Hamilton Helmer’s 7 Powers provides a framework for how to think about persistent sources of competitive advantage.
It is easy to take the framework and adapt it to the blockchain context without questions, but it’s valuable to examine the validity of each power.
Blockchain businesses' sources of competitive advantage differ from non-blockchain businesses.
Power 1: Scale Economies.
A business in which per unit cost declines as production volume increases.
In crypto:
Blockchains have diseconomies of scale. Blockchains have limited throughput, so increasing blockspace utilization increases transaction costs.
Scaling solutions attempt to tackle diseconomies of scale inherent to blockchains by increasing blockchain throughput, but the scale effect is still sub-linear.
Concentrated liquidity creates economies of scale. Uniswap pools execute transactions at a better price with increased liquidity.
Power 2: Network Economies
The value of a service to each user is enhanced as new users join the network.
In crypto:
Network effects require lock-ins.
Blockchains don’t have explicit lock-ins as data is user-owned, but implicit lock-ins are abundant.
Most users still use MetaMask and OpenSea as default options.
Typically, network economies require creating a network that is hard to replicate. For instance, replicating Uber’s or Lyft’s network of riders and drivers would cost tens of billions of dollars.
Many blockchain projects have released tokens to attain network economies. But tokenomics-fueled bootstrapping threatens the endurance of network effects.
The fact your competitors can bootstrap a network with tokens (e.g. Blur, SushiSwap vs. Uniswap, and LooksRare vs. OpenSea) threatens the endurance of network effects.
Because insurgents have a path to scaling their network with tokens, network economies are, to a large extent, a non-enduring power.
Power 3: Counter Positioning
A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
In crypto:
Lower take rates of marketplaces like Blur and Zora are an example of counter-positioning.
Lower take rates are also a premise of web3 as a whole.
Ownership of your assets and data also counts as counter-positioning and is something non-crypto businesses cannot credibly replicate.
Power 4: Switching Costs
The value loss expected by a customer that would be incurred from switching to an alternative supplier for additional purchases.
In crypto:
In theory, there should be none as data is open.
In practice, user convenience plays a decisive role.
MetaMask is still a dominant wallet because switching wallets is hard and scary.
Power 5: Branding
The durable attribution of higher value to an objectively identical offering that arises from historic info about the seller.
In crypto:
Yuga Labs NFTs are one example of successful branding.
OpenSea still has branding with “normies” and is synonymous with NFTs.
The value of branding should be high in crypto.
Projects with access to identical data and similar capabilities will need to differentiate themselves through branding.
Power 6: Cornered Resource
Preferential access at attractive terms to a coveted asset that can independently enhance value.
In crypto:
Ali Yahya said it best: “by definition, a blockchain that is designed correctly cannot benefit from any kind of cornered resource. The very notion that a blockchain is decentralized means that there exists no small group of people that has unilateral control or outsized power over it.”
A limited applicability of cornered resources is blockspace. Those with preferential access to blockspace can extract more miner extractable value (MEV) or protect themselves against MEV.
Being a validator and engaging in MEV within your blocks is a cornered resource.
Power 7: Process Power
Embedded company organization and activity sets which enable lower costs and/or superior product.
In crypto:
Composable data makes coordination easy compared to non-crypto products. But open data does not provide a single actor with a persistent advantage.
A DAO could develop process power.
Process power is currently a limited source of competitive advantage in blockchain projects.
To evaluate blockchain projects, you need to understand persistent advantages available to blockchain businesses.
Evaluating the applicability of non-blockchain analogies is an essential step in that process.
If this piece resonated with you (or if you disagree), I'd love to chat. Please DM me on Twitter or send me an email.