The web3 playbook: using token incentives to bootstrap new networks

0xD1B0
March 19th, 2022

The Web 3 playbook: using token incentives to bootstrap new networks. 🧵

The killer app of the internet is networks. The web and email are networks. Social apps like Instagram and Twitter are networks. Marketplaces like Uber and Airbnb are networks.

Networks get more valuable with more participants, which is great when they are at scale, but cuts the other way when starting out. This is the bootstrapping problem.

In the Web 2 era, overcoming the bootstrapping problem meant heroic entrepreneurial efforts, plus in many cases spending lots of money on sales and marketing.

Because bootstrapping networks is so hard, it’s likely that there are many networks that should exist—that would improve our collective well-being— but don’t because no one has figured out how to bootstrap them.

Web 3 introduces a powerful new tool for bootstrapping networks: token incentives.

The basic idea is: early on during the bootstrapping phase when network effects haven’t kicked in, provide users with financial utility via token rewards to make up for the lack of native utility.

The network bootstrapping problem
The network bootstrapping problem

(This chart comes from a longer blog post I wrote on the topic back in 2017: cdixon.org/2017/05/27/cry…)

Over time, as the network effect and native utility grows, the token incentives taper off and eventually go to zero, and the world is left with a new, scaled network.

There are lots of intricacies about how to design the token schedule and keep out spammers and scammers, which I won’t go into here but is a very interesting topic.

Let’s look at some examples. Helium is trying to create a grassroots competitor to big telecom companies by incentivizing individuals to install networking equipment in their home.

(Btw the idea of a grassroots, bottoms-up telecom to take on the entrenched incumbents is a perennial techie fantasy, and there have been many noble attempts to build it including early Fon and early Meraki/Roofnet. Web 3 might finally make it happen.)

The core problem is how do you get enough equipment installed to get broad coverage while also building out the demand side. It’s a classic chicken-and-egg problem.

Helium uses the power of token incentives to bootstrap the supply side. It’s worked well so far. The network has over 200,000 nodes worldwide. Here’s a coverage map of the US and another zoomed into the Bay Area. (Here’s the full network explorer explorer.helium.com/hotspots)

Helium network coverage map of the U.S.
Helium network coverage map of the U.S.
Helium network coverage map of the Bay Area
Helium network coverage map of the Bay Area

Another network that’s been bootstrapped with token incentives is Arweave, a decentralized storage network. The Arweave network has grown roughly 12x in the last year. Here’s the growth over the last 2 years. (Full network explorer here viewblock.io/arweave/)

Arweave network growth
Arweave network growth

Token incentives are effective, but also far fairer than the centralized Web 2 model. Shouldn’t the people who helped build a network get to own a meaningful piece of it?

I’ve worked in Web 3 and crypto since 2013 and have never worked with a project that spent meaningful money on sales and marketing. You don’t need to spend money on marketing when users are genuine owners, love what they do, and love telling other people about it.

Web 3 allows the users and builders who create networks to own a meaningful piece of them, while also unlocking powerful new tools for entrepreneurs.

**a16z is an investor in Helium and Arweave. None of the above should be taken as investment advice; see a16z.com/disclosures for more info.

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Originally published on October 1, 2021

==Addendum==

A key point missed by many web3 critics:

Token incentives are temporary, used to overcome the hardest part of creating new networks: getting through the “bootstrap” phase.

The network bootstrapping problem
The network bootstrapping problem

source

The end state of many of these networks will be:

A network that provides utility like any other online network (Twitter, FB, Lyft, Airbnb)

but

50% or more (typically) of the network owned by users who built it

and

Strong incentives to keep the network open and neutral.

Longer thread on the topic (using Helium as case study)

Helium is a great case study because there is a 20-year history (maybe more) of entrepreneurs trying to build a “bottoms up / grassroots telecom”

eg this how the Meraki team originally got started

There were many other attempts. It’s a big idea that ambitious founders consistently gravitate toward. But in the past the bootstrap phase was just too tough to overcome.

Incumbents like Verizon solve this problem with capital- they invest tens of billions building out the network before there is demand, and then turn to the demand side after.

The result is we were left with a handful of giant incumbents and no real possibility of new entrants challenging them.

As Helium is showing, web3 provides a powerful new set of tools to overcome the bootstrap problem and level the playing field for startups.

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Originally published on February 19, 2022

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