Web3 competitive advantage: Winning in open and decentralized ecosystems

Competition is the art of accessing and managing scarce resources to create advantage. Changes in technology shift scarcity, thereby changing the basis of competition. The ‘new competitors’ look different from the ‘old competitors’ largely because what’s scarce now is different from what was scarce before.

Openness adds an interesting dimension to competition. Opening out your organization to uncover latent capacity, making it abundant, shifts the scarcity. Similarly opening out what was previously a scarce resource, makes it a commodity and shifts the basis of competition.

With the rise of Web3, we’re moving into a new era of competitive advantage. Scarcity shifts again, and so does the basis of competition. This essay chalks some initial ideas around this new scarcity and how firms will compete in this new era.

Let’s get started!

Competition follows scarcity

To understand where new scarcity lies, we need to better understand how firms access and manage scarce resources.

Resource based competition

In the industrial era, firms competed on the basis of their access to scarce resources. Scarce resources included access to unique sources of supply (oilfields and mines) or unique intellectual property (Coke’s formula).

A lot of this translates into competitive advantage for digital era firms as well. Google’s search algorithm continues to be protected as a trade secret, a critical resource providing them competitive advantage.

When Airbnb successfully piggybacked Craigslist and pulled Craigslist’s user base to itself, Craigslist lost its scarce resource – the listings created by sellers – to Airbnb. In response, Craigslist started doling out cease and desist letters to any startup that tried to emulate Airbnb’s integration.

Resource-based competition is centered around accessing and managing scarce resources. Accessing scarce resources may involve acquiring new sources of supply or getting access to the best innovators who can create unique intellectual property. Managing these scarce resources then involves creating necessary moats (both structural and legal) to prevent others from accessing it as well as leveraging these scarce resources towards competitive advantage.

Web2: Data as new scarcity

With the rise of the social web, firms identified a new basis of competition: user data. Scarcity shifted away from accessing and managing internal resources only towards accessing and managing user data.

Data harvesting – the efforts of Web2 champions to access user data – took centerstage as firms developed new ways to get users to commit data (Remember LinkedIn’s profile completion progress bar?) while also developing an entire backend industry dedicated to exchanging and transacting data.

To stretch the farming analogy around data harvesting to its uncomfortable limits, Data may be harvested when users ‘sow’ their attention. Hence, competing on data was really competing on attention. Firms invested in behavior design to ‘hook’ users and engage them in cycles of increased data commitment. UX dark patterns emerged to extract data surreptitiously. M&A activity followed suit. While firms in the industrial era acquired competitors with similar or complementary scarce resources, firms in the digital era got busy acquiring similar or complementary pools of user attention and data. Facebook acquired Instagram and WhatsApp and Google acquired Waze, all in a quest to hoard more of the scarce resource.

To manage this scarce resource, firms at first invested heavily in big data processing technologies (2008-2013) and then shifted their focus on creating value using AI and machine learning (2010 onwards).

Centralized platforms, empowered by a lax data protection regulatory regime, competed on this new scarcity. But that landscape is increasingly shifting. The rise of GDPR and other data protection regimes makes data extraction increasingly difficult. The rise of web3 similarly heralds a new era where ecosystems may be organized without centralization and extraction.

The scarcity is shifting again!

 

As I explained in Unbundling the unbundlers, developer engagement is a core value driver in Web3 ecosystems because market infrastructure is no longer built by a central platform business but by developers in the ecosystems building modules complementary to the core protocol. Developer engagement is the primary source of value at the infrastructure layer of Web3 ecosystems. On the developers’ part, this requires commitment of developer time, resources, capabilities etc.

There is another reason why developer engagement is scarce. Developer engagement and resource commitment involves high multihoming costs (costs to developers in simultaneously building for multiple platforms). By building and committing resources to a particular ecosystem, developers are implicitly opting out of committing their limited time and resources to other (competing and non-competing) ecosystems.