How to create legal monopolies via network effects and economic moats

If there’s one thing that customers dislike, it’s the barriers in switching between competitive products. As customers, we want to retain our freedom. However, as entrepreneurs, we are incentivized to curtail that freedom. As I wrote earlier, head to head competition in a market pushes profits to zero. To make a profit, an entrepreneur needs to find a way to keep customers and competition away from each other.

There are two ways this separation can happen:

  • Prevent competition from entering into your market
  • Prevent customers from switching to a competitor

Obviously, these tasks are hard in a free market (and that is why market pays through the roof for companies with a sustainable competitive advantage). Unless you sell drugs, you can’t (and shouldn’t) hire an assassin to prevent competition. Nor, can you (and should you) threaten your customers with dire consequences if they switch. ...  Read the entire post →

Reading Recap #3: Governance systems beyond democracy

Anybody who has thought about democracy even one level deep knows that a decision taken by the majority vote isn’t always a good decision. For issues of importance, such as Britain’s participation in EU or global warming, most people do not have the necessary background knowledge or motivation to cast an informed vote.

Any scientist can tell you that just because you had snow in your area, it doesn’t mean global warming is false. Most people care only about immediate and local issues, and good policies usually require second or third order analysis that’s hard to do and even harder to explain.  ...  Read the entire post →

Bitcoin’s value beyond hype

A product or a service creates value when it solves a human need. When Amazon was founded, it was a lifesaver for book lovers in remote places where they didn’t have good bookstores. People of the world allowed Jeff Bezos to become rich because he made their life simpler. We happily exchange money for services when it enables us to make our lives better. Librarians help others but scientists help themselves. Guess who makes more money?.

Just like Amazon solves a real-world need, so does Bitcoin. (Of course, like Amazon stock, people speculate on Bitcoin’s price as well.) What needs does bitcoin solve for? The answer to that is long-winded. The network effects and feedback loops in bitcoin ecosystem make teasing out the value question really difficult, but I’ll try doing that here. ...  Read the entire post →

Bitcoin is mother of all network effects

Bitcoin is such a strange beast that it’s hard to really understand what it really is. Some people call it the biggest Ponzi scheme ever invented, while others see it as the currency that’ll power a decentralized, libertarian utopia. Whatever it is in reality (and whatever “reality” really means), there is no question that network effects are playing a central role in making it the most hotly debated idea of recent times.

I’m a big fan of the power of network effects and have previously written about different types of network effects. In this post, I want to talk about what network effects are at play in bitcoin. This post assumes you know what bitcoin is and how it works at a high level. In case you don’t, go through my introductory post on basics of bitcoin first...  Read the entire post →

Reading Recap #2: Basics of Ethereum and mental models for blockchain

After my first weekly reading recap on basics of bitcoin and blockchain, I couldn’t post a recap last week as I was away attending my weekly class of Stanford’s Seed program in India for growth stage entrepreneurs.

My favorite part of the week was the design thinking class where various teams (of 4-5 people) had to interview people, discover a problem, brainstorm, prototype and test potential solutions — all within one day. The team I was part of went to autorickshaw stands and had detailed conversations with drivers about their lives, hopes, regrets, likes and dislikes. My biggest learning (and shock) was about their idle time: auto drivers don’t do anything for 90%-95% of their workday and so are unable to meet their ends meet (earning only Rs 200-600/USD 4-10 per day). We discovered lots of economic inefficiencies that are waiting to be fixed by an entrepreneur. I recommend you see my entire Twitter thread with detailed data and observations. ...  Read the entire post →

Cryptocurrencies are belief systems

Making fun of hundreds of new cryptocurrencies launching every month is understandable. People are confused by all diversity of cryptocurrencies (bitcoin, litecoin, ethereum, ripple, etc.) because historically there was never a competition among currencies. All we’ve ever known or used in our lives is just one currency: the one the government issues. Imagine telling someone who had grown up reading the New York Times in the early 1990s that in less than two decades there will be hundreds and thousands of publications covering the city. He would have laughed at you. Today, the same person would be consuming news on Twitter or discovering new restaurants on Yelp, and catching up on celeb-gossip on Instagram. ...  Read the entire post →

Meta mental model

Mental models are shortcuts that help you think better. One of the most famous ones is Pareto’s principle which says that for many phenomena, 80% of effects come from 20% of inputs. Management consultants love mental models: BCG matrix helps you with manage a portfolio of businesses, Porter’s five forces model helps you think about competition and Peter Principle helps you understand why organizations become full of incompetent managers.

Mental models are abstractions of reality. They’re like proverbs. For example, “Actions speaks louder than words” tells us that revealed preferences carry more information than stated preferences (something economists now take for granted). It’s a fun exercise to go through popular proverbs and decide if these old mental models are still useful in our interactions in the modern world. ...  Read the entire post →

Reading Recap #1: Basics of bitcoin and blockchain

From this post onwards, I’m starting a weekly recap of insightful articles and videos that I come across. This recap serves two purposes: a) curate and filter only the most insightful articles for readers of this blog; b) improve my mental models by reflecting on what I read recently. I intend to do this recap every week, so if you’re interested in reading along with me, subscribe to the mailing list.

The inaugural weekly recap (this one!) is mostly going to be about blockchains and bitcoins. What I find fascinating about the cryptocurrency mania is that perhaps the biggest current phenomenon that’s begging to be analyzed. Previously I covered how fidget spinners became all rage, how Facebook beat Friendster and how Singapore rose into dominance. All those were historical phenomena but bitcoins is what’s happening right now.  ...  Read the entire post →

Speaking your mind is a public service

There’s a famous joke (that I discovered on Scott Aaronson’s blog). It goes something like this:

There’s a man standing in the Moscow train station, handing out leaflets to everyone who passes by. Eventually, of course, the KGB arrests him—but they discover to their surprise that the leaflets are just blank pieces of paper. “What’s the meaning of this?” they demand. “What is there to write?” replies the man. “It’s so obvious!”.

This joke gives a chuckle because without saying anything it points out how bad the living conditions were in the Soviet and how everyone knew that the conditions were bad. Yet, the Soviet Union remained in power from 1922 to 1991. How did it last so long when the public knew that central planning was devoiding them of progress? Surely, the large population (that included soldiers in the army) could have revolted against a few leaders. ...  Read the entire post →

What fidget spinners teach about making hit products

Chances are that you know what fidget spinners are. I’m willing to take the risk of not linking to its Wikipedia page because I know almost everyone on the Internet either had one or seen one. (I had two!)

If you are a regular reader of InvertedPassion, you would know that I like going into rabbit holes. Previously, I wrote about Singapore’s foundation and lessons for entrepreneurs and also analyzed reasons for Facebook’s adoption in 2004 despite Myspace and Friendster having millions of users then. In this article, I’m spinning my way (no fun intended) into learning what made these little toys a global phenomenon and what entrepreneurs can learn to make their products grow like wildfire. ...  Read the entire post →