Do you even decentralize? — Governance and network effects
BlockFellows Cryptoeconomics research on governance and network effects.
I bet you do.
The fall of centralized authorities
Ever since the beginning of internet we’ve seen some paradigm shifts. What started with central computing units that served multiple purposes slowly shifted to more distributed networks with the rise of cloud computing. This was done primarily because as platforms were scaling up they also had to reduce the impact of relying on a single point of failure. Distributed networks across the globe reduce latency to responding to user’s requests.
With the possibility for platforms to scale with almost no down time and fast connections, we’ve seen multiple businesses thrive over the past 15 years. YouTube, Facebook, Uber, Google are few examples of platforms that have became super successful with powerful large distributed networks.
Recently, we’ve seen the rise of popular awareness on how large companies treat user’s data. How they pack, analyze and sell the data. How they possible violate user’s privacy. We have no clue what happens inside these companies’ servers, how could we? Bit after bit is stored. The rest is history. In this case, being a central server or a distributed network means precisely the same. For us, probably better UX in the latter.
Distributed networks do not mean decentralized networks and this is where I want to grab your attention. Internet brought us the power to build powerful networks. It brought us the possibility to build disruptive networks. Also brought us the possibility to build toxic and manipulative networks. I mean, it’s the internet. Everything is literally possible.
Facebook brought billions of people to the same room. It made it possible for people to create and build their own network. It made possible for businesses, artists, models and individuals in general to succeed, because their content could be literally at the fingertips of almost anyone in the world. This applies to any platform. The bigger the audience, the better.
In my opinion, a big problem with the current model is that before you are able to build and connect with your network, you create a strong relationship with a central authority. What does it really mean? Simplistically, the platform dictates your success among your peers. Before people engage with your content, they are strongly engaged with the platform, meaning that the platform decides what to show or not. This happens in black box processes we don’t really know the workings.
Transparent systems are on the rise and we need them. We need better relationships, better content and more control over what we watch and follow. In the limit, we may even need to participate in the governance of such platforms. If these models thrive we may see platorms shifting from companies to networks where everyone has a voice.
Bityond
This year I came across Bityond. Bityond is a recruitment, talent and project management platform that matches candidates to jobs, based on skills, experience, characteristics and availability. You can take a look at the white paper here.
One thing I really like about this project is that it will be possible to participate in the governance of the platform. This will be possible through staking BYT (Bityond’s token).
Why does this matter?
To start with a definition, governance is “all of the processes of governing, whether undertaken by a government, a market or a network, over a social system and whether through the laws, norms, power or language of an organized society”, according to Wikipedia. Network effect is “the positive effect described in economics and business that an additional user of a good or service has on the value of that product to others. When a network effect is present, the value of a product or service increases according to the number of others using it”, according to Wikipedia.
Commoditization is the process of making a good or service into a commodity and competing on price. It is all around us! Bandwith, hosting costs and hardware costs became trivial. It’s not about producing the best software now, but actually applying the technology for the purposes of marketing. Commoditized markets are associated with the increase of competition and decline of prices.
What happened before with bandwith, hosting services and hardware, may happen to products and software platforms. In a commiditized market issuing a token is a good way to differentiate. This allows the creation of a network effect around the product or service. The token holders will prefer the product they own tokens of over the alternatives. This may not always be the best case, read this for more information on Defensible tokenization.
Networks are anti-rival with network effects that push towards monopolistic competition, but commoditization driven by decentralization pushes the market towards perfect competition. Decentralized networks will either be wildly successful, or have minimal value, and the biggest factor is how well the network is able to nurture its network effect.
— Luke Duncan, Aragon
We can quantify the interest of token holders. Basically, they are the only party that we can actually verify the interest. Having the power to participate on decision-making processes, token holders become keepers of the network effect.
Governance as a Service allows for differentation in markets were the hardware, software, and data have become commoditized.
The model is defensible because [A] fees can be justified for the service token holders provide (making decisions that ensure the long term sustainability and growth of the network). If token holders do a bad job, or charge excessive fees, the network will fail, but if they do a good job they will be able to adapt to changing market conditions and be more resilient to the effects of commoditization. [B] Properties like stability are not critical to participating in governance. [C] Using a unique token is required because it quantifies a users influence in order to align incentivizes to ensure the service provided is consistent.
— Luke Duncan, Aragon
In conclusion, I’m really excited with the rise of GaaS models and believe it will somehow shape future platforms and networks. There is still a lot of work-in-progress and I will for sure take a close look to how successful Bityond will make it happen.
