Blockchain technology and crypto-tokens enable new business models for creating open protocols, financed by the tokens protocol creators retain at launch
Protocols are a geeky topic. It's way more interesting to talk about applications. People will go on and on about why they like gmail or some other email application. Tweets: @arnaudcapdupuy , @naveen_mandava , @tech_ika , @philmorle , @romainrouphael , @gautamseshadri , @braxton and @louishatzis Tweets: Arnaud Capdupuy / @arnaudcapdupuy : Business model innovation is more disruptive that technological innovation - AVC http://avc.com/... Naveen Mandava / @naveen_mandava : “we now have a new model that supports a protocol-based business model” http://avc.com/... Erika / @tech_ika : “One problem in #tech is that there aren't large monetary incentives to create and sustain open protocols” http://avc.com/... via @avc Phil Morle / @philmorle : What if your business was a protocol? - AVC http://buff.ly/2and6AC Romain Rouphaël / @romainrouphael : After TCP/IP, HTTP, SMTP/IMAP,#blockchain and crypto-based tokens can fuel the future generation of open protocols http://avc.com/... Gautam Seshadri / @gautamseshadri : Great post on how open protocols married with blockchains and programmable incentives are a new investing paradigm http://avc.com/... @braxton : I hope this plays out and we make a general transition to protocol developers vs. monopolistic brokers. http://avc.com/... Ilias Louis Hatzis / @louishatzis : “the more open protocols we have, the more open systems we will have” via @fredwilson http://avc.com/...
Context & Ripple Effects
Fred Wilson's 2016 argument is the seed of what became the token-financing debate: instead of building closed products on top of free protocols like SMTP or HTTP, creators could fund open protocols by retaining tokens at launch, giving the protocol itself a business model. Balaji Srinivasan formalized the idea a year later in his piece on how blockchain-based tokens would transform technology financing.
What followed split along the lines this corpus already documents: a 2018 warning that Bitcoin and ICOs were a 1999-like bubble that would crash yet still yield durable companies, Kai Stinchcombe's counterargument that blockchains' no-trusted-parties premise is largely irrelevant, and by late 2021 Stephen Diehl's charge that tokens mainly let venture capitalists dump investments on an enthusiastic public without regulation.
First-order effects
- Protocol creators gain a funding route that bypasses traditional venture equity — the retained-token stake finances development the way equity once did, directly competing with VCs for early-stage infrastructure bets.
- Application-layer startups face a shifted value proposition: if the protocol layer can capture value via tokens, the classic 'rich applications, poor protocols' trade-off that shaped the HTTP and SMTP era no longer holds by default.
Second-order effects
- The financing mechanism invites its own backlash: Diehl's 2021 critique frames token launches as an unregulated exit for insiders, meaning the model's legitimacy now depends on how the VC-to-public distribution question gets resolved.
- Skeptics force a scoping correction — TechCrunch's advice to blockchain startups to build small viable applications rather than a decentralized Facebook-sized replacement pushes teams toward narrower use cases like Royal's musician NFTs, where token ownership maps to a concrete asset.
Third-order effects
- If the 1999-analogy holds, the token-financed protocol model survives its speculative phase the way dot-com equity did — producing a few durable protocol businesses while most token launches fail — with value concentrating at whichever layer (protocol or application) actually retains users.
- Sustained insider-dumping criticism points toward regulatory codification of token distributions, which would determine whether retained-token financing becomes a standard capital-formation structure or stays confined to jurisdictions tolerating the ambiguity.
The trend: Capital formation for internet infrastructure is migrating from equity to protocol-level tokens, with each speculative cycle and regulatory response deciding how much of Wilson's 2016 thesis survives.