Zee Prime Capital: How do project founders find the "wedge" to leverage the crypto market?

Original Title: Wedge is the Founder's Edge

Original Author: Rapolas, Zee Prime Capital

Compiled by: Qianwen, ChainCatcher

Highlights

• ****Wedge in the **** Blockchain
• Small Markets Discovering Large Markets
• Wedge Economics and Volatility
• Conclusion

"Why you should never aim for 1% of a $1 trillion market?"

As a founder, promoting your company as having an infinite TAM (Total Addressable/Available Market) through slides is more harmful than beneficial. Anyone claiming their target market is "everyone on the internet" or "every smartphone user" shows they do not have a detailed understanding of their target market.

Every market is composed of more segmented markets; if you are an early-stage startup, you are likely able to articulate the specific market your product serves from day one. This is why we say, building a product that appeals to everyone means it cannot attract all users.

Every successful product at launch is either a novel idea or a unique approach to an already tested idea; thus, it will initially be overlooked by most users.

Aiming for 1% of a $1 trillion market sounds ambitious and could yield a $10 billion reward, but without a unique value proposition targeting the segmented market within this giant market, it sounds like trying to board a plane that has already taken off. You must find a smaller plane (or jetpack) ------ your own wedge.

Wanted by Zee Prime: A founder flying a jet-pack product wedge

****What is a Wedge in the **** Blockchain?

The mainstream cryptocurrencies or blockchains we know today began with the Bitcoin whitepaper. It was a protest against the existing banking and monetary systems. The P2P payment system proposed by Bitcoin, which eliminates centralized intermediaries, is an elegant solution to a specific problem.

Bitcoin has proven its initial vision in payments, but the underlying blockchain technology subsequently sparked a series of ideas. If Bitcoin's original whitepaper proposed launching financial primitives, social networks, games, and art on the blockchain, then it would ultimately achieve nothing. The idea of blockchain itself would be questioned, and using blockchain to solve every imaginable problem would raise the execution threshold to an unimaginable height.

If you look at those popular and enduring on-chain applications, you'll find they all started by solving a very small problem (or a problem that didn't seem like a problem at all) that was relevant to a small subset of users. Few can point out the problems they face and articulate specific solutions (if they could, those problems would have been solved long ago).

Of course, the mystery lies in that we cannot reason why or how this problem transitions from "affecting a few" to "affecting many." In some cases, great products specify the problems that need solving for consumers. Before you see a car, you cannot imagine driving around in one (at which point your problem becomes buying a car); before you have a full touchscreen phone, you cannot imagine using a phone smoothly.

This is why building businesses (and investing in them) cannot be entirely rule-based and is often inspired by science fiction. It is the founder's intuition that helps them navigate through the fog and bet on specific outcomes; without this intuition, people will try to solve abstract problems for a large group of people with very little commonality among them.

Uniswap's daily trading volume approaches $1 billion, and people naturally see it as a competitor to centralized exchanges. But it is actually a simpler version of a trading product; if its proposition was "trade, but on-chain," it would not have succeeded.

The wedge of Uniswap V1 was allowing permissionless liquidity bootstrapping (and trading) for long-tail tokens, which market makers and centralized exchanges could not provide but was needed by industry founders. Even the term "liquidity bootstrapping" is now primarily associated with Uniswap, just as "Google" is synonymous with search.

Once this small problem was solved and an on-chain usage pattern established, Uniswap was able to capture adjacent markets typically traded on centralized exchanges (like ETH) and solidify its success by minimizing the shortcomings of AMM (like providing concentrated liquidity). (ChainCatcher Note: Adjacent market refers to markets that are related or connected to a company's existing market but are not within the core market range the company operates in. For example, smartwatches are an adjacent market to smartphones.)

This is not about creating a perfect product for everyone. It is about solving someone's problem (or specifying a problem, as mentioned earlier), and then using that momentum to expand into adjacent markets while iterating on the product. Now, Uniswap's trading volume in 2023 has surpassed Coinbase:

While the Blur vs. Opensea debate is no longer a hot topic, we believe Blur has two great insights that allowed it to carve out a niche in a market predominantly led by Opensea (finding a wedge):

• There are differences within the NFT investor market. There is a clear distinction between collectors (passive holders who accept liquidity and fees) and traders (active participants seeking higher liquidity and lower fees). Opensea caters to the former's needs while sacrificing the latter's interests—there is an inherent conflict between the two;
• Opensea did not issue its own token, while tokens themselves are a product with more crypto-native characteristics than anything else.

If Opensea's target users are artists and collectors, then trading volume may not be the perfect or only metric for measuring market success; conversely, if Blur's target users are traders, then trading volume becomes more critical as it depends on the available liquidity. This is precisely why Blur uses token rewards to incentivize market makers (who provide bids and asks).

Weekly trading volume on the platform

Although some have criticized Blur for primarily serving a few powerful users—500 whales—if these whales are shaping Blur, that is also understandable. In fact, serving a small number of followers can actually: a) validate product ideas and release quickly; b) achieve excellent marketing results.

Since Blur already has the deepest market liquidity, it can launch an adjacent but highly relevant product—Blur Lend, which is a lending market using NFTs as collateral.

Weekly lending volume on the lending platform (USD)

Small Markets Bring Large Markets

The examples above illustrate that successful companies can create their own monopolistic markets. They escape competition by pushing their wedges. Uniswap does not compete with Binance in the same direction; Blur does not compete with Opensea for the same users; blockchain does not compete with "the internet" or tradfi institutions—blockchain is self-contained with unique attributes.

Blake Masters explains this from a broader perspective:

"The common saying is that capitalism and perfect competition are synonymous. No one can be in a monopoly position, and profits are lost in the process of competition among businesses. But this statement is strange. A better way to say it is that capitalism and perfect competition are opposites; capitalism is capital accumulation, while a world of perfect competition means you earn not a penny."

Paradoxically, in a perfectly competitive market, the market a business targets is very broad, but to pursue differentiation, they will immediately narrow the market (even if they do not seem to be narrowing it). However, if they do not participate in a perfectly competitive market but start from their (small) market, they can only grow without narrowing the market.

" Thus, the best companies can tell enticing stories about the future. These stories vary, but the form is the same: find a small target market, become the best company in the world at serving it, capture adjacent markets, expand the focus, and occupy more and more markets. "

Reverse wedges are abundant in perfectly competitive markets

When observing giant markets, people often look towards the mid or late stages of the cycle, as growth momentum itself can drive growth, and success is evident. However, success is only obvious in hindsight; people cannot appreciate the secret insights required to start from a small product or service to a market worth hundreds of billions.

Newton laid the foundation of classical mechanics. This branch of physics deals with the motion of objects and the forces acting on them, forming the basis of all engineering fields. But to be an excellent engineer, one must master the secret knowledge of traditional, well-known mechanics beyond just understanding classical mechanics.

This is why every successful founder who escapes competition understands competition; however, they do not need to be obsessed with it, as competition is not where their advantage lies. Businesses understand competition just as engineers inherently understand Newton's laws of motion.

Intuitively, we believe that every major brand today started by finding a wedge:

• Facebook initially was a platform exclusive to Harvard students before opening up to other universities, high schools, and the general public;
• LinkedIn's market promotion primarily relied on employees from the tech industry, allowing it to break the cold start problem (of course, this also relates to tech becoming a trend later);
• Nvidia's hardware initially served the gaming industry before expanding to data center training models, and the CUDA software computing platform was built for this purpose;
• Google's insight (wedge) was that its PageRank algorithm produced higher quality search results compared to other engines, which ultimately led to not only the most profitable advertising business but also Google Cloud, hardware business, etc.;
• Porsche started with sports cars but now primarily sells SUVs. Since the late 1990s, the production of sporty 911 and Boxster models has not significantly increased.

All these businesses ultimately expanded and captured adjacent markets, which seemed out of reach on the company's founding day (advertising, hardware, cloud computing, etc.). No company illustrates the power of the wedge better than Amazon.

Among all the categories available for sale, Amazon chose books, which is a perfect category for establishing an online retailer, with over 3 million products, while physical stores are limited to under 100,000. In other words, this would be an excellent category to prove the hypothesis that "retail shopping will shift from physical stores to online." Amazon sourced inventory from multiple book distributors to meet order demands.

Leveraging existing customer traffic, Amazon launched other product categories and introduced listings for third-party sellers, further expanding its supply range. This is what we know today as the Amazon marketplace, but it originated from a single category (books) and a less scalable transaction model (arbitrage).

The volume of goods Amazon handled required them to establish an internal logistics business—distribution, processing centers—ultimately making the system more robust and becoming a major carrier providing logistics as a service to third-party companies outside the Amazon marketplace. Amazon's shipping created a value proposition for retail consumers that, in most cases, surpassed existing UPS and DHL offerings. While many logistics startups aimed to disrupt traditional carriers, most failed due to insufficient shipping volume, but Amazon had its own volume.

As Amazon's e-commerce business scaled and grew in complexity, internal teams needed a set of universal infrastructure services and fortified APIs for everyone to access. Thus, Amazon's rapid growth drove engineering teams to consolidate its infrastructure.

Amazon seemed to have multiple teams concurrently researching AWS ideas. As Ben Black, co-author of the concept behind AWS's first product "Elastic Compute Cloud," wrote:

Chris (the manager) was always pushing me to change the infrastructure, especially to achieve better abstraction and uniformity, which is crucial for efficient scaling. He wanted a fully IP network instead of Amazon's messy VLAN at the time, so we designed and built this network and worked with developers to make their applications compatible with it.[…]

Chris and I wrote a short paper describing the vision for Amazon's infrastructure, which was to be fully standardized, fully automated, and widely reliant on network services for storage, etc.[……] Near the end, we mentioned the possibility of selling virtual servers as a service.

What started as an internal project ultimately led to the launch of AWS and a whole new market—cloud. By 2022, annual spending on cloud services is projected to reach $5 trillion. However, when AWS launched in 2006, people at Amazon did not yet have enough awareness of the potential behind the idea, nor did they realize it would be filled with unknowns, gaining their own market.

Wedge Economics and Volatility

While renewable energy and renewable energy investments have become a trend since the 2000s, their wedge has always relied on government subsidies provided through tax breaks. Climate change advocates may claim that the wedge is an environmental cause, but try explaining that to those struggling to pay their energy bills. For a long time, renewable energy itself was not economical (even with subsidies):

Source: Lazard Annual Levelized Cost of Energy Report

Thus, in the early stages of this cycle, the return on investment capital was very low (especially for solar, which has always been less economical compared to wind), and most renewable energy developers and suppliers from that era went bankrupt or performed poorly in the public market.

In the 2000s, renewable energy was not a mystery—people have known and utilized wind and solar energy for thousands of years (vertical-axis windmills and concentrated sunlight). Government initiatives and budgets incentivized the private sector to further develop solar panels and turbines, driving the industry's growth, and now, in some cases, renewable energy is competitive even without subsidies.

Source: Lazard Annual Levelized Cost of Energy Report

What we want to say is that cheap and blank blockchain is somewhat similar to uneconomical and subsidized renewable energy. Renewable energy lacks a clear wedge beyond subsidies and the hope that costs will eventually decline, and most blockchain infrastructures currently in development rely on the same premise—massive venture capital and predictions of declining transaction costs. But what if there is external consumer-driven momentum to accelerate the development timeline?

Blockchain has maintained low prices for a long time, and the wedge effect of products has already manifested (it has manifested more than once in the past). If you are a founder who believes that once transaction costs drop from $0.10 to $0.01, your crypto product will be adopted, then you may be heading in the wrong direction. There are some applications on Solana and NEAR that can reach hundreds of thousands or millions of users, regardless of what Ethereum Rollup does.

Cryptocurrency has two development directions: one is censorship-resistant and private currency/payments (which have succeeded but are hard to scale); the other is creating global online wealth through technology. In the latter, cryptocurrency has a huge wedge, which is its volatility* and the ease with which every new asset can gain liquidity (which is different from the real world). It is akin to* penny stocks , tech stocks, poker, sports betting, and other forms of speculation , all riding the early winds.

In the cryptocurrency space, we have ICOs, NFTs, ERC-20 tokens, LBPs, and the recent friend.tech stocks. Don’t hate the players; hate the game. This is not the goal but a means to achieve the goal.

Volatility has won founders time and user attention. In many ways, it serves as a customer acquisition tool. The best cryptocurrency founders will leverage this momentum to test and launch killer products while overcoming pressure and dealing with ever-increasing expectations. However, the volatility of their own native tokens should not be the default assumption—there are other speculative means that do not undermine the long-term product-market fit discovery (Uniswap, Aave, and Maker all allow speculation, but success does not explicitly require speculation in their own native tokens).

Conclusion

In the search for and implementation of great ideas, there is no one-size-fits-all approach. We do not know whether the secret needs to be created or discovered, whether your product should solve others' problems or "create" problems for others, nor can we judge whether first-mover advantage is more important than late-mover advantage.

But one thing is clear—success requires progress, and progress is incremental (though sometimes surprising), with major discoveries preceding smaller ones. Wedge design is crucial for finding the right users for the right product (product-market fit); wedge design allows testing product ideas with users who care about the product, rather than casting a wide net over all users.

We have proven countless instances ------ whether in the Web2 space or in the cryptocurrency space ------ the success stories that aspiring founders seek always start from small and unremarkable ideas. Founders cannot predict the path dependency on day one; at the beginning of their ventures, they cannot see all the adjacent markets on the horizon. But it is precisely the "adjacent possibilities" that allow businesses to discover and merge new markets as they grow.

We hope to see cryptocurrency founders adopt "wedge" as their default buzzword from now on (just as they have used superapp this year). If you wish to discuss this topic with us, please feel free to reach out to the Zee Prime team.