Blockchains and Data
From private silos to open ledgers — a $2.5 trillion opportunity.
Today, 5 of the 7 world’s largest companies are software companies:
These software companies are powered by data. Apple, Google, Microsoft, Amazon and Facebook built huge businesses by gathering, managing and selling their users’ data.
Companies get this data by building products people enjoy using. They extract economic value by owning the data, selling it to advertisers, and using it to improve their products and services. Proprietary databases have become their most valuable asset, creating huge barriers to entry that prevent startups to compete.
These 5 tech giants have a combined valuation of $2.5 trillion dollars. In the information age, data is the new oil.
Blockchains as open data ledgers
A blockchain is a public ledger that holds a permanent record of events within a distributed network. It provides economic incentives for participants to maintain the operation and integrity of the public ledger by means of its own currency.
Participants contribute resources to a public system, and the system rewards them with its own currency. This currency is the de-facto unit of exchange to transact within the system. Therefore, the more people use the system and its associated currency, the more the currency — and participants’ profits — appreciates.
Take Bitcoin for example. The Bitcoin blockchain holds a permanent record of all transactions in the Bitcoin network. The ledger is maintained by miners, incentivized to keep the system running by earning bitcoins.
Bitcoin (with an upper case B) is a protocol for money. It defines the rules for how people interact and exchange value within its network. bitcoin (with a lower case b) is Bitcoin’s associated currency, unit of account used to exchange value and reward miners.
The Bitcoin protocol uses its own public blockchain to determine who owns what. Instead of relying on banks’ and governments’ private databases, it built its own open, parallel ledger. People are incentivized to use the parallel ledger because they get rewarded economically. Users are incentivized to use the parallel ledger because it provides a cheaper, faster and state-independent financial system.
To summarize, the Bitcoin blockchain acts as a public database (and platform), tied to an open protocol (Bitcoin) with an associated currency (bitcoin) that incentivizes players to keep the system running. Behind the scenes, the system is orchestrated by a combination of complex mathematics, cryptography, network systems and economics.
Once the right economics are in place, we have the incentives to drive people to the system. As with the internet, the public nature of these open protocols allows for anyone with a computer to join the network and participate. The more people participate and build things on top of open networks, the higher the innovation rate at the application layer, which ends up benefiting the end user.
What does blockchains mean for today’s tech giants?
Let’s analyze how Apple, Google, Microsoft, Amazon and Facebook create value, using the protocol framework described above:
Tech giants build products that provide the interface — application — , medium — private networks — and rules — private protocols — for their users to interact with each other. In exchange, they get to own the data their users generate, stored in proprietary servers. This data includes who you and your friends are, what you buy and sell, and what you search for, among others.
What if we take Bitcoin’s example, and provide the same products these tech giants offer, but using blockchains, open protocols and their associated currency?
This is already happening. Products and services we use every day are being built using this model: social media (Steemit), storage (Sia, Storj, Filecoin), and computing power (Golem), among others. We even have Brendan Eich’s Basic Attention Token, which acts as the medium of exchange to represent users’ attention within a decentralized ad exchange based on the Ethereum Blockchain.
These projects aim to provide the above services in a more efficient, cost-effective and privacy-ensured way by relying on the open protocol model, powered by blockchains. The Apple’s, Google’s, Microsoft’s, Amazon’s and Facebook’s will have a hard time competing as venturing into this space means they will need to cannibalize their current business models.
In the next few years, I expect to see more products and services shifting from private protocols and proprietary databases to open protocols built on blockchain platforms — maintained by their own currencies. If this happens, we have a $2.5 trillion dollar opportunity for building these protocols, securing their operation and buying in their associated currencies.