This post originally appeared in the Delphi Digital Quarterly Macro Outlook. My members get access to the full report by logging into their account here.

Paul Graham wrote that startups = growth. Getting growth right, he argued, could make up for getting a lot of other things wrong. This philosophy has served his firm Y Combinator (and the rest of Silicon Valley) well.

The most valuable startups build network effects. Each user gets more value from the startup every time the startup adds another user to the network. Successfully growing a company with a network effect leads to the massive impact enjoyed by companies like Facebook, Google, Uber, and Airbnb.

By and large, the projects in the crypto space aspire to build massive and sustainable networks. Whereas companies that operate network-effect businesses can run into conflicts of interest (the interests of the company run counter the interests of the user), the ideal “decentralized” network has no operator and naturally aligns the interests of all its participants.

If this logic holds, crypto projects aspiring to the ideal have the same imperative to grow as startups. Grow fast and obtain an insurmountable lead over competitors. Fail to grow and fail to materialize a network effect.

Growing a network tends to require subsidizing one side of the network. For example, Airbnb and Uber subsidized the “supply side” of their marketplaces by providing homes and cars to their users at a discount. This is often called “bootstrapping” the network.

(For a crypto example, Dharma–an open and permissionless loan platform–is subsidizing the “borrower” side of their network by offering lower rates than they are paying to the “lenders” side of their network.)

Most crypto projects want to encourage people to build things on top of their protocol. The most common example of this is a “smart contract protocol” like Ethereum. In this case, ones institution would say, bootstrap the network by subsidizing developers.

Ethereum has successfully bootstrapped the supply of developers (compared with competing protocols). Hundreds of teams raised money through Initial Coin Offerings (many are still very active today) and even more have built various apps and utilities without issuing their own token. Ethereum accomplished this in a variety of ways–enabling capital formation through ICOs (probably the biggest way), direct funding through grants, and more.

But perhaps the most interesting way they bootstrapped supply was to generate a sort of mass movement around Ethereum itself, growing a community of Ethereum supporters, some of which were developers or interested in becoming developers. The simple self-interest of feeling excited about Ethereum combined with the financial incentive of wanting to see their own Ethereum holdings increase in value formed a pool of early adopters willing to build on a platform with no clear demand for the things they were building.

Now, two years after the big ICO boom of 2017 and over five years (wow) after Ethereum’s founding, a substantial developer community continues to build–see DeFi, crypto games–but I hesitate to say that it has successfully grown a network effect. There appears to be a surplus of products and services created by developers and a shortage of users.

Perhaps it’s the demand side of the marketplace (actual users of stuff) that needs subsidizing.

And perhaps the demand side is being subsidized. The users that we see tend to be drawn from the same pool of Ethereum supporters as the early-adopter developers that decided to build on an immature platform without users. They are enthusiasts with a financial incentive. They are willing to suffer the inefficiencies and costs of using crypto products and services today, even if they aren’t benefiting much beyond speculation.

In the case of Ethereum, both sides of the marketplace–developers and users–are being subsidized by believers in the network itself, paid in gas fees and tedious user experiences.

This year, we will see the launch of several highly anticipated competitors such as Cosmos, Dfinity, Algorand, Polkadot, and literally dozens of other projects that have raised tens of millions (oftentimes more) of dollars.

What I’m curious about: will true believers in those platforms bootstrap their networks the same way Ethereum did (true believers and investors subsidizing both sides of the network) or will these projects successfully recruit developers or users that couldn’t care less about the underlying protocol, attracting them with direct benefits (e.g. better developer experience, better user experience). If the winning growth model is continuously expand the population of believers, some of whom will bootstrap both sides of the network, eventually reaching some critical mass, Ethereum is squarely in the lead (in the war for smart contract protocols). If it’s more like traditional startups, it could be anybodies game.

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