The Corporate Threat to Decentralization.

Monday, November 12, 2018

On Oct 31, 2008, Satoshi Nakamoto released his groundbreaking whitepaper.

It was quickly clear how disruptive blockchain could be. He outlined a financial system that could exist for electronic payments that had no trusted third party operating it.

Bitcoin brought with it a promise of decentralization — a redistribution of power from the few to the many.

Ten years later that potential of decentralization and disruption is still there, but we have yet to see it realized. The 2017 bubble brought a flood of newcomers to the space who didn’t really understand the technology or why it was disruptive. They were simply eager to make enormous returns for minimal work.

Large corporate entities have also jumped into the space, trying to capture as much value as possible in this new and expanding market. The death of the public token sale has been a godsend for corporates selling “blockchain without crypto”.

Custom, private, & permissioned blockchain solutions feel safe to big corporate players because they can purchase them the same way they purchase enterprise software.

These private blockchains might help to solve certain corporate problems but they do little to help bring about our decentralized future.

Limitations of Imagination

In a few years time, we might see blockchain systems controlled by a few big players, underpinning traditional markets, and serving to concentrate wealth with the 1%, while adding a few new players to the mix. If this bleak future of blockchain comes to pass, the reason will be a combination of greed and a lack of understanding of the creative potential of blockchain.

Let’s be honest, it’s hard for people to understand new technological concepts. We need a frame of reference to relate to new technologies.

In the early 90s, when the Internet was new, the Internet evangelists called it the Information Superhighway. Bill Gates went on David Letterman to explain why the Internet was going to be so disruptive and talked about getting an electronic mail or a newspaper delivered to our computers. The confusion was palpable — is this really better than getting regular mail or a regular newspaper? Who would want to do that? Yet here we are, nearly three decades later and the Internet has fundamentally changed everyone’s life.

The problem with blockchain is that people understand it in the same way they understand the Internet.

We think of Bitcoin as a better PayPal or electronic gold. We think of blockchain as a slow, unchangeable database. These notions aren’t incorrect — but they don’t grasp the truly disruptive elements of blockchain. They’re akin to describing the Internet as “a way to watch cat videos during your morning commute.”

New Infrastructure

What truly makes blockchain disruptive is its potential to form new, decentralized infrastructures.

Infrastructures are systems, utilities, and technologies that are used by a large portion of society, which benefit society as a whole and enable society to function. Infrastructures have to be maintained by someone, and those maintenance costs paid for.

The first thing many think of in terms of infrastructure are roads and bridges. These are used by the public, enable transport and trade, and are paid for by the government through taxes. They are a centralized infrastructure but, because they are maintained by government lacking a profit motive, benefit society at large.

Telecommunications are another type of infrastructure that is by and large privately maintained. Telecom companies own cell phone towers and communications cables and charge monthly service fees to pay for them. Although telecom companies are for-profit entities, these companies are heavily regulated to protect the wider society from abuse by the telecom oligopoly.

With the dawn of the Internet, we saw the rise of social media, search, and the sharing and gig economies. Companies like Google, Twitter, Facebook, Linkedin, Airbnb, Uber, and more became de facto infrastructure because of the data monopoly they commanded. Despite being for-profit companies, the speed of their technological developments left regulators lagging behind. So they were not regulated in the same way as telecom companies were, and ended up selling private data and amassing enormous wealth.

And this is where blockchain’s disruptive potential comes in.

Blockchain allows us to create rare digital coins or tokens that can be distributed according to the rules we set beforehand.

This allows us to create infrastructures that maintain and pay for themselves, without having a centralized company in charge of collecting rent.

No Rent Collection

Traditional internet companies often have a trusted or central entity perform a value-added service, and then charge a fee for the service. There’s nothing wrong with that. However, for a blockchain infrastructure to be truly distributed, there should be no central entity taking value out of the system.

This is the key tenet that is difficult to grasp. It requires changing the rules of the system so that the central entity is no longer required for the infrastructure to function.

To envision how this can work, picture the Internet. Nobody’s made money by charging transaction fees off of TCP/IP packets.

The Internet is a protocol that is free for anyone to use.

Companies make money off the Internet by providing value-added services, such as running fiber optics to your house, allowing you to use their server infrastructure, hosting your websites, selling computers so you can access the Internet, or creating apps that use the Internet.

Another prime example is Bitcoin. There is no company at the center of Bitcoin. No one controls it. Fees are charged by miners running nodes, but it is decentralized, no single entity charges the transaction fees. It is an infrastructure that sustains itself based on the rules of the system, not based on an entity providing a service that’s slightly more secure than prior technologies.

Avoiding the centralized future

Because of the ICO boom of 2017, companies raced to create new protocols. They built everything from payment platforms to computer game economies.

Many of them had a company at the center that took fees for the service just like a traditional company. This encouraged competitors to try and make their own token, launch their own ICO and build their own competing protocol — and struggle for dominance.

This caused significant fracturing of the market and led to the bubble bursting in 2018. With the crypto bear market came the big players — the IBMs and Microsofts of the world — selling private permissioned blockchains to large corporate players.

This could lead to the wealthy few tightening their stranglehold on this new market…unless new infrastructures are developed that follow some key principles:

1. Feeless Architecture. There’s a time and a place for fees, and it’s in your value-added services. If you’re using a decentralized architecture then your fees should also be decentralized. If you’ve got a protocol and a DApp, charge fees on the DApp. If you’re using a token, it should be to make the decentralized incentives operate without a central rent collector — so don’t become one in the process.

2. Usability is critical. If the user experience is frustrating it will never be widely adopted. The average person does not know why decentralization is important. They are not willing to purchase Ether and download Metamask in order to participate in an ICO. They are not willing to download a separate DApp and engrave their private keys on copper plates in an underground vault — just so they can use decentralized Linkedin (while none of their business contacts are on it). We have to work hard to reduce friction if our crypto projects are going to be truly disruptive.

3. More incentives than simply financial. So far almost every blockchain incentive model has been financial in nature — contributors of value are rewarded with tokens. This is fine, yet it means playing by the rules of the systems that blockchain was born to disrupt.

In the off-chain world, humans are motivated by more factors than just money. People are driven by autonomy, mastery, purpose, status, and relationships.

- People leave well paying corporate jobs to freelance for less money just so they can have greater control over their life and time.

- People volunteer for charities not to be paid, but to help a society greater than themselves.

- People help their neighbors to move not to be paid, but to nurture the relationship they have.

- People study chess not to be paid, but to become adept masters of the game.

- People upload content to social media not to be paid but to receive recognition from their peers.

- People edit Wikipedia not to be paid, but to become part of an elite group guarding human knowledge for the world.

- Even transactions we think of as financial, like the sale of machinery to a company, will be prefaced by meeting in person, calls on the phone, going to dinner, and attending events together. We consider trusted relationships a key element of financial transactions.

If we design blockchain systems to be a new way of accumulating financial resources to a central entity, we can expect nothing major to change about how wealth and power are distributed in our economy. Maybe a few new players will emerge, but blockchain will just be a new asset class, nothing more.

We must design our blockchains to be infrastructures utilized by the masses, with incentives that actually motivate people. Only then can we hope to avoid an increasingly centralized future and realize the true disruptive potential that blockchain brings.

- ABOUT THE AUTHOR

Nathan Williams

Nathan Williams is an experienced blockchain entrepreneur. He is the founder and CEO of Minespider, a second-layer protocol for responsibly sourced mineral data on a public blockchain. Nathan is a regular conference speaker, moderator, blockchain aficionado, and co-host of the Analysis in Chains blockchain podcast that boasts over 175,000 downloads. Nathan holds a BS in computer science from McGill University and an MBA from Concordia University.

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