Tech is not a defensible moat
Pick your buzzword of choice: AI, blockchain, fintech: there is a popular, but no less misguided assumption that better tech is the key to a company’s success.
But this couldn’t be further from the truth.
We write this long thesis as a cautionary note to everyone in tech today — whether you are a founder, employee, or investor.
In the software space, daily news headlines buzz over the latest AI model, each bigger, better, and more versatile than the last. More token capacity, larger training datasets, and better fine-tuning for specific contexts and data types.
Crypto and finance Twitter (or should we say, X) is a sleepless hive of activity, crowing over the latest blockchain scaling technology like zero-knowledge rollups, some new cross-chain interoperability solution, or upgrades to legacy blockchains like Ethereum account abstraction, and Bitcoin ordinals.
In the hardware space, new device launches eagerly crow over better GPUs, ever-smaller nanometer semiconductor microchips, better battery technology, or more advanced software upgrades.
Faced with this constant firehose of feature-worshipping, it is hard to escape the conclusion that the surest means to achieving success is having the best, and latest tech stack.
To be clear, technology is not unimportant. However, the edge that superior tech confers over the competition is both: i) constantly diminishing, and ii) overstated relative to other competitive advantages.
We draw examples from recent history, across various industries and verticals to illustrate our thesis: distribution eats tech for breakfast.
The commodification of technology
Technology is not the defensible moat you think it is.
Disruptive technologies confer significant competitive advantages when they are first introduced. History is replete with such examples.
From the 16th century, armies that used firearms wiped out those that brought knives to a gunfight.
In the 19th century, transportation services relying on horse-drawn carriages lost to steam engines. Artisans who sewed garments by hand, could not compete with factories using sewing machines.
By the early 2000s, companies that still refused to learn how to use computers or the internet, lost to those that did.
Over the next decade, those who don’t learn how to use AI-based tools, will be replaced by those who do.
But having an online store, a mobile app, a chatbot, or using cloud services are no longer the competitive edge they once were. There is no shortage of white-label tools available in every single one of those categories.
The same is happening in fintech, blockchain, and AI today.
There has been a Cambrian explosion in the number of alternative blockchains all claiming to solve Buterin’s trilemma. Every quarter now, someone seems to be releasing a new stablecoin, DEX, or cross-chain solution.
Fintech and banking software today is nearly as commonplace as Shopify alternatives. OpenAI is now competing against a growing number of LLMs, ranging from Anthropic’s Claude, to open-sourced ones like Llama.
All disruptive technologies eventually become the new normal — without exception. Consequently, the competitive advantage of new technologies constantly diminishes as their adoption spreads.
That’s the funny thing about advantages: if everyone has it — no one does.
Nowhere is this commodification more visible than at tech industry conferences.
We recently attended both Token2049, and the Singapore Fintech Festival (SFF). The two annual events have become quite possibly the world’s largest industry events for fintech — in both traditional finance, and crypto.
It is hard to fully experience the gargantuan scale of the two events without being there in person. Token2049 itself saw over 500 side events held in a single week — alongside several entire side conferences running in parallel.
SFF hosted hundreds of exhibitor booths across a venue the size of six airplane hangars: about 60,000 square meters. It would take you roughly the same time to walk from one end of SFF to the other as traversing the deck of the world’s largest aircraft carrier: twice.
Anyone who labors under the delusion of being in a blue ocean by virtue of having the latest tech, is rapidly disabused of such notions at these conferences.
Why does this happen? Because investors love to back companies selling “picks and shovels” — and startups consequently learn to love building “infrastructure”, or “platform” companies.
Everyone wants to launch a new blockchain protocol, a new LLM, or a white-label marketplace. Nobody seems to be interested in actually acquiring end-users.
Yet in short order, they quickly find themselves jostling shoulder to shoulder in an undifferentiated ocean of rival “picks and shovel” stores; all peddling the same wares with minor variations on the same sales pitch.
Distribution eats tech for breakfast
When tech becomes a commodity, distribution becomes the edge.
Bitter struggles are being fought over getting node operators to run decentralized blockchain networks, attracting app developers to build on their protocol, or getting traders to use one exchange over the other.
Stablecoin issuers are all vying to become the preferred currency: but distribution remains the differentiator. Despite being one of the first stablecoins, DAI is nowhere near the most popular to date. And despite Circle’s ostensibly superior transparency of its underlying assets held in reserve, Tether’s stablecoin remains the dominant one in circulation.
This is thanks to Tether’s aggressive marketing to crypto communities outside of the US for years, particularly in China, and other emerging markets.
After the collapse of Silicon Valley Bank, USDC’s market cap fell from around $43 billion to $26 billion. Meanwhile, USDT’s market cap rose from around $72 billion to $83 billion over the same period.
More recently, the tokenization of real-world assets like T-bills, money market funds, and other hard assets like real estate, or even collectibles is increasingly popular.
One of the key arguments for tokenization is that it increases accessibility and liquidity by reducing ticket sizes. For example, it might be hard to find buyers for a million-dollar house. But selling tokens representing $100 fractional ownership stakes of that same house might be far easier.
But in reality, our conversations with market makers like QCP Capital and Flowdesk highlight that one of the major challenges is the lack of liquidity and trading activity across tokenized asset trading venues.
Launching a crowdfunding campaign on Kickstarter doesn’t guarantee you’ll be funded. Similarly, tokenization enables — but does not create liquidity.
If you cannot figure out who the buyer is and why they are buying, then you don’t have a customer. And when you don’t have these customers buying and selling, the market loses its core reasons for existing.
Other examples outside of crypto illustrate the competitive edge of focusing on distribution. David Sacks — founding COO and product leader at PayPal — talks through the factors that he believed contributed to the success of the “PayPal mafia”.
The employees of PayPal went on to build many of the companies that defined Silicon Valley in the 2000s, such as Tesla, SpaceX, LinkedIn, YouTube, Palantir, Yelp, Yammer, and more.
With just around 220 employees pre-IPO, they produced 7 unicorns post-PayPal. In contrast, ex-Googlers have not produced anywhere close to the same number, despite having 100x the number of employees.
The crux of his thesis is that the early employees at PayPal were forced to innovate on distribution, not just product.
They leveraged viral, platform, and embed strategies to achieve explosive growth at PayPal and then took these strategies to their next companies.
In contrast, when you work in a large company like Google with a large established user base, people pay less attention to innovating around distribution strategies.
Concluding thoughts
The lesson is clear — while product innovation is crucial, it is strategic distribution that crowns kings in the fiercely competitive arena of disruptive technologies.
Events like Token2049 and the Singapore Fintech Festival vividly demonstrate the fallacy of relying solely on technological innovation as a differentiator.
As tech becomes commoditized, the real competitive advantage shifts to distribution: a company’s unique ability to reach and market a product, to engage and capture the right audience.
