Open Startups and Collective Business Models in Open Source

An analysis of the role sound
crypto economies may play in open-source development

In this piece, I propose a framework to develop crypto
economies in a way that is consistent with the original crypto ethos, with the ultimate goal
of funding open-source development:

• Bootstrapped development with no early venture capital involvement;

• Achieving product-market fit;

As a bitcoiner, I share the aversion Bitcoin maximalists
feel for what the typical crypto project has become. From the early-days
copy-cat coins and meme coins claiming to compete with Bitcoin and the
ICO-over-a-whitepaper frenzy to the current VC-dominated web3 space, I too
believe that 99% of crypto projects are either outright scams or poorly
designed projects that don’t need a token.

My focus is on the remaining 1%, and on the saner trends
that may emerge after all the lessons learned so far.

But let me get something out of the way so that we can focus
on the subject at hand. Bitcoin is the best form of money we will ever get and
there is no second best. I’m a Bitcoin maximalist for the money use case in the
broadest possible sense of the word money.

Bitcoin fixes money. Once adoption broadens, humanity will
be in a much better place thanks to first, second, and nth-order effects. If
you don’t know what I’m talking about, just go and grab The Bitcoin Standard. Feel
free to throw in The Fiat
Standard as well, both by Saifedean Amous.

There is no valid case for payment tokens, as Bitcoin offers
a superior infrastructure and network effects that no new token may ever
achieve. If your project or product requires payments, use Bitcoin over the Lightning Network.

That said, there are open-source crypto projects that
Bitcoin maxis should support. Why? Because they share our values, and because
they offer a sensible way forward in our collective quest towards
decentralization.

Now, shall we get started?

The Incentives Use Case

To me, the most compelling use case for crypto tokens is
incentives.

In the case of Bitcoin, the design of incentives is one of
the most exceptional features of the protocol. How do you get random rival
entities to perform costly work to secure the network?

You offer an incentive and let the free market do what it
does best: distributed problem-solving!

As users of the Bitcoin network, we don’t need to care or
even know about all the hurdles miners have to go through to find the next
hash. We don’t care where they set up shop, how they source energy, what
contracts they sign or the financial engineering they have to come up with to
be profitable. All we care about is that they get the job done.

Satoshi’s design of incentives allowed the network hashrate
to grow from the output of a single CPU to over 200 exahashes per second in
thirteen years without any changes.

The incentives policy was defined mathematically and coded
in from day one. Zero need for management. Brilliant!

The Importance of Supporting Open Source

Free and open-source software is at the core of the shift
towards decentralization that bitcoiners believe is fundamental for a better
future. The free and open-source movement is likely the first and foremost
enabler of the technology infrastructure that currently serves as railways for
the world’s economy — and of Bitcoin itself.

There is no privacy or individual sovereignty without free and open-source software.

The success of open-source projects is tightly linked to the
number and quality of contributions. There’s only so much a founder or a small
technical team can achieve working in their free time. The best projects tend
to form large communities, with hundreds and even thousands of contributors.
That is precisely how open source beats closed source. It’s a brute-force
attack. The sheer number of early adopters, testers, and developers in vibrant
open-source communities render for-profit corporations and their closed-source
development models unfit to compete.

But we can’t take open source for granted. Starting,
leading, and bootstrapping an open-source project is hard work, often with no
motivation other than curiosity, self-interest, and altruism!

Most of the time, projects start as a side gig of curious
developers exploring a space of personal interest. Whenever a product becomes
usable, it may start attracting a user base. With no marketing budget, users
tend to show up at a very slow rate through word-of-mouth. If the user base is
technical, the growth of the user base may eventually lead to the emergence of
a few contributors. Until the project has a life of its own, it’s the founder’s
job to bootstrap the whole thing for as long as it takes.

It’s usually a lengthy, organic process that may get
truncated at any point before it reaches critical mass, for whatever reasons.
No wonder why most open-source projects end up disappearing before gaining any
traction!

Now, let’s go back to the previous line of thought about
incentives…

Blockchain platforms need to incentivize network security
because security is paramount for the functioning of the blockchain. But, what
if your project doesn’t require a blockchain of its own?

What else could a project incentivize?

Contributions!

Fair Launch

Bitcoiners often complain about the role venture capital
plays in the so-called web3 space. The argument is that VCs fund projects in
the seed stage only to dump their bags on retail investors once the project
launches. The short investment horizon is said to skew their analysis. Instead
of scrutinizing the fitness and long-term feasibility of the project, they
focus on marketability, or so the accusations go.

So, what’s the alternative for funding worthy open-source
projects?

A fair launch, right? But we didn’t like ICOs either!

“Only because of pre-mines, ” goes the argument,
“and con artists selling illusions over a whitepaper!”

Fair enough. So what’s the alternative for a fair token
distribution?

Distributing the token among open-source contributors!

Open Source on Steroids

Deploying a crypto token as an incentive to contribute to an
open-source project is not just an evolution of the typical open-source project
dynamics. It’s a game-changer!

The token turns
open-source contributors into partners in a collective venture, and the
software into an ever-improving product designed to dominate its niche.

Let me break that down for you…

The token distribution among open-source contributors aligns
everyone’s interests in the same direction. For the token to have any market
value, contributors must first deliver a worthy product. Think of this new kind
of open-source project as an open startup.

If the initial work by the founders is any good, the project
will sooner or later start attracting contributors, in particular those with an
entrepreneurial mindset. Contributors will put in the work necessary to achieve
product-market fit because that is a fundamental requirement for the token to
become valuable. They will invest their time and effort in a calculated bet
that their efforts will bear fruits in the long run, pretty much like
traditional entrepreneurs.

What happens next is that people and entities using the free
and open-source software will want to support the efforts of contributors
because supporting contributors is the best way to ensure that the software
will keep improving, remain relevant, serviced, and available. That is what
happens with traditional open-source projects, and it’s the reason why
Github.com introduced the Github Sponsors program. The limitation of such
programs, though, is that they turn supporters into mere sponsors.

On the other hand, a crypto token may have multiple
utilities and may offer a superior experience in terms of how supporters may
interact with the project.

Because tokens are distributed exclusively among
contributors, people that wish to support the project’s development efforts can
buy the token directly from contributors—either from individuals or from a liquidity pool set up
by contributors in a decentralized exchange (DEX). That is how the token
initial price discovery occurs.

So, now the token has a market value.

Suddenly, the incentivization capability of the project is
no longer based on a distant promise of the token being valuable in the future.
In turn, the token becomes liquid, and the incentives the project offers to
contributors become tangible.

What happens next is that market forces start playing the
market game.

The project becomes more attractive to the typical
open-source contributor. Developers now have a choice. They can either
contribute to traditional open-source projects or this new brand of open
startups running collective business models. Other things equal, people tend to
go for the money option.

So the project starts attracting more contributors. What
happens next?

The product continues to improve! Development accelerates
and the frequency of releases increments. The user base starts growing faster,
as the word gets out that the project is booming and the product is a killer.

With a product improving by the hour and the user base
growing, the token starts attracting speculators. Investors figure that the
collective business model driving the project makes up a positive feedback loop.
The market prices in improvements in the product as well as the expansion of
the user base. The token appreciates. And that’s how the positive feedback loop
gets started!

The higher the price of the token, the larger the
incentivization power of the project, the more contributors it attracts, the
faster the product improves, the more the user base grows, and the more
investors the token attracts.

That is how open-source contributors become partners in a
collective venture. And that is how the product ends up dominating its niche
market.

You’ve built an organism that forever improves itself!

Bootstrapping Phase

The positive feedback loop must be bootstrapped by the
founders and the rest of the early group of contributors. At the end of the
day, founders are contributors like everyone else.

Notice how the setup differs from the typical startup that
would likely want to secure funding early on over a business plan and an MVP (not to mention scammy crypto projects getting funded over a whitepaper).
Open-source projects are used to going by without any funding at all, and that
is a feature, not a bug.

Usually, project founders start working motivated by their
curiosity and personal interest. That shouldn’t change.  We don’t want open source to turn into a
for-profit, speculative hustle. We know how that ends!

The goal is to make more open-source projects sustainable in
the long run and to give a boost to the free and open-source movement by
creating new opportunities for developers.

Imagine a world where developers may make a living out of
working on open-source projects, instead of Google or Meta. Such is the vision.

Under the proposed framework, contributors — that is, the community
of early adopters that help build the product — get invested in the token first.
It’s not a pre-mine, as tokens are allocated for specific value added to the
project, with the corresponding receipts in the form of commits to the
repository, making the token distribution 100% auditable and traceable.

Notice how the distribution mechanism results in each token in circulation being backed by a specific form of value. Let’s call it Proof of Value.

Early adopters of the software and supporters of the project
come next. The project doesn’t sell tokens, so supporters have to buy them directly
from contributors — or become contributors themselves!

Speculators come last, only after the product has been
delivered and has developed enough traction for the world to notice.

Token Utility

The first requirement for the token to derive any value is
that the product solves a problem and grows a user base.

The second requirement is for the token to have a
significant utility.

If the product is destined to dominate its niche market, a
governance utility becomes fundamental. In addition to contributors, the user
base and maybe even investors should have a saying in how the project develops.

Other utilities may be related to the access to premium
products and services associated with the base product, which is free for
everyone. Notice that the token doesn’t need to be spent. The mere holding of a
token could provide users with access to these premium offerings. These eliminates the worries about network congestion, fees, etc.

As suggested earlier, if there are commercial spinoffs of the base product that require payment solutions, like a marketplace, for instance, then Bitcoin + Lightning is the answer.

In Practice

The collaboration model described above emerged during the
bootstrapping phase of the Superalgos Project,
a community-owned open-source project that crowdsources superpowers for retail
traders.

It’s an ongoing experiment that — if successful — may lay
out a roadmap for other open-source projects to follow.

At this stage, the project counts over 140 contributors who
delivered the Superalgos
Platform in November 2021, after 12 open beta versions
and four years of hard work. The platform is currently #1 in the crypto trading and crypto trading
strategies topics on Github.com and is also in top positions when searching
Github for trading and trading bots.

If you’re curious about the details of this first
implementation of the open startup and the collective business model, take a
look at this series of articles about how
to contribute to Superalgos.