There are two main ways in which I see Web3 strategy differing from Web2:
- Product Design — moving away from vertically integrated product strategy
- Organization Design — moving away from large, hierarchical organizations
In this short, we will be talking about Product Design.
Product Design
Web2 product strategy largely could be summarized as doing whatever you need to do to own the customer relationship so that you can vertically integrate and become a one-stop shop.
We saw such a strategy having tremendous benefits for companies like Apple that were able to make computers safe and usable by being a tightly controlled, closed system. In recent years, the strategy seems to have lost its charisma with the end customer. Google owning the browser, the email, and the search stoke deep fears of surveillance capitalism and the end of privacy. Epic famously sued Apple for their 30% app store fee. Facebook then hilariously made a metaverse play with a 50% fee on the transactions happening through their platform.
While consumers can love Apple’s principal approach of creating a curated ecosystem, and tolerate Google’s diverse service offering, new integration plays we see happening with social media companies are despised. Such companies themselves are also feeling the liability that comes with “owning the customer” and the closed platforms they have.
Web3 is different. Instead of being deeply vertically integrated, Web3 is about being deeply horizontally integrated. Instead of owning the customer, the goal is to own the software integration. The more deeply integrated your protocol is with other protocols, you are able to accrue tremendously more value and create an ever-deepening moat. Such a product is often referred to as a primitive.
Consider Uniswap. Most, or at least a significant portion, of Uniswap’s volume, is not coming from people going to their website and interacting with their protocol. Most of them are coming from aggregators that crawl decentralized exchanges looking for the best price, or protocols directly calling their contracts. They do not own the customer in the traditional sense. However, they have the deepest liquidity, their LP tokens were what was used during the liquidity mining frenzy, and their contracts are well understood and easy to integrate with.
As a result, they can do 67% of the volume of Coinbase with only 3% of the workforce. That’s magical.
Consider even Ethereum. The vast majority of people interact with Ethereum through wallets not created or maintained by the Ethereum foundation. There is no customer ownership there. Ethereum is, however, able to capture $325M in value.
As trends oscillate, Web3 promotes deep horizontal interoperability instead of deep vertical integration. Those that can work with the most, will win the most.
Uniswap’s labor efficiency is incredible and not a coincidence. In an upcoming short, we will talk about how organizational design will be different in this new world.
This post is a part of a sequence of smaller articles I will be writing around ideas I have every day. They will not be as polished. Please forgive any typos and errors!
If you want to receive notification for when I write [1–2 times a week], you can follow my substack here.