Don’t underestimate the ability of crypto protocols and clients to make money.
One of the big promises of crypto is that it will significantly lower the fees of financial services by removing middlemen, enabling competition, and giving users a voice on the prices themselves. No more shelling out 3-10% to our payment processor overlords. Perhaps counterintuitively, even if this promise is fulfilled, many crypto protocols and clients will become incredible businesses.
There are useful precedents to visualize the role crypto protocols and clients will play in the near future; what SMTP + email providers (Gmail, Outlook) are to email, or HTTPS + browsers (Chrome, Safari, Edge) are to the internet, crypto protocols (Ethereum, Bitcoin, Uniswap) + wallets and dapps (Coinbase, Rainbow, Metamask) will be to digital money. A novel aspect of protocols in the context of crypto is that they have tokens users can hold, equivalent to an alternate reality where it was possible to buy equity in SMTP or HTTPS. Yet, while SMTP or HTTPS equity might have been interesting from a governance angle, not so much from a business one. As much value as these protocol + client pairs create for the world, historically they have struggled to capture any of it. Most open protocols don’t generate revenue, and clients usually monetize not through their core actions, but through adjacent revenue streams; advertising, data, bundling, and cross-selling. Simply put, we don’t pay 1¢ for every email we send or every website we load.
Why is this the case? Surely the average website or email provides more than 1¢ of value, so it’s not a matter of fairness. It’s about psychology.
Think about the components of an email: there is a sender, a receiver, a message, and perhaps some links and multimedia. To charge 1¢ per email, we would need to add money to the equation. The problem with charging 1¢ is not the amount, but the mental burden that comes with introducing the concept of money to an operation that wouldn’t have dealt with it otherwise. Same with websites; the problem with charging 1¢ per site is not that it’s too expensive, but that we wouldn’t have had to think about money if it weren’t for monetization.
Financial services are different. They are so profitable because they are simple to monetize. Money is a native component of their operations, so it feels natural when they keep a portion of the value transacted, especially when it's tiny. The cognitive load is so low, that it‘s easier for a financial service to charge 10¢ (or even $1!) per operation, than it is for a non-financial one to charge 1¢ — even when they generate equivalent value.
This is a big deal for crypto, and DeFi in particular. The ease of monetization means that not only is it possible to hold stakes in crypto protocols, but that these stakes are worth much more than they would on non-financial protocols. The same applies to crypto clients. Wallets and dapps can still monetize through adjacent revenue streams, but they also have the option of capturing a few cents per transaction.
Investors know this better than anyone, hence the substantial rounds raised by projects like Uniswap, Compound, OpenSea, Rainbow, Argent, Coinbase, and Zora. A few of these have already turned. on this revenue stream, and while I don’t know when (or if) the rest will follow suit, the fact that it’s even an option is not to be underestimated.
At the end of the day, crypto might be open, user-governed, and cheaper — but don’t think for a second this makes it a bad business. Crypto is capitalistic, it is more efficient than traditional finance, and thanks to psychology, crypto services in the flow of funds will find it relatively easy to monetize as long as they remain fair.
Special thanks to Alex, Paolo, and Dima.