Original author: Rapolas
Original compilation: Deep Chao TechFlow
Nothing creates a bigger obstacle for a founder than presenting a slide with unlimited TAM (maximum addressable market) potential. Anyone who claims their TAM is everyone on the Internet or every smartphone user shows they dont understand their target market in detail.
Every market is made up of more granular niches; if youre a startup, chances are you can explain the niche your product serves at the outset. That’s why we say that building a product that works for everyone means that the product appeals to no one.
Every product that is successful at launch must be a novel idea or have a unique execution of an already-tested idea; therefore, most users are bound to ignore it at first.
Capturing 1% of a $1 trillion market (although not yet) is already an enticing $10 billion vision, but without a unique value proposition for a sub-segment of this large market, it sounds like a sign of failure. The last flight that has taken off. You have to find a smaller plane (or a jetpack) - your own entry point (wedge).
Blockchain Wedge
Cryptocurrency, or blockchain, as we know it in the mainstream today, started with Bitcoin’s white paper. It is a protest against the current banking and monetary system. This proposed P2P payment system without centralized intermediaries is an elegant solution to a very specific problem.
Bitcoin has proven its original payment purpose, but the underlying blockchain technology has since inspired a wider range of ideas. Bitcoins original white paper would have accomplished nothing if it proposed launching use cases such as finance, social networking, gaming, and art on the blockchain as well. The mere idea of blockchain arouses skepticism; using blockchain to solve every imaginable problem raises the bar for execution far too high.
If you look at the on-chain applications that have grown and survived to this day, youll see that they started by solving a very narrow problem (or didnt look like a problem) that was useful to a small group of users. Its important to say. Very few people can clearly identify the problem they are experiencing and at the same time provide a concrete solution (if the reverse were true, the problem would have been solved long ago).
The mystery of the problem, of course, is how it goes from being a concern to a few to being a concern to the majority. In some cases, great products create specific problems for consumers to solve. You cant imagine driving around in a car until you see one (your question then becomes how to get one), nor can you imagine perfectly using a full touchscreen phone until you get one cell phone.
This is why there is no standard answer to building startups (and investing in them), and is often inspired by science fiction. It’s the founder’s intuition that helps navigate and bet on a specific outcome; when this intuition is lacking, people resort to solving abstract problems for a large group of people with whom they have little in common.
With a daily trading volume approaching $10 billion, Uniswap is truly viewed as a competitor to centralized exchanges. But in reality, it is an inferior product for transactions and would not succeed if its proposition was transactions, but on-chain.
The entry point of Uniswap V1 is to allow permissionless liquidity bootstrapping (and trading) for the long-tail portion of tokens, something that market makers and centralized exchanges cannot provide, but is necessary for the founders of the industry of. Even now the term “bootstrap liquidity” is mostly associated with Uniswap, just like “Google” is synonymous with search.
By solving this narrow problem and establishing an on-chain usage model, Uniswap can capture adjacent markets that would normally be traded on centralized exchanges (such as ETH) and do so by minimizing the shortcomings of AMMs. Enhance success (e.g., by providing centralized liquidity).
The point is not to build a perfect product for everyone. The key is to solve someones problem (or specify a problem as discussed previously) and then use that momentum to expand into adjacent areas while iterating on the product. Now we have reached a point where Uniswap will surpass Coinbase in trading volume in 2023.
While the Blur vs. Opensea comparison isnt exactly a hot topic these days, we think Blur does a good job identifying two aspects that have led to its position in a market largely dominated by Opensea:
The NFT investor market is not homogeneous. There is a clear distinction between collectors (passive holders, accepting illiquidity and fees) and traders (active participants, seeking higher liquidity and lower fees). Opensea meets the needs of the former at the expense of the latter—there is an inherent conflict between the two.
Regarding Opensea, it does not leverage a token, which itself is more of a crypto-native product than anything else.
If Openseas target users are artists and collectors, then the transaction volume may not be the perfect or only measure of market success; on the contrary, if Blurs target users are traders, then the transaction volume becomes more critical, Because it relies on available liquidity. This is exactly what Blur achieves by rewarding market making (providing buy and sell prices) with tokens.
Despite criticism that Blur mainly caters to a handful of power users, thats not a bad thing if these whales are the tastemakers. In fact, building for a small group of people who care actually allows a) to quickly validate product ideas and launch them; and b) to achieve superior marketing results.
Since Blur already has the deepest market liquidity, it allows for the launch of an adjacent but highly related product - Blur Lend, or Blend, a lending marketplace that uses NFTs as collateral.
Discover big markets from small markets
The above example shows how successful companies create their own monopoly markets. They avoid competition through their entry points. Uniswap does not compete with Binance on the same axis; Blur does not compete with Opensea for the same users; blockchain does not compete with the Internet or traditional financial institutions - blockchains are their own thing with unique properties.
An explanation of Thielism by Blake Masters illustrates this point more broadly:
The common narrative is that capitalism and perfect competition are synonymous. No one is a monopolist. There is competition among firms, and profits are consumed by competition. But this is a strange narrative. A better narrative would be to describe capitalism as and perfect competition as the opposite; capitalism is about the accumulation of capital, and a world of perfect competition is a world where you can’t make money.”
Paradoxically, in perfect competition, companies start out broad but immediately narrow their market in pursuit of differentiation (even if narrowing doesnt feel like what theyre doing). But if they dont participate in perfectly competitive markets and start in their own (small) market, they can only grow, not shrink.
So the best business models are where you can tell a compelling story about the future. Those stories will all be different, but they take the same form: find a small target market and become the best at serving it globally people, take over the immediate market, expand the scope of what you do, and capture more and more.”
When looking at large markets, one tends to focus on the mid-to-late stages of the cycle, when momentum itself brings growth and success is evident. But success is only apparent after the fact, and people don’t realize the secret insights needed to start a small product or service that could lead to a market worth hundreds of billions of dollars.
Consider that Newton laid the foundation for classical mechanics. This branch of physics, which deals with the motion of objects and the forces acting on them, is fundamental to all fields of engineering. But being a great engineer requires more than just understanding classical mechanics—it requires possessing secret knowledge of traditional, well-known areas of mechanics.
This is why every founder who has successfully avoided competition understands competition; but this does not require an excessive understanding, because this is not their strength. Businesses understand competition the same way engineers intuitively understand Newtons laws of motion.
Intuitively, we think every major brand today started with a narrow wedge:
Facebook was originally a platform designed for Harvard students but has since become available to other universities, high schools, and the general public;
LinkedIns go-to-market strategy relies heavily on employees in the technology industry, which allows it to overcome the cold start problem (it doesnt matter if the technology becomes popular);
Nvidias hardware initially served the gaming industry, before expanding into model training in data centers and building the CUDA software computing platform to facilitate it;
Googles unique insight is the Pagerank algorithm, which produces better search result quality compared to other engines. This led not only to the most profitable advertising business, but also to Google Cloud, the hardware business, and other things;
Porsche started out as a sports car company, but now it mainly sells SUVs. Production of the sporty 911 and Boxster models hasnt grown much since the late 1990s.
These businesses all ended up expanding and occupying adjacent markets that seemed out of reach on day one (advertising, hardware, cloud, etc.). But no company exemplifies the power of the wedge strategy better than Amazon.
Of all the product categories available, Amazon chose Books, a perfect category for building an online retailer with over 3 million products, while brick-and-mortar store options were limited to less than 100,000. In other words, this would be a great category to demonstrate the shift in retail shopping from brick-and-mortar stores to online. Amazon obtains inventory from several book distributors to fulfill orders.
Existing customer traffic is used to launch additional product categories and bring in listings from third-party sellers to further expand the offering. This is the Amazon Marketplace we know today, but it originated with a single category (books) and a less scalable transaction model (direct mail).
The volume Amazon handled required them to set up in-house logistics operations—distribution, fulfillment centers—that were eventually refined to the point where they became the shipping company of choice for providing logistics-as-a-service to third-party companies outside of Amazon’s marketplace. Amazons shipping creates a value proposition for retail consumers that in most cases is better than traditional companies like UPS and DHL. Although many logistics startups hope that traditional shippers will be disrupted, most companies fail because they never ship any goods. Amazon brings their own volume.
As Amazons e-commerce business grew in size and complexity, internal teams needed a set of common infrastructure services and hardened APIs that everyone could access. Amazons rapid growth has pushed engineering teams to harden its infrastructure.
Amazon seems to have multiple teams working on the AWS concept at the same time. Ben Black, co-author of the idea behind Elastic Compute Cloud (AWSs first offering), writes:
Chris was always pushing me to change the infrastructure, especially driving better abstractions and unification, which are critical to scaling efficiently. He wanted an all-IP network instead of the VLAN mess that Amazon had at the time, so we designed that , built it, and worked with developers so that their apps would work with it.
Chris and I wrote a short paper describing a vision for a fully standardized, fully automated Amazon infrastructure, relying heavily on web services for storage, etc. Near the end of it, we mentioned the possibility of selling virtual servers as a service.
What started as an internal project eventually led to the launch of AWS and a whole new market - the cloud. Annual spending on cloud services will reach half a trillion dollars by 2022. But when AWS launched in 2006, people at Amazon didnt have enough appreciation for the potential of the idea behind them; it was their own market, with so much unknown that it wasnt worth quantifying.
Wedges, economics and volatility
Although renewable energy and renewable energy investments have been popular since the 2000s, the wedge has always relied on government subsidies through tax credits. Climate change proponents will claim the wedge is environmental, but try arguing that to those struggling to pay their energy bills. For a long time, renewable energy itself was not economical (even with subsidies):
Correspondingly, returns on capital invested are very poor in the early part of the cycle (especially in solar, where the economics per dollar are always worse compared to wind), and most renewable energy developments of that era Traders and suppliers have gone bankrupt or underperformed in the public markets.
There are no secrets about renewable energy in the 2000s - the power of wind and solar has been understood and used for thousands of years (vertical axis windmills and sunlight concentration). The industry is being driven by government initiatives and a budget that encourages the private sector to further develop solar panels and wind turbines until, in some cases, unsubsidized renewable energy is now competitive.
The point we are trying to make is that cheap and idle blockchain is somewhat similar to non-economic, subsidized renewable energy. Just like renewable energy has no clear advantages beyond subsidies and the hope that costs will eventually come down, most of the blockchain infrastructure being researched and developed today relies on the same premise — massive venture capital and falling transaction costs. Prediction. But what if consumers were pushed externally to speed up development?
Blockchain has been cheap enough for long enough for product wedges to show up (and it has shown up more than once in the past). If you are a founder who thinks your crypto product will gain adoption when transaction costs drop from $0.10 to $0.01 on Rollups, you are probably working in the wrong direction. Applications on Solana and NEAR can reach hundreds of thousands or millions of users.
Cryptocurrency has two directions: one is censorship-resistant and private currency/payments (which has been successful, but difficult to scale); the other is creating global wealth online through technology. Of the latter, cryptocurrencies have a huge wedge — it’s the volatility and easy access to liquidity (unlike in the real world) of every new asset.
In cryptocurrencies, we already have ICOs, NFTs, ERC-20 tokens, LBP, and most recently friend.tech. So dont hate the players, hate the game. It is not a destination, but a means to an end.
Volatility buys founders time and users’ attention. In many ways, its a customer acquisition tool. The best cryptocurrency founders use this momentum to test and launch killer products while managing pressure and inflated expectations. But the volatility of your own native token shouldn’t be the default assumption — there are other means of speculation that won’t undermine the discovery of long-term product-market fit.
in conclusion
There is no standard way to find and execute great ideas. We don’t know exactly whether secrets are created or discovered, we don’t know whether your product should solve someone’s problem or “create” a problem for someone, and we don’t know for sure whether the advantage of being first in line or the advantage of being late is more important.
But one thing is clear - success requires progress, and progress is achieved sequentially (albeit sometimes unexpectedly), with major discoveries preceded by smaller ones. Wedges are critical to finding the right users and the right product fit (product-market fit); rather than casting a wide net, wedges allow product ideas to be tested with users who care.
Weve shown through numerous examples, whether its Web2 or cryptocurrencies, that the success stories new founders aspire to all start with small, vague ideas. Founders cannot predict dependency paths when they start; when they start, they cannot see all the adjacent markets right next to each other on the horizon. It is the proximity possibilities that allow companies to identify and incorporate new markets as they move forward.
We hope to see crypto founders default to using “wedge” as their buzzword from now on (much like they did with super apps this year).
