The Decentralization of Value Through Cryptography and Blockchain Technology
Digital ownership of cryptocurrency and tokens enabled by cryptography and decentralized blockchain protocols, like Bitcoin and Ethereum, is transforming commerce and industry. This transformation can be seen first hand by entrepreneurs creating software protocols for specific industry use cases and micro-economies, capturing value by tokenizing access and functionality. Gone are the days of bootstrapping an MVP, growth hacking, loading up on VC capital, marketing blitzkriegs and winner take all playbooks. New business models are based on empowering communities of developers and users with a passion for growing an improved network of value together.
Blockchain technology makes it possible to monetize open source protocols for decentralized applications and exchange. A primary benefit is improved and rapid commerce, all be powered by agile development and upgradeable software. These new protocols are changing industries. Game theory, mechanism design and economic modelling of incentives are the tools used to create powerful network effects, leading to an increasing token valuation.
Decentralized protocols are removing the need for third party intermediaries that don’t add value to transactions. Trust and the ability to form economic relationships is baked into the software. Assets and functionality are fully owned and controlled by the end user. No more transacting online with a credit card or applying to the bank for a business loan; the future is peer to peer. Designing and writing legal contracts will soon have the simplicity of creating a website with tools like Squarespace or WIX. This movement is happening across all industries and will completely reshape our existing financial systems, dramatically reducing our reliance on centralized industry and government.
Tokens are more than numbers or balances on a decentralized tamper proof ledger. Tokens are a new form of programmable capital; a new currency and settlement layer for industry specific commerce. Token value appreciation, increasing against other currencies, is based on the network effects of increased users, data and transactions in a decentralized blockchain based protocol. When the network expands with new users or data, token value increases. When the protocol of a token gets a software upgrade, introducing new revenue streams for users and data, token value increases.
Developers can release new revenue models, licenses, and contracts that are available instantly across all existing users and data. This creates the potential for increased transactions and a natural demand for the settlement token. When users join the network, they can receive tokens directly for adding valuable data or performing services, purchase tokens through one of many on-ramps, or buy them from a secondary market. Demand increases, value increases.
Typically a micro-economy will issue a finite token supply. The increasing demand and finite supply model of Bitcoin and other cryptocurrencies is easier to understand when supply is finite. Won’t we run out of these tokens though? That might be true of traditional currency, asset or securities models, but these new protocol layer tokens are almost infinitely divisible, for all intents and purposes today.
Decentralized models for creating value are new models that make existing models obsolete. The profits are not in large corporations, walled gardens and data lakes. Everyone has access to participate and utilize content in a decentralized economy. Users bring their data and identity with them and decide whether to contribute content to the network in exchange for value. There are no trade secrets or competitive advantages. What was once the core value in a centralized business is now a ubiquitous atom of the decentralized network, ready to be used by anyone participating in the growth of the new micro-economy. Users and content on the network benefit from increased efficiency, cost savings and utilization. It’s a win win for peer to peer. Then what value does a visionary entrepreneur or transitioning business create in the new decentralized macro-economy?
A startup or existing business becomes a transitioning on-ramp to the network and new micro-economy they create or choose. Decentralized protocols, businesses and currencies are facing major challenges in user experience and adoption. While removing intermediaries is a nice end goal of decentralization, it’s simply impractical to remove intermediaries if they add value by taking care of some of the headaches associated with user adoption of cryptocurrency and token ownership. By providing transitioning services, a business becomes an intermediary, but adds substantial value to users and data looking for exposure to new decentralized economies and networks. Value is added through on-ramps, education, custodial wallet services and overall user experience. This means businesses can charge a fee matching their level of service. Transition models are a necessary stopgap measure while mass adoption and scalability of decentralized economies mature.
When launching a new industry specific protocol, creating a token that appreciates with the value of the network can be useful for funding development, adding valuable content to the network and user adoption.
First, a portion of tokens can be sold provide founders with initial funding to see through the full vision of the protocol. Consistent upgrading of the protocol brings value to both the data and users on the network. This happens instantly and also increases the token valuation.
Second, dedicate a large portion of tokens for growth through strategic partnerships with businesses adding valuable data to the network. These businesses can can build additional on-ramps mentioned in the first method and accelerate user adoption.
Third, token generation events and initial offerings serve to jump start the network by creating instant users. These users are also owners of the protocol by virtue of being token holders.
The responsible governance of an initial token supply is a non-profit body, legally charged with increasing the value of the protocol and network. Over time, this non-profit will trade their tokens for fiat currency or stable cryptocurrencies to continue funding development and adoption. Eventually they will run out of tokens. The non-profit can reach out for support from the economy they created, or dissolve and melt away completely. The design of the protocol should leave no small group of actions in charge. The community at large benefiting from the new shared infrastructure economy should be empowered to continue the development and expansion. This is not unlike the modern internet infrastructure, although the build out was uncoordinated through private industry and the protocols not adequately monetized.
Newly circulating tokens sold by the original protocol team will not crash the token value if traded properly for enough added network value and only introduced sparingly after appropriate network valuation milestones. As the original protocol team run out of the token supply, the network should be self sustaining through a passionate community of users, valuable content and vibrant ecosystem of third party applications and developers. The protocol pioneers are handsomely rewarded and it’s on to the next trust disruption!
One of the primary goals of decentralization is embedding trust in the protocol. No longer will managing risk be a value added benefit. Likewise, a business setting up a cottage industry on a decentralized protocol will never suffer the censorship and shutting down of valuable APIs they depend on. We’ve certainly witnessed this in the Web 2.0 era (looking at you Twitter).
Yes, there are certain core developers creating upgrades to the protocol and some centralized non-profit governing strategic partnerships, content and adoption. These actions are also likely to be entirely economically aligned with increasing protocol, token and network value. A rising tide floats all boats, open the flood gates and invite more boats, is the only path forward for a successful new decentralized protocol and network. In fact, if the protocol is designed correctly and taken to it’s logical conclusion, the right valuable actors will have a stake in the future governance and direction of the protocol and therefore value creation in the network.
The Next Shopify, Spotify, Facebook…
The competitive landscape for those building on top of existing value protocols will be defined by design, user experience and customer success. While Web 2.0 monetization strategies are clearly moving away from customer interests, Web 3.0 will bring us back to the original ideals of the internet and world wide web; a level playing field.
Markets All the Way Down
Decentralization is not for the anarchist. Baking a business model, unique selling proposition and intellectual property into an open source protocol any business can build on is a radical move. Fundamentally though, this is a free market strategy to take advantage of blockchain technology, laying down the future protocol infrastructure of decentralization before any competitors. Letting any business or application developer benefit from open source infrastructure is free evangelism for the new protocol and increases token valuation. As more protocols are created and layered together through software inter-operability, value creation and appreciation flourishes. Markets on markets.
What decentralized peer to peer technologies protect against is the centralization of value and control in a market. There is no NYSE or Nasdaq for protocol development. There are only blockchains for publishing and for the most part their governance structures have stayed decentralized and censorship resistant. This is an open opportunity, a green field, a blue sky, to launch a public, permission-less, transparent economy.
Cryptography is enabling peer to peer ownership and exchange of digital assets. Decentralized protocols are removing trust as a barrier to entry for building applications that conduct commerce every industry. Value can be created by developing new protocols for commerce using agile software development and issuing a token to power new decentralized and peer to peer micro-economies in an industry. Additionally, businesses building on blockchain protocols can capture value by providing interfaces for users or data and own a share of the token supply. At each level of value creation, the focus is on a virtuous circle of success for all members of the network. The core protocol team mission should be incentivizing community, partners and developers through the ability to earn tokens or manage end user customer success.
There will be millions of protocols and tokens, as we transition toward decentralization from data and cloud dominated industries. There will be an ebb and flow from centralized to decentralized, protocol to protocol, because the switching costs of software are extremely low. Overall, the movement will be toward decentralization and the resulting transformation will be open societies fostering individual sovereignty and personal freedoms, with added responsibility and accountability.
Decentralized peer to peer network protocols with cryptographically secure ownership and exchange are here to stay. What value will you help to create?
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