Source: https://www.placeholder.vc/blog/2019/10/6/protocols-as-minimally-extractive-coordinators
Summary
A protocol is not a business, meaning it should not make a profit from its service. Although it should add value, it should be minimally extractive from a money point of view. A protocol is part of an ecosystem that includes the market, consumers, distributors, suppliers, and consumers
Notes
Whereas businesses are meant to be maximally extractive, protocols should be minimally extractive
Quotes
Protocols provide structure for businesses, but are not businesses themselves; they are systems of logic that coordinate exchange between suppliers (businesses) and consumers of a service. ==As coordinators of exchange, protocols should be minimally extractive, whereas businesses are incentivized to be maximally extractive (that’s profit, and a business is valued as a multiple of its profit).
==To avoid confusion, I should note minimal extraction doesn’t mean crypto assets that capitalize protocols will capture minimal value; if something is minimally extractive, but globally produced and consumed, the coordinating asset can capture a significant amount of value.
To further unpack protocols as coordinators of exchange, we’ll investigate the:
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Protocol
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Suppliers
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Distributors
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Consumers
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Market
Protocol
==Protocols encode the rules of engagement that coordinate the exchange of a service between a global supplier and global consumer.
==Both the supplier and consumer must strictly abide by the rules of engagement; if they don’t, they won’t get paid (supplier) or won’t receive the service (consumer). There’s no special deal for any suppliers, distributors or consumers. The flatness with which a protocol treats everyone that interfaces with it is part of what drives its efficiency as a coordinator of exchange (no room for human corruption or capture).
==While a protocol allows for fluid exchange between a supplier and consumer, the logic that makes up the protocol is just code that has no cares about profitability. If you want to argue that protocols are a business, show me Bitcoin’s income statement.
Suppliers
==The suppliers (or supply-side) of a crypto network are businesses.
==Supply-siders include miners, stakers, voters, judgers, transcoders, location-providers, and any other supplier of a network’s core service. Right now, protocols mostly coordinate suppliers of machine work, but I expect them to shift to be increasingly human work (think Lyft, Doordash, etc) as crypto matures.
In the short to medium term, suppliers’ margins may remain elevated for two separate reasons, depending on whether they’re producing a novel service or existing service. In cases where a novel service is provided, there’s no preconception of what should be paid. It’s then easy for the consumer to overpay in the process of price discovery, and the situation is further muddied by the use of inflation as a supply-side subsidy in the early days.
In cases where an existing service is produced, but the costs of production are much lower than what exists outside of crypto, then the protocol’s suppliers can offer it to consumers at much lower prices than non-crypto forms of production can, while still maintaining healthy margins. One could argue that fat margins early is one way suppliers are compensated for the risk they’re taking as pioneers in cryptoland.
Distributors
==While suppliers can be thought of as sitting beneath a protocol, producing the discrete service(s) that the protocol specializes in, distributors can be thought of as sitting on top of the protocol and delivering those services to the consumer. Often, distributors bundle protocol services and provide extra-layers of insurance and customer protection.
Consumers
==The consumers (or demand-side) of a cryptonetwork pay in one way or another to use the network’s service. They can pay via transaction fees, inflation, staking, or any number of to-be-invented mechanisms. Some mechanisms are less obvious than others (e.g., inflation), hiding the cost from the consumer, but they all require the consumer to pay.
Market
==The market allows for global consensus on the pricing of the service(s) and the worth of the network’s native cryptoasset.
==The pricing of a protocol’s service has been contentious from as far as I can remember, dating back to early Bitcoin “fee market” debates. It has since spread to the rest of crypto as other networks mature and have enough demand to price some consumers out.
At a minimum, consumers have to be willing to pay enough to cover a supplier’s cost, and if using a distributor, also covering the distributor’s cost. If the service is highly valued by its consumers, and in short supply, then consumers will bid up the price to pay suppliers and distributors well above cost, making them a healthy profit. ==However, as stated in the sections on suppliers and distributors, open-market forces will be ruthless on margins over time.
==That said, running a business is not the only way for a core team to fund development. Already we see plenty of experimentation, such as inflation funding (e.g., Decred, Zcash) and volunteer funding (e.g., MolochDAO, Grin). I expect future experiments around transaction fee funding or ongoing capital raises through community-approved mini-dilutions.