Open Startups and Collective Business Models in Open Source

7 min read

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;
  • Fair token distribution;
  • Community-owned;
  •  Aligned incentives;
  • User-centric;
  • Focus on privacy.

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.

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