Why ownership is the future

In today's Internet, consumers are renters. About the ownership economy, and why Uniswap > Coinbase.

Why ownership is the future

In today's Internet, consumers rent access to most goods and services.

Netflix rents you access to movies, Spotify rents you access to music, and Substack rents you access to writers.

Sometimes you pay with attention instead of money. Google rents you access to answers, Facebook rents you access to friends, and Twitter rents you access to news.

The same pattern is everywhere, from SAAS to sharing.

Is this good for consumers?

For a comparison, let's look at the offline world. When does it make sense to rent? When does it make sense to buy?

Renting your home gives you freedom and flexibility. But owning it means that no one can raise your rent or ask you to leave. Owning means stability and control. Perhaps even appreciation.

Renting a vacation home gives you freedom and flexibility. You pay for only what you use. Buying a vacation home means you can use it whenever you want, but you're responsible for all its expenses and exposed to changes in value. For most people, the cost of renting for annual vacations is less than the maintenance and property taxes of owning.

Similar calculations play out in countless domains. And the best choice is often not obvious. The problem with today's Internet is that renting is the only choice.

At first, this doesn't seem like a problem. Because landlords often price below cost to attract users and build network flywheels. But over time, monopoly platforms find shifting from attract (cooperate) to extract (compete) irresistible:

source: Why Decentralization Matters by Chris Dixon, Partner, Andreessen Horowitz

As a reaction to the unfavorable economics of renting and pioneered by crypto, an ownership model is finally emerging.

Why is this important?

Because home owners are invested in their homes and communities in a way that renters aren't. And car owners maintain and take care of their cars in a way that renters don't. Now, for the first time ever, renting is not the only model for Internet goods and services.

As Jesse Walden, former partner at Andreessen Horowitz, says:

Ownership is a powerful motivator for users to contribute to products in deeper ways, be it with ideas, computing resources, code, or community building...this more cooperative economic model helps ensure better alignment with users over time, resulting in platforms that can be larger, more resilient, and more innovative. This is the Ownership Economy, and beyond being a positive social endeavor, the platforms building it are able to leverage the strongest form of market incentives to grow network effects.
Today, crypto tokens are the latest protocol innovation to expose a disruptive new model. Just as BitTorrent allowed us to exchange packets of information instantly and without an intermediary, crypto tokens let us distribute value in the same way.
The protocol innovation of tokens is akin to packets for value, but the disruption is in the way new software platforms can be built and gain adoption. The breakthrough of early crypto networks is a new model for market-driven networks, where users build, operate and own a piece of the products and services that they use everyday.

User ownership is core to the success of Bitcoin and Ethereum, and the model will continue to spread beyond money and finance:

Source: Jesse Walden, Variant

How will it work?

Many people think of non-fungible tokens (NFTs) as a way to own virtual goods in a game or as digital artwork. But this is just a scratch on the surface. NFTs make the Internet ownable. And all participants can make more money from the markets they enable.

Creators make more money because they can sell direct to fans and can automatically collect royalties every time an NFT is resold. This is only possible because of true verifiable ownership where royalty logic is directly encoded into the actual media.

You might think that renting is a better business model for creators, but this isn't true. Not only does the ownership model dramatically reduce customer acquisition costs (CAC) and boost network effects, but NFTs allow more efficient capture of a larger area under the demand curve:

Source: Chris Dixon, Partner, Andreessen Horowitz

For consumers, owning instead of renting combines the benefits of patronage with the possibility of generating compound utility or even making a profit. It rewards early adopters and enables the possibility of earning value alongside the creators or services you support.

Developers make more money because they can build without restriction on permissionless infrastructure in a way they cannot on platforms from Apple, Google, Facebook and others, where APIs have restrictions and free market development is limited. This improves developer economics, accelerates innovation, and prevents situations like Epic Games vs Apple.

Let's look at an example where this may play out today.

Coinbase just went public and there is a lot of excitement about it. You might believe their competition is Binance, Gemini, Kraken, or OKCoin.

But what if it's not?

What if the real competition is Uniswap? Uniswap is a decentralized marketplace that connects people wanting to swap cryptocurrencies with professional market makers. All fees collected for swaps go directly to market makers, and a governance token allows stakeholders to vote to change the system. Uniswap v3 uses NFTs to enable concentrated liquidity positions and flexible fees, among other innovations. At scale, it might be as compelling to market makers and takers as the most sophisticated order-book based exchanges.

Uniswap is the ownership model. Coinbase is the rental model.

Choosing the right one has important consequences.

But at least now there is a choice.

In many ways, the business model evolution from renting to owning is similar to what has already taken place in gaming. Gamers are early adopters, and much of gaming has already shifted to free-to-play (but monetized via virtual goods).

A broad and distributed ownership economy requires something new. It requires social tokens. Next week we'll take a look in detail at what social tokens are and how they work.

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