With all the hype around AI and token prices still finding their footing, it’s tempting to overlook web3 these days. But a chat over coffee recently got me thinking. A friend asked if web3 was still viable, and it felt like a cosmic nudge to jot down my perspective. For me, the real opportunity for web3 isn’t token speculation or NFT art, but protocol networks — the platforms that have evolved from their corporate network cousins like Facebook, YouTube, or Uber. The potential of these new networks lies in their ability to decentralize. This isn't just a technical detail; it's a gateway to improved economic conditions for users, driving down take rates and, by extension, making services more affordable and attractive. The road ahead for web3 is anything but clear, and that’s exactly why continuing to flesh out the nuances of these concepts feels so crucial right now. Some of this might feel familiar to the crypto veterans, but this piece is meant to be a “Lego block” for thinking about protocols — a waypoint I can reference in my own protocol design exploration.

Protocol Networks vs Corporate networks

Before we go further, it’s important to understand the core concepts of a network. At the most base level, networks of any type allow two parties (a supplier and a consumer) to exchange some thing. You can see this dynamic at play in some of our most well-known corporate networks today:

• Youtube — viewers (consumers) watch content uploaded by creators (suppliers)
• Etsy — buyers (consumers) purchase items from artisans (suppliers)
• Uber — passengers (consumers) purchase rides from drivers (suppliers)

The difference between the corporate networks above and the new breed of protocol networks is how they’re organized.

A simple example is a corporate network (e.g. Youtube), where a single business (e.g. Google) owns the entire stack. The simplified stack in this case is the user interface or client (the YouTube app), the exchange protocol (rules for how views are counted, revenue share, etc), and the user data (the videos). Google takes sole responsibility for ensuring the whole stack works and in turn has the power to set the global rules of engagement, such as requiring all videos to be watched through their own user interface.

By contrast, a protocol network offers a decentralized approach. It sets up a public exchange protocol and a data store that is collectively owned by its users. This framework allows for the development of multiple clients by different software businesses, offering suppliers and consumers various options for how they engage with the network, enabling them to switch clients without losing access to their user data. This unbundling balances the power dynamics by giving the users much more say (as opposed to zero say) over the network’s rules of engagement.

But... Why is this important?

So, why sweat over who controls a network? Ethically speaking, it boils down to shifting the balance of power towards those who truly make the network worth something: the users. This idea dovetails neatly with Metcalfe's Law, which posits that the value of a network is proportional to the square of the number of its users. Essentially, as a network grows, over time a greater share of its value migrates from the technology itself to the users who participate in and enrich the network. To bring it back to Youtube: their tech enables smooth video streaming, but without your favorite creators uploading content, what’s the point? It’s the community and their creations that really light up the platform, turning it from a bundle of code into a place where value is constantly being created and shared.

This shift in power towards users isn't just a lofty ideal; it's central to unlocking the economic benefits we've been talking about. Take the concept of take rates, which is basically the cut a network owner takes from the revenue generated. In the excellent Read Write Own, Chris Dixon outlined the current take rate norms among corporate networks:

Of the large social networks, YouTube is the most generous with creators, taking 45 percent of revenue for itself and passing 55 percent to creators… Such generosity is uncommon, though. Facebook, Instagram, TikTok, and Twitter extract about 99 percent of their networks’ primary revenue source, advertising.

As a data point from the world of ride-sharing, Uber's take rate stood at 28.8% in 2023. These cuts are significantly higher than the costs necessary to maintain the network, but in most of these cases the corporate owner wields absolute power given that they own the entire ecosystem. For users, especially when a network becomes integral to their income or daily life, jumping ship isn't really an option.

In a protocol network, the dynamics shift significantly. The decentralized structure and user-driven governance (a meaty topic for another post) of these networks not only grant users control over take rates but also naturally foster a lower market equilibrium for these charges. Unlike corporate networks, where the goal often leans towards maximizing take rates to showcase company growth and bolster stock prices, protocol networks operate under a different incentive system. Here, the users double as the owners, and their primary interest lies in the network's functionality and efficiency, not in inflating costs to please external shareholders.

Consider the ride-sharing scenario: if a driver is okay with $10 for a ride, a corporate network like Uber, with a take rate of around 30%, would hike the cost to $13 for the rider, keeping $3 as its cut. This rate far exceeds what's necessary for the network's upkeep. On the flip side, a protocol network might only apply a 2-5% take rate, covering operational costs without unnecessarily padding the price. Consequently, the rider might only pay $10.20—a savings of over 20% compared to the corporate model.

This is the crux of my optimism for protocol networks. Their inherent design not only champions user empowerment but also drives prices down, making services more accessible and fair. Given the choice, the appeal of paying $10.20 instead of $13 is clear. It's this potential for more competitive pricing, rooted in the structure of protocol networks, that underscores their promise for a more equitable digital economy.

Where do we go from here?

Having said that, it's crucial to recognize that the widespread adoption of protocol networks isn't guaranteed. Establishing a successful network on the scale of Uber or YouTube requires substantial investment, not to mention the significant risks founders and venture capitalists shoulder. Innovators deserve rewards for their risks, and a central debate within the web3 sphere revolves around finding ways to ensure these pioneers are compensated, albeit less extravagantly than in the corporate network model. Current approaches still depend on a significant amount of altruism from highly ambitious individuals, which may or may not be feasible depending upon your view of the human condition.

Governance presents another hurdle. Granting users ownership sounds promising, but the practicalities of decision-making within this model are complex. How do users exercise their ownership rights? What mechanisms ensure their voices are heard and their interests served? These questions highlight significant gaps in our understanding and implementation of protocol networks.

Tokens have emerged as a potential solution to both of these problems, yet it's clear we haven't fully cracked the code. These are both deep rabbit holes that I want to tackle separately — my aim here is not to dampen the enthusiasm for protocol networks but to underscore that there's a lot of groundwork to be laid. For all its promise, realizing the full potential of protocol networks involves navigating a labyrinth of unanswered questions and unresolved issues.

Diving into the world of protocol networks, we're essentially peeking into the future of the internet—a place where users call the shots, not just a few big tech firms. Turning this vision into reality is no small feat; it's a path littered with financial risks and unanswered questions about governance and fair compensation. Yet, the fundamental structure of a protocol network makes me optimistic that we’ve uncovered a blueprint for a more democratic, cost-effective digital space. Even though the path is still unclear, I believe we're laying the groundwork for a more equitable digital ecosystem.