Your Protocol is The Product
One of the most influential posts on protocols is Fat Protocols by Joe Monegro.
Primarily because of the shared data layer and a value-capturing token, protocols capture more value and have higher market caps than the applications built on top.
I've been writing about the distinction between a traditional product and protocol Protocols, Products, and Platforms .
But today I want to tackle a Product-Led approach to Protocols.
Some of this has already been covered.
For example, Personas, Stakeholders and Adversarial Network Effects has a user-centric approach by carving out the different personas. And incentives and objective functions are pretty analogous to jobs-to-be-done.
Where do tokens fit in, and is my approach different from "Token is the Product" -- which is a valuable complement:
The evidence clearly shows that tokens can act as self fulfilling prophesies of their own value, where price gains can occur in advance of the value creation itself. This stands in direct opposition to the way that traditional company building/valuations work, which is why crypto remains dumbfounding to anyone not accustomed to this new paradigm.
The "fat protocol" essays sees tokens as a way to encourage speculation, which is a common and probably necessary vehicle for innovation via the capital inflows.
The article above focuses on this side of the equation, which is attention flows and liquidity:
Ultimately, most of the art comes down to the simple math of selling the token to as many new buyers as possible, while simultaneously doing everything possible to keep existing token holders from dumping their tokens.
I think the token as the product approach is largely a way of raising capital via attention and influence.
Capital, however, does not guarantee a successful product.
On the other hand, successful products guarantee capital interest.
The reflexivity, then, depends upon whether or not it can be made productive to the underlying value of the protocol.
In the fat protocol article, one way has been to build applications, despite these applications typically capturing much less value.
The value could also end up being in the moat and composability -- a point alluded to by Mark to the well-cited revelation that more value is in the award points that in the airlines themselves.
So I would say that the token is part of the protocol.
But it should be treated with a product mindset (not a financial one).
Variant's article "Tokens are Products" has similar take-aways:
Ownership through tokens is a tool to address user problems in entirely new ways. And so, when setting out to design a token a question worth asking is:
What is the core user problem, and how does the token address it?
Many tokens in the wild today were launched without considering the user. Other tokens bundle too many “jobs to be done” into a single asset, muddying the value proposition like a feature-packed product that tries to be everything to everyone.
It's the incentive mechanism, the coordination layer, and attention-flow go-to-market machine wrapped into one thing.
But it cannot be seen as the end-product itself; and this can be an existing risk when leaders or founders focus on the owners of the token who are yield-seeking; versus actual stakeholders who contribute in direct, tangible ways to the protocol.
From this lens, I think all things still converge on the product management discipline -- just with a wider canvas of levers and personas.
Where does one begin? At the end, of course.
Protocols, like products, need to solve a problem -- this can be for individuals, it can be for businesses -- but it needs to both solve a pain and enable a vibrant picture of the future in a tangible, step-wise fashion.
Bitcoin is an example where a vibrant picture freed from fiat money is envisioned. But the means to get there are also able to be articulated in step-wise levels of adoption and awareness. The underlying primitives which make it feasible and the metrics to get there are legible.
This is hard to do.
It can be tempting to skip the step-wise playbooks and jump to a solarpunk vision; but protocols don't thrive in wishful thinking.
They thrive when value and incentives can flow to solve problems for multiple stakeholders.
I'm working out these principles in a use case, which I'll write about here: Protocol as Product - Verifiability Service
Value Capture and Token Price
One of the elements which is important, although is secondary to the essential product considerations, is the way the system capture value in such a way that it accrues to the token.
The token is an incentive, coordination, alignment, and in some instances a security mechanism. So being crystal clear on what is meant and how to do it matters.
On that topic, there’s another nuance worth stressing: value capture does not equal investment returns. We can use this logic to predict overall distribution or “capture” of value across an economy, a market, a value chain or even within a firm. But value capture is more of a TAM input, related but independent of returns. Returns are a function of cost basis, growth rate, and ownership concentration among other things.
-- "How to Think About Value"
To this degree, the protocol's "features" need to meet both the business goals and the goals of the stakeholders. Yet, it is easy to over-index, either because of mistaken understanding of mechanism or bad personal incentives by decision-makers:
Advantaging one group over the other, for example by over-allocating value to investors when most of the costs are expected to be taken by supply-siders, can be destructive. -- "How to Think About Value"
So one of those considerations will be where the costs lie.
A distinction which the article goes into (and is probably worth a more detailed think-piece) is that things that are costly (and therefore need to capture more value to cover those costs) aren't always valuable.
Distribute costs to distribute value. We explored this idea in an article comparing web and crypto service models. A deeper understanding of the “economic physics” of costs and value is key if our goal is to design systems that distribute value more broadly. Long-term, markets will naturally allocate value to those who bear the costs and risks.