Strength, valence, and source are key aspects to consider when analyzing network effects in Web3.
Embeddedness, where platforms and assets become integrated into various services and ecosystems, is a strong source of competitive advantage in Web3.
Builders should leverage embeddedness to create a seamless user experience and drive network effects in Web3.
Deep dives
Understanding Network Effects in Web3
Network effects in Web3 can be characterized by their strength, valence, and source. Strength refers to the level of influence users have on each other and the growth potential of the network. Valence focuses on the direction and positive orientation of the network effects, which are enhanced through composability in Web3. Source reveals where the network effects originate, such as liquidity, data, user know-how, or technical advantages. In Web3, the strength of network effects has increased due to the global reach and asset-based nature of the networks. Valence has become more positive as new forms of network effects emerge, encouraged by composability. However, the sources of network effects have shifted, making traditional advantages like proprietary data and technical superiority less defensible. Embeddedness, on the other hand, has become a stronger source of competitive advantage in Web3, as platforms and assets can be embedded across various services and ecosystems.
Modes in Web3 and the Importance of Embeddedness
Modes in Web3 are more complex than in Web2. While traditional sources of competitive advantage, such as proprietary data and technical superiority, have weakened, new modes and sources of advantage have emerged. One significant mode in Web3 is embeddedness, where platforms and assets become integrated into various services and ecosystems. This embeddedness creates a necessary and seamless experience for users, making it difficult to switch or replicate the value offered by a platform. The ability to embed wallets, identity solutions, NFTs, and other digital assets across different applications and contexts enhances the overall value and stickiness of a platform in Web3.
Network Effects and Competitive Advantage in Web3
Understanding the dimensions of network effects is crucial for builders in Web3. Strength, valence, and source are key aspects to consider. Strength relates to the level of influence and growth potential within the network, valence focuses on the positive direction and orientation of the network effects, and source determines where the network effects originate. In Web3, traditional sources of competitive advantage may have weakened, but new avenues for positive network effects and composability have emerged. Embeddedness, particularly through the integration of platforms and assets across various services and ecosystems, has become a strong source of competitive advantage in Web3. Builders should carefully analyze these dimensions and leverage embeddedness to create and defend their network effects.
Enhancing Competitive Advantage through Embeddedness in Web3
Embeddedness plays a crucial role in enhancing and defending competitive advantage in Web3. By integrating platforms and digital assets into various ecosystems, builders can create a seamless and necessary user experience that is challenging to replicate. Embeddedness allows platforms and assets to be easily accessed and utilized across different applications, amplifying network effects and driving user engagement. In Web3, embeddedness is a powerful source of competitive advantage, fostering stickiness and facilitating the growth of networks and communities. Builders should focus on leveraging embeddedness to establish and maintain a strong position in the evolving Web3 landscape.
Embeddedness and Open Source
The concept of embeddedness is crucial in both traditional platforms and open source software. In open source, the success of individual software products is often built upon by developers who contribute to its development and build on top of it. However, it's important to note that open source lacks the economics of participation, which can lead to vulnerabilities in software used by large user bases.
Community Cohesion and Competitive Advantage
Community cohesion plays a significant role in web3 platforms by fostering a sense of ownership and shared identity among users. Users are personally invested in the success of the platform and actively contribute to its growth and improvement. This cohesion creates a competitive advantage by attracting users who not only want to use the platform but also contribute to making it more valuable. NFT communities serve as an example of this shared ownership and a desire to identify with the brand attached to the NFT.
In this deep dive and tour through key business concepts, from theory to practice, we cover the topics of strategy, competitive advantage, network effects, moats, and more -- covering both both basic foundations, as well as the tricky nuances in a new world of open source, including web3. In the first half of this discussion, we cover foundational business concepts and questions -- such as the nature of competition, and how it *really* changes in web3; as well as how network effects really work -- and then, in the second half (in case you want to skip ahead), we cover mindsets and general guidance for builders…
Our expert guest -- in conversation with editor in chief and host Sonal Chokshi -- is a16z crypto research partner Scott Duke Kominers, who is also a professor at Harvard Business School; a faculty affiliate in Harvard’s Department of Economics; and advises several companies on marketplace development, incentive design, and more; as well as advises, and is directly involved, in several NFT communities.
Scott also teaches on these topics -- both at Harvard and also recently at our Crypto Startup School -- so be sure to subscribe to our playlist for those talks on the a16z crypto YouTube channel to get the latest updates as we release more videos from the 2023 cohort.
Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures.
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