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Protocol Value Model

Understand how value is created, exchanged, and where it settles and why.

Objectives​

Focus on understanding how value is created, aggregated, and distributed over tokenomics and charts

Business Model Fundamentals​

A token is not a business model. While many focus on tokenomics (circulation, supply, inflation), the long-term value depends on the underlying business model for generating cash flows. Most protocols resemble software marketplace businesses that connect supply and demand sides to create new markets.

Protocol Structure Assessment

  • Identify the product/service offered
  • Map the supply side participants
  • Define the demand side users
  • Understand the value exchange mechanics

For example, in Layer 1 protocols like Ethereum, the product is censorship-resistant block space, validators form the supply side, and developers/users represent the demand side.

Revenue Framework Analysis​

Protocol Revenue Identification

  • Direct protocol revenue (value accruing to token holders)
  • Supply-side revenue (separate from protocol revenue)
  • Revenue predictability and growth patterns

Protocol revenue includes mechanisms like burn mechanisms on Layer 1s, staking commission fees for liquid staking protocols, and take rates on trading fees for DEXs.

Revenue Optimization Levers

  • Fee structure adjustments
  • Market share leverage
  • Supply-side/demand-side balance management

A protocol with significant market share should experiment with fees to understand its leverage over the supply side.

Cost Structure Evaluation​

Cost of Revenue (COR)

  • Token issuance to validators
  • Data posting costs to Layer 1s
  • Software operations and maintenance
  • Oracle services and data feeds

Operational Expenses (OPEX)

  • Research & Development: Protocol upgrades, new features, security audits
  • General & Administrative: Finance, legal, compliance
  • Customer Acquisition Cost: Incentives, referrals, marketing campaigns

Key Health Indicators​

Growth Metrics

  • Steady, growing revenue (both total and per-customer)
  • Revenue growth exceeding supply-side revenue growth (for mature protocols)

Efficiency Metrics

  • COR growing slower than revenue (margin expansion)
  • Thoughtful R&D and G&A investment
  • CAC efficiency (aiming for gross profit at least 3x CAC)

Economic Sustainability​

Margin Analysis

  • Gross margin benchmarking (compare to 70%+ for SaaS businesses)
  • Potential for margin improvements over time

Incentive Structure Review

  • Design of sustainable acquisition models
  • Balance between immediate growth and long-term economics
  • Risk management for volatile token-denominated incentives

Case Study Application​

The article demonstrates this framework with Lido's P&L analysis, examining:

  • Revenue strategies and growth avenues
  • Gross margin health (89%)
  • Acquisition cost efficiency and denominating incentives in stable assets

Actionable Insights

  • Revenue expansion opportunities
  • Dynamic revenue sharing with validators
  • Market-driven pricing mechanisms
  • Transition from volatile to stable asset denominated incentives

Leadership​

  1. Clear intentions and reasoning why
  2. Validated pain points to navigate
  3. Consistent communication of intent
  4. Consistent alignment of actions with intentions
tip

Honest and driven to deliver on their potential to contribute to a greater good

Business Development​

Business Development in the crypto industry involves identifying, pursuing, and capitalizing on new business opportunities to drive growth and revenue. Here are the key aspects:

  • Identifying Opportunities: Researching new markets, partnerships, and products that can expand the company's reach and revenue streams.
  • Strategic Planning: Developing and implementing strategies to capture these opportunities, often involving market research, trend analysis, and competitor analysis.
  • Networking and Relationship Building: Building and maintaining relationships with key stakeholders, including clients, partners, and industry influencers. This is crucial for generating leads and closing deals.
  • Collaboration: Working closely with other departments such as sales, marketing, and product development to align business development strategies and ensure successful implementation.
  • Market Research and Analysis: Staying updated on industry trends, regulatory changes, and technological advancements to inform business decisions.
  • Negotiation and Deal Closure: Negotiating and closing partnership deals, contracts, and other business agreements