Open protocols are not new. While crypto has renewed interest in open protocols, they actually form the backbone of the internet. Picking from the least obscure acronyms, we have TCP/IP to connect the internet; HTTP to power the web; SMTP, POP, and IMAP to deliver emails; and RSS to transmit blogs.
In a bygone era of the web, enterprising developers were able to build businesses like Google by indexing the open web. But over time, only a few of these protocols survived, while others were replaced by closed protocols or walled-garden equivalents like Twitter, Facebook, and Slack.
Venture capitalist, Fred Wilson, attributes this to the lack of monetary incentives to create and sustain open protocols. The very nature of their openness, made them difficult to monetise via traditional business models. It’s often far more profitable to improve products built on top of protocols, like email clients, than it is to improve the protocol itself. Indeed, many of the internet’s core protocols were created by various government and research agencies.
The emergence of blockchain technologies, however, has opened up a whole new design space for protocol business models. It is now possible for open protocols to be monetised, and for people who innovate on new crypto protocols to be handsomely rewarded.
Take Ethereum, for instance, the world's decentralised computer. In order to store data or run calculations on Ethereum requires the user to pay a certain amount of "gas," a fee denominated in Ethereum tokens. Value is created for the creators and holders of the Ethereum token when there is demand for storage and compute through applications like NFTs and other smart contracts. The corresponding increase in value of Ethereum accrues back to the token holders and developers, who are then incentivised to continue work on the Ethereum blockchain to stave off hungry upstarts.
The incentives unlocked by such a mechanism has since opened the floodgates to all kinds of new open crypto protocols for file storage, social networks, push notifications, and many more. And unlike the open protocols of web1, these new protocols now have strong financial incentives to evolve and persist into the future.
It is this business model innovation, not so much the technical breakthroughs that have piqued investor interest. One of Fred Wilson’s investment theses, is that business model innovation is more disruptive than technological innovation:
Incumbents can adapt to and adopt new technological changes (web to mobile) way easier than they can adopt new business models (selling software to free ad-supported software). So this new protocol-based business model feels like one of these “changes of venue” as my partner Brad likes to call them. And that smells like a big investable macro trend to me.
As end users, we are the ultimate benefactors of this investment, competition, and innovation. The more open protocols we have, the more open systems and open infrastructure we will have.
On the flip side, when we don't have open protocols, value tends to be restricted by the controlling entity. The evolution of Twitter offers an interesting case study, as it illustrates both the promise of open protocols and the stagnation that can arise in walled gardens.
In a 2009 essay on Why Twitter is a Big Deal, Paul Graham was quick to identify Twitter's significance and promise:
The reason is that it's a new messaging protocol, where you don't specify the recipients. New protocols are rare. Or more precisely, new protocols that take off are. There are only a handful of commonly used ones: TCP/IP (the Internet), SMTP (email), HTTP (the web), and so on. So any new protocol is a big deal. But Twitter is a protocol owned by a private company. That's even rarer. …Because they haven't tried to control it too much, Twitter feels to everyone like previous protocols. One forgets it's owned by a private company.
In Twitter's early years, there were a number of third party applications built on top of its API that extended Twitter's feature set. There was Summize for search, Tweetie for mobile apps, amongst many others. Developers big and small were able to experiment, earn a living, or even build businesses on top of the protocol.
Unfortunately, this approach did not last. For a whole host of reasons, all reasonable at the time, Twitter steered towards an ad-based business model. They began to compete with or acquire third party applications, and restricted API access. Summize was acquired by Twitter in 2008 to augment Twitter's search capabilities, and Tweetie was acquired in 2010 and rebranded as Twitter's official mobile application.
Jack Dorsey later reflected that this was the "worst thing we did”.
In the beginning, Twitter was so open that many saw the potential to become a decentralized internet standard, such as SMTP protocol. For a whole host of reasons, all reasonable at the time, we took a different path and we increasingly centralised Twitter.
Interestingly, Twitter has since started to explore the possibility for Twitter to reinvent itself as an open protocol.
From the perspective of developers and entrepreneurs, open and permissionless protocols lowers the barriers to entry. When the network is open, developers no longer need to deal with API keys, rate limits, or unpredictable denials of service. When developers have access to an existing network, the cold start problem becomes much easier to solve. Convincing potential customers to try a new product is much easier when they can bring along their data or social graph with them.
The reduced barriers to entry will spur more competition, and competition will spur more experimentation and innovation. Just as Google was built on top of the open web, we'll see new businesses and value created on top of this new generation of open protocols. Just as Pull-to-refresh was first introduced on a Twitter third party client, Tweetie, open protocols will introduce new paradigms, UX patterns, and of course, memes into all corners of our digital world. Just as the Renaissance revived and surpassed the ideas and achievements of classical antiquity, I’m optimistic that this Renaissance will revive and surpass the ideas and achievements of the early web.
Truth and accuracy is a value I hold dear. If any of the above is incorrect or inaccurate, please let me know. My primary goal for writing is to improve my own understanding.