Defensibility is the competitive advantage of a protocol. It’s what keeps consumers from going to your competitors.
In short, moats.
The more defensible a protocol, the more value it can capture, and the more overtly it can do so.
Maximizing defensibility results in a monopoly.
In Peter Thiel’s famous talk at Stanford, he describes why you want to have a monopoly in your industry – monopolies can capture nearly all of the value they create.
It’s difficult to have a monopoly in crypto, as it’s hard to build defensibility in open source – how do you compete when your competition knows your secrets?
Still, there are various ways to build defensibility, and the more defensibility you have, the more value you can capture.
Moats in crypto
There are many reasons to build defensibility into your crypto protocol, and there are five moats – concrete ways of doing so.
These are:
- Network effect
- Lindy effect
- Documentation
- Brand
- Gas efficiency
Network effect
Network effects build defensibility proportional to value created.
From Metcalfe’s Law, we know that networks become exponentially more useful to participants as the number of participants grows.
Metcalfe’s Law was originally used to describe fax and telephone networks.
Because crypto protocols share a network topology with these earlier telecommunications networks, Metcalfe’s Law also describes the utility of crypto protocols increasing exponentially with the number of users.
Protocols may use a first-mover advantage to generate strong network effects which increase utility, and therefore defensibility.
Lindy effect
The Lindy effect is a theorized phenomenon whereby the longer something has been around, the more likely it is to remain.
Lindy is somewhat of a meme in crypto, where it’s perceived as a somewhat irrational phenomenon. Yet it makes an excellent moat for very rational reasons.
The length of time a given protocol has persisted without being hacked is a testament to that protocol’s security (especially in DeFi protocols, where black hat hackers are strongly incentivized to take advantage of a protocol).
The more unique the protocol, and the greater its TVL, the more Lindy “staying power” is ascribed to it.
Lindy effects become a strong moat for unique, high-TVL protocols over time as users prefer the security of battle-tested protocols to slight improvements in utility, or decreases in value capture.
Documentation
Good developer documentation is an under appreciated moat in crypto.
Good doc invites developers to build on top of a protocol.
In this way, documentation is important for primitives and other protocols that aspire to be money legos.
Brand
Never underestimate the power of a good brand.
At a certain point, marketing takes care of itself for crypto protocols with good branding.
It can be difficult to displace incumbent protocols which have developed a good reputation, even becoming synonymous with their protocol’s function.
A good brand can be developed through organic or paid marketing activities, eventually causing the marketing activities to take on a life of their own.
Gas efficiency
Gas efficiency is another moat, which, combined with the Lindy effect will give your protocol defensibility.
Gas efficiency is especially important for hyperstructures, or money legos. Because they are non-upgradeable contracts, hyperstructures must optimize everything possible before launching a version of the protocol.
Conclusion
Defensibility is one of the most important aspects of designing a protocol.
Building defensibly plays a part in the optimization between utility and value capture.
If you don’t design defensibly using these moats, your protocol will be copied by a competitor, who will capture less value.
Optimizing for defensibility is one of the topics we focus on in Tokenomics For Founders.
If you’re interested in learning more about mechanism design to help your protocol capture value sustainably, creating win-win-win situations for all participants, reach out to us and tell us what you’re building.