Phez: Losing $29,014 Creating the Bitcoin-Rewarding Reddit

Shanti is a 38-year-old software developer and entrepreneur who, using Ruby on Rails, built Phez, a Reddit clone that rewarded users with Bitcoin. After a few months, however, Phez failed due to its poor business model. If Shanti would have sold the BTC he used as rewards at BTC peak, he would have made $29,014!

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What will I learn?

You will learn about the importance of validating your idea, as well as why you should spend a considerable amount of time thinking about your business plan.

Hi Shanti! What's your background, and what are you currently working on? 🧑

Hello. I’m a 38-year-old software developer and entrepreneur based in Portland, Oregon. Phez (formerly located at phez.co) was a Reddit alternative that I launched in the summer of 2015. The concept of Phez was to reward content submitters in Bitcoin and had an emphasis on free speech. I was the sole creator of Phez, and honestly, this isn’t an utterly remarkable story where we blew through $17 million in VC funding and ended up crashing and burning or anything exciting like that. It’s just an honest take on what happened when a side project fails.

The business model was going to be very similar to Reddit, with the exception that we would also reward the top contributors in Bitcoin payments. So, the idea was that we would eventually build a big enough audience to run ads, sell in-house ads, offer premium subscriptions (e.g. phez gold, etc.).

What motivated you to start Phez? 💡

Phez Hat Inspiration
A fez hat. The word “fez” always sounded funny to me.

I’m a big believer in free speech. Reddit has had its issues with silencing certain communities over the years. It’s a private company; that’s their right. But I believe there should be somewhere online where you can voice opinions that are outside of the Overton window. My background is in web programming -- primarily backend development, but I know enough front-end to cobble together an okay-ish Bootstrap-powered site. Phez was just a side project for me. I built the initial prototype over a few long weekends, then continued to iterate on it over several months. I’ve been doing freelance Ruby on Rails development for the last five or six years.

Phez definitely wasn’t my first rodeo in the side project game. I have literally lost track of how many little side projects I have created over the years. That may be indicative of a problem area for me -- that I don’t give an idea enough time to flourish. It’s very hard to tell when one should “put down” one of their darlings and move on to potentially greener pastures.

(In hindsight, something similar to Phez has actually done fairly well in the marketplace, by many accounts: Steemit. It is a social network backed by its own cryptocurrency. It’s a great idea, but much more ambitious than what I had in mind with Phez.)

How did you build it? 🚧

Phez Marketing Meme

I’ve been developing Ruby on Rails web applications since shortly after DHH released the framework, some 10+ years ago now. So, I knew that I would use RoR. To launch, I just wanted the MVP set of features for a Reddit clone: posts, communities of interest, voting, commenting, etc. I was the primary developer throughout the entirety of Phez’s brief lifespan (a few other contributors submitted patches). I use Sublime Text for an editor, and my typical deployment stack is: Amazon AWS, Ubuntu Linux, Ruby on Rails (latest at the time), PostgreSQL, nginx, and unicorn.

The initial product looked terrible! Just like a boilerplate Bootstrap site, that was very obviously a Reddit clone, functionality-wise. One of the biggest obstacles I faced was responsive HTML/CSS development (getting the same HTML to look decent on desktops and mobile devices). As a backend developer, who also deploys/manages applications (e.g. some DevOps), you have to know pretty much already. Then throw in HTML, CSS, JavaScript, jQuery, etc. on top of that -- and you are looking at pretty many technologies, and it’s hard to master them all. So, I pride myself on being a jack-of-all-trades, but yes, perhaps, master of only a few.

Publicity is an area that I’ve never had a knack for, honestly. I basically just find a few subreddits that might appreciate it and launch my projects on there. Maybe a handful of other social networks, but I never do much promotion otherwise, typically. That was the case with Phez.

Which were your marketing strategies to grow your business? 📈

I guess that was the problem, I didn’t have one or any. I was hoping for some -- any -- kind of natural, viral growth. But it just didn’t happen. It was hard to get even one single user to contribute anything that wasn’t the most bottom-tier, effortless kind of post. It seemed like 99% of posts/comments were made with just the idea of doing the bare minimum to receive a Bitcoin micropayment. I believe there was a problem with the model altogether -- that when you suddenly introduce money into the equation (and it’s, say, nickels or dimes in Bitcoin equivalent, in this situation), people may feel even less likely to contribute. That is, then if they were just receiving imaginary Internet karma points. (Even though Phez had the notion of karma, too.)

One thing I’ve noticed over the years is that dominant social media platforms like Facebook and Twitter have pushed out many of the smaller sites, where one used to be able to find content. Back in the day, one could email a handful of bloggers and get the word out about a new project. It’s much more difficult to do that today.

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Which were the causes of Phez’s failure? 💀

The main cause of Phez’s failure was a poor business model. It was self-funded, with about $350 or so worth of Bitcoin (to be paid out to the top contributors each month), and some more funds used for Amazon AWS. The first month -- I know people were curious as to whether it was a scam or not. But then the payments actually went out. So, people knew they could make at least, say, $10 to $25 or so in Bitcoin, if they were one of the top contributors. The payout structure was like a pyramid where the top user might get $25 or so, and then the other $100 or whatever was split between the rest of the top, say, 15 contributors.

I kept improving Phez over the course of several months, but traffic was not increasing. SPAM and attempts to game the system were a major issue, as one could imagine. I knew they would be, of course. But every few weeks, it seemed like someone would come up with a new way to post gibberish comments/posts, in an attempt to boost their karma rankings. There was hardly any traffic on the site, so I monitored everything pretty closely. It was very easy to shut these attempts down, but it was still annoying nonetheless.

I made sure to announce ahead of time that Phez would be closing so that people would know on the 1st of the next month, users would no longer be getting rewarded for posting content, and the site would be shuttered shortly thereafter. It was actually a relief to shut it down. It wasn’t fun for me to work on it anymore.

Which were your biggest mistakes and challenges you had to overcome? ⚠️

The biggest mistake was probably just that it was a flawed concept, to begin with. Something like Steemit seems much more viable. But they have an actual cryptocurrency that backs their social media platform. I believe they have a whole team of developers. I’m just a web programming guy. It would take me years to get over the learning curve to build a cryptocurrency in C++, and I just have no desire, either.

Phez was a very poor man’s Reddit. There was NO competitive advantage, other than the idea of getting rewarded for your content in Bitcoin. Sure, we had the concept of “free speech platform,” but there was already Voat, and that has just turned into a toxic echo-chamber itself. (That seems to be what happens when major social media platforms limit free speech. A certain kind of speech gets shuffled over to its own echo chamber, where it stews. I don’t think that’s the healthiest approach to speech on the Internet, but that’s just my opinion.)

One big mistake was rewarding users in cryptocurrency (say, instead of just USD) in the year 2015 when it would happen to rise meteorically over the next few years. Hindsight is always 20/20, though.

Phez Bitcoin Lamborghini
‍‍If I hadn’t of started Phez, I could be one of those Bitcoin Lambo guys now (just kidding).

Which were your expenses? Did you achieve some revenue? In the end, how much money did you lose? 💰

On July 15th, 2015, one Bitcoin was worth approximately $260 USD. Of course, the price fluctuated throughout the several months that Phez was live. But let’s use this rough amount as an estimate for the value of one BTC back then.

I would estimate that we paid out somewhere between 1 and 2 BTC (I don’t remember the exact figures). Let’s assume it was 1.5 bitcoins so we can do some calculations. At the time, that was only $390 USD. Not a huge investment, if you think about it. I was willing to throw that amount away if I had to, to get the site going. What I didn’t know--what was hard to predict back then--was that the price of Bitcoin would rise meteorically over the coming years.

Let’s assume I was actually a master market predictor and could have timed the market perfectly, and cashed out this entire amount of BTC at its last peak (at the time of this writing) at $19,343 on December 16th, 2017.

$19,343 * 1.5 BTC = $29,014.50 (!!!) 

Wow, do I feel stupid now.

Phez Pizza for Bitcoin
Hey, at least I’m not the guy who spent 10,000 bitcoins on pizza.

Amazon AWS hosting costs were minimal -- probably $20 per month or so. The most important thing I lost was the opportunity cost of my time. I poured at least 100 hours into Phez development.

One cool thing about Phez: if you are looking for an open source Reddit clone written in Ruby on Rails, the source code for Phez is still available online in GitHub.

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If you had to start over, what would you do differently? 🕐

If I could go back in time, I’d tell myself to wait and pick a better idea than doing a Reddit clone with Bitcoin rewards. (Also, it’s a silly name!)

I tried reaching out to Ruby on Rails developers who were potentially interested in helping out with Phez development. The idea was that it could power other sites than just the one at phez.co. This ended up being a waste of time. A few guys were interested, but they just ended up kicking the tires and didn’t contribute all that much in the end.

If I could do it all over again, of course, I’d just reward users with USD instead of Bitcoin. But the idea that it was Bitcoin (as opposed to just USD) was a pretty core part of the concept. I believe there were already other content networks where you could get micropayments (in USD) for your content.

I suppose I should have spent more time trying to market the site. It’s just not my strong suit.

I built an entire API for Phez because I had big dreams of a mobile app one day. I don’t think the API had even one single user, ever!

Overall, I just invested too much time in this failed experiment. That’s what I regret most actually (the opportunity cost of my time), even more so than paying out some Bitcoins before they rose in price dramatically.

 

Which are your favorite entrepreneurial resources? 🔗

Y Combinator’s Hacker News, of course. It’s actually been a while since I’ve done a lot of entrepreneurial reading. I was a major reader of all kinds of business books back in the day, and just got kind of burned out on them.

One good one that comes to mind is “The E-Myth”, and there’s an updated version as well.

The gist of it can be boiled down to this: let’s say you sell widgets. You think you are in the business of creating and selling widgets. But what you’re actually doing (if you want to be successful) is creating a system or business process that allows you to create and sell those widgets. That’s where the real value is--the system--not in creating the best or cheapest widget.

It’s not an earth-shattering concept by any means, just something to keep in mind for business owners who are just starting out. For me, I love creating automated websites that can eventually just bring in cash each month with minimal effort.

Where can we go to learn more? 🔎

I’m in the process of launching a new project, called Timewalk Ventures. We’re trying to do something similar to Y Combinator, but for smaller side projects. Moreover, make sure you check out my Twitter!

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