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Steps to build a useful crypto product.
In previous sections, we went through the shortcomings of progressive decentralization, the meaning of decentralization in protocol governance, and the aspects of where we should and shouldn’t decentralize.
Here is a quick recap from the last post - 1) protocol development needs to be decentralized, and 2) product development does not need to be decentralized.
Now, given everything we have talked about, we can follow the steps below to approach building a crypto product. In each step, I will first talk about the general concept and then use Uniswap as an example - if following this playbook, how Uniswap would be built.
Step 1: Build a protocol (in months)
Like any startup, founders aiming to develop a crypto product must first identify a problem and propose potential solutions. The protocol serves as the foundation of the entire project and is crucial to all subsequent solutions. It defines the logic of value transfer and how it connects various stakeholders.
In the case of Uniswap, the protocol is a constant-function market maker written in solidity and deployed on the Ethereum mainnet. It facilitates the connection between liquidity providers and traders, allowing for immediate on-chain settlement of trades.
Step 2: Build a product (in months)
With the protocol prepared, product development should follow. The goal is to create a user-friendly interface that doesn't require extensive technical knowledge. The product can take the form of a webpage or a mobile application. At this stage, user expectations are established, and it should be clarified that airdrops will not be part of the roadmap for the next three years. This is done to discourage speculative users and provide clear user metrics for the product teams to iterate on. Otherwise, identifying genuine users can be challenging for a team with limited staff.
During this stage, setting up discords or other community platforms can be helpful for gathering user feedback and facilitating product iterations. Additionally, these community channels can serve as a means to identify talented individuals who are passionate about the product and possess the necessary skills.
The development process of a crypto product is dynamic, with contributors joining and leaving. In the early stages, a small community functions like a DAO, where individuals collaborate to generate ideas and contribute their skills to build solutions. This is an area where the DAO model excels: collective exploration of solutions.
In the case of Uniswap, the V1 webpage serves as the product.
Step 3: Formalize protocol development processes and transfer to foundation (in years)
During this period, protocols should have undergone iterations and received major updates to address the evolving needs of users. While the core team primarily handles protocol development, significant efforts should also be made to identify community members interested in protocol-level development. It is important to establish standardized documentation outlining formal processes for protocol updates and upgrades. These documents instill confidence in users and new contributors, especially those unfamiliar with the existing community, by demonstrating that the protocol is open and decentralized.
Once these documents are drafted and approved by the community through social signaling, a foundation should be established to manage ongoing protocol-level development. This development process should resemble traditional open-source software (OSS) development, and no token is required at this stage.
For protocols like Uniswap, it is advisable to create a dedicated governance forum, similar to https://ethresear.ch/, for technical discussions about the protocol. Documentation on updates and upgrades should be collaboratively drafted and revised within the community. There is no need for gating or restrictions in this forum, as open discussion is encouraged.
Once the initial version of the development documentation receives approval through social signaling within the governance forum, the aforementioned foundation will assume responsibility for protocol development. The core team will appoint administrators within the foundation. However, it is important to note that at this stage, the foundation is not a decentralized autonomous organization (DAO), and formal voting does not take place. The ultimate decision-making authority remains with the core team until it is transferred to the foundation.
Step 4: Centralize product development and form traditional company structure (in years)
To establish the foundation, product development should be centralized in a traditional startup structure. A separate company should be created with a clear hierarchy and defined responsibilities for each role. The company's goal is to build the best product on top of the open protocol. It's important for the centralized entity to have a different name from the core protocol to maintain decentralization at the protocol level. This prevents discouraging competition from new crypto founders who might want to build a new front end for the Uniswap Protocol.
In the case of Uniswap, a company called Cape Labs will be formed to handle product development. It will operate similarly to a traditional venture-backed startup, including business model, employee benefits, and potential IPO.
After step four, the process becomes similar to traditional open-source software (OSS) development. Ethereum follows a similar approach, where the foundation coordinates protocol development while venture-backed companies build products on top of Ethereum.
Step 5: Launch a token to govern protocol development processes
Token distribution and governance remain unresolved issues in the space. The approach outlined below is a preliminary version with evident inefficiencies. Nevertheless, this model could offer a fresh perspective on the ICO model, which has proven effective for L1 protocols but not application-level ones.
Once the foundation is established to coordinate protocol development, a governance token can be issued to facilitate coordination with the community. The token distribution process should be divided into stages. The initial stage should focus on active researchers and builders in the field, while the second stage should involve past researchers who have contributed to the protocol development process. Throughout these two phases, tokens will be allocated to individual or group multisig wallets rather than companies. This aims to reduce tension between the product development company and individual protocol developers. Finally, token distribution will extend to other stakeholders outside the protocol development process, such as investors and users.
In the case of Uniswap, the Uniswap Foundation will initially allocate a portion of its token supply to current researchers/builders in the field, including protocol developers, documentation writers, community organizers, and other contributors. The first distribution will be determined by the existing Uniswap Foundation administrators. Subsequently, a portion of the tokens will be retrospectively distributed to previous protocol contributors. The second distribution will be proposed by the administrators and approved by the token holders. Finally, tokens will be distributed to users and investors. The distribution plan will be drafted by the foundation administrators, and token holders will vote to ratify it.
Token holders will then have the option to delegate their voting power to others or vote themselves on upcoming changes in the protocol development process. As most token holders are protocol researchers and developers, voter turnout is expected to improve compared to the current model significantly.
Equity structures for crypto products
To align with this playbook, the fundraising strategy should also be adjusted. Instead of relying on the two common methods of fundraising, namely 1) SAFT + SAFE or 2) SAFT alone, it is advisable to have separate strategies for protocol and product ownership.
Fundraising for the product can be straightforward. The centralized company responsible for building the product should adopt a structure similar to that of a traditionally venture-backed company. Therefore, a SAFE would be sufficient. Implementing a SAFT at the product level would only offer early liquidity but could potentially hinder innovation speed and attract regulatory scrutiny.
Fundraising for the protocol, on the other hand, is more complex. The most optimal approach to initiate and scale a protocol is through grants from entities such as Gitcoin, OP, EF, and ICF. Grants ensure that these projects remain non-dilutive and maintain the protocol's neutrality in the future. I would even argue that raising equity-like shares for the foundation could have long-term detrimental effects on the project. If a VC firm has ownership in both the product organization and the protocol foundation, it could limit the foundation's ability to remain neutral during conflicts. Examples of structures for traditional OSS development can be found in Mozilla and Rust, while crypto foundations follow similar steps, as seen in Ethereum (with a 3-person board) and Cosmos (also with a 3-person board).
Centralized exchanges are the most successful products in the crypto world, based on user feedback and revenue. This is because of the speculative nature of crypto and the exchanges' ability to continuously improve their product. They prioritize building the best product rather than seeking early liquidity.
Although centralized exchanges may not fully embody the crypto ethos, they have the right approach to product development. In many cases, crypto teams unintentionally sacrifice early liquidity for the sake of innovation. Once a token is launched, previously simple tasks become complicated due to regulatory concerns.
Do I believe tokens are a superior form of equity shares? Absolutely. However, I don't think making these shares liquid earlier will help us achieve our goals.
"The first ten people establish the culture, and the first hundred maintain that momentum." Speculators can quickly undermine a good community and brand. Never let them win.