideas, that there should be a quality of opportunity that you should be willing to enter this society in any position because, with your level of ambition, the odds of you being able to attain success should be equivalent to anyone else of that same ability level and same motivation to use their intrinsic talents. And so I think the same holds true for networks. I think a fair network is one that you would actually be willing to enter at any time at any level of wealth with any level of tokens. Because doing so presents you with an opportunity to benefit yourself in a way that feels fair, in a way that doesn't feel biased in terms of your personal outcome from entering at that position. So I think it's okay that early adopters can be rewarded because they provided a lot of the initial value preceding that network. But later participants may still want to join and still feel that it's fair to join at that point. Maybe there's less financial upside, but there is a much greater level of utility to be gained from using that product.
Sari: Li, would you agree with the framing that tokens are the new CAC? So if you don't have funding to spend, hundreds of millions of dollars on marketing, acquiring customers. So in theory, you're not necessarily spending money, but you are giving up equity. And so I guess, poke holes on that framing. But if you do agree with it, one question in my mind is: VCs aren't advocating for community ownership because of fairness. They likely believe that you can build very valuable networks on top of this and founders as well must believe that sharing upside and building less extractive networks and building community ownership can make networks more valuable. Yeah. I'm curious would you agree with that framing?
Li: I think tokens as the new CAC is one possible framing in that it's one possible way to leverage tokens as a builder. But I think there are other ways to leverage tokens as well. I think tokens can also serve as a way to basically imbue people with governance rights in your network. I think tokens can also serve as a retention mechanism. So there can be usage incentives that take the form of tokens that get rewarded to users based on their participation and ongoing usage. So I think tokens as CAC is like one form of how tokens can be implemented, but there are many other possible ways to leverage tokens too.
Joey: I'm glad that you brought up, some specific examples. I know that none of us really have the answers here, but there are some very specific and personal examples. Obviously, I'm building a kind of Web3 network. We have plans, and I won't go into those plans, but take it as a hypothetical, we're a C-Corp company. We don't have our own token. We're doing a lot of things that we believe are in the ethos of Web3. So we're building audiences that people can take elsewhere by using interoperable, primitives like NFTs and other tokens. So generally speaking, we're just trying to help different projects come to life and benefit from community ownership, et cetera. But I think the same principles apply to us. First of all, we have a cold start problem. Like any network. Second of all, if we are successful, the network should be very valuable. And that's something that probably benefits from community ownership and from being credibly neutral in some capacity so that all the participants in our network know that we're not gonna go against them in the long term. But I think it's pretty unclear for people in our shoes to know what the first step is. The biggest challenges are the financial challenge and the legal risk. I think it's not really clear how to do this in a way that is legally compliant. And with governance, I think it's a little bit unclear how small teams are supposed to use governance in a way that actually helps them move faster. Because generally speaking, what small teams need to do is move faster and governance often comes at a pretty high cost in terms of overhead. So I'm just curious, let's say that you were in my shoes. What are some of the ways that you might think of taking initial steps... if you're like me, you're committed to all the things that we're talking about. Like they all make sense. They all feel like the right things, but like, how do you take the first steps or how have you seen companies thoughtfully take the first steps towards that place?
Li: Yeah, I think it's a really great question. And I think the answer is probably category-dependent based on the product that you're building. So I would say that in general, consumer Web3 products are how they leverage tokens and what functionality or utility the token has is extremely under-explored for consumer Web3 products versus DeFi products wherein the token is core to the mechanism of whatever DeFi protocol they're building, in the consumer worlds of Web3, there's basically been a handful of examples of projects that have launched tokens so far. And I would characterize them as being kind of lukewarm in their success or having delivered very mixed results in terms of benefits to the users as well as benefits to the networks themselves in terms of ongoing usage, user retention, liquidity for a marketplace, et cetera. So I think the best practices are still really under-explored and need to be illuminated. I think some of the interesting work that's going on right now for consumer products in Web3 relate to: how can we make governance more democratic and more reflective of actual participation in the network. So rather than a lot of DeFi protocols that have just tied governance to liquidity or economic value, I think consumer products are a lot more complicated in terms of how you actually measure the value that's being driven by any type of user. Like there are lots of different actions to take within a consumer product. It's hard to nail down the actual value. There are some interesting examples of projects right now that are exploring a combination of different tokens, basically, a non-fungible token or a non-transferable token plus a fungible token, that basically attempts to create a more democratic governance system. Yeah, it's basically trying to create a system in which every unique user is able to participate in governance to some extent without whales just being able to buy up all of the fungible tokens and disproportionately sway governance.
Joey: It makes sense. I think it's unclear to me in that consumer category whether it's really possible to survive a lot of financial speculation, at least given the tools that we have now. If what you want is for early participants in the network to be able to have a voice in governance and for that to essentially strengthen the community and maybe like help with adoption and retention early on. Like the moment that you have a lot of speculation, it basically just crowds out like all of that interaction. I guess there are mechanisms like quadratic voting and whatever that are generally designed to get around the fact that you have these like whales that will buy up a lot of tokens and over-exert influence on the network. But I just wonder whether it's necessary or beneficial at all to have the two token system that you're mentioning. I wonder if we'll see a lot of like consumer apps basically just only use non-financial tokens for months, years until...I mean primarily for governance, until the point where it makes sense to even have some sort of financial upside. But I agree that it feels like the playbook really hasn't been written on that.
Sari: Yeah. It's interesting, because to me the idea that companies are not public on day one and that's a feature, not a bug...There has to be some sort of long-term thinking I think when you're an early team and building. But if the token is not fungible and not tradeable then the benefits of ownership as equity, as upside, as financial upside begin to disappear. And so decision-making power, or maybe like the emotional affinity to the community, becomes more important than the financial upside. And I struggle with that a little bit because what got me excited about this in the first place is the ability to actually share financial upside.
Joey: If you take the example of Startupy or something. I think it's partially that we just haven't seen this play out enough times for there to be existing behavior expectations. When you work for a startup and you get options it totally influences your behavior. It's why you work really hard and you make it through what is often a lot of chaos and noise, because you know that you're gonna benefit from the future upside. Maybe there are some platforms now that help you sell your options on a secondary market, but for 99.9% of startup employees, that's not even possible. So it's not like you really have that financial upside from the beginning. It's just that you have this understanding that that might become true. And it exerts a powerful force on your behavior and your emotions. So I feel like we could have both but I just think that playbook hasn't really been written and right now it seems like one or the other...either you can have a governance token, or you can have a financial upside token, but it's very hard to do one and then the other.
Li: Yeah, I agree with that assessment. I think of the instances that we've seen of networks being really successfully bootstrapped by a token...I'm thinking specifically in the play to earn world where the token was really critical to the network success and people join the network because they could earn tokens. So in other words, the financial incentives were really powerful incentives for users to join and build out the network. Those have also been some of the least sustainable networks that we've seen wherein the moment that those financial incentives dissipate or start to go down there's user churn in mass which creates this negative spiral downwards. I think the interplay of financial incentives plus intrinsic motivation is really tricky.
Sari: Li, one of the points that you brought up earlier is that the most interesting token-enabled networks are the ones that were not possible to build in Web2. And one of the questions that I keep coming back to: will the most powerful ownership economy Web3 platforms...will they be Web3 native? Like Backdrop building interoperability? Or will we see a lot of different Web2 type interface companies where the underlying data is still Web2, but there's some of the ownership and token distribution on top of that?
Li: For the latter, do you mean like a Web2 business that then distributes ownership in the form of a token?
Sari: Yeah, at Startupy we don't host our data on IPFS. It's not Web3 native, but we would love to have some sort of community ownership on top of the network we're building. Which I think brings me back to one of the points you brought up earlier around how ownership could also be in the form of owning your data. And when this data lives on the blockchain it becomes easier to just move around with it and, we could get into that in a little bit but I'm curious as you're thinking about these businesses, do you find it more interesting to think about Web3 native businesses where the token mechanic is woven into the core, or could it just be a cherry on top? Like maybe a writer's collective and we're just distributing tokens to writers. What do you think about that distinction?
Li: I would say that as investors we're generally more keen on the Web3 native businesses and protocols. I think with the latter example, there also could potentially be securities issues with regards to whether the network is sufficiently decentralized and whether the company is essentially just issuing a security in the form of a token to its users. I think that gets into really hairy territory, which is why we tend to invest primarily in protocols and Web3 native businesses that can really claim to be sufficiently decentralized.
Joey: I'm curious about your thoughts on this, but I feel like something that is definitely a big trend in Web2, or just product building in general, is community-led growth. So this was a topic long before Web3 ever became mainstream. And I've worked for a number of products that have this, right? You have someone on the team that's specifically building a community around the product, maybe because the product is really complex to use. And so the community is really useful for acquisition and onboarding or there's some other mechanic that makes it important to have this community. And I think a lot of people have talked about Web3 as in some ways, community tooling or incentives for community alignment or ownership or whatever. So like, how do you think about communities where the community is the product? Let's take Startupy as an example…the product itself may not be Web3…it may be stored locally, but the actually valuable thing is that there is this community of curators. It's almost like a DAO that is working in partnership with Startupy so there's this community-owned thing that is mediated by tokens. I guess my question is: do you think that the most important or most valuable things will be protocols and products or do you see an opportunity for products where the community itself is the product?
Li: Yeah, that's a really great question. We're definitely open to both. So in our portfolio, we have basically everything across the board where investors and communities (i.e. DAOs)...we're also investors in investment clubs, or like on-chain investment DAOs. The vocabulary is still pretty nascent with the whole category, but we're investors in a bunch of different DAOs, but we're also investors in protocols and products. And I think on the community side, what's really interesting about Web3 is the potential to create communities that I think are both smaller and bigger than what currently exists. And what I mean by that is if we think about it, the unlock of crypto and tokens when added to a community is that everyone becomes incentivized as a co-owner of that community. And so you can imagine that these communities actually grow to be much larger than their non-user-owned versions. So you can envision I think, some of the biggest Facebook groups in the world. Millions and millions of members. But there's no real glue holding them together, aside from just intrinsic motivation to be there. There's no coordination mechanism aside from people assuming leadership positions. There's no shared ownership in that community. We think token incentives could actually help those communities to grow much larger than their non-user-owned counterparts. And then simultaneously, I think on the other side of the spectrum, the potential to create communities that are smaller than what can viably exist today. And what I mean by this is I think the reduction of friction to spin up some of these communities is much lower than what had previously been the case in the legacy world. So to create an on-chain fund with your friends is a lot easier than hiring a lawyer, setting up a VC fund, and creating all of the Delaware entities, which costs thousands and thousands of dollars. And so now there's a whole host of on-chain investment clubs or investment DAOs that are Crypto native investing in assets on-chain that you would've just never seen in the non-crypto world because that barrier to entry was too high. There's a whole host of different communities that can result from this. As investors, obviously we're interested in investing in things that grow to be really big. So we would be interested in investing in things that grow to be bigger than their offline counterparts. And then I think there's a lot of communities that will leverage crypto but be smaller, and that's great. And they aren't a great fit for VC funding probably because they will remain nation small, but their existence is a testament to the power of crypto and how crypto basically enabled them to exist in the first place.
Joey: Yeah. The reason I asked, by the way, is because I think you mentioned that for a Web2 product to issue a token to reward community members or whatever is maybe not sufficiently decentralized or is legally risky. But I think having a community in parallel, maybe I would imagine this is like a viable option. And so take the case of Reddit...if Reddit were to issue a token that rewards all of the moderators of subreddits, which is like a super valuable community for them, and maybe has financial upside…maybe this actually looks like a security, but what if all of those Reddit community moderators were to decide to form a DAO that helps them pool resources... it's basically like a union. In some ways, I'm not sure Reddit would actually want this. But I do think that thing is definitely specifically decentralized to be able to have a token. And so I wonder if maybe the problem is that we're thinking too much about going from the Web2 product to just creating a token for its community and less about the way that communities and Web2 products can powerfully interact.
Sari: Li, maybe this would be a good time to bring up business models because you mentioned we could build communities that are larger or smaller. And when we think about Web2, predominantly it's advertising subscriptions...and in some ways, yes, people talk down about advertising, but it's given like millions and millions of people access to incredible free products. And do we really wanna live in a world where everything is paywalled? And it seems like when we introduce tokens, there's a lot of design space to think about new business models that could make knowledge more accessible...it doesn't necessarily have to be advertising. I'd love to just get inside your head a little bit. What do you think are new business model opportunities that could be token-mediated?
Li: First of all, I would say that I'm not a maximalist for anything. I don't believe that advertising is an evil business model. Like I don't think that it should be eradicated or that it's created such perverse incentives that it should be completely supplanted with another business model. As you mentioned, advertising has been amazing for all sorts of different reasons. It enables things to be free for consumers creating a massive consumer surplus. But it also creates different incentives for content creators and for platform owners. So I'm really in favor of a flourishing of different business models that are now possible to exist, in addition to the old advertising-supported business model. What that can look like...obviously, I think tokens have given new business models to creators, whereas previously creators have been pretty aligned on advertising or brand sponsorships and tokens create this direct relationship between content creators and their audiences in the form of being able to sell tokenized media or create something that is token gated that users would be willing to pay for. While I would describe social tokens as still a pre-product market fit, for the most part, social tokens essentially make content creators investible as a person, which is interesting and like a new business model that hasn't really been possible before. A really interesting new model of incentivizing third-party developers or an ecosystem to arise around the token or around whatever it is that you're building in a way that previously may have required subsidization or grant funding or corporate venture or something like that. But as an example of this, if you look at the ecosystem that has arisen around NFT collections like Loot...That's really fascinating and I think that's possible because developers are incentivized as owners of those tokens to want to build up the value of their holdings by creating new experiences on top.
Sari: Yeah. It's really interesting to me to think about NFTs also as a way to monetize the status layer instead of the content. At Startupy we have a paywall…past a certain point there's a monthly membership. And we also have this believer tier, which is $1,500, and we've made an order of magnitude more from people that have signed up to our believer plan, then the monthly plan, which would almost indicate that perhaps you could monetize the status of wanting to be a patron of this sort of knowledge graph versus trying to create this artificial paywall for a product that has zero marginal cost. And so there's something interesting to me... beyond subscription...can you make things that are public goods accessible to everyone, but where the layer that you monetize is not the content, but something else?
Li: Yeah. I'm reminded of Jacob Horne's really interesting post, Hyper Structures, which contains the very kind of provocative and controversial view that you can make protocols that run forever for free, but that are still really valuable to own. There was this idea of how something can be really valuable to own, even if it never actually extracts any value. And this was a really provocative proposition because that obviously flies in the face of how we think about businesses and companies and the value of any stock today. Companies are valuable as investments, or stocks derive their value from what you expect to earn in terms of profits in the future. And so the idea that something can be free forever and never actually turn on a fee switch, yet be incredibly valuable to own is really interesting. And the idea basically is that token holders could basically have governance rights over whether or not to actually turn on a fee switch at any point in time. And he says that logically, you would never actually want to turn that on because doing so would be value-destructive. It would create the incentive for someone else to fork the protocol and remove the fee. And so therefore you would never actually want to turn on the fee, but that threat of fee is what gives the token its value.
Sari: It's still hard for me to wrap my head around that. We have operating costs and we have people to pay. And so where does the money come from to maintain an operation? Are people buying tokens? And so the money comes from the demand for the token? Maybe say more on that, because I'd love for a world where that can happen, but I still can't quite see it.
Li: Yeah. The post didn't really go into details about how this all gets funded. Notably, Zora is venture-backed and it has raised quite a bit of money. So I think that also raises the question of how will Zora investors presumably earn a return in the future if Zora plans to be a hyperstructure and never actually turn on any sort of fee switch and be free to use forever. Yeah. I don't know, to be honest. I think it was very much a theory that I think is super interesting, but in practice, you would essentially need an entity that is capable of raising capital initially to fund the development of this public good or utility.
Joey: I think you mentioned in that article that there would be the ability to build in parallel… maybe service model revenue streams or some way to generate money for whatever entity is maintaining the like sort of core protocol. Whether the core protocol itself would be this hyper structure...this thing that has no fees in and of itself. I'm still not sure that I fully 100% understand the concept, but I do think major layer one blockchains...I don't know if that would qualify, in the sense that they do have a recurring revenue model or there is this kind of like almost access-based revenue model. Some people are doing work. Some people are paying for the service that is being provided and there is money flowing. One thing that we've talked a lot about on this podcast is: to what extent do early projects that do use tokens need to be thinking about recurring revenue streams? Because on the one hand, maybe these token models are really good ways to align people early... and if you're growing they kind of work. But as soon as you stop growing, they stop working...at least for you to have money to continue developing the thing. And so at that point, you need to have, in parallel, some kind of recurring revenue stream from the beginning. So I'm curious, how do you think about balancing those two things? Do you feel like there should be more people thinking about how to build normal, boring revenue streams early on, or is that fine to delay until down the line?
Li: Yeah. Before I answer that question, going back to hyper structures... I think Uniswap is an interesting example of an instance in which there is a protocol that was initially developed by a team, has a token, and the token holders have the ability to potentially turn on a fee switch in the future, but I think as of right now, have not yet turned on that fee switch. And so the protocol is free to use. Obviously, liquidity providers are earning revenue from all the transactions happening, but the uni-token holders aren't extracting additional value from the protocol. And despite that, the token is currently trading at a 5.6 billion fully diluted market valuation, which is significantly down from where it had been during the bull market. But I think that particular example is potentially an instance of: there is a hyperstructure, there's this protocol that is just running on chain forever. And it's permissionless...developers can build on top of it and it's free to use but valuable to own. And what's interesting to note is that there are companies building on top of the protocol that have been able to charge additional fees on top of the actual protocol itself. And so it has created this expansive universe of third-party applications that can be profitable, even though the protocol itself is not extracting additional profit. So just an interesting example to toss out there of how this might be possible. TBD on 10 years later what people will think about how to value such a protocol and whether it will continue to be free to use and valuable to own. But so far that seems to be the case. On additional business model exploration: One of the biggest pitfalls right now of crypto-based business models is that there's really a lack of recurring revenue. There's no subscription business model possible in crypto right now, to my knowledge...all of the business models are really predicated on the value of a token going up or a one-time sale, or maybe a fraction of secondary sale volume going back to the original creator. But obviously, in the real world, our expenses are recurring. The cost of being a person on this earth is very recurring and predictable. And there's no business model in Web3 that really maps well to the nature of our recurring expenses. And so what I advise to artists and creators experimenting with Web3, going back to the maximalism-minimalism, is actually to leverage Web3 business models in conjunction with traditional business models. So layering them on top of what they had been earning already versus supplanting, their subscription business model entirely.
Sari: Yeah. Cause I think it's interesting, Joey when you asked how much should we be thinking of revenue. In some ways when you think of revenue, you have to think about utility because the only way people are gonna give you any money or pay for your service is if you're delivering a useful service. Whereas I think in the case of like tokens, you have to think about utility. But I think that the novelty of it, the design space...you're thinking about incentive design and economics design and so a token is not really a substitute for product market fit and for utility. And so in some ways, it seems to me like the industry has over-indexed on token design and under-indexed on utility.
Joey: Yeah. Because even in the example of the hyperstructure, at least as far as I can understand it, it makes sense that it can be free to use and valuable to own and the value can continue to increase as long as more people want to use it because it's free to use. Because you have these free protocols, they become totally dominant. They become the only thing that people use, but when they get to that point they're tough to fund. So maybe it's useful to get to that point of being really huge and super valuable...hopefully, you should then be able to last for 30 years at a maximal value and still pay all the people that are contributing. And it feels to me like there's no way to get around that being some kind of recurring revenue. Or maybe it's like a service model for the foundation developing the underlying protocol, but there has to be something there that just pays the bills.
Sari: I wanna come back to this idea of "own your data." Something that people often talk about contributing to these walled gardens: you don't own your followers on Twitter. If Twitter gave me the ability to export my followers, something I struggle with is that you can't really export it away from the Twitter context and expect that to have meaning. Or maybe like another way to frame this would be: maybe on Substack I can have 20,000 emails. I email them all the time. Yes, I own the emails, but if Gmail flags my emails as promotional people still wouldn't see them. And so ultimately the power is in the hands of whoever owns the recommendation systems and the feeds... and in Web2, it's really a handful of companies that control where we consume a lot of this content. Yeah. I'd love to just poke holes at this framing. When you own your data, what else is possible? Does it mean we're gonna be consuming content in a lot of different contexts... How do we move away from this world where really at the end of the day, even if I own my data, it doesn't really matter if I can't divorce it from the context of the big five.
Li: Yeah. I agree with you. I think just owning one's data or one's customers is meaningless without also being able to trust the distribution mechanism by which you reach those users. I think just saying that data ownership is sufficient is really unsatisfactory to me. I think that sort of overlooks what actually matters to people or to creators, which is at the end of the day, they're trying to make a living. They're trying to have a livelihood. They're not literally, per se, trying to own their data. They want to be able to continue to reach people who care about them and people that are going to continue to pay for their work. But that goes beyond just data ownership. I think your example was spot on. It's not sufficient to own your email list if the dominant email platform is going to mark all of your emails as spam or as a promotion.
Sari: When I think of like a tool like Mirror, for example... as somebody who's written a couple of things on there, the fact that it's interoperable to me is less important than the fact that I was able to publish something freely accessible and a couple of people bought NFTs and I made money from it without limiting reach. But, obviously the interoperability of it...the fact that like the content is stored on, I don't know.... are we of IPFS? I don't know. It's a critical piece for a lot of these projects. And so I'm curious: As an investor, when you think of these projects, how important is that data layer, that interoperability layer? Cause it seems like for a lot of creators, at least today...maybe there's not enough infrastructure, but it's not like really a core part of the value prop for creators at least.
Li: Yeah. I think that's right. I think the data ownership part gets to the value proposition of being able to monetize your work because what users are owning is this digitally scarce piece of media when they're buying an NFT. But as a creator publishing something that is on IPFS and then having users collect that NFT and being able to possess all of their wallet addresses. What can you actually do with that today? Very little, because a lot of the infrastructure for messaging people on chain doesn't exist. Even if you own those users' addresses, there's not much that you can do with that today. And so I think there are a lot of missing pieces of the puzzle to make that data ownership actually utilizable for creators. But I think where ownership comes in is the idea of being able to own a piece of media on-chain with prevalence and this history of originating from that creator that you have affinity to and people valuing that notion of ownership, thereby unlocking the ability for content creators to monetize. I think like just owning wallet addresses or owning customer data is insufficient for today's creators in a world in which so much of user attention is mediated by a handful of platforms.
Joey: Yeah. I do think there's an infrastructure maybe missing here, or this will develop over time. So if you take the Substack example, I think first of all, there's already incremental pain to owning your audience that we could do a lot better. So yes, you can download your email list and you can re-upload it somewhere else. But actually moving people around from Stripe to another payment platform is pretty difficult and that's one small form of lock in that is just not super composable. Like it's just generally hard to move you're like paying subscribers around. But I also think it's maybe less about me moving off of Substack to a different kind of tool. But let's say that I wanted to enable an experience for my fans, which is an IRL event or I wanted to give them access to merch or I wanted to do something else. I think it's pretty hard to unlock that easily. In some ways I've gotten permission from my audience to send them emails with stuff, but I can only do that on one platform, which is just a newsletter platform. So if I wanted to give them merch. I would have to go to Substack, create an email, tell them there's merch over here on some other platform. Maybe it's not a huge deal, but I do think in general the pipes to manage that composability do matter and will generally reduce the lock-in on any single creator platform. It's kinda one of those things where I feel like a 10% decrease in the lock-in is actually pretty meaningful in terms of the ecosystem that gets built.
Li: Yeah. I think that in the creator world, the holy grail is to get an email list. Basically to get all of your follower's emails, whether you got that audience on YouTube or a podcast or a Substack or whatever…email is like what you want. Because I think what people actually mean when they say that they want the email list is they want a non-platform controlled way to reach people who care about them. That ability to be able to message people without an intermediary is super, super important. And today that doesn't exist on chain, there is no way to message different addresses. So even though, in theory, I could own my user list in terms of wallets, there's not much that I can do with it. I agree with you that I think a lot of the pipes are missing. And I think email is the proxy for that pipe in Web2, because with email, you can tell people to do things and you can communicate anything via email. And we're really missing that in Web3. I'm curious, Li. Just getting around to this idea that there's a lot of piping missing. It seems to me that there are a lot of people who are sold on peer to peer collectives, co-ops, ownership... I think few people would debate the merits of that. But a lot of people debate whether we need a blockchain to make that a reality or why we should be implementing these kinds of structures on the blockchain. I'm sure you have a boilerplate answer to this, but if you had to distill why it's so converged with Web3 in crypto, what's the most succinct way to capture the intersection of those two?
Li: Yeah. I've definitely been seeing that kind of narrative a lot on Twitter recently. I think you didn't need email to send communications before...you could have done it via fax or physical letters. I think that's analogous to how you don't necessarily need blockchains to send and share value with lots of users over the internet. Theoretically, there are other technologies, including legal frameworks to allow you to do that. But I think the power of new technology is it dramatically lowers the barrier to doing something that had been possible before. And so we oftentimes describe crypto as an innovation in transmitting value over the internet, just as the original internet was in innovation and transmitting information. Obviously, we had lots of different ways of transmitting information before the internet, but the internet added superpowers to our abilities to do so...to anyone across the world. And I think Blockchain enables us to be able to transmit value so much more easily and efficiently versus prior technologies that we had for doing that.
Joey: Li, I think you've been reading a lot of traditional political philosophy theories and applying that to how internet-based economies are evolving. So just for listeners out there who want to also follow that path, what are some of the best essays, books, and podcasts that you've been listening to or reading recently that people can get to be inspired on these topics?
Li: I highly recommend that everyone reads John Rawls’ “A Theory of Justice.” I think there's a lot of applicability that it has to the internet and software platforms, even though he was envisioning how we design social institutions and governments. But I think it has a lot of really interesting foundational frameworks on topics. What even is fairness and what are the principles of justice? I have a really eclectic reading diet. I would recommend...let's see: Candide by Voltaire. That was a pretty interesting read as well. Another book that I recommend to a lot of technology builders is a book called "Inventing the Future: Post-Capitalism in a World Without Work." And it's basically about: so what does the future look like? What is the meaning of work in a world in which productivity continues to increase and technology continues to innovate and we get lots of productivity gains? What is it all for? And what is the north star goal of what we should be doing with those productivity gains? And basically, the vision painted in this book is that ultimately we have a world of complete automation. Basically, we move to this post-scarcity world. But it's important to make sure that the returns to that automation get distributed to society at large versus just occurring to a few people who actually created those technologies. Obviously, I'm a fan of radical markets. I recently just read Glen Will's paper with Vitalik about decentralized society, which I thought was really interesting. I'm a big fan of Thomas Piketty Capital, as well as the original Capital. Those give you about you 3000 pages to read. That's a good start.
Sari: That's an amazing reading list. And also probably very non-traditional for a venture capitalist.
Li: Yes, I think so.
Sari: Amazing, Li. You've been wonderful. Thank you so much for joining us.
Li: Thanks so much for having me.
Sari Azout
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