When looking for product-market fit, how to avoid common pitfalls?

Compiled & Translated by: DeepTide TechFlow

Guests: Eddy Lazzarin, Chief Technology Officer of a16z crypto; Miles Jennings, General Counsel and Head of Decentralization

Host: Robert Hackett, Operating Partner at a16z crypto and Head of Content and Editing Department

Podcast Source: a16zcrypto

Original Title: Token do's and don'ts

Broadcast Date: August 8, 2024

Background Information

In this episode of a16z's Web3 program, the content related to Tokens will be comprehensively discussed, including the role of Tokens in decentralized protocols, different types of Tokens, and considerations for designing and issuing Tokens.

The guests for this episode are Eddy Lazzarin, Chief Technology Officer of a16z crypto, and Miles Jennings, General Counsel and Head of Decentralization. They have provided protocol design and Token design advice for numerous projects. They will discuss the differences between Web3 and the early technological era, how to avoid common pitfalls when looking for product-market fit, how to evaluate various designs and strategies, and their risks and returns, and more.

The Necessity of Decentralized Protocols

The Core Function of Tokens

• Eddy explained why decentralized protocols need tokens to sustain their sustainability and incentivize the participation of all stakeholders. He pointed out that tokens are not just a payment tool, but a means for users and network participants to represent their ownership and control. Eddy emphasized that tokens should be seen as a tool that allows users and stakeholders to represent their ownership and control in the network, rather than just a payment medium for purchasing traditional goods.

Comparison of Tokens with Traditional Protocols

• When comparing protocols of Web1 and Web2, Eddy mentioned that although the protocols of Web1, such as HTTP and SMTP, were decentralized, they were eventually absorbed by large companies, leading to users losing control over these protocols. He pointed out that decentralized protocols can sustain decentralization through the introduction of tokens and maintain decentralization through economic incentives. This economic incentive mechanism enables the protocol to operate sustainably without relying on centralized entities, thus avoiding control by large companies like Gmail.

• Eddy also mentioned that the advantage of decentralized protocols is the ability to gather all stakeholders and ensure the sustainability and value of the protocol through the economic model of tokens. He believes that tokens are a key tool to achieve this goal because they can be written and executed in the program, ensuring that the protocol continues to operate as designed.

Types and Classifications of Tokens

• Eddy discussed several different types of tokens, pointing out that each type of token has its unique function and market positioning within decentralized protocols. He listed some common types of tokens, including:

  • Stablecoins: Such as USDC and USDT, these tokens are usually pegged to the value of fiat currency, aiming to reduce price fluctuations and provide users with a more stable value storage and trading medium.

  • Arcade Tokens: These tokens are usually used in specific application scenarios or platforms, similar to points or reward systems in games, which users can obtain by participating in activities or completing tasks.

  • Meme Coins: These tokens usually originate from humor content on the Internet or social media. Although they may lack substantial applications, due to their community-driven nature, they sometimes attract widespread attention and speculative interest.

• Eddy emphasized that different types of tokens need to consider their specific functions and target markets when designing and launching them to ensure their effectiveness and sustainability within decentralized protocols.

Legal and Regulatory Challenges

Regulatory Uncertainty

• Miles emphasized the legal risks and regulatory uncertainty faced by token issuance and decentralized protocols. He pointed out that with the rapid development of cryptocurrency and blockchain technology, regulatory agencies around the world are increasingly paying attention to these emerging technologies. However, due to the incomplete legal framework, projects often face complex legal and compliance challenges when designing and issuing tokens.

• Miles mentioned that project teams need to carefully consider their legal structure when launching tokens to avoid potential legal issues and regulatory penalties. He suggested that teams adopt different strategies to mitigate these risks, including:

  • Compliance Review: Conduct thorough legal and compliance reviews during the token design phase to ensure compliance with local and international laws and regulations.

  • Legal Consultation: Seek professional legal advice to understand the latest regulatory dynamics and requirements in order to develop appropriate compliance strategies.

  • Transparency and Communication: Maintain transparent communication with regulatory agencies, actively cooperate with regulatory requirements to build trust and reduce legal risks.

• Miles emphasized that despite the challenges in the legal and regulatory environment, projects can effectively navigate these complex areas and achieve innovation and growth on a compliant basis through careful planning and professional legal support.

Governance and the Value of Decentralization

Technological and Legal Advantages of Decentralization

• Eddy and Miles emphasized the importance of decentralization in technology and law. They pointed out that decentralized protocols, through the decentralization of control, can provide greater autonomy and transparency for users and communities, thereby enhancing the reliability and trustworthiness of the system.

  • Technological Advantages: Eddy mentioned that decentralized systems reduce the risk of single points of failure and improve the resilience and security of the system through a distributed network architecture. This architecture enables the protocol to operate sustainably without centralized entities and be more resilient in the face of external attacks or internal failures.

  • Legal Advantages: Miles discussed the potential legal advantages of decentralization. He pointed out that decentralized protocols can reduce the concentration risk of legal liability by introducing a decentralized governance structure. In addition, decentralized governance mechanisms can give community members more decision-making power, allowing the protocol to better reflect the needs and interests of users.

Pros and Cons of Token Governance

• When discussing token governance, Eddy and Miles also explored its potential pros and cons. Token governance typically involves token holders participating in the decision-making process through voting or other mechanisms, which can enhance community participation and the democracy of the protocol. However, they also pointed out that token governance may bring some challenges, such as:

  • Governance Participation: Although token governance gives users the right to participate in decision-making, actual participation may be low, leading to excessive influence by a few large holders in the decision-making process.

  • Complexity and Efficiency: Decentralized governance mechanisms may increase the complexity and time cost of the decision-making process, affecting the protocol's responsiveness and innovation capabilities.

• Despite these challenges, Eddy and Miles still believe that decentralized governance is one of the key factors for the long-term success and sustainable development of the protocol.

Product-Market Fit

Definition and Importance

• Product-Market Fit refers to the state where a product meets the needs of the target market and finds its position in the market.

• Eddy emphasized the importance of this concept in decentralized protocols and token projects. He pointed out that product-market fit is crucial for the success of a project because it determines whether the product can gain widespread adoption and sustained usage among users.

Strategies for Achieving Product-Market Fit

• User Needs Analysis: Eddy suggests that project teams deeply understand the needs and pain points of their target users to ensure that the product design and features can truly solve user problems. This requires extensive market research and collection of user feedback.

• Iteration and Optimization: Through continuous product iteration and optimization, projects can better adapt to market changes and user needs. Eddy emphasizes that flexibility and rapid response are important factors in achieving product-market fit.

• Community Engagement: In decentralized projects, community participation and support are crucial. Eddy believes that by building strong community relationships, projects can gain valuable user feedback and market insights to better adjust product strategies.

• Market Education: For emerging technologies and products, market education is key to helping users understand and adopt the product. Eddy suggests that project teams allocate resources for market education activities to increase user awareness and acceptance of the product.

Challenges and Solutions

• Achieving product-market fit is not easy, Eddy points out some common challenges such as intense market competition and diverse user needs. He advises project teams to address these challenges through differentiation strategies and unique value propositions, while remaining sensitive to market trends and user feedback to make timely adjustments and optimizations to the product.

Good and Bad Practices in Token Issuance

• Token issuance is a critical step for blockchain projects to raise funds and drive ecosystem development. However, there are good and bad practices in the token issuance process that project teams need to carefully consider and follow. Here are some common good and bad practices:

Good Practices

• Decentralization:

  • Eddie and Miles emphasized the importance of decentralization, considering it as one of the core values of blockchain technology. Decentralization not only helps reduce dependence on managers but also brings technological and legal advantages.

  • Decentralized systems better protect users from the impact of information asymmetry and also reduce the risk of being considered securities from a legal perspective.

• Clear Economic Model:

  • Ethereum was mentioned as a successful example because it has a clear economic model that can maintain value in the long term.

  • Tokens should have clear utility rather than just existing as speculative tools.

• Community-Driven Participation:

  • Effective token issuance should encourage community participation, ensuring that the token's utility and governance mechanisms are clear and necessary.

Bad Practices

• Decentralization Theater:

  • Miles mentioned "decentralization theater," where projects claim to be decentralized but are actually controlled by centralized teams. This practice has no technological advantages and may pose consumer risks.

• Tokens with Unclear Utility:

  • Issuing tokens solely for governance is considered a bad practice, especially when governance is not truly needed.

  • In the example mentioned by Robert Hackett, some projects force users to use their tokens, which have no actual function or value.

• Legal Risks:

  • Publicly selling tokens in the US may be considered securities, and Miles emphasized that this practice should be avoided as it brings significant legal risks.

• Premature Token Issuance:

  • Miles pointed out that many projects issue tokens prematurely without clear utility or product-market fit, often leading to failure.

• By following good practices, project teams can increase the success rate of token issuance and lay a solid foundation for the long-term development of the project.

Summary and Recommendations

• The Importance of Decentralization:

  • Decentralization is not only a legal requirement but also a core value in technology. It provides system robustness and global adaptability, allowing users and developers to trust and rely on these systems.

  • Decentralization reduces dependence on management and lowers the risk of information asymmetry, which is one of the core concerns of securities law.

• Clear Utility of Tokens:

  • Before issuing tokens, projects need to clarify the actual utility of the tokens. Tokens should not just exist as speculative tools but should contribute to the operation of the protocol and the healthy development of the ecosystem.

• Avoid Premature Token Issuance:

  • Many projects issue tokens prematurely without clear product-market fit and token utility, which can bring legal risks and market failure. Projects should issue tokens only after determining the functionality and market demand of the tokens.

• Legal Compliance and Risk Management:

  • Projects should fully consider legal compliance when issuing tokens, especially in the US market. Avoiding unnecessary legal risks, such as tokens that may be considered securities from public sales, is crucial.

  • Strategies such as decentralization, excluding the US market, or restricting the transferability of tokens can to some extent reduce legal risks.

• Community Participation and Governance:

  • Community participation is crucial for the long-term success of projects. Projects should design reasonable governance mechanisms to ensure effective community participation in decision-making when necessary.

  • Voting should be used as a last resort, only when necessary, and not as the primary reason for token issuance.

• Economic Model and Incentive Mechanisms:

  • The economic model of tokens should be carefully designed to avoid unnecessary speculation and market manipulation. Projects should focus on building a sustainable economic ecosystem.

  • When designing incentive mechanisms, attention should be paid to balancing the interests of both supply and demand sides to ensure market stability and predictability.

• Focus on the Product, Not Just the Token:

  • Eddie emphasizes that founders should focus on the design and implementation of the protocol, rather than just focusing on the token itself. The token is part of the protocol, not the whole.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。