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AVCWhat Will Happen In 2025
I've done a lot of these January 1st look forward posts in the 20+ years I've been blogging. I've used many different approaches. I sometimes talk big themes, like I did last year. I sometimes focus on just one thing. And sometimes I just make a bunch of predictions. I am going to do the latter approach today because I feel like it and it's so much fun. 1/ Apple and Google will leverage their existing market power to surpass OpenAI/ChatGPT in consumer AI prompts by the end of 2025. 2/ Waymo w...
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AVCWhy Monetize Protocols?
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AVCWhy Monetize Protocols?
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.
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.
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11 comments
Monetizing protocols opens up new ways to govern and manage protocols that should be superior to the traditional standards body approach. https://avc.xyz/why-monetize-protocols
Hi Casters. I've been thinking a lot about protocol monetization and what it opens up. I wrote some thoughts on that today https://avc.xyz/why-monetize-protocols
Outside of base layers, what are the best incentive models between protocols <> application/interfaces? The Synthetix integrator incentives are one (linked below). Curious if there are other high-quality examples. https://mirror.xyz/kwenta.eth/ncMauzmLjanuz-FkNFBQbrysVOujs7OUOop89NVy2a4
I like what Helium is doing
You seem to indicate that monetizing is mostly a defensive technique (avoiding capture) and I think that is fair, but I also think if done well, they could also create an incentive toward adoption of said protocol and drive growth by creating a "valuable" public good.
Yes. For sure. But that argument is not as compelling for regulators and rule makers
fair... but shortsighted in their end imo :)
Interesting article! 1/ The argument that monetization via a protocol token is a mechanism to prevent bad actors to capture governance is how I typically think of tokens. What's the issue with standards bodies "centralizing" governance of web2 protocols that don't have tokens though? Some examples here would be great.
2/ You point to Ethereum as a monetized protocol where a large say is difficult given high economic costs to acquiring lots of ETH. Is Ethereum and ETH a great example though? First, most protocols have tokens that start centralized, unlike Ethereum. Second, what important "say" does one get lots of ETH on Ethereum?
3/ I wonder if monetizing protocols also has to do with creating "reliability" in the continued delivery of products or services by collectives. An example is to introduce an economic cost to spamming: it's cheap to spam via SMTP but expensive to spam via onchain transactions.
Follow me pls