😰 [Analysis] Fear of crypto copycats – Tony Sheng

Copying is rampant in crypto projects due to its open-source and global nature. There are five sources of economic moats:

• Cost advantage (e.g. economies of scale): when a company uses its scale or unique assets to undercut competitors on cost
• Intangible assets (e.g. patents, brands, trade secrets): when a company holds intangible assets like patents or brands that lead to monopolies or pricing power in the market
• Efficient scale: when the market of limited size is best served by one or a small handful of companies (e.g. utilities, airports) and a competitor is discouraged from entering because the returns in the market would fall below the cost of capital
• Switching costs: when a customer would have to incur an expense or inconvenience in order to switch from one supplier to another
• Network effects: when the value of the network increases for both new and existing users as more people join

For crypto projects, these moats translate in the following ways:

• Cost advantage: for the copycat, the cost-effective solution is to wait, spend no resources on R&D, and take what you need from the innovators
• Intangible assets: patents (e.g. Hashgraph), brand (Bitcoin), and trade secrets (STARK technology)
• Efficient scale: because of the near-zero cost of copying, efficient scale doesn’t matter much for crypto projects
• Switching costs: switching costs are usually in the form of social costs and moving to a new platform with less mature infrastructure
• Network effects: network effects are very prominent in crypto especially in the form of consensus mechanisms

For crypto projects, network effects are more important, switching costs are equally important, intangible assets and efficient scale are less important, and cost advantage is not important. Overall, there are fewer ways to build a moat, but it’s not true to say crypto projects cannot have economic moats. Copying reduces overall R&D costs across the industry (and benefits everyone), but disproportionately benefits new projects with deep pockets and distribution. However, copying plus go-to-market is only effective in bootstrapping a protocol. At sufficient scale, copying is no longer as effective. Over a long enough time horizon, the teams with a clearer connection to their constituents and superior execution can win–but having capital and distribution makes it a lot easier.

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