I like to bookend the New Year holiday with two posts, one looking back at the year that is ending (What Happened) and one looking forward to the year ahead (What Will Happen). This is the first of these two posts. The second one will run tomorrow.

I ended my What Will Happen In 2023 with this advice:

Buckle up, hang tough, and be smart.

What I did not predict in that post, although we had been discussing the possibility internally at USV for several months at the time I wrote it, was the failure of Silicon Valley Bank and several other banks that focused on the startup and web3 sectors.

I feel like that moment, which hit us in March, marked the bottom of the downturn, although it has taken at least the rest of the year to work through the carnage and there is still a bit more to come.

That look-forward post also missed the biggest new thing in tech, Chat GPT, which had initially launched about a month before I wrote it. That was a big miss as 2023 will most certainly be remembered as the year that AI went mainstream with consumers, thanks to Chat GPT and other consumer interfaces to large AI models.

To some extent these two things are related. The end of the 2022/2023 tech/startup downturn happened when two things came together. The first is the end of a period of rising interest rates that had sent the stock market and broader capital markets reeling. The second is the emergence of a new tech megatrend, AI, which has been developing in front of our very eyes for as long as I have been in tech, so that is over forty years now.

But before something can become mainstream, it takes a consumer interface that allows everyone to see the power of the technology first hand. That thing was Chat GPT and it will rightly take its place along with the iPhone, Netscape, the Macintosh, and other consumer products that brought a new technology into the mainstream and provided for a wave of technology innovation that followed.

Of course, a lot of other things happened in tech, startups, and web3 in 2023, but these two things are the ones that matter the most. Markets have settled down and are poised to move higher and we’ve got a new megatrend that will drive innovation, investing, and the economy.

So while it was a very difficult year, I also think 2023 was an incredibly important year and sets us up for an exciting new period in tech. More on that tomorrow.

Every year I put together a playlist at the end of the year with some of the new music I found and got into.

Most of these songs are under the radar which is my favorite kind of music.

So I hope you find something new that you like in here.

Traditional web protocols like SMTP, HTTP, RSS, etc are not monetized. They are free to use and build on and maintained as open standards that anyone can use for free. That has worked reasonably well in the web era so the question arises why we would want to monetize the new protocols that are emerging in web3.

The answer lies in securing the governance of protocols and managing bad actors/applications built on them.

Securing Governance

We are moving away from the traditional model where protocols are governed by standards bodies to community-based/decentralized governance of web3 protocols. Typically a foundation is created to maintain and manage a web3 protocol and token holders propose and vote on upgrades and changes to the protocol. This allows a much larger community to have a say in the future of the protocol. Literally anyone can get involved in proposing upgrades and voting on them.

If the protocol is monetized, via fees or some other technique, and the fees flow to the protocol treasury and/or the token holders, then the token develops intrinsic value and there is a material cost to acquiring a large stake in the token and therefore a large say in the governance of the protocol.

In a community-based/decentralized model, you want to avoid any one holder accumulating control of the token supply. In the case of the Ethereum protocol, that would cost about $150 billion at today's prices. And ETH holdings are distributed widely so it would be extraordinarily difficult to accumulate a large position in ETH at this time.

A highly valued protocol token is a security blanket that the protocol governance will not be hijacked by anyone.

Managing Bad Actors/Applications

A feature of protocols, both legacy and web3 protocols, is that they are open and permissionless and anyone can build on them. That is incredibly powerful for many reasons and we have the global Internet because of them.

But we also want ways to deter bad actors and applications. If a protocol is monetized, then it can decide how that fee is shared. We are seeing more and more web3 protocols choosing to share a portion of the protocol fee with the applications that are built on it. Fee sharing can be a powerful driver of behavior. The protocol governance body, usually a foundation, can maintain a set of rules that compliant/good applications will follow. These can be things like encrypting all messages, filtering spam, etc. And protocol fees can be shared exclusively with compliant apps.

This will not stop bad actors from creating applications that are not compliant, but it will incentivize compliant applications and deter non-compliant ones.

In summary, monetizing protocols opens up new ways to govern and manage protocols that should be superior to the traditional standards body approach. Teams that are building protocols should embrace monetization and regulators and rule makers should as well.