Many founders and investors assume crypto projects cannot capture value because they rely on open source code. The logic is that if you build open source software, someone will inevitably copy it, siphoning off your users and any chance at revenue. That does not look like a solid base for a business.
Yet crypto networks do follow a durable business model, and it is one that will feel immediately familiar to anyone who understands the forces behind valuable Web 2.0 marketplaces. As with marketplace businesses, crypto projects aim to build defensibility through network effects that create fee revenue and make users hesitant to move to a rival service.
What sets crypto apart is its ability to extend that familiar model. The key innovation of crypto networks is that they can deepen network effects by letting users participate in the value they produce.
Network Effects, Switching Costs, and Defensibility
Confusion about crypto and value capture is understandable. Open source code has helped software companies create trillions of dollars in value, but the communities that wrote that code usually have not had a direct way to capture much of that value themselves.
That is because there is an important distinction between open source code libraries, which are easy to duplicate, and networks that emerge around operating open source code as a service. An open source library is just an empty plan. It is inactive code until it is launched as an instance and populated with data, users, or both, creating a network or service. Many internet platforms are built on open source libraries, which companies run as an instance or service. With every new database record, or user, the service grows more valuable to each user, producing a network effect. This creates a built-in cost for users who switch to a new competing service. Those switching costs make it harder for rivals to gain ground, which creates defensibility. Picture a Facebook clone with no friends, or an Uber clone with no drivers. That is why large platforms keep getting larger while challengers remain trapped.
Once network effects establish defensibility, switching costs become the foundation for fees that companies can start charging users, advertisers, or both. This approach works as long as the fee stays below the cost of switching to another option.
Why Forking Does Not Eliminate Switching Costs
Like Web 2.0 platforms, a well-built crypto network is a live, operating service, and it can also support powerful network effects that generate switching costs. Since crypto networks depend on open source code, it is true that they can be copied more easily, or forked. But even if code can be duplicated for free, the social cost of getting every network participant to leave for an empty room is not zero. Add the trust and familiarity that come from brand, lindy effect, and smart contract integrations, and you have a recipe for strengthening an existing service, reinforcing its network effects, and producing switching costs.
Bitcoin’s network effect comes from more people viewing it as a store of value, which in turn encourages miners to protect the network. Ethereum’s network effect comes from developers who launch apps — each one becomes a building block that other developers can combine into higher order services, increasing usage and demand for ETH.
At the application layer, Uniswap, an automated token exchange, becomes more useful with every new user because more liquidity in the marketplace produces better trade prices. Compound, a money-market protocol for lending and borrowing, provides more competitive loan interest rates as lending liquidity rises.
In each case, a fork of the original network will at first be technically identical but functionally worse than the canonical instance. A fork of Compound would have poorer interest rates because of lower liquidity. A fork of Uniswap would have weaker pricing for the same reason. A fork of Bitcoin is less likely to be seen as a store of value or medium of exchange and therefore less likely to capture value.
This follows the same basic logic of defensibility in traditional Web 2.0 platforms: bring in users, build network effects, and raise defensibility through switching costs. That switching cost then becomes the basis for margin extraction, usually in the form of a fee:
Crypto Web 2.0 Bitcoin Fee per transfer PayPal Fee per transfer Ethereum Fee per function call Twilio Fee per API call Compound Fee per borrow LendingClub Fee per borrow Uniswap Fee per exchange Coinbase Fee per exchange
As long as a service stays only minimally extractive — charging a fee that is lower than the cost of switching — its model remains viable. So what is new in crypto is not the business model. It is who gets the benefit from it.
The Differentiator: Crypto’s Value Distribution Capability
Crypto tokens are an innovation similar to data packets. We can now transfer pieces of value the same way we move pieces of information: through an open standard, in highly granular transfers, instantly, to anyone, anywhere in the world. This means that valuable crypto services now have the unique chance to redistribute that value directly to the users who create it.
When designed well, an effective distribution of a fee stream can further lock in network effects by giving users a direct financial reason to contribute, creating more defensibility, which in turn, strengthens the viability of the fee stream in the first place. This is a virtuous loop that can produce sustainable, user-owned networks that expand in size and defensibility because of their cooperative economic model.
Crypto networks like Bitcoin and Ethereum are the first community-owned-and-operated platforms at scale. But with the right tools, many more founders may be able to use this new stack as a tool to distribute economic value, build network effects, and generate value for themselves, investors, and their user communities.
By making economic collaboration with users a core part of the product experience, founders may be able to unlock networks that are larger, more competitive, and more defensible, while at the same time enabling more innovation — all thanks to crypto’s open source foundation.