Identifying New Scarcity in Web3: Open Source Developers

Original Title: 《Web3 competitive advantage: Winning in open and decentralized ecosystems》
Author: Sangeet Paul Choudary
Translation: Skyhigh Feng @DAOrayaki.org, DoraFactory

How to compete when users face zero switching costs and all code is forkable?

Competition is the art of acquiring and managing scarce resources to create an advantage. Changes in technology alter the scarcity of resources, thereby changing the basis of competition. "New competitors" look different from "old competitors" largely because the scarce resources now differ from those that were scarce before.

Openness adds an interesting dimension to competition. Open organizations can discover potential capabilities, making them abundant and transforming their scarcity. Similarly, opening up previously scarce resources turns them into commodities, thereby changing the basis of competition.

With the rise of web3, we are entering a new era of competitive advantage. Scarcity is changing again, and so is the basis of competition. This article (part of our upcoming web3 strategy) presents some initial thoughts on this new scarcity and how companies will compete in this new era.

Competition Accompanies Scarcity

To understand where the new scarcity lies, we need to better understand how businesses acquire and manage scarce resources.

Resource-Based Competition

In the industrial age, the basis of competition for businesses was acquiring scarce resources. Scarce resources included obtaining unique supply sources (like oil fields and mines) or unique intellectual property (like Coca-Cola's formula).

For companies in the digital age, these mostly translate into competitive advantages. Google's search algorithm, protected as a trade secret, remains a key resource providing them with a competitive edge.

When Airbnb successfully captured Craigslist and drew its user base to itself, Craigslist lost its scarce resource—listings created by sellers—transferred to Airbnb. In response, Craigslist began sending cease-and-desist letters to all startups attempting to emulate Airbnb's integration.

Resource-based competition centers around acquiring and managing scarce resources. Acquiring scarce resources may involve obtaining new supply sources or securing the best innovators capable of creating unique intellectual property. Therefore, managing these scarce resources requires building necessary moats (both structural and legal) to prevent others from accessing these resources and leveraging them for competitive advantage.

Web2: Data as the New Scarcity

With the rise of social networks, businesses discovered a new basis for competition: user data. Scarcity shifted from merely acquiring and managing internal resources to acquiring and managing user data.

Data collection—web2 advocates striving to acquire user data—led companies to develop new methods for users to submit data (remember LinkedIn's profile completion bar?) and became a point of contention, while also fostering a complete backend industry for exchanging and processing data.

Comparing farming to data collection is extremely uncomfortable; when users "plant" their attention, data may be collected. Thus, competition over data is essentially competition for attention. Companies invest in behavioral design to "attract" users and encourage them to cyclically increase data consumption. Dark user experiences secretly extract data. Mergers followed. While industrial-age companies acquired competitors with similar or complementary scarce resources, digital-age companies busied themselves acquiring similar or complementary user attention and data resources. Facebook acquired Instagram and WhatsApp, and Google acquired Waze, all to hoard more scarce resources.

To manage this scarce resource, companies initially invested heavily in big data processing technologies (2008-2013), then shifted focus to leveraging artificial intelligence and machine learning to create value (post-2010).

Centralized platforms, authorized by loose data protection regulations, competed over this new scarcity. But this situation is increasingly changing. The rise of GDPR and other data protection regimes has made data extraction more challenging. Similarly, the emergence of web3 heralds the arrival of a new era where ecosystems can organize without centralization and extraction.

Scarcity is changing again!

Web3: Tracking New Scarcity

The rise of web3 alters many assumptions about scarcity. Data is portable and is no longer the basis of competition. Users can easily switch services, and user attention and data may no longer be accessed, collected, and managed as they were in the web2 world.

The open ecosystems of web3 also erode the vertical integration advantages that web2 platforms benefited from. For instance, as user interfaces separate from underlying platforms, competition for user interfaces (and user attention) will intensify in web3. Web2 marketplace platforms vertically integrated search interfaces, ensuring a monopoly over both. Web3 protocols managing marketplace transactions may support many search agents, as I explained earlier.

For example, marketplaces like eBay bundle seller onboarding, seller analytics, buyer onboarding, buyer decision support, search functionality, and transaction infrastructure together. All these components will be disaggregated in the web3 world.

Thus, we shift from a centralized market maker architecture to a decentralized agent-based architecture, all coordinated through a shared universal protocol. This is akin to a Hollywood-style talent market, removing relationship-based gatekeeping.

So, where will the new scarcity emerge?

Developer participation will become the new scarcity in the era of open ecosystems.

As I explained in "Split and Split Again," developer participation is the core value driver of the web3 ecosystem, as market infrastructure is no longer built by central platform businesses but by ecosystem developers creating modules that complement core protocols. Developer participation is the primary source of value for the infrastructure layer of the web3 ecosystem. For developers, this requires investing time, resources, capabilities, and more.

There is another reason for the scarcity of developers. Developer participation and resource commitment involve high multi-hosting costs (the costs developers incur to build on multiple platforms simultaneously). By establishing and investing resources in a specific ecosystem, developers implicitly choose not to allocate their limited time and resources to other (competitive and non-competitive) ecosystems.

Not All Developer Ecosystems Are Alike

Managing developer ecosystems is also a significant consideration for web2 platforms. So how does Web3 change this?

To understand what distinguishes the web3 developer ecosystem, we need to revisit the argument I made in earlier newsletters about building blocks.

In any developer ecosystem, developers engage in two key categories of activities: they may contribute to solution development (value creation), or they may create different integrations that drive solution usage (value distribution).

Open-source projects primarily rely on developer ecosystems for solution development. They then package, deliver, and support software through traditional company-owned channels (e.g., Redhat's relationship with Linux). This is shown in the upper left quadrant.

Many web2 platforms are related to developer ecosystems. However, the core platform of the value proposition is built and delivered by internal developers. Most web2 platforms rely on developer ecosystems either to create complements to core platform technologies or to establish integrations that drive platform usage. The latter is particularly evident in companies like Stripe and Twilio, which provide API-based functionalities (as a service). These companies invest heavily in developer ecosystems, but primarily to drive solution usage (value distribution). This is shown in the lower right quadrant.

What makes the web3 ecosystem unique (in this regard, any ecosystem following the Building Blocks Thesis) is that these ecosystems attract developers to engage in value creation, solution development, and value distribution by facilitating solution usage. This is shown in the upper right quadrant.

For example, developer participation activities in Lens Protocol span both solution development and usage. Similarly, Boson Protocol's bug bounty program leverages developer participation for both solution and security development, while Boson's roadmap to v2 expands the scope of developer participation in solution development and usage.

Value and Defensibility of Web3 Ecosystems

As mentioned above, web3 ecosystems are unique, with value creation across the entire value chain driven by developer ecosystems.

Web3 projects need to establish developer participation programs focused on solution development to accumulate value for their tokens. As solutions become more comprehensive, the value of the tokens will also increase.

Equally important, web3 projects need to establish developer participation programs that encourage solution usage through integrations. As solutions are integrated into more projects, the defensibility of the solutions increases. New competitors sharing codebases may replicate the codebase, but it is challenging to replicate the countless integrations established through developer participation projects that drive solution usage.

This is why the competitive advantage in web3 will revolve around the ability to attract developers.

A thriving developer ecosystem serves two transformative functions.

1. They increase token value (enhancing the project's attractiveness) and attract more developers in a self-reinforcing loop.

2. They increase defensibility (making it harder to replace the relevant projects).