The Case For Airlocked Economies

Today's article is about product design.

It's important to note at the outset that we are talking about product, not protocol or mechanism design. Product sits above these, meaning that a single product can contain multiple protocols and mechanisms, along with a host of other things like branding, user interface, transformative goals (i.e. the service being provided), and finally opinions.

Yes opinions.

Opinionated product is the sum of allowable behaviors you give to all the components within a system combined with how a project expresses default behaviors as the best way to use the service. A low level example of an opinionated product is setting the default UI to night mode. A high level example is what information LLMs will return and how they are allowed to express themselves. There's a massive difference between OpenAI, Claude and open source models. Some of that exists within the model performance itself, but much of that manifests within the constraints placed on top of the models.

Once you get into commodified services, the only differentiator besides capital becomes opinion. Said another way, how a product chooses to express itself in the world via what it does and does not allow users to do. Software as knowledge work is a commodified service, especially in a composable, permissionless environment like crypto. Controlling behavior within isn't just an internal act, it has impacts on the larger ecosystem in which the product lives and competes.

Consumer crypto is an area where product opinion will have an outsized impact on a project's success, far more so than with generalized infrastructure or defi protocols. There's a spectrum here which assumes increasing levels of product complexity as the service being offered becomes more specialized. I am not saying one is harder to build and maintain than the others. I'm saying that as you create narrower experiences that require depth over breadth, opinion becomes elevated, because what a thing isn't allowed to do may have as much of an impact on a project's success as what it is allowed to do.

With that setup out of the way, we are going to talk about a very strong product opinion within the crypto landscape, airlocked economies.

To start with, it's a term that I made up.

To be slightly more useful, let's begin with the definition of an airlock:

A compartment with controlled pressure and parallel sets of doors, to permit movement between areas at different pressures.

There's the cold, empty vacuum of space, and there's a pressurized, heated, oxygenated atmosphere which allows astronauts to live. In between them, there is an airlock whose job it is to keep an unforgiving immensity from obliterating a life support system.

Simple enough.

An airlocked economy operates on the same principles. In this case, we are talking about making use of a substrate (crypto protocols, tooling and design patterns) while shielding a product to varying degrees from the permissionless extraction of value, speculation and other forms of behavior which are short term destructive to the ongoing health and development of a consumer project.

There is an entire spectrum of use cases which already act as airlocked economies. Here are three examples and the opinion they are expressing:

1. We are too early to financialize: Onchain gaming is a category still under active early development. There's both the theoretical to figure out and the simple hard task of building a feature complete game with a balanced economy. Primodium is an example of this. You can play the game on testnet, it's 90% there, but there's still more work to do before a free floating token can sit on top of the game.

2. There are laws and we obey them: Tribute Labs DAOs are capped at 99 seats per DAO and only open to US accredited investors. The team here took the opinion that operating within the US and being subject to its laws were worth the tradeoff on limiting size and participation within their product.

3. Our product is stronger if we manage key functions in house vs. outsourcing them: Here we turn to social and gamblefi. Friendtech is an example of an airlocked economy. The token is only tradable on its own internal DEX, Bunnyswap, and it manages all aspects of platform activity within a closed ecosystem.

Before going further, I want to note that airlocked economies are not a generalized use case. I am not advocating that crypto abandon core principles like composability and that all protocols should hide behind walled gardens. This is a specialized use case that should be employed either as a matter of requirement, or when limiting what something can do is as important to success as what it offers users the ability to do.

There are many advantages to having an opinion, especially when a product is largely a self-contained system exhibiting the properties of a social network. The first thing to consider is how value is being created. If value is being created by performing a role within a larger network of external relations, then the fewer opinions it expresses the better. If however, value is being created by acts of collective communal work within an internal network, then it is best to look within and optimize for fuel and focus as the primary opinions a product should express.

Fuel are the primary inputs into your system. Since we are in crypto, fuel can be reduced to liquidity and attention. Because crypto is a heavily financialized substrate where money and work go hand in hand, these two things are joined at the hip. There have been plenty of interesting projects which are suddenly a lot less interesting once the economic incentive to participate disappears.

Focus allows you to maximize the output of your system. That can either be an export which is pushed out of the system once a final product is created (Botto is an example of this), or it is the value users get from giving their time to what happens inside the network (Crypto the Game comes to mind here).

Fuel and focus are also strongly correlated to each other. If you were part of an NFT "community" and that communities' number one goal was to make the group's collective holdings go up in value, then this is a story that writes itself. As soon as the number goes down, the community devolves into finger pointing, apathy and placing demands on the team which are not to the long term benefit of the project.

Focus is not only a problem for users, it affects the project team as well. Look at the distraction caused when marketplaces stopped honoring royalties. How many NFT projects went from hubristically competing to become the next Disney to simply trying to survive and figure out how they were going to fund operations? What complexities were introduced when their solution was to flood the market with cash grab derivatives that debased their core product?

Lose your fuel and you lose your focus. It's as simple as that.

The easiest way to manage both fuel and focus in crypto is to limit a product's exposure to and reliance on volatile flows of liquidity across the ecosystem. Said another way, own your own liquidity.

There's a couple of approaches projects can take here:

Bonding Curves

The simplest is to put your product on a bonding curve. A bonding curve is a mathematical mechanism that determines the price of a token based on its supply. As tokens are bought, the supply increases, causing the price to rise according to a predefined formula (e.g., linear or exponential). Conversely, as tokens are sold, the supply decreases, causing the price to fall. This creates a predictable, transparent pricing model where the cost of tokens adjusts smoothly with buying and selling activity, ensuring continuous liquidity and incentivizing early participation by offering lower initial prices.

When a bonding curve acts as a project's liquidity mechanism, it allows the project to autonomously manage the buying and selling of its tokens. As users purchase tokens, funds are added to a reserve pool, increasing the token supply and price according to the curve's formula. Conversely, when users sell tokens, they withdraw funds from the reserve pool, decreasing the supply and price. This ensures that there is always a market for the tokens, providing continuous liquidity without relying on external liquidity providers. The bonding curve's self-regulating nature helps stabilize the token's price and ensures that liquidity is inherently tied to the project's overall token economy.

Protocol Owned Liquidity

In a fundraising effort, a project can sell its initial supply of tokens or assets, such as NFTs, to raise capital from early supporters. This process involves offering these tokens or NFTs at a predefined price or through various sale mechanisms. The funds raised provide the project with the necessary resources to develop and expand. To ensure long-term liquidity and stability, the project can allocate a portion of the raised funds into protocol-owned liquidity (POL). By doing so, the project places these funds into liquidity pools on decentralized exchanges under its control.

Protocol-owned liquidity (POL) refers to a system where a DeFi protocol itself owns and controls the liquidity for its tokens or assets, rather than relying on external liquidity providers. This ensures there is always sufficient liquidity for transactions, enhances trust among investors, and reduces the project's reliance on volatile external liquidity sources. By owning its liquidity, the protocol can ensure stability, better align incentives with its users, and create a more resilient and sustainable economy, reducing the risks of liquidity shortages or manipulations by third parties.

A lot. Power, focus, optionality, the ability to stack hits on hits, resilience, a performance-based pathway to self-funding operations, and a much clearer signal to noise ratio all are advantages to owning your own liquidity.

Product is a hit driven business in which the success of your core offering enables you the ability to do a number of things. As a product grows, scale enables efficiency, augmentation and experimentation. Efficiency comes from both economies of scale and using user data to optimize product. Augmentation is a feedback loop where users want and ask for more from your product because it is already useful to them. Experimentation is a process of trying to find a second and third hit to stack on top of your first.

This is the flywheel and once you have it going, you want to reduce all external factors which can interrupt it. In crypto, reliance on third party liquidity whether that is LPs or market conditions is the existential threat to your flywheel. We make financialized products, ergo money is the primary fuel.

Consider Friendtech which owns all its liquidity. When it came time to launch its clubhouse feature, it did not need to reach out to third party LP providers with an incentivized program which would support that new offering. It launched it within its own internal economy backed by protocol owned liquidity. Fuel allowed for focus, but also efficiency because capital remained in a single pool rather than forcing external LPs to choose between competing reward programs offered by the protocol in which flight from one pool to another could undermine the core flywheel of the product.

There's also the benefit of clarity to consider. Are you managing a product, a token, or both as aligned reflections of each other? Too often token becomes the product. We can view the graveyard of zombie chains holding billion dollar marketcaps as the worst manifestation of this. More commonly, the token starts to act as a second product whose management needs are no longer aligned with the core health of the product.

As a product guy, my preference is to align the token as a reflection of the product's performance. This dampens the noise ratio of speculation and keeps the token bounded to the product (not the other way around). On a long enough time horizon, it's the product that has to win. Vaporware tokens can only perform well in certain market conditions and eventually get caught out.

That leads us to optionality as another benefit of having an airlocked economy. The longer you hold something successful back, the more options present themselves to you when it is time to open up. Airlocks can be opened once the environment inside has been hardened to the point it can withstand pressure on the outside. Aavegotchi is an example of a project which kept itself on a bonding curve for the first two plus years of its existence and then released its token from the curve to trade freely.

This article is about opinions, postures and product. What I tried to do here today, is show that opinion matters within product, especially in commodified environments like the blockchain where the only other material differentiator is capital. From there, we looked at the appropriate types of categories where product should be strongly opinionated. There's a difference between more generalized services that interact in a composable environment where cooperation leads to a multiplier effect and narrow services offering more specialized experiences that favor depth and rely on the communal work of an internal network to create value. When a project is the latter, it has different needs and those needs break with mainstream orthodox thinking around design patterns in crypto.

One of the biggest breaks is shifting emphasis away from interoperability and instead focusing on shielding a product from disruptive events in the larger market. This is a strong opinion that a project can perform better by limiting its interactions with the broader world, and turn that attention in on itself. Projects can achieve this by airlocking the economy so that what comes in and what comes out is controlled at the product level. The challenge with that approach is financial. The very nature of our space is driven by the conjoined relationship between liquidity and attention, so projects who want to operate inside airlocks must bring capital inside and employ strategies built upon protocol owned liquidity.

This approach is working. The FT's (Fantasy Top and Friendtech) are the largest volume drivers and fee generators in the consumer crypto space today. Even if questions remain about the wherewithal and sincerity of Friendtech's userbase, it looks like an extremely attractive project to me because it has demonstrated working flywheels to support growth, expansion, rebranding and new audience onboarding. Hiring marketing and product people to seek new markets is a hell of a lot easier when you have a working funding model to pay for them, and can avoid external dependencies such as relying on venture capital or token sales.

So consider airlocked economies not as a violation of the core tenets of what our space is about, but rather as a new niche within crypto where some categories are better off selectively interacting with the broader economy in a way that prioritizes their health and growth, so that they can find footing and success, rather than being cut down prematurely due to volatility across the entire market.