August 16, 2022
A mental model for crypto tokens and web3 businesses:
The below image shows the efficiencies that *well-run* crypto projects can create by utilizing public blockchains – which fundamentally create new business models that remove intermediaries, reduce friction, and drive down costs.
When you remove intermediaries, you create value for someone else.
The value doesn’t just disappear.
So, where does it go?
In the case of a DeFi app like Uniswap (as well as others), the value created gets distributed to a decentralized set of service providers. In this case, liquidity providers, who are paid directly by traders.
*The value extraction has been removed from the center, and re-distributed to the edges — where those that make the network function exist*
Meanwhile, the holders of the Uniswap token, UNI, get to vote on how those revenues will be distributed in the future. They just passed a vote to test a pilot where 10% of the revenues from 3 select pools will be clawed back by the treasury.
But how does value accrue back to the token? If Uniswap (or some other DEX) were to clearly establish itself as the leading automatic market maker for DeFi, we could see the token holders vote to distribute a small % of the fees back to token holders as dividends. For reference, DeFi is extremely nascent today, and Uniswap did over $700 billion of trading volume over the last year. It’s unclear how this will play out for the token, but it is clear that value is being created by DeFi protocols, and the token holders get to vote on how this value is managed and directed.
[Perhaps we could view Uniswap’s growth and decision to hit the “fee switch” similarly to how Facebook built out its network effect of users before turning on Ads and returning value back to its shareholders]
The bottom line is the value created by more efficient business models has to be captured somewhere.
Therefore, it seems reasonable to project that the token could capture this value for *well run* projects that have a clear product/market fit.
Throughout history, good technology fundamentally creates efficiencies and new business models. Crypto and the new business models being created on public blockchains are simply the latest expressions of this.
The DeFi Report released our “Tokenomics 101” report this week – it covers mental models, frameworks, best practices, and regulatory concerns related to crypto tokens. You can access it for free.