This lesson covers alot of topics:

• Layer Stack of Blockchain

• Business Models of Layers 1 & 2

• Value Capture in Crypto

• Network Flywheel

• COMPOUND Business Model

Layer 0 -> includes miners and validators communicating through peer-to-peer networking

Layer 1 --> then after P2P networking, they agree with the truth of the network i.e. Consensus

Layer 1.5 --> then they compute that state through game theoretical mechanics

Layer (0 + 1 + 1.5) combines to form a "blockchain computer".

On top of this, we can deploy programs.

Now comes,

Layer 2 (Smart Contracts)

• computational foundation written by developers which runs on "blockchain computer"

• fundamental building block for everything built on blockchain

Layer 3 (Client and UI) :

• code that runs on user side (phone, browser) like wallet, apps etc.

• connects the world of protocols to the world of people

Let's talk about Business Models:

Layer 0 and Layer 3 are called "The Periphery Of Crypto"

• both follow the same traditional business model like web2

Layer (1 + 2) is also called "The Core Of Crypto"

• both layers follow the same business model i.e. Multi-Sided Platform.

What is a Multi-Sided Platform?

A common ground that creates value by enabling direct interaction b/w diff kinds of participants.

Eg:

Bazaar --> which connects merchants and buyers Lyft --> connects drivers and riders

LAYER 1 BUSINESS MODEL (FLYWHEEL)

PROTOCOL itself is a multi-sided platform which connects every participant

TOKEN is a key mechanism for value capture

How it captures value?

This Value Capture Paradox is solved by defensibility.

Defensibility is the ability to maintain a positive rate of return over a period of time for a network

It comes by having Network Effects in a system.

Two types of Network Effects: a) Same Sided

More existing users --> More trusted by new user Value of a network to a new user increases if there are already large number of users.

• Cross-Sided

Eg: In case of Lyft If a driver joins ---> More riders will ride

More financial capital by investors --> Greater Token Value --> More attractive to miners

Also called Cross-Sided Network Flywheel (another thread)

So that's how token value is fabricated in so many layers, so it can't be just copied whether it is open-sourced.

Network Effects are so powerful, you can't just open a new token or join one.

LAYER 2 BUSINESS MODEL

LAYER 1 --> Community Owned + Controllable by Autonomous Programs called Smart Contracts.

Smart Contracts are multi sided platforms that themselves are built on layer which is also a multi sided platform.

COMPOUND CASE STUDY

• COMPOUND is a decentralised money market (lending platform)

• Built on Ethereum

• Includes 4 diff participants

LENDERS - Provide Money KEEPERS - Financial Support to network BORROWERS - Borrow Money by providing collateral COMP HOLDERS -> Risk Management

This is a core template for the business model for Layer 2

It is also replicable.

But what makes it un-replicable?

Defensibility for Layer 2 --> Network Effects

Activity in protocol increases --> its Assets increase ---> Cost and Risk for users decrease --> Defensibility increases

In summary,

Value Capture in Crypto --> Multi-Sided Platform + Network Effects