The Decentralized Economy

Neil Weintraut
13 min readApr 27, 2018

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In the beginning God created centralized operations, and it was good.

Centralized operations impeded innovation and transferred assets and control from the individual to the central authority, but they were very easy to set-up and run, if not the only practical means to do most everything in our life, so centralized operations became the norm.

And so life as we know it is ruled by centralized operations. Enterprise Automation, Games, Banking, Securities Exchanges, Media, Currency, Security, Retail, Logistics, and most everything else of scale in our civilization, are centralized operations — operations created, controlled and operated by single, trusted organizations and products.

When we think of online storage, for example, we think of Dropbox, Box, or some other — centralized — service and vendor. Ditto for online games — think Electronic Arts or Zynga. Securities exchanges are the NYSE or NASDAQ. Retail is Amazon or Walmart. Social Media is Facebook. Currency is controlled by the U.S. Government, European Central Bank or the Chinese Government.

Centralized systems have been around for so long and are so pervasive throughout each of our lives, it’s hard to imagine there is any other way that anything could be organized, or if it could be organized differently, that it could somehow be better than centralization.

It turns out that God also created decentralized systems. Decentralized systems are vastly more innovative than centralized systems, consider the ecosystems in Nature as primary examples. Decentralized systems leave assets and control with the individuals/organisms (rather than controlled by a centralized authority). However, decentralized systems have historically been too costly and complex to operate in scale within the context of human civilization…. until now. The technological shift — known as a blockchain — sitting on top of the Internet, has enabled and unleashed decentralized systems that offer an alternative to most every system of our economy and society, as well as, new things never before even imagined.

In the near future, our identities will be ours… no longer will we have to choicelessly surrender it (and in perpetuity) to (centralized) systems such as Facebook or Google. Even better, we may get paid per event for our identity, and we can decide who and when our identity can be used, and even revoke it at our whim.

In the near future, the routine disgorgement of 70 million credit histories (including yours), via one hack into a centralized (and static) computer system will be no more — instead, this sensitive information will be decentralized across millions of computers, and moreover this information will dynamically moving, fundamentally thwarting hacks.

In the near future, counterfeit aircraft parts will no longer infect our military aviation and readiness; instead, global blockchains of crypto-validated and crypto-accountable vendors will be tied to each and every part. Ditto for food supplies, medications, art, semiconductors, and even weapons systems.

In the near future, online gaming assets (e.g. virtual swords, armor, messages, avatars) that cost real money and time, will no longer be tied to a centralized vendor such as Zynga, but usable across thousands of decentralized games and gaming communities. Moreover, the online games are not limited to those handful selected by Zynga or other centralized game authors, but an essentially endless flow of games and innovations created by millions of individual contributors.

In the near future, cash flow vehicles such as real estate rental properties will be easily sellable and buyable, and as fractional ownership (e.g. Turbadium).

The Opportunity of Decentralization

Decentralization is: (i) different, (ii) powerful, and (iii) big.

The last time that a technological shift like this occurred, was the advent of the commercial Internet. It is fair to say that our life, economy and society and even governments are markedly different and more prosperous today because of the Internet.

Where the underlying power of the Internet was the networking of (centralized) systems, the power of Decentralization technologies (i.e. Blockchains) comes from distributing systems across the Internet. And much as the Internet opened the door to business models and ideas that were profoundly different or more powerful than the established businesses and offerings, Blockchain technology is doing it again.

Where the Internet displaced software with (centralized) cloud-based services and associated business models and superior value, the decentralized systems are in the early stages of displacing the business models and companies of (centralized) cloud-based services with decentralized storage (Filecoin and Storj), and enterprise automation (Fluree). Where the Internet displaced game software with (centralized) online games and communities such as Zynga, Decentralized systems are in the early stages of displacing (centralizing) online gaming business models and companies with gaming federations where users maintain their assets and identity, and seamlessly, move from vendor to vendor. Cross-country logistics is hampered today by a patchwork of disparate (centralized) systems despite the interconnectivity enabled by the Internet and wireless. However, blockchain technology is now paving they way to have end-to-end tracking of food, medicine, industrial parts, and money through universally accessible and auditable decentralized logistics tracking systems. Where the Internet led to the concentration of power and information of such unprecedented scale that Google and Facebook are now under the scrutiny of both the European Commission and the U.S. Congress, decentralized systems empower the individual with control of their information rather than the centralized vendor.

Indeed, the power of the Internet was that the Internet itself was decentralized. The Internet flourished in the face of highly-established centralized online services such as America Online and Prodigy, because its very openness (i.e. Decentralization) fostered innovation and participation that was inherently throttled by centralized systems. This disruptive shift to a decentralized network was identified early by David Isen in his iconic essay, “Rise of the Stupid Network.”

The underlying Decentralization of the Internet also underscores our predilection as individuals and society to not grok how decentralized systems can possibly work, as at the time the Internet was coming of age the U.S. Government led by Vice President Al Gore ardently believed that the Internet “should be constructed and regulated by the Government for all Americans.” (The New York Times, January 24, 1993).

While the Internet had to bootstrap itself from the legacy telephone network and digital mobile didn’t even exist, blockchain-enabled decentralized systems are building on top of well developed Internet and mobile infrastructure. Until 1999 or so, the Internet was hampered by both the number of users on it being both only fraction of the global population and most access was at 1 Mbps (megabit per second) or less. It took another five years for the Internet population and access the Internet as we know it today, and digital mobile only came of age in the past decade (the first iPhone was released in 2007). Much of the Internet that we know today only kicked into gear after all of this occurred. In contrast, this new decentralized system starts on top of all of this. The consequence is that the rate of change brought forth by Decentralization on the global economy should be far more rapid than what was seen by the Internet.

Blockchain: The Enabling Technology of Decentralized Systems

Any sustainable system requires a combination of functionality and reliability. It needs functionality to do something, or else it isn’t useful. And it needs reliability or people will stop using it. These two requirements are often competing design constraints. As an example, the most reliable system is one that is never used, and thus never has a chance to fail.

So-called blockchain technology combines three concepts and their technological incarnation, to create a system with functionality and reliability — a system that in particular is decentralized. Those concepts and associated technologies are crypto-encoding, a ledger of cryptographically-linked transactions, and an incentive mechanism for dozens or even millions of independent actors to execute the cryptographic processing that perpetuates the blockchain.

In other to make the system reliable, blockchains employ a cryptographic technology that both irrefutably links each transaction to the previous one, and assures a consensus (in lieu of a single centralized third party) of trust. This combination assures that each successive transaction (or so-called “block”) in the chain of transactions is correct, trustable and irrefutable. The underlying mechanism of trust through cryptography is also why the decentralized economy is also known as the Crypto Economy. The result of this invention is the creation of “trust” that can be distributed. This has never happened in the history of human civilization. Trust lies at the foundation of human interaction. The most recent innovation of similar import was the invention of money itself, transforming the barter economy amongst hunter-gatherer tribes into the modern world we know today. The long-term impact of such a fundamental innovation — “distributed digital trust” — cannot be underestimated.

The cryptographically-linked chain of transactions or blocks is collectively the blockchain or distributed ledger. The blockchain system of independent actors operates because these actors (or so-called miners) are incentivized to do the processing that maintains it. The incentive mechanism has become one of the Decentralized Economy’s most prominent facets. In particular, this incentivization takes the form or digital tokens. This incentivization particularly rewards individuals for processing a transaction correctly and rapidly. In some configurations, for example, transactions can be expedited by incentivizing miners with more rewards. Similarly, other configurations actually require miners to post earnest funds, and in turn are economically rewarded for processing a transaction correctly, or penalized for failing to process it honestly.

The Technology Stack of Decentralized Operations

Decentralized operations are implemented in practice by a stack of technologies: (i) starting with an underlying platform providing the actual digital communication and coordination across the Internet; (ii) that is then wrapped with a so-called protocol that distills and precisely-defines the commands and communications universally across a specific decentralized-system; (iii) along with an incentive mechanism for rewarding independent individuals to comply and process the “products” of the decentralized system; and finally (iv) an application that does the specific processing.

The platform, protocol, and incentives are all “horizontal” — concepts and technologies universal across a given decentralized system. The applications are the actual decentralized processing software and computers that are individually run and maintained by dozens to millions of miners across the Internet. The protocol and incentive system are typically coupled together.

The first application of blockchain technology, namely Bitcoin, as well as other forms of cryptocurrency, bundle the platform, protocol and incentive system together and their incentive is getting issued more of the cryptocurrency itself. Conversely, this bundling also means that these technologies cannot be easily used for other applications.

Subsequently, new technologies were developed that provide a platform for most any protocol, incentive and application to be built upon it. The most pervasive of such platforms by far, is Ethereum. In turn, most of the prominent decentralized applications (and their associated protocols) are built on top of or have been transferred to, the Ethereum platform.

Most of the decentralized applications are catalyzed and nurtured by a business, that operate in fashion to companies that shepard specific open source software (e.g. RedHat for Linux). For example, Protocol Labs is nurturing a decentralized storage system by, amongst other things, combining a protocol called the InterPlanetary File System (IPFS) with an incentive token called Filecoin.

Decentralized Economy Wealth Creation

The New Economy of the Internet produced hundreds of companies each worth billions of dollars, and thousands of companies each worth hundreds of millions of dollars. Given that the New Economy of decentralized applications is starting on top of the now massively deployed Internet and mobile devices, and it appears to have as much ability to ripple throughout our economy and society as the Internet did, the (financial) wealth created by the Decentralized Economy appears to be on scale with the Internet, if not much greater.

The instruments through which much, if not most, of this wealth will manifest is the form of familiar forms of private and public equity. However, the decentralized technology unleashed new and versatile financial instruments. The most widely known of these new instruments are (i) cryptocurrencies, (ii) so-called tokens (which manifest in numerous forms), and (iii) pseudo-equity, notably so-called Simple Agreements for Future Tokens or SAFTs. Many of these financial instruments provide virtues never before imagined, but this also means that existing regulations and tax laws need to be updated to accommodate these new virtues. In March, for example, attorneys representing major Venture Capital partnerships met with the SEC to discuss the regulation of tokens.

Venture Capital and Other Forms of Private Equity. According to a report by Sharespost, more than $2 billion of traditional institutional venture capital has been invested into more than 150 different decentralized economy companies, half of which was within the past two years.

Decentralization is already touching at least a seven different industry sectors, with dozens of startups in each of these sectors. These sectors include: technology infrastructure, financial services, online gaming, social media, enterprise automation, insurance, and health care information systems.

Cryptocurrencies. Cryptocurrencies are financial instruments that provide the equivalent function of fiat money such as the U.S. Dollar or Euro. Currencies provide: (i) a store of value; (ii) a unit of account; and (iii) medium of exchange. The progenitor of the Decentralized Economy was a cryptocurrency, namely, Bitcoin. Since, then other currencies such emerged, such as Monero and Litecoin. Because Cryptocurrencies are literally global in scale, they have been and are likely to the asset category with the highest notional amount of all cryptoassets. The notional amount of Bitcoin, for example is approximately $140 billion.

Tokens. By dictionary definition, a token is a voucher that can be exchanged for goods or services, and decentralized technology enables most any type of token imaginable. Over the past three or so years, the some parts of the collective crypto-industry has applied both the fact and terminology of tokens in sensational manners, often at conflict with regulations and / or common sense, which often clouded media coverage and popular understanding of the very powerful and generally wise and innovative applications of crypto-based tokens.

In particular, wisely-applied tokens provide either or both the incentive mechanisms and native currencies that enable very powerful decentralized systems. Most notable amongst them is the Ether token that powers the horizontal Ethereum blockchain platform. Another example is the Reputation Token powering Augur prediction markets.

SAFTs. Issuing a token intended to be used as a utility token prior to a functioning network runs afoul of security regulations in the United States and possibly other countries. In September 2017, the law firm of Cooley LLP devised an instrument label a Simple Agreement for Future Tokens (SAFT) sold to accredited investors in accordance with Regulation 506c exemption, that is believed to raise development capital in a regulatory-compliant manner. Filecoin (Protocol Labs), Basis (Intangible Labs), and Orchid Labs have each recently raised significant amounts of capital from prominent venture capital and hedge fund firms using a SAFT instrument.

Fundamentals in Place for Wide scale Proliferation and Uptake

Over the past eight years, much of the technology, knowledge, and enabling infrastructure has been put in place for the decentralized economy to rapidly and massively proliferate. These include:

  • The development and wide scale proliferation of horizontal blockchain platforms, notably Ethereum, which makes the development and deployment of most all of the applications discussed above as straightforward as developing and deploying a mobile application on the App Store or Google Play.
  • Major companies are actively supporting and developing decentralized systems. These include DTCC, Google, Huawei, IBM, Maersk, Oracle, U.S. Department of Energy. Major companies such as Amazon, Bank of America, Mastercard, Petroteq Energy, and Walmart have each recently filed patents pertaining to blockchain technology.
  • At the startup-level, startups addressing areas as varied as: consumer wallets (Abra), food-tracking (ripe.io), decentralized storage (storj.io), energy sharing (Grid+), identity monetization (Earn), decentralized social-gaming (BitGuild), skills exchange (StormX and Vanywhere), active data security (CryptoMove), health records (SimplyVital Health), and decentralized enterprise application infrastructure (Fluree), are either already deployed or in the midst of development.
  • Whereas the Internet Economy was throttled by the rate of deployment and proliferation of high-speed connections and then mobile technology, the network and ubiquitous access is already in place for the Decentralized Economy. Moreover, the Decentralized Economy inherently utilizes the multiplicative effects of social networking, and other macro-economic trends such as the now widely-accepted practices of the sharing economy. There are now more users on Coinbase (13 million) than Schwab, an investment service that has been online for more than 17 years.
  • More than half of the $2 billion of institutional venture capital has been invested into more than 150 different Blockchain companies has been placed just within the past two years.
  • Within the past six months, regulatory oversight clearing markets for good businesses and ideas to flourish, has started around the globe,,.
  • The recent and shocking uncovering of personal identity abuse of Facebook data by a firm with ties to President Trump’s campaign plays directly into the solutions offered by the Decentralized Economy, where user’s information is kept and controlled by the user rather than a centralized entity such as Facebook (and Cambridge Analytica). Orchid Labs, for example, recently raised $35 million

In the same way that Internet Protocol disrupted the telecommunications industry first, then the media industry, and later just about everything else, Decentralization technology promises innovative disruption across most of civilization’s most established institutions, starting with finance and then beyond to everything involving trust in human interaction. John Doerr, a prominent partner of the venture capital firm Kleiner Perkins Caufield & Byers, once commented that the Internet would lead to “the largest legal creation of wealth in the history of the planet.” While he was directionally correct in that forecast, it is likely the Internet Economy was just a small precursor to the global wealth creation that will be realized over the next decade from the proliferation of blockchain technology.

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J. Neil Weintraut is a Managing Member with Golden Oak Ventures (www.goldenoak.vc), a Decentralized Economy Hedge Fund. Neil previously co-founded an ran Palo Alto Venture Partners, a $150 million Venture Capital that invested in the early opportunities of the Internet, and was one of the first analyst on Wall Street to identify and define the opportunity of the Internet.

https://www.linkedin.com/in/nweintraut/

Disclaimer: The comments, views, opinions and any forecasts of future events reflect the opinion of the quoted author, do not necessarily reflect the views of Golden Oak Ventures, LLC (“Golden Oak”) or other professionals at Golden Oak, are not guarantees of future events, returns or results and are not intended to provide financial planning or investment advice. The author may hold investment positions in some of the companies or assets cited in this article.

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