The Monegro Paper
In a highly quoted Aug 2016 paper by Joel Monegro of Union Square Ventures, the following argument was laid out:
- In the Web, all the ultimate value ended up being captured by the top consumer apps: Google, Amazon and Facebook. Protocols like HTTP and HTML made zero money.
- There are no successful apps in Blockchain. And yet “protocols” such as Bitcoin and Ethereum have made reached hundreds of billions of dollars in market cap.
- Therefore, all the real value clearly goes to protocols not apps.
- The reason for this is that apps are free but create demand for tokens from the protocol. Token prices increase and protocol investors win. QED.
Implicitly or explicitly 95% of all crypto investors that I meet seem to buy into this argument. But the argument, while crystal clear and elegant actually is completely false. It’s a page out of Rhinoceros by Eugene Ionesco.
“All cats are mortal. Socrates is mortal. Therefore Socrates is a cat.”
As clever as both syllogisms are, they are both equally flawed.
In the case of cats A → B and C → B does not imply A → C.
In the case of Protocols, it’s even more devious: Bitcoin is not a protocol, and Ethereum only half is.
Bitcoin is not really a protocol
Let’s start with Bitcoin. Clearly Bitcoin is not an app, since it’s not built on anything and really is just a protocol for how everybody agrees on operating — right?
Wrong. The general usage of the word “protocol” generally implies a “base layer” (such as HTTP) on which other things are built. What is built on top of Bitcoin? Nothing. In fact it is more like a single decentralized application than a base layer protocol. More like a decentralized Paypal as opposed to FTP.
Ethereum is hardly a “base layer” either.
What about Ethereum? Again, this doesn’t feel to me so much like a pure protocol like HTTP, and much more like an app for creating for ICOs. I don’t actually think that many people use Ethereum for apps (there are virually no high volume apps built on Ethereum). I think people buy and sell Ethereum for speculation (first use case) and use it exactly in the same way as Bitcoin (second use case) based solely on its branding in the ICO world.
So the clever diagram where all these apps are built on top of Bitcoin and Ethereum is a fallacy. There are zero apps built on top of Bitcoin, and at the present time close to zero on Ethereum.
So why is this thinking so dangerous?
This thinking is dangerous, because the subliminal implications is that investors should look to invest mainly in protocols not applications. Time and time again I have heard people in the blockchain world scoff at the mere idea of investing in anything that might actually be used by a consumer. The implicit argument is that “apps are a dime a dozen”. There are millions of apps in the app store, investing in those is a fool’s errand. But if we invest in clever protocols, with ZERO apps currently on them, we will certainly make money.
Augur, to me is a poster child for this kind of thinking. In development for 5 years, it’s a betting protocol with exactly zero users, and a market cap of 436 million dollars (as of April 30 2018). Now Augur may end up doing fine, as any app in the app store may end up being the next Spotify, but in playing with the Augur beta as opposed to the early Spotify beta (circa 2009), there are clear usability differences. One is essentially not only not useful, but hard to see why it has any real advantage over other betting platforms such as BetFair (other than it being more difficult to shut down). The other one was pure joy from day 1.
It’s a protocol with nothing on top of it.
Machine Zone, on the other hand is also doing an ICO. But Machine Zone is a 550 person game studio with massive hits like Game of War and Mobile Strike. It has products people actually love. It is creating a token which will accrue 100% of the value to Machine Zone and close to zero on HashGraph on which it will build its LIT token.
It’s an app with a token.