The key to exploring the Web3 protocol: in-depth understanding and practical value creation

Author: Eric Jorgenson; Compiler: Leia, TEDAO

Translator's Guide

In a Web3 world, value creation is critical. As pointed out in the article "Ethereum Founder V God: Going Beyond the Token Economy", "value creation" is the goal or core of the Web3 protocol/project, and business, incentives, and governance are the basic elements for realizing project value creation.

Only by deeply understanding and applying the principle of "value creation" can a project truly stand out and have a lasting impact on users and the entire ecosystem. Therefore, in the process of building Web3 protocols/projects, builders must think carefully and practice value creation.

The author of this article, Eric Jorgenson, deeply analyzed the essence of "value creation" in the article, which not only helps us better understand value creation, but also provides valuable guidance for Web3 builders to help them better apply "value creation" to innovation Practice.

Value Creation

Value creation is the starting point for all businesses. The goal of a business is usually to create and deliver value efficiently enough to ensure that revenues cover costs and become profitable.

Whether a business is successful or not, it is important to understand the fundamental concept of value creation. This article brings together a wealth of wisdom on value creation, and next, we’ll explore the following:

• Definition of value, and how to create value
• The evolution of value creation in history and the future development trend
• How to measure and manage value

How to create value(define value)

In the broadest sense, value is created through work. Work can be mechanical (like cutting down a tree and turning it into lumber) or creative (like designing a logo or writing a thesis). Of course, not all work creates value (such as some endless and futile work, like Sisyphus's rock can never reach the top of the mountain).

The purpose of a business is to create value through work, which is then sold or traded to customers, capturing some of that value as profit. (Okay, this is obvious, but let's start with the basics.)

Precise definition of value creation

In his book "The Origin of Wealth" (The Origin of Wealth), Eric Beinhocker gave a rigorous scientific definition of economic value creation based on the research of economist Georgescu-Roegen:

A pattern consisting of matter, energy and information is economically valuable if all three of the following conditions are met:

1. Irreversibility. All economic transformations and transactions that create value are thermodynamically irreversible.

2. Entropy. All value-creating economic transformations and transactions reduce entropy locally within the economic system and increase entropy globally.

3. Fit. All economic transformations and transactions that create value generate artifacts or behaviors that serve human purposes.

If you're like me and didn't take a thermodynamics class in college, you can think of entropy as "disorder" as an approximation. So, in more layman's terms: value is created through an irreversible process that makes the "ordering" of resources more useful to others.

By this definition, almost any activity that creates value, from opening someone’s door, to writing, to turning solar energy into electricity to power a ceiling fan, can create value and positively impact others.

Not all value creation is created equal

With so many possible (and growing) ways to create value, how do we decide which one to use? Is every way of creating value equally useful to us?

Peter Thiel doesn't think so. In this very practical book, Zero to One, he talks about what it takes to be a successful business. All businesses must create value, but some types of value (and how to create value) are more useful than others. Thiel summed up the book's ideas in a talk at Stanford University:

Creating value by producing standardized products is not the path to success. Think about the substitutability of your product or service: Do customers have many other options? Do they have to buy your product or service? Are you significantly different from your competitors?

If your company is in competitive equilibrium, its disappearance has no effect on the world, and other competitors that are not much different from your company are ready to take your place at any time.

This is what happens to most businesses—they sell products that are not unique, but universally fungible. If you want to create value and build a sustainable and successful business, Thiel believes you must be unique:

Businesses succeed for different reasons: each monopoly achieves monopoly status by solving a unique problem.

To solve that unique problem, you must develop a unique skill or process:

In the real world, outside of economic theory, every business succeeds precisely because it does what other businesses cannot.

This series of ideas actually leads us to study competitive advantage, that is, how to develop and realize this unique value proposition. In what ways does your company achieve what other companies cannot match?

*Note: It is indeed a low-cost competitive advantage and a very valuable method of value creation by offering standardized products at a very competitive cost structure. *

Value Creation Chain

To understand value creation in a more intuitive way, we can look at Porter's Value Chain. The Harvard Business School professor summarizes all business processes and shows how each one creates value for customers and achieves business goals:

These "principal activities" are the processes through which "work" is done to create value that customers are willing to pay for, as implied by the first definition we got from Beinhocker:

Incoming Logistics: Various activities associated with receiving, storing and distributing such as raw material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers.

Production Operations: Various activities associated with the transformation of inputs into final product form, such as machining, packaging, assembly, equipment maintenance, testing, etc.

Shipment Logistics: Various activities related to the collection, storage and dispatch of products to buyers, such as finished goods inventory management, raw material handling, delivery vehicle scheduling, etc.

Sales: Various activities related to providing buyers with ways to purchase products and guiding them to purchase, such as advertising, promotion, sales force, channel building, etc.

**Services: **Various activities related to the provision of services to increase or maintain the value of a product, such as installation, repair, training, parts supply, etc.

Any business, even a one-man service company, will involve some form of these activities. These main activities are the basis for enterprises to create value.

The Evolution of Value Creation

Value Creation in History

This infographic from Funders and Founders summarizes the long history of human attempts at value creation. I don't think it's scientific or comprehensive (strictly, I don't think looting counts as value creation), but it's a quick way to see how economic development evolves. To view the full content, please visit the illustrated link.

Of course, there have been many parallel ways of creating value throughout history, and here are just a few examples of what each era dominated. Considering where we came from... where are we going next?

What will future value creation look like

When we look back at the changes in economic value creation over the past 100 years, we can see that during the industrial revolution, we focused on large-scale mechanical production, while in the information age, we focused more on creative and customized production. Software and related services increasingly dominate value creation.

This is the point Jack Hughes makes in his Harvard Business Review article, What Value Creation Will Look Like in the Future.

The value of today's products and services increasingly depends on innovation - their innovative use of new materials, technologies and processes. Value creation in the past was determined by economies of scale: mass production and high efficiency of repeatable tasks. Future value creation will be based on an economy of creativity: the high value of mass customization and bringing new product or service improvements to market; the ability to solve customers' tough problems; or the way new products or services are sold and delivered.

[…]

We need to understand how to manage creativity as much as we manage work. Productivity means we have reduced costs in production. Creativity means we create more value: we sell X products that didn't exist before; we increase sales of Y not because we make it cheaper, but because we make it better, or by Meeting a previously unmet need increases our value to our customers.

As our economies become more flexible and individualized, we need to open up our perceptions of value and allow creative work to co-exist with other, more mechanized forms of value creation.

How to Measure Value Creation

Value is created in different ways, so how to measure it uniformly? Can we compare the value created in various ways through different processes?

Value Creation as Revenue

One of the measures of value creation is revenue. This is the easiest way to measure it, and it ensures that the value created is valuable because someone is willing to pay for it.

Revenue is the measure of value creation, not profit. A company can create value without making a profit, and many companies do. But they cannot last long.

Peter Thiel mentions this in his book "From 0 to 1":

Even large companies can run poorly. For example, U.S. airlines serve millions of passengers every year and create hundreds of billions of dollars in value.

Google, on the other hand, created relatively little value, but profited much more from it. Google generated only $50 billion in value in 2012 (while airlines generated $160 billion).

Revenue is not a perfect measure of value creation—just the simplest one. Revenue actually measures the floor of value creation. The total value created cannot be less than the revenue it generates. The reason is as follows...

Exchange Value vs. Perceived Use Value

Value Creation Versus Value Capture by Bowman & Ambrosini examines possible approaches to value measurement and draws an important distinction.

If something is purchased, customers will perceive consumer surplus to be greater than 0, otherwise they will not make the exchange. Therefore, the total value created includes the price paid and the customer's perception of residual value. It is shown in the figure as follows:

Here is the official definition:

Perceived Use Value ‍is subjective and defined by customers based on their perception of product usefulness. Total monetary value is the amount a customer is willing to pay for a product.

Perceived Use Value is determined by each individual and may change at any time. Another measure of value is Exchange Value:

Exchange value is realized when the product is sold. This is the amount that buyers pay producers for perceived value in use.

Revenue can be used as a quick metric to assess value creation, but it does not capture all aspects of value creation.

Expanded reading on enterprise value measurement

If you are interested in gaining a deeper understanding of value creation, measurement, and management in large organizations, the following two books are recommended reading:

1. "Value-based metrics: Foundation and Practice" (Value-based metrics: Foundation and Practicee)

2. Managing Customer Value

Open Question on Value Creation

Is it possible to generate profit without creating value? It might be possible, but I think that counts as a scam. At best, it can be counted as arbitrage. (Is there an objection here?)

How do we think about the value that has been created but never monetized? Can this be seen as creating goodwill and positive influence through well-intentioned and positive actions?

And what about the value that is created through meaningful effort but lost before it can be sold? (e.g. spoilage of food)