Starting my first Onchain SMB in 5 mins

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If I had to choose one company TOC subscribers have urged me to do a deep dive on the most this past year, it would be Splits Protocol.

"World class team"..."cracked product thinkers"...."everyone will eventually use their product". You don't hear testimonials like these that often in crypto.

So after months of pushing this post off, I finally decided to get into the weeds of Splits this week. I got a chance to talk to Abram (co-founder) to understand the company's vision. And, yesterday, the whole team even onboarded me and the other co-hosts of /latenightcrew to a new product they're building! More on that in a bit.

Before I get started on Splits, let's quickly rewind back to 2021 when Mirror.xyz was gaining a ton of attention in the space. Mirror, a crypto native writing platform, was the first to bring the idea of onchain splits in a meaningful way.

"Splits, Mirror’s latest feature, present a truly exciting alternative to involving people in your work. From a monetary perspective, collaborators typically have to divy up their earnings manually. That process relies on trust, manual coordination, and sometimes a ton of paperwork and legal overheard. Split’s crypto-native approach replaces a social contract with code-enforced rules that can’t be fudged."

In the hype of the bull market, people were pumped to use the new features such as crowdfunding (remember ConstituitionDAO?), sharing writing revenues with co-contributors, etc. And it wasn't just Mirror. A ton of crypto natives were also using tools like PartyDAO v1 to buy rare 10k pfp NFTs together onchain. Gnosis multisigs were popping off. It seemed like everyone was talking about the DAO narrative of "group chats with a shared bank account".

But as market activity started cooling down, a majority of the space stopped thinking about the creative capital coordination mechanisms.

And right around then, in late 2021, is when the Splits team got to work. To them, it was clear that all the tools mentioned above had a ton of value. But what was at the core of this new trend?

"We were inspired by this simple idea—a contract that continuously splits incoming funds among recipients according to preset ownership percentages. It’s a simple concept with big implications, but we know that simple doesn’t mean easy." - Splits Team

Simple concept, big implications. The perfect tl;dr on everything I'm covering in this post.

With that being said, let's dive in.

Sections Below

1. Scratch for Defi

2. The evolution of the company

3. Starting my first Onchain SMB

4. Crossing the Chasm

For those of you that took a beginner computer science class a decade ago, there's a good chance you've tried out Scratch. In my opinion, it's one of the best tools to learn the fundamentals of programming. Instead of focusing on syntax, it helps you understand the logic that goes into building software and how to piece together the "atomic units" (i.e. conditionals, loops).

The Splits protocol product suite can be thought of in a similar way when it comes to using smart contracts.

Consider the atomic units of onchain capital coordination. Splitting an income stream to multiple parties, diversifying revenue to multiple assets, swapping, bridging, assigning revenue ownership, setting up royalties, etc. The list goes on. Smart contracts open up an entirely new design space, and we’ve barely scratched the surface of what's possible.

But so far, it hasn't been easy for the people in crypto to use these units simply. Sure, multisigs allow multiple people to hold and use funds. But they're heavier products and feel limited to a single use case: have the majority of participants sign transactions to buy & sell assets.

Splits Protocol, on the other hand, is taking each of these capital coordination atomic units and providing the smart contract functionality as "open source widgets".

Ben Thompson has a post from 2020 in which he discuss how Stripe is a platform of platforms.

"Stripe Treasury, as its website notes, is banking-as-a-service, but, critically, Stripe is not a bank; look carefully at the product’s press image."

I believe there's a parallel analogy here with Splits. It's not exactly a defi or creator protocol but rather a protocol of protocols. Other protocols use the splits smart contracts as an API to embed defi services in their products.

In fact, there are several case studies already out there on how teams in crypto are leveraging Splits to get creative with their own products. Abram even mentioned that they thought the initial user base would be creators but the target audience turned out to be devs.

Now here's the thing. Stripe makes billions off of their financial services. But Splits is not a platform. It's a protocol. All the smart contracts they've developed are open for anyone to use for free as long as the Ethereum network is alive.

So how does the team actually plan to make money? What's the business model for the Splits Product (not protocol)?

To understand that, let's go back to the 16th century.

Chris Dixon often mentions the book The Company by John Micklethwait and Adrian Wooldridge when discussing his viewpoints on the future of coordination.

The core premise of the book is that 1) the company itself is one of the most impactful innovations of the last ~500 years and 2) the idea of a company has also been iterated on - each version unlocking a new wave of entrepreneurs & opportunities.

Around the 1500s, the first versions of Joint Stock Corporations were getting started that allowed people to pool together capital and share profits. The most prominent early example is the East India company that established British trade in India. This was a huge unlock as the mindset changed from what can I do to what can we do? All of a sudden, projects that seemed outrageously ambitious seemed realistic with the power of a team.

And over the next 300 years, the model of partnerships continued to expand in different ways. Then, in the 1970s, Wyoming introduced the "LLC" which made it possible to separate the business owner from the business. This was crucial as aspiring entrepreneurs could take a stab at bold ideas without the worry of being personally liable for anything that went wrong with the company.

By the 1990s, the internet was taking off, and once again the scope of what a business could be changed. E-commerce enabled companies to go global overnight. It was now possible to to find your customers not only in your geographical area but from around the world. Tech companies such as Paypal, Amazon, and eBay gave birth to the concept and since then we've seen an explosion of internet businesses. And then, companies such as Shopify and Stripe helped enhance the e-commerce experience for aspiring entrepreneurs that didn't have a tech or banking background. Anyone could spin up a business and start earning in only a few clicks.

The common thread with the rise of each iteration of the company is that projects that seemed impossible became approachable.

Okay, so why did I just go through all of this?

Because I believe over the next decade we'll see an unlock of a new business model enabled by the design space blockchains & smart contracts offer: Onchain Companies.

It's worth noting that we only realize the inefficiencies of a system until we get to see something else that works way better. For some of us deep in the crypto space, it's clear that even services like Mercury, Stripe Atlas, etc. still have a ton of limitations and overhead! Why? Because of the multiple stakeholders involved, need for trusted third parties, integrations with large (and slow) banks, etc.

At the end of the day, what is a company? It's a small group of people working toward a common goal. Capital is used to help facilitate progress towards that goal and can come in the form of grants, funding, expenses, revenue, etc.

But today, the idea of "starting a company" still feels like a daunting task. You start a company because you're an entrepreneur wanting to grow a business and want to be considered "official". So you form an LLC, create a business bank account, get an EIN, etc. But given the definition of what a company is above...aren't all these steps overkill for some teams? They're probably thwarting people from experimenting with even the simplest of ideas.

There is yet another wall to be broken down in terms of what a company can be and how this new capital coordination model can unlock the next growth curve of innovation.

And this is exactly where I believe the Splits team comes in.

At the beginning of the post, I mentioned how /latenightcrew tried out the new product they're making. I think it's the best example to share in order to prove the point above about the potential of Onchain SMBs.

For those of you that don't know, Late Night Crew is a fun project my friends Brian, Matthew, Zinger, and I started a few months ago where we hop on Tavern (basically a Clubhouse client on Farcaster) every Wednesday and just shoot the shit on what's happening in the crypto space.

Recently, we received a retro grant from PurpleDAO for our work. They sent the funds to Zinger's wallet because he applied for all of us. The plan was for him to just split up the funds 4 ways, send the equal share to the rest of us, and call it a day.

After all, this is just a fun project anyways right? Not really a company or anything. Right??

Well, that's where my thinking changed this week.

So Late Night Crew is not an LLC. We don't have a business account with Chase. And there's no leadership / c-suite. It's 4 friends that got a bit of money from the ecosystem we love participating in.

But why should the points above stop us from thinking of ourselves as a business?

The new product that the Splits team tested out with us is called Teams. Simply put, it's a tool to quickly spin up an Onchain SMB.

When you create a new team on the Splits dashboard, you start by setting the admins and who has access to what. There's two accounts every team starts with: Operating and Treasury. Think of this as your checking and savings account respectively. The treasury will be where the majority of your team funds sit and requires multiple people to approve any transaction. And the operating is like your credit card for the team.

The entire process takes less than 5 minutes. And your Onchain SMB is setup! You can easily set permissions - no need to trust any one member of the team with the funds.

Note: Splits integrated passkeys into the product flow, so someone new to crypto can transact onchain without having to interact with a wallet. It's as simple as using touchID to sign on a Mac.

But the treasury and operating accounts are just the start. What's amazing about this setup is the amount of creativity and efficiency it unlocks for Late Night Crew.

For example, on the teams dashboard, we can set our ENS to point to the treasury and set automatic payouts. 20% of any funds that comes into the treasury will go directly to the Operating wallet and 16% of revenue will be split equally four ways, swapped to USDC, and sent to the personal wallets of all co-hosts.

We can even engage our true fans. First, we would create a ranking of our most engaged community members using the eventcaster frame and farcaster channel activity. Based on those metrics, we can create a ranking of our fans. Then, we can take the wallets connected to the list of those FIDs and set up tiers for audience rewards.

And this is just one iteration! The matter of fact is that smart contracts enables our small project to get incredibly granular with how we can think of our funds.

When starting any project, the most important thing that matters is speed. How can ideas be quickly executed on?

In each iteration of the company, the primary metric that improved was the decrease in time (and effort) to experiment.

This concept of an Onchain SMB is doing exactly the same.

With this model, what we think of as a "company" today can expand to perhaps more niche, sillier, and personal use cases. One important note here is that to me an onchain business doesn't just mean a product like Stripe enabling USDC. Rather, as @chaskin puts it, an Onchain SMB is a "a business whose core product or service cannot exist without the use of smart contracts".

There was probably a 5% chance Late Night Crew would have spent the effort on making an LLC and bank account to do all of the above. But with Splits, our imagination got wild in a matter of 5 minutes.

Okay...now I want to be crystal clear that the concept of Onchain SMBs is not even at stage v1 but more like version 0.0001.

There are very few people who even fit into the category of "potential users" right now. Think onchain creators such as myself, Coop Records, Mint Podcast (Levy), Rehash, Paragraph writers, and Hypersub creators.

All of these people are running onchain businesses in their earliest forms. Meaning the core of our business model is dependent on onchain activity, NFT collects, payments through contract royalties, stablecoins, etc.

But the rest of the world is far from that point (including most of the crypto space itself).

In the book, Crossing the Chasm, Geoffrey Moore explains how with any new technology, the path for adoption starts with the enthusiasts, innovators, and early adopters.

We are currently as left as you can get in the graph above. I can count the number of people on my hands that fall into the Onchain SMB category.

Here's the spectrum of how I believe adoption will continue as things like UX, regulation, tax frameworks, reliability, etc. are solved.

With each cohort of people crossing the chasm, the jump will only get harder.

More eyes means more blockers, limitations, regulations, security concerns, unknown unknowns, etc. And that's why it's important to understand that the bullishness of Onchain SMBs in this post is over a 10 year horizon, not 10 months.

Early adopters such as myself and TOC subscribers will need to prove the early functionality of this concept. Then it might be the case that web2 creators start seeing onchain creator tooling as a no brainer and start to migrate over. Then maybe a few popup retail shops and Shopify businesses realize there's some value in a hybrid onchain-offchain model. And that pattern will continue to go on and on for a...long time.

This question by Will is basically the question the Splits team will have to print out and put up on their office wall. And the product will need to continuously grow until that question becomes an easy yes.

That's all for today's post, I hope all of you have a great weekend!

I'd love to hear if any of you have ideas on how I can effectively use Splits with the Terminally Onchain community!