Finding the balance point of web3.0, discussing the qualitative changes brought by web3.0 to the commodification of complementary goods

Authors: Jesse Walden, Jonathan Glick

Compiled by: Kyle

About 20 years ago, Joel Spolsky, the author of "Joel on Software," coined a phrase that has since guided the decisions of countless startups and tech giants: "Commoditize your Complement." (Note: Complement refers to products that are purchased alongside your product, such as gasoline being a complement to cars.)

In general, a company's strategic interest should be to lower the price of its complements as much as possible. The theoretically sustainable lowest price is the "commodity price"—the price that occurs when you have a bunch of competitors offering indistinguishable goods. So: smart companies try to commoditize the complements of their products. If you can do this, demand for your product will increase, allowing you to charge more and make more money.

When the prices of gasoline, milk, and ink go down, companies selling cars, grains, and printers benefit because the total price of the product includes anything else you need to maximize its potential—its complements. When the cost of complements decreases, the core product becomes more affordable overall. As affordability increases, sales also rise—along with sales, the pricing power of complements increases—creating a virtuous cycle. If ink is almost free, then the biggest winners will be Canon and HP, which will see their product costs decrease without having to lower their product prices.

Web3 teams have the opportunity to learn and improve strategies for commoditizing complements. In this article, we will discuss why building and commoditizing products on top of user-owned protocols can provide the greatest leverage to execute this strategy, with the potential to drive growth and value through a more robust economic equilibrium, surpassing the early implementations executed by traditional tech companies.

Let’s start with some historical examples.

Licensing, Co-opting, and Walled Gardens

In hardware, the most famous example of "commoditizing complements" may be Microsoft's strategy of licensing its popular operating system Windows to anyone who could pay, thereby fostering competition among PC hardware manufacturers. This encouraged fierce competition within the PC industry, weakening the market position of hardware manufacturers. By lowering the total cost of purchasing a desktop, Microsoft eliminated IBM's position as a hegemonic threat, expanded the potential market for personal computers, and in turn increased demand for Windows, enhancing their pricing power.

In software, corporate acceptance of open-source projects has stifled startups' ability to develop profitable and threatening businesses at that layer while encouraging the use of proprietary services, further expanding the advantages of tech giants. Google's licensing of TensorFlow (which cost millions of dollars to develop its machine learning engine) stifled potential competitors building general-purpose machine learning frameworks and increased the number of developers using and improving TensorFlow software, thereby driving demand for TensorFlow Enterprise on Google Cloud.

During the Web2 era, platforms like Twitter and Facebook ran powerful but temporary "commoditization of complements" strategies in the early stages of their growth. By giving away their products and APIs for free, these platforms were able to attract valuable social graphs and user data, which in turn helped attract an ecosystem of third-party developers who built products to reach these users and extend the platform's capabilities. But there was a problem: after commoditizing the API as a way to drive growth, social networks shut off the spigot, turning their platforms into proprietary walled gardens to extract more value from them. This created a zero-sum conflict with third-party developers and their users, as their choices were eroded.

Web3 protocols have the opportunity to do things differently because they can distribute tokens to transform users into owners, enabling them to govern the platform according to their ongoing interests.

Guiding Through Commoditization in Web3

The first and largest "user" of Web3 platforms—defined as software services running on open blockchains (often referred to as "protocols" in Web3 parlance)—is typically the product teams building the underlying platforms. The Web3 teams building these platforms wisely construct the first product on top and give it away as a "free" commodity to guide users, data, and network effects.

Uniswap is an example: Uniswap Labs built app.uniswap.org, which is the first and primary interface for the Uniswap protocol, which is open and runs on the Ethereum blockchain. Compound Labs is another company that did the same for the Compound money market protocol. Allowing these early DeFi protocols to be accessed through intuitive, user-friendly frontends is crucial for guiding liquidity into each market platform—once liquidity flows in, network effects follow, making the product pricing better for each additional user. A growing user base, combined with reliable developer documentation, facilitates third-party developers integrating the underlying protocol into new products and services. For example, Metamask includes token swaps directly in its Ethereum wallet, with liquidity coming directly from Uniswap. Crucially, Metamask can do this without permission and without worrying that the API will be pulled from underneath, as is common in Web2, because the Uniswap protocol and all its data run on a public blockchain and are owned by the users.

In summary: zero-cost access to complements (the Uniswap trading application) is a way to maximize end-user benefits, with the end-user usage driving the network effects of the underlying platform (the Uniswap protocol). These network effects, guided by commoditized products, can help attract third-party developers who build more features, attracting more users and usage, thereby compounding these network effects. Ultimately, the ownership distribution of the underlying platform—in the form of tokens—can be allocated to those who drive value, typically users and developers.

In other words, Web3 companies can commoditize complements—but not as a means of extracting profits and status from potential competitors as in Web2, but as a practical means of fostering sustainable innovation.

This gradual decentralization approach aligns incentives around the growing value of the underlying platform or protocol—and allows teams that earn tokens through contributions to commoditize their own products to capture value within the underlying platform.

Balancing Protocol and Product Demands

This Web3 model of commoditizing complements—and the resulting structural separation between protocol and product—creates a demand for economic balance, where protocols incentivize developers to commoditize their complementary products while covering as broad a user base as possible, aligning their success with the growth of the underlying platform.

As more teams join Web3, it is essential to emphasize best practices for achieving this balance. Two steps are particularly important:

First, as Web3 platforms mature, it may be beneficial to build core project development work between two teams: those focused on the underlying platform or protocol, and those building initial products for end users (each team may have its own distinct branding to avoid confusion). Product teams understand the needs of end users and can help inform protocol design. As protocol teams understand the needs of product developers, they can consider adding features that attract more developers.

Second, both product and protocol teams should align around a single goal: a KPI focused on protocol growth. Measuring against protocol-level metrics helps ensure that products are genuinely complementary, driving the expected value of the underlying protocol. By having dedicated product and protocol teams aligned around a shared metric (a protocol or platform-level KPI), it should be possible to measure contributions to that KPI and allocate the value of the underlying platform to the developers and users driving it.

Initial product teams help guide the network effects of the underlying protocol and should be rewarded for their significant contributions to the ecosystem. But ultimately, the protocol library is best optimized for multiple product teams at the top level, as this may be a way to make the platform larger and faster. The economic balance that can achieve this has the potential to be a rising tide that lifts all boats.

In this balance, products that attempt to extract too much value from the protocol layer will face fierce competition from others commoditizing their products to capture value elsewhere. This excessive value extraction will replicate rather than reform the Web2 model—third-party innovation will be stifled, developers will tend to fork, and users will seek cheaper, more innovative alternatives.

Some early examples of protocols committed to achieving the right balance include grant programs from large DeFi protocols like Uniswap, Compound, and AAVE, which reward third-party developers with their native treasury tokens for providing products and services that grow the ecosystem. The Liquity protocol rewards developers who build frontends for its stablecoin protocol, with LQTY tokens proportionally rewarded to users who deposit funds into the protocol. These frontend operators can earn a share of these rewards by tagging deposits facilitated by their interface and specifying the percentage of LQTY rewards to be allocated to users. The UMA protocol attempted something similar with its developer mining program, which encourages distributed innovation, using economic incentives to reward developers who contribute directly to sustainably increasing the Total Value Locked (TVL) KPI of UMA. If you have built or seen other good examples, I would love to hear about them.

Commoditizing complements is a concept deeply rooted in technological strategy. The ownership economy of Web3 provides us with new tools to use it, not as a means to stifle innovation and community, but to encourage them.

Thanks to Jonathan Glick for his assistance, and to Li Jin, Spencer Noon, and many builders in the Variant portfolio and community whose conversations helped shape the ideas in this piece.