The Power of Relinquishing Control
In 2020, an ex-Google engineer was sentenced to eighteen months in prison for stealing trade secrets. He was found guilty of downloading the code for self-driving cars that he worked on at Google and taking it along with him when he started his own company. This company was later acquired by Uber. The court battle ran for three long years, culminating in him being found guilty and sentenced.
In 2021, Disney filed lawsuits to protect copyrights for many of Marvel’s blockbuster characters including Iron Man, Spiderman, and Thor. Some individuals, including the younger brother of the late Stan Lee, filed notices demanding the termination of copyrights on these characters based on certain exceptions under copyright laws. Disney moved swiftly to block these attempts by filing counter lawsuits.
This is nothing new. There is a long history of companies fiercely protecting their trade secrets and intellectual property rights — be it for code or art. And rightly so. These secrets and IPs are the bedrock of the success of these companies and letting a competitor use them could mean losing market share or worse, being run out of business. It all makes sense.
Then, comes along web3. Web3 is built on public blockchains where all the code is public for anyone and everyone to see. Not only that, all the user and application data is also public, something which tech giants like Google and Facebook have closely guarded and built their fortunes on. Similarly, many of the NFT projects being released are opening up their copyrights for owners of those NFTs to use, and in some cases, even for anyone in the public to use. And as we all know, web3 is surviving thriving. So it begs the question — how are the applications with open code and open data, and these digital art forms (NFTs) with open licenses able to succeed, blatantly defying the traditional paradigm?
I explore answers to this question in this piece. But first, let’s level set on what really is open code, open data, and open art licenses.
Open Code and Open Data
Imagine you need to pay your friend via Venmo. Here is the flow of money: your bank account funds your Venmo account, you use the Venmo app to send the money from your Venmo account to your friend’s Venmo account, Venmo deducts the money from your balance and adds it to your friend’s Venmo account, and your friend finally withdraws the money to his bank account using the Venmo app. This whole process is quite seamless and has made everyone’s life much simpler.
However, for this whole process to work, a key element required is “trust”. You need to trust your bank to keep all your money safe and move it around whenever you ask. And you need to trust Venmo to keep your money safe and move around whenever you ask.
In 2008, a pseudonymous individual (or a group of individuals) released the Bitcoin white paper describing a system of digital money that aims to remove “trust” from this equation, through 3 properties of the system:
- Only you can access your money, no one else.
- The transfer of funds happens through a distributed network of tens of thousands of connected computers (called nodes).
- All the historical transactions can be seen by anyone and it is near impossible to change history.
#1 means you don’t need to trust anyone to keep your money safe for you. #2 means that as long as half the nodes are honest, transactions will be genuine. And anyone can run a node, even you. It is far more difficult for so many disconnected entities to go corrupt together, than one or two. #3 means that you don’t need to trust anyone for history, as you can see and verify it yourself.
This was a revolutionary idea that sparked a lot of research on the creation of trustless systems. Then in 2014, the Ethereum whitepaper was released which extended this concept to computer programs. It too proposed a system of connected nodes, but instead of just facilitating monetary transactions, now, you could write code that will be run on this network. This code can be seen by anyone too.
So, Bitcoin and Ethereum established trustless systems where all the code of programs and all the data they process, need to be available on an open network of nodes. And anyone can run these nodes which means anyone can see the code and data. What’s more? If you run one of these nodes, you can even retrace every step of the execution of the code. It’s open code. Open data. Open execution.
And this openness led to one more unique property — composability. In blockchains, one application can permissionlessly use another application. Think of it as completely open APIs. In the traditional world, if you create an app that needs to pull data from Facebook, you will use a Facebook API, with their permission, and will only be able to use what they decide to provide. But on public blockchains, you can directly call and use any other app from your own app. For example, Uniswap is an exchange where you can swap tokens, and 1inch is an aggregator which uses different exchanges (including Uniswap) to provide the best rate to the user. 1inch doesn’t need to partner with Uniswap for this, they can just permissionlessly use the Uniswap app to get the swap rates and perform a swap for the user. As we will see in later sections, this composability is a key aspect of web3’s success as well.
Open Art Licenses
Whenever someone creates art, that work is by default protected by ‘exclusive copyright’. This means that nobody, apart from the original creator, has the right to copy, modify, or distribute the work. If there is more than one creator, then any use of the work needs to be agreed upon by all the creators.
However, the creator(s) can grant certain rights to anyone who buys their work. While there are a lot of nuances to copyrights, we can categorize the rights into the below four broad buckets.
- No Rights. The creators own the intellectual property and the commercial rights. No one can do anything with their work without their permission. The primary use case is for collectors to buy the art for their collections. Or maybe sell in the secondary markets.
- Limited Commercial Rights. The creators own the intellectual property rights. But they grant limited commercial rights to buyers of the work. For example, buyers can make merchandise using that art and earn up to $100k per year. The use case includes collectibles as well as some commercial use like merchandising. However, your commercial brand can’t scale because your growth is capped by the licensing terms.
- Unlimited Commercial Rights. The creators own the intellectual property rights. But they grant unlimited commercial rights to buyers. So if your commercial business based on the art you bought grows exponentially, you are not limited by the licensing terms.
- Free for All. This is the most open category of all. Creators can grant a ‘CC0’ license which means nobody owns any copyright. Anyone can use any of this work in any form they would like. You don’t even have to buy the work first. Being a collectible is still a use case for such pieces because there is value in being the original work of the creator. But anyone can create any derivative work and use it in any form they would like.
As NFT space has evolved, projects have moved from more restrictive rights to more open ones. Early NFT projects mostly didn’t grant any rights to the buyers. They were purely for collection purposes. CryptoPunks, one of the earliest and most valuable NFT collections (the cheapest one sells for more than $200k), granted limited commercial rights so the owners could sell merchandise up to $100k a year. Then in April 2021, the NFT collection Bored Ape Yacht Club (BAYC) was launched. Arguably, the most valuable NFT collection right now (the cheapest one sells for more than $350k), BAYC granted unlimited commercial rights to the buyers. This set a trend where many of the successful NFT projects started granting unlimited commercial rights to the buyers.
Fun fact: The CrytpoPunks community has been demanding a more open license for a while. While the original creators of CryptoPunks didn’t comply, they recently sold the collection’s IP to the creators of BAYC. And their first order of business was to grant unlimited commercial rights to CryptoPunks owners.
Now, more recently, we have seen some projects going one step further and granting a free for all license. One such NFT project, mfers, has picked up steam with the cheapest one selling for around $10k. While nowhere near the success of some other projects, this is an experiment in progress and it remains to be seen how successful it will be.
Projects like CryptoPunks and BAYC have set the standards for open NFT licenses and it will be hard for newer NFT projects to succeed if they don’t live up to these standards. Case in point: of the 10 most successful projects by all-time trading volumes, 6 grant unlimited commercial rights, and 2 grant limited commercial rights to their owners.
Why are open code and open license projects successful?
Now, back to the original question posed at the beginning of this piece. Why are these projects successful despite their open code and open art licenses?
It may seem like a project’s code or commercial rights are its moat. While they are important in creating a useful product, the true moat of most modern projects can be understood by the term ‘network effects’. A somewhat overused term in silicon valley, network effects can be best described as the phenomenon that makes products more useful as more people use them. Let’s take some examples.
- It is more fun to use Facebook as more of your friends join
- You can find cabs quicker on Uber if there are more drivers, and drivers can consistently make more money if there are more riders
- You are more likely to find what you are looking for and keep coming back to Amazon as the number of sellers increases. And as buyers keep using Amazon, more sellers are incentivized to list their items on the platform
- As more people become Harry Potter fans, it incentivizes creative studios to make more movies and set up theme parks, which then attracts more people
Be it code or art, the most successful projects are the ones that benefit from these network effects. And there is one thing common at the core of network effects — a strong community! An ever-expanding set of individuals, who are not only the consumers but also the advocates of the project. They help build its brand and accrue financial value. And this is exactly why web3 projects are thriving. Because the magic lies not in the code or data or commercial licenses, it lies within the community.
And it could be argued that these projects succeed not despite open code/data/licenses, but because of it. Let’s see how this openness helps build a community, create a brand, and accrue financial value.
Community
Trust & Ownership. Open code means anyone can check the code to verify if there is any malicious programming. And open data means that anyone can verify the past activity of the application. While not everyone will be technically adept at doing this, the availability of the code and data in public keeps the project team accountable and helps foster trust in the community. Moreover, many community members also propose code changes through Github to help improve the projects. An extreme example of this is when a community member deployed the code for the launch of the token for Curve Finance before the actual planned launch.
Similarly, when NFT projects open up the art licenses, the community gets a sense of ownership. There is only so much you can do with NFTs. Open licenses help significantly improve community engagement. There are stories of NFT owners making creative use of their commercial licenses by using their NFT art to promote their ventures. Examples include starting a beer, starting a burger joint, and putting up a Times Square advertisement for a parody mayor candidate (coz why not?). Then there are more ambitious projects like Jenkings the Valet which is using BAYC NFT characters to expand into books, films, TV, podcasts, and more. And the more recently released music video by a production house that aims to combine NFTs and music. While most of these ventures may not be very successful, and many are just side hustles or hobbies, it demonstrates how opening up licenses provides a sense of ownership and improves community engagement.
Cross Pollination. The composability of public blockchains allows any application to permissionlessly use another application (remeber the Uniswap-1inch example discussed earlier?). This composability aligns the incentives of communities of the two projects and helps cross-pollination of communities, further strengthening them.
Similarly, with open licenses, different NFTs can combine with each other to create even more creative projects. A recent example is this trailer from the creators of BAYC which teases a project with characters from different NFTs. As can be seen from the screenshot below, it has characters from NFT projects Cool Cats, Mutant Ape Yacht Club, CrypToadz, CryptoPunks, World of Women, and Meebits. All of this is only possible because these projects provide more open licenses. And this kind of freedom and collaboration helps in the cross-pollination of communities, further strengthening these communities.
Brand
Composability of code also helps improve a project’s brand. For instance, on Terra blockchain, Anchor protocol provides a ~20% APY return on deposits. Now, a different protocol, Whitewhale, allows you to make deposits and make money from arbitrage opportunities whenever Terra stablecoin loses its peg. It integrates with Anchor to earn the 20% APY whenever your money is not being used for arbitrage. Whitewhale boasts of this integration as one of its features, thereby adding value to Anchor’s brand. Another example would be Gem, which aggregates NFT prices from all the different NFT marketplaces like OpenSea, LooksRare, etc. This acts as an advertisement of the marketplaces to Gem users, thereby adding to the brand value of the marketplaces.
Similarly, NFT projects that open up the rights reap the benefits of an improved brand when the owners use their NFT to create new projects. All the examples listed above (the beer, the burger joint, the Times Square ad, etc.) help spread the word about the original NFT project. You could argue that the use of NFTs for nefarious purposes could also tarnish the original project’s image, but in the grand scheme of things, I think the net effect will be positive.
Financial Value
And finally, what most people care about, the moolah 🤑 Composability also helps drive more business. In the Anchor-Whitewhale example I presented above, Whitewhale is driving more deposits to Anchor by providing the ability to earn returns when its money is not being used for arbitrage. And same is the case for Gem, which aggregates prices from different marketplaces and allows users to initiate their purchases from Gem, which in turn purchases the NFT from the respective marketplaces. All this means more business for the initial protocol aka more money.
For NFTs, it works slightly differently. As more derivative art and projects are created using NFTs with open licenses, the original work’s brand and value increases. While you could argue that derivative projects can become more successful than the original (don’t think this has really happened yet), it still improves the prospects of the original project and drives value by increasing its sellability. Which means more money for the original project.
What if other projects copy you?
Copying another crypto project is laughably easy. You don’t even have to re-write the code yourself. Just go to their Github repository and fork the code. And you can bet that it has happened many times. However, the results have been the same. Majority of the forked projects miserably failed. And very few that have succeeded, only play a second fiddle to the projects they originally forked from.
Bitcoin was forked during the early days to create Bitcoin cash, a blockchain that will allow a slightly increased transaction throughput. While it’s still alive, it’s nowhere near the success that Bitcoin has seen. Uniswap (an app where you can swap tokens) was forked to create Sushiswap, which now has only half the total value locked of Uniswap. Yearn Finance (an app that automatically switches your deposits from one protocol to another to get the highest yield available at any given time) was forked to create DFI Money, which now has only 1/10th of the total value locked of Yearn. These are examples of some forks that “succeeded”. Majority of the others went to zero. So, history tells us that forks usually don’t work or see only limited success.
Similarly, in NFTs, copycats don’t work either. After the success of BAYC, there have been innumerable ape-themed NFTs, none of which have really succeeded. And for the projects that have opened up their rights to allow owners to create derivative projects — as explained earlier, the success of a derivative project actually adds value to the original project.
But why does this happen? While it is easy to fork the code or copy the art, it is impossible to fork/copy community, partnerships, and brand. Many of these copycat projects may succeed in the short term, but they usually only attract mercenaries that come on board to make quick profits and then leave. They fail to attract genuine community and build partnerships. Only the ones that truly offer some differentiation end up succeeding to some extent.
In conclusion
Traditionally, companies have closely guarded their code or art rights. But web3 projects have their code/data in public, and NFTs have started opening up their rights. Despite this, web3 projects have seen immense success because this openness helps build a strong community, which in turn helps improve the brand and accrue financial value through cross usage. This demonstrates that the true reason for success for most projects is the community you build around them. And the best way to build a community is to relinquish control! It is a new paradigm shaping the world, one where the emphasis is on its community and users. I do not mean to say that the web2 projects do not value their users, but the very design of blockchains being open makes sure that the projects do not lose focus of it.
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References and Additional Reading
- Use of commercial BAYC licenses
- Building Expansive NFT Universes by Simon de la Rouviere
- Unchained podcast about NFTs and Licenses
- Why collapsing cost of trust is profitable by Joel John
Originally published at https://theleanblock.substack.com on April 18, 2022.
