Protocol Competition in an Open and Permissionless World

Thursday, September 14th, 2023

True competition should, in theory, result in true innovation.

But there's complexity beneath that statement.

First, let's decouple capitalism from competition, because the two are often associated with each other. Successful capitalism doesn't equate competition. The rise of Google and it's dominance is purely capitalistic; and the behavior of Amazon to capture more share, decimating whole industries, sometimes at the expense of its workers, is arguably also pure capitalism. It is returning maximum value to the shareholders, and that is important to successful capitalism, and is taking on the laborers with high salaries and rewards to return more value to the shareholders.

But as a result they have built competitive moats which limit competition.

Who would want to start a search engine?

Who would want to compete in eCommerce or cloud services?

True, people do try, but they largely fail with rare exceptions, which prove the role.

Protocols on the blockchain, by the decentralized nature, lose one of the competitive moats, which is aggregation of resources. Typically this is associated with computing resources, but the decentralized and permissionless nature also means openness.

These large entities compete because they acquire and keep proprietary data and IP.

They don't share the insights from, say, mining our private information; they often don't share the IP they have in core competitive advantages, such as the google search algorithm.

What then does it mean for a protocol?

Any data that it collects about use behavior or transactions is likely to exist on chain for public or permissioned access outside of its own four walls. So data likely will not be.

Could computations like algorithms be on a decentralized compute and remain entirely a black box? This is possible (I am not familiar with this) but hard.

Much of the code base can be forked, so no part of the software infrastructure can remain a moat.

To me, competition implies different entities are vying for scarce resources in either a macro or micro win-lose scenario. Some macro situation are so all encompassing, they are winner-take-all; and this has been the dominant thesis of most venture-scale businesses, which is to have a winner-take-all approach.

Microsoft illustrated this before the rise of Linux, mobile, and cloud; their dominance in the operating system, core productivity applications, and the systems stack (DB, monitoring) put them in a true winner take all position.

Amazon's scale and ability to enter many consumer markets and win by virtue of distribution and bundling strategies has put it into a winner take all situation.

Microsoft hated open source with a passion for a reason.

All of these companies vigorously fought against trade mark or patent infringement.

New companies have a winner take all position, now, such as nVidia for compute.

What about competition?

Ethereum has many competitors, many of whom are forks.

But as of this writing, still has more transactions and locked value that the others.

The right approach, then, is to imagine protocol dominance as enabling competitors to be better off playing within the protocol than against it.

Ethereum's competitors still share the EVM and many of the ERC and EIP standards. So they are technically competitors, but Ethereum, I suspect, is still largely the beneficiary of these changes.

Protocols that are above L1 (those creating brand new ecosystems as L1 really are direct competitors as far as I can see; for example, new language, different smart contract models (or no smart contracts)); these are platforms that compete and compete directly, in the way that Apple competed with Microsoft and now with Google/Android.

Why does someone or a business create a direct competitor?

Because they have an insight into the market that will make them highly profitable, more profitable than doing something else or joining that existing entity.

Yes, on the outside, some people believe that they have a better vision or philosophy, and I suppose that can be lumped into a form of "psychic" profitability -- someone "gains" more by competing than joining.

Microsoft in some parts fo the business subsumed their competitors by creating a powerful ecosystem of dsitribution and technology for other ISVs; it was profitable for those ISVs to be a part of the microsoft ecosystem; and Microsoft often did not profit from competing directly (until they did, in which case they would, which is a bit of the catch here).

At the core, finding ways that it is better for someone to partner with you (and this applies as an individual) rather than competing against you, even if they have a philosophical stance or something personal, will deflect competition. Up to a point, of course. Sometimes philosophy and someone's emotions will just override any rational benefit. They may dislike me inside because I'm Asian, and no additional benefit they get from being cooperative will override this (and there are people like this); there are some businesses which must compete because their values are against the reigning comeptitor (Hey vs Gmail is a great example; as is Proton vs Gmail, and both are doing very well, so there is something to be said about this as a reason to compete.)

But protocols that create a platform such that it simply doesn't benefit anyway to build differently will grow their ecosystem.

How they do this largely has to do with resource distribution: as long as some other entity feels they can make more money going directly against (risk adjusted), there will be competition.

So this brings me back to the openness. The risk adjusted perception is often the mismatch: a competitor enters the same space because they think they can do better and see no benefit of joining forces.

Protocols that shows fully both a) activity and metrics which make long-term dominance are compelling conclusion; b) an interface which shows how someone with those skills can maintain sovereignty while making more than directly competing yet contributing to the ecosystem, will win.

The open interfaces of decentralized protocols can provide for this. Instead of needing to join, potential competitors can build on top of it and not feel they will get rug pulled; economic value can be distributed so that truly talented people who also want sovereignty (an important aspect to why people start businesses in the first place) can benefit to match their true market opportunity, and information to align perception with reality.