# Crypto Business Models: Notes from Ali Yahya's Lesson

By [arnavb](https://paragraph.com/@arnavb) · 2023-03-18

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![](https://storage.googleapis.com/papyrus_images/5600923cd679de1504137fd1208c8044.jpg)

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

![](https://storage.googleapis.com/papyrus_images/09c27e6941de1fc452b9241ced69815a.png)

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

![](https://storage.googleapis.com/papyrus_images/d40b10238563a01c0e9d85a829568242.png)

LAYER 1 BUSINESS MODEL (FLYWHEEL)

![](https://storage.googleapis.com/papyrus_images/800a9f6684c81b9627db9875c67b4610.png)

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

![](https://storage.googleapis.com/papyrus_images/475c5a36d5e031dccac9ec64f186e24a.png)

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

Also called Cross-Sided Network Flywheel (another thread)

![](https://storage.googleapis.com/papyrus_images/f92572d78b56b32b5fa469eecf7a7034.png)

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

![](https://storage.googleapis.com/papyrus_images/5ed38896b0d5dc8de6d93e04729def74.png)

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

![](https://storage.googleapis.com/papyrus_images/3b7b0b6463a681c01062b7cc366bddc8.png)

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

![](https://storage.googleapis.com/papyrus_images/900c443f83c63527b320dd42f734e887.png)

In summary,

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

![](https://storage.googleapis.com/papyrus_images/b0e3f8ccdf25a9053b614cb058080990.jpg)

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*Originally published on [arnavb](https://paragraph.com/@arnavb/crypto-business-models-notes-from-ali-yahyas-lesson)*