Introduction: Business fundamentals still apply in crypto
Whether you’re building in Web2 or Web3, it’s important to start with an assessment of the business you are building.
Web3 and crypto have gone through a honeymoon phase of people thinking that if you’re building a crypto project, it is exempt from traditional practices and logic inherent to Web2 businesses. This may be true in some areas, but unless you’re creating some form of public good, business logic remains critical to the design of any blockchain project.
Problem & Solution
Having a clear understanding of the problem at hand is a must. You may not be able to describe your solution yet, this is normal, simply having an idea at this point is good enough. Throughout the process, you will be exploring and developing this idea.
Helpful Prompts
- What is the problem you're trying to solve? Why is it a problem worth solving? Are there any drivers of urgency to solve this problem now vs. later?
- What is your solution?
Resources and further reading
Tasks
Create a problem & solution statement for your project.
Focus more on the problem as you see it, especially if it's a personal problem you've encountered. An effective problem statement aims to identify the gap between the current state (the problem) and the desired state (the solution) of a process or product. A good problem statement creates a framework that offers a possible solution to the problem.
Your solution should directly explain how you will remedy the ailments you stated in your problem statement. Your problem statement should organically set the stage for your solution to communicate why what you are building is important.
If you are having difficulty drafting a solution statement, consider revisiting the problem statement, as the solution should be much easier to draft. The problem statement is essentially a "softball" question to which you know the answer.
If you are still struggling to draft a concise solution, focus on why you are the right team for the job or why the technology you are building offers a novel solution to this problem that wasn't available until your project came along.
NOTE: Drafting the problem statement is your immediate priority. Take an initial pass at drafting the solution, but it doesn't need to be perfect. You can always come back and update it later.
Mission & Vision
Whereas the problem and your solution often allude to a single product, your mission and vision are an opportunity to extrapolate further and discuss the overarching business model of your blockchain project as well as your aspirational future state.
Helpful Prompts
- What is your mission? What are your business model and core objectives? How do you intend to reach these objectives?
- What is the vision? Where does the organization aspire to go? What are the lofty “blue sky” opportunities that you have the potential to achieve?
- How will you get from where you are today to achieve your growth strategy?
Resources and further reading
Tasks
Create a mission & vision statement for your project.
Focus more on the mission, and don’t worry as much about concisely articulating the vision. Your mission should organically align with the solution statement you've drafted in the previous task. This mission statement is more important given that it is based in the present and will convey why your project exists and where it currently stands. In contrast, your vision statement alludes to the future and is meant to inspire and excite communities and stakeholders aligned with your project.
The vision may become more clearly defined as you work through the process and identify future state opportunities if you can successfully execute the launch of your minimum viable product / protocol (“MVP”).
Value Proposition & Value Creation
Whenever you solve a problem successfully you create value for someone. Successful projects consistently solve a problem for a user and have a core feedback loop to capture this value. We don’t need to think about how value is being captured here (we’ll cover this later on), but we do need to have a good understanding for what value is being created and for whom.
Value creation is a theme that should be worked on throughout the whole design process, if you're not creating value then you don’t have a product.
For those of you thinking about the token yet again, a token can often be used to enhance the value creation or even capture the value created, there are cases in which the token is inseparable from the product and thus is included in the value creation, but you will be surprised at how little this is the case.
Value creation is a culmination of a good understanding of the problem, who you're solving it for and how this solution creates value for said user.
Helpful Prompts
- What is the value that your project creates and for whom? (closely related to the problem that you're solving)
- What does your project produce? What are its key products, offerings, and services?
- What is your project’s competitive advantage relative to others?
- What is the overall market opportunity for the product and how much market share can you grab?
- How crowded is the market for your product now?
- Are you improving an existing product or is your goal to build something unique?
Resources and further reading
Tasks
Explain the value your project creates.
Try not to think about the token. Focus on the value your project intends to provide to a demographic of users currently experiencing a problem. How might these users benefit (and therefore extract value that the project creates)?
Business Model
The section began by explaining the value and importance of having a solid business and assessing your project from a traditional business logic point of view. Here we will expand on this. The basic business logic we’re talking about is the simple idea of sustainability. This can come in two forms depending on the type of project;
Here we can think about our different revenue streams, their strength, longevity and potential (target audience/market size). Simply put, is income greater than expenses?
This one is a double-edged sword since users and adoption are only really sustainable if they can be monetized, so be conscious if this is the case for your project. Put, if your road to sustainability is via users and adoption, you have to reach critical mass and plan how to monetize this user base and adoption.
The business model is intrinsically linked to your project's growth and evolution. Growth is simply another word for value capture. In the previous step, you defined what value is for your project, here we are now thinking about how you capture some of this value, aka your business model and who value gets distributed to.
When we start to look at how to tokenize your business it will be very relevant to have an understanding of the growth and evolution (i.e., value capture) of your product since we can then target incentives during the token design towards this growth, thus, if properly applied, acting as gas on a fire and achieving the bootstrapping effect that tokens are famous for. But do not mistake your business model for a value increase in your token, it can be the case, but this is a poor mental model to adopt.
There are 3 important things to think about regarding your business model:
Essentially your revenue source. This is important because it will allow the user to judge how sustainable the source will be which will impact how they interact with your project (if they deem it viable or not). It is also relevant for you since having a strong revenue source will determine your path to profitability.
If you're coming from Web2 then this won't make much sense since services/products are paid for (denominated) in fiat. In the world of crypto, however, services/products can be paid for in a myriad of tokens, each of which has its own holdability profile (the same way that fiat has a strength factor) and thus it is important to understand what your revenue source is denominated in.
Money in, money out. Simple. In Web3 however, there is the notion of revenue split, distributed to token holders via an automated mechanism. Web3 tends to have a flatter hierarchy when it comes to value share.
Helpful Prompts
- How does your business model help your project gain value (not the token)?
- What is the revenue source of your project? Will users passively purchase your product or will a sales team be required?
- What is revenue denominated in?
- Where does revenue go?
- Will users have long-term contracts? Will the revenue be “sticky” in nature?
- Will revenue be transactional in nature?
Resources and further reading
Tasks
Explain the business model for your project
Work through three basic questions:
- Where does revenue come from?
- What is revenue denominated in?
- Where does revenue go?
It's okay if you aren't confident in responding to these questions. Sometimes, it can be difficult to assess the business viability of a revolutionary concept when thinking through its initial phases of user acquisition. Don't feel pressured to fundamentally change aspects of your business if this is the case!
However, suppose you struggle to identify any source of revenue. In that case, it may be worthwhile to consider how the protocol plans to monetize its "solution" and value creation to continue operating as a sustainable business.
Token Evaluation
Before you move on to the actual design, it’s good to understand why you want a token. This means that you have to have an idea of what tokens can be used for and their benefits/downsides.
Token Use Cases / Benefits:
- Secure a network, such as via staking (e.g. Proof-of-Stake)
- Bootstrap supply sides of networks
- Create a tangible incentive for coordination among dispersed parties (e.g. what we see with many DAOs)
- Decentralize/distribute governance
- Fund public goods (eg Optimism is doing)
- Incentivize positive externalities within an ecosystem
- Reward participants for contributions to a network
- Coordinate & create insurance pools
- Form digitally-native units of account (aka internet money)
- Track & build an on-chain reputation (eg via SBTs)
- Create new digital identities (via NFTs)
- Give users a share of ownership in the network
- Membership gateway
- Proxy for underlying value
- Rebates
This list is not exhaustive and there are likely many more token use cases, each specific to the project in question
Token Necessity
A token's necessity can be seen as a spectrum with two ends. At one end, the token is "absolutely necessary" for the project to function, while at the other end, the token is "adjacent" and not essential to the project. For example, tokens on the adjacent side may offer governance rights or revenue shares, which are not crucial to the product's core functionality. It is recommended to launch non-core tokens only after finding true product-market fit.
The middle of the spectrum includes tokens that are important but not necessary for the product's functioning, such as bootstrapping tokens. Incentives can be temporary, closer to the adjacent side of the spectrum, or essential, such as those with inflating supplies and funded by protocol revenue, which is closer to the "absolutely necessary" side. When designing token incentives, it is crucial to consider what will happen when those incentives end.
On the "absolutely necessary" end of the spectrum are tokens like Ethereum, Bitcoin, Solana, and other Layer 1’s. These tokens are native economic units of account and critical to the product's functionality. It is best to launch these tokens at the same time as the project itself.
Product Improvements
Evaluating if you need a token (applicable to web2 products transitioning to web3) and when (applicable to both web2 & web3) is one of the hardest parts of the design process.
In previous steps, you defined the problem and how you aim to solve it. Using the Token use cases information provided above, you can think through how tokenization can help improve your product to better solve the problem at hand. The Token Necessity section helps you to think about how critical a token is to your solution, ranging from completely necessary to adjacent.
This understanding will be useful in later stages for reference to see whether your design has achieved its goal. If this results in not needing a token, that’s fine.
Resources and further reading
Helpful Prompts
- How might a token improve the “Solution” described in the “Business Assessment”?
- How might a token enable the project to uniquely achieve the Vision and Mission described in the “Business Assessment” compared to some other medium of exchange?
- If the token was swapped for USDT, USDC, or some other stablecoin, would it make a material difference?