A recent Flipside Crypto analysis sparked concern by asserting: "Despite labeling themselves as decentralized networks, protocols, foundations, and frameworks, cryptocurrency projects are businesses that must prioritize profitability to survive." While Flipside’s work on the Fundamental Crypto Asset Score (FCAS) is valuable, framing protocols purely as businesses risks undermining their core purpose.
Protocols ≠ Businesses: The Role of Minimal Extraction
Protocols are coordination systems—not businesses. They structure exchanges between service suppliers (businesses) and consumers with minimal extraction, whereas businesses aim for maximal extraction (profit). Key distinctions:
- Protocols: Act as "routers" of economic activity, optimizing efficiency like internet infrastructure.
- Businesses: Compete to capture value, often adding layers of cost.
👉 Why minimal extraction drives adoption
The Exchange Multiplier Effect
Matt Ridley’s The Rational Optimist highlights how exchange unlocks human innovation via comparative advantage. Protocols facilitating global exchange thus occupy a critical societal role:
"Minimal extraction doesn’t mean minimal value capture. A globally adopted protocol’s native asset can accrue significant value despite lean operations."
Anatomy of a Protocol Ecosystem
1. Protocol
- Function: Encodes rules for supplier-consumer engagement (e.g., smart contracts).
Traits:
- Impartiality: No preferential treatment; corruption-resistant.
- Profit-agnostic: Protocols don’t "earn" (see Bitcoin’s lack of an income statement).
2. Suppliers (Businesses)
- Examples: Miners, stakers, data providers.
Economics:
- Run as profit-driven entities.
- Margins compress over time due to global competition.
- Novel services may temporarily command premium pricing.
3. Distributors
- Role: Bundle protocol services with added conveniences (e.g., Coinbase for Bitcoin).
- Market Dynamics: Face competition but cater to less tech-savvy users.
4. Consumers
- Payment Models: Fees, inflation, staking.
- Market Pressure: Collective demand sets price floors for services.
5. Market
- Pricing: Balances supplier costs, distributor margins, and consumer willingness-to-pay.
- Cryptoasset Valuation: Driven by governance, tokenomics, and value flows to suppliers.
FAQ: Protocols and Profitability
Q: Can protocols survive without profitable suppliers?
A: Yes—until the last supplier exits. Chronic unprofitability signals flawed design or low demand.
Q: How do core developers fund work without running a business?
A: Alternatives include:
- Inflation funding (e.g., Zcash).
- Community grants (e.g., MolochDAO).
- Transaction fee allocations.
Q: Why don’t protocols maximize extraction like businesses?
A: Open-source competition penalizes inefficiency. Minimal extraction fosters adoption by lowering costs for consumers.
👉 Explore tokenomics of top protocols
Conclusion
Protocols thrive by minimizing extraction, enabling efficient exchange at scale. While suppliers and distributors operate as businesses, the protocol itself is a public good—a lean coordinator that benefits consumers and fosters innovation. The future belongs to systems that optimize for accessibility, not extraction.
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