We’ve been reflecting a bit about Uniswap lately, admiring what they have achieved so far and the elegance of its design. No token, no VCs, no hype. This by Cyrus is a great primer on it, if you missed the note. 

So here’s a summary of those mostly unstructured ramblings…

(Note: I had to update this screenshot taken on Friday ago as over the weekend ETH locked up in Uniswap shot up from 7k to >10k!)

One aspect of Uniswap that fascinates us as investors is that, in its current form, it’s effectively “un-investable”, as in there’s nothing for an investor to invest in. To be precise though, there is one way to gain financial exposure to its growth, and that’s what makes it so unique: anyone with capital can provide liquidity to Uniswap pools and earn fees from that activity. Capital is the product itself (liquidity in this case).

Which led us to wonder whether there are any other projects, assets, entities, organizations, companies etc. out there where the *only* way to gain financial exposure to is to directly participate in the product, or at least that got off the ground in that fashion. We could not think of any, certainly not from the ‘real world’. 

Take listed equities for example, you can just buy Apple shares and sit on them, you are not required to do anything. Same thing for unlisted equity. 
For something like Lending Club, you could be lending to the marketplace yes, earning interest from it, but you can also just own its shares and do nothing. 
Moving on to crypto, the same goes with virtually any crypto asset actually: you can just hodl your way to the moon without having to do much at all (other than having good opsec). BTC might be the only exception here (and that might be the key), where in the very early days you could only get one by mining, in absence of secondary markets. 
#Defi dapps like Compound, dydx/Expo, Lever etc. all have investors who can just sit on their equity or SAFE and be passively exposed to their growth in value. 
There’s a lot of talk about “generalized mining” or “active network participation” in crypto these days, where investors get actively involved on the demand or supply side of the networks. But again, that’s not the *only* way to gain exposure to the underlying network, and more passive investors can still just free ride on the more active ones (a simplistic take for the purposes of this post, but in part true). [1]

Point being, most traditional investing has free riding built-in by nature. Sure, it’s not technically free riding as capital is still being put at risk and good venture investors actually do work for their companies, but you get the point: capital is not the product, at best it indirectly helps build the product (e.g. in primary markets like venture).

You can’t free ride Uniswap. It’s an open source public good that lives on its own thanks to its internal incentive mechanisms, deliberately built with no rent seeking features to optimize for user adoption. The trade-off, and perhaps the subject of another post, is that it’s not immediately obvious how to fund it. Having investors on your cap table demanding a return, having sold a token or simply being incorporated as a company in some jurisdiction are all decisions that, directly or indirectly, eventually result in frictions for the end users. 

So what Uniswap shows is that those sorts of structural decisions prone to free riding, that normally constitute the genesis of a project, can be deferred to post product-market fit, and beyond. And more generally that with crypto one can bootstrap a network without relaying on legacy incentive structures, even without a token! So far Uniswap has been supported by generous grants from Balance and the EF, but given the current trajectory it could definitely do with a more sustainable funding stream.

[1] Bonding curves and DAOs are potentially free riding-free structures akin to Uniswap, however we’ve not seen one like it in the wild yet, certainly not with the sort of traction Uniswap has.

Curated on a Product Hunt collection!

Token Economy is written and curated by Stefano Bernardi & Yannick Roux.

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