Why I Decided to Build My First Startup on Web3 — and Why You Might Want to Do the Same

Hey fellow on-chainers! In my first post on Mirror I'll be talking about my journey that takes us beyond the realms of traditional tech startups. We'll discuss what I've learnt as a non-technical founder based on my interactions with DAO communities, my team, outside collaborators, and listening to and researching everything crypto. I delve deep into key insights I've come across during my journey so far.

The biggest point I've learned over the past year is that it's not just about selecting a business model and thinking it's going to work. It's about embracing an entirely novel way of creating, interacting, and thriving in the digital era.

Platforms & communities = network effects

Platforms are any context in which a business is engaged in enabling people to interact with each other, but it's characterized by network effects. The more people or users on the platform, the more powerful and higher quality the average interaction and network effect is. But platforms are not a business model novel to the internet. Credit cards are platforms too. For example, the more people that have a credit card and use it, the more firms will accept a credit card, the more people want to use it, and vice versa. I should emphasize that Bitcoin is a platform. It's a network for sending value from one person or entity to another.

One of the most fascinating aspects of Web3 is the dynamic communities that flourish within its decentralized ecosystem. These interactions show how communities foster a sense of ownership, allowing micro-startups to engage directly with their users and co-create value. Unlike the Web2 model, where platform providers hold the reins, Web3 empowers startups by giving them the ability to shape the destiny of their platforms collectively. Take an NFT project like the Bored Ape Yacht Club: it's a platform, right? It's a community, right? It's a brand as a platform — a way to connect people with a similar aesthetic and shared interests and enthusiasm with each other. And it has network effects: the more awesome people are in an NFT community, the more valuable it is to be in that community.

Competitive advantage and bargaining power

Everyone in Web3 already knows that with DeFi, startups can pool resources from across the globe, erasing the geographical limitations that often hindered funding in the Web2 world. But people in Web3 have missed something even more important — the dynamics of bargaining power shifting in favor of startups as they combine with other innovators to reshape industries.

First of all, there's just general competition among your rivals. There's the static state of who all the businesses building similar products are, competing for the same users — how strong is that rivalry, how intense is it? There are five forces usually oriented around this competition, like a compass rose, as Scott Kominers (Harvard economist) describes — North, East, South, West, and the center. In the center of the compass is the current competitive landscape, and on one side of that is new entrants.

Let's break down Kominers' theory:

West: new entrants with similar products. A particularly valuable market emerges, or someone invents a new technology that enables them to enter. More entrants enter through the West with the same product.

East: new competitors with substitute products. Think about this with the social media wars. One ongoing threat to the competitive advantage of any social media company is the possibility that somebody new will come and compete with them directly. It's proven in many contexts to be very hard to compete with the dominant social media platform for a given function, because the network effects are so strong — but new functions evolve, competing for the usage share of social media. The best example is Facebook as a social network versus Instagram. Instagram was a substitute, and Facebook could see people engaging actively there in a very different way. Another example might be cable TV: you could have new entrants in the form of more cable providers, but then you have the threat of a substitute like Netflix, an on-demand technology.

North and South: think of it like a supply chain. In the North there's the bargaining power of your suppliers, and down South there's the bargaining power of your customers. If something happens that gives customers more bargaining power — a change in law, a change in the demand structure — the balance shifts. In Web2 it's still difficult for customers to leave because of how deeply embedded they are within your ecosystem — take Apple as an example. Apple has more bargaining power over its suppliers because of the sheer scale of its customer base and demand.

How does this apply to Web3? Blockchain-based platforms store their data in public, which means a new platform can leverage a lot of that data. It creates a ledger upon which many different people can build and interact. But that of course means it becomes easier for a competitor to show up, because they can build on the code base you've made publicly available. So that West point on the compass gets more intense — there's more competitive pressure. Meanwhile in the East, with decentralized protocols there's an immediate substitute: a fork (a copy) of the original protocol, modified to act as a substitute. On bargaining power, both buy-side and sell-side: because a lot of the critical data and information is stored in each user's crypto wallet under their own control, users have more ability to move from place to place. They can pick up all of their data and move to another platform simply by connecting their wallet — so the threat that people will leave grows, and the bargaining power of your users gets stronger.

What about the circle in the center? Because users can get up and leave, we're seeing lots of strategies where platforms try to incentivize users to stay. But it still doesn't stop users quickly switching wallets from one platform to another every hour. It sounds bleak, but there are two really important things to keep in mind. First, on the customer and supplier side, there is something really good going on: you have the opportunity to create community cohesion — to convert your users into people who have a preference for your platform. And ironically, that comes through the same thing that creates the lack of switching costs. Giving users a slice of digital ownership — controlling assets (tokens, in most cases) that come from their interaction with the platform, often with some degree of governance or advanced user privileges — causes people to want to participate in a given platform. It's not that users are locked in like Web2. Protocols give them a preference for staying through shared ownership, which is really powerful. That's the thing Web2 didn't do — control sits with the black suits, whereas DAOs (Decentralized Autonomous Organizations) do the opposite.

DAOs: shared ownership and value creation

Shared ownership is a thing we didn't have a way to do previously, and the first consequence is that it's a completely new way to maintain your network effect: maintaining a network of personally invested users. The second is that, while competition is getting more intense along many dimensions, those personally invested users also have a strong incentive to create a lot of value for you. The ideal of Web3 is not platforms that have locked in a bunch of users and are just extracting value from them. On the contrary, you have engaged users who are, in a real sense, part of the platform. They're making governance decisions for the platform. That doesn't just make them want to stay — it makes them want to help it succeed. If there's no way to capture value, people are not going to invest in doing the value-creating activities. If they can't extract at least enough value to keep going, no one's going to help build the ecosystem. That's the fundamental mindset shift from Web2 to Web3.

The power of platforms

Every piece of core infrastructure is a platform. A wallet like MetaMask is a platform, and an NFT trading platform like OpenSea is a platform. MetaMask benefits from the existence of these NFT platforms and from all the people creating NFTs; the NFT platforms benefit from MetaMask's availability and users. All these things are cross-pollinating and cross-operating in a way that is much less centralized. There's always been some degree of cooperation of this form — think about payment processing companies. The invention of a more efficient web-based payment processor fostered the growth of many types of consumer web platforms that couldn't have happened without payment infrastructure, and vice versa. It's also a reminder of the early days of the API economy. The thesis was that there would be all these companies, each with a specific core competence, pulling in APIs for everything else — an interlocking set of API providers that supersized each other's powers. But in Web3, the scope of every one of these innovations is much broader, and integrating one of these platforms into yours — embedding features — is much faster and easier.

On treasuries, communities and embeddedness

Web3 is more complex and often more high-tech than anything that's come before it in its category. The talent moat has widened and deepened. But the core platform competitive advantages have mostly weakened. There's one, though, that stands out as having strengthened tremendously: embeddedness.

One way platforms achieve dominance is by being embedded into everything. Think about Gmail as the login to so many different web platforms — many people don't really know their account credentials for those websites. All they do is connect Gmail and it propagates credentials for them. That's embeddedness, and it makes Gmail a necessary service. Even if all your emails suddenly became transferable between Gmail and Outlook, people would still have so many accounts managed through Gmail that they'd have to keep logging into it. Wallets have even more potential for embeddedness. In fintech, think of WeChat or Alipay — payments and messaging platforms combined that have become the interface to everything in the East. The same idea comes to mind in Web3, where the wallet address becomes the interface for decentralized identity. Wallets open up everything. Not only can your wallet be embedded in many different services — so can your NFTs, your digital diploma, the legal contracts of your real estate, and much more.

Similarly, think about big communities with a treasury. One thing you could do is invest the treasury in bringing in the next 100,000 users. Another is to throw a big party for everyone in the community next week. It's not actually incorrect for people to prefer the party over some complicated abstract thing with a potential future return. This alignment problem is difficult — it's been difficult in companies historically, and it's difficult in Web3 governance too. But one advantage in Web3 is that token holders share some alignment with the platform's overarching goals. Even if the token is a simple arcade token meant to be used across many mini-games, those tokens are more useful to you if the platform builds a lot of really cool mini-games. So you at least have some incentive to build alignment with the platform's long-term interest.

It's not always clear that everyone agrees on what the platform's best long-term interest is, and startups sit in a haze of massive uncertainty. Add Web3, and on top of that there's the incentive to devote your time and effort to your own private interest rather than what's best for everyone. We're going to have to see how this plays out. But the strongest technique we have is shared ownership — it strengthens users' incentive to want the platform to succeed, not just by creating and contributing to it, but by trying to guide it in what they believe is the best direction.

Remarks

An entrepreneurial journey in Web3 isn't confined to a traditional playbook. Startups that venture into building new things inherit a canvas that spans continents, cultures, and possibilities — informed by DAO communities, embeddedness, network effects, and shared ownership. Anyone who wants to challenge themselves should consider the audacious potential of Web3. It's not solely about constructing a business; it's about co-authoring a digital universe where every startup has the power to rewrite conventions and disrupt the norms we've become used to in the past ten or so years.