Elimination of Platform Risk: A “killer feature” for open source protocols

What is platform risk?

Platform risk refers to the dangers involved with a business or application relying too heavily on a platform for many of their core operations and revenue streams. This language is often used in the tech world for software platforms that allow third-party developers to build on top of them. Some of the major platforms currently are Facebook, Apple, and Google, for example. These companies are all places where third-party developers can launch apps for the use of end users. However, these developers/businesses are subject to platform risk because these platforms have oligopolistic-like control over their platform mediums (i.e. social network, smartphones, internet browsers).

Where do we see it today?

Facebook, Apple, Google, and many other large platforms have the power to reject, censor, or even ban developers for arbitrary reasons. In many cases, the platforms will launch a competing app or product after seeing its success. Here are a few examples that demonstrate the negative consequences of platform risk:

1. Zynga and Facebook

Zynga was one of the first developers of in-app games on Facebook. They were one of the earliest successes on the platform and and shared in a great partnership. Facebook would promote their games and help them meet monthly users metrics; Zynga would limit what other platforms they were on and exclusively share data.

However, Facebook started taxing in-game purchases, creating its own competing games, and actively reducing Zynga’s ability to market on Facebook. Additionally, the unexpected shift to mobile made it difficult for Zynga to keep up, as all its earliest product was developed for desktop use. Its overdependence ultimately hurt it substantially. Zynga’s stock price peaked at around $15 in 2012 and is now hovering around $4.

2. Apple App Store

Many times since the Apple App Store was available, particularly since the release of its first iPhone, the company has decided to simply copy some of its most popular apps. Often, Apple has released their own exact or a nearly exact copy of an app, even making it a standard, pre-downloaded app on the Home screen. It did this with its Health app, Apple Music app, News app, and even its flashlight feature. All the companies that had previously had those ideas in health, music, simple utilities and many others were severely hurt or even went out of business entirely.

3. Twitter and Meerkat

In 2015, Meerkat launched as an app that let users record live streams of themselves while simultaneously connecting to social media accounts like Twitter. It was a huge hit and saw rapid growth very early. However, Twitter soon blocked Meerkat from accessing its social graph and acquired a competitor, Periscope. It then integrated Periscope into its platform and Meerkat eventually went defunct a little over a year later.

These are just a few examples. There are tons of other instances of this on these platforms and other, as well. Platform risk is an inherent and unavoidable problem for many developers and software startups in today’s tech-centric economy.

Why does it matter?

Platform risk matters for several reasons.

1. It can ruin a company’s entire business through a few arbitrary decisions by a central entity.

2. Investors are less willing to fund projects that rely on these platforms.

3. It ultimately cripples innovation as fewer companies are willing to build on these platforms, due to the high risk it poses.

4. Platforms trend toward monopolistic states, which hurts consumers and raises the cost of using the platform, sometimes in terms of fees and sometimes in non-monetary ways, like privacy and data violations.

5. Centralized platforms who can censor and ban both users and companies at will pose a fundamental restriction on personal freedom and economic freedom.

Overall, platforms follow a similar trend. At first, they rely on attracting users to the platform and look to have cooperative relationships with developers and businesses building on it. However, as they are able to do this successfully, the relationship takes a pivot. They begin to extract value from users, usually in the form of data and fees, and then have enough leverage to start competing with third-party businesses. This is possible in large part because of network effects, data monopolies, and the ability to censor whomever they want.

Open-Source Crypto Networks

Open-source crypto networks for the first time make it possible to eliminate or, at least, significantly reduce platform risk. The inherent public, permissionless and decentralized nature of most crypto networks immediately alleviate some of the major problems involved with platform risk. Since there is no central entity controlling the platform, there is no gatekeeper or ultimate rule maker. In other words, users and developers cannot be banned from a permissionless platform.

Additionally, the open-source nature of most crypto networks completely shifts the current economic model. Centralized platforms rely on proprietary, private databases as the main pillar of their profitability and anti-competitiveness. Because data is scarce and only privy to them, it is worth a lot of money. The unique features and algorithms of a platform are also built in a “black box”, so it is very hard to replicate. This results in an extremely profitable entity that is almost impossible to compete with.

Crypto networks, turn the business model of a platform on its head. Rather than seeking data monopolies and gatekeeping powers, they make data a free, public resource and make accessibility a guarantee. Sustainability is made possible by the native tokens of the network as a way to align economic incentives and allow for all stakeholders to accrue value. Miners (or network validators) are rewarded for securing the network. Core developers receive an allocation of tokens for building the foundational tech. Users can be rewarded in different ways for their own usage and contributions. Third-party developers can build and operate their own applications and receive tokens, as well.

While native crypto tokens help create and transfer value, the real power of crypto networks is the perpetual ability to copy or even fork the open-source code. Having a public code for any competitor to copy may seem counterintuitive at first, but it actually helps create a more fair ecosystem of stakeholders. With the lingering possibility of a fork or a better competitor emerging, core development teams have increased pressure to deliver high-quality products, and accommodate all stakeholders equitably (users/miners/third-parties).

A Concrete Example

Let’s take Augur, the open-source protocol for building prediction markets, as a case study. Augur is essentially a platform where anyone can create a prediction market and any company can build a prediction market app on top of. The Forecast Foundation and its core developers initially built and maintain Augur, along with many volunteer developers around the world. It uses Ether for betting on different predictions and uses REP to incentivize market creators and outcome verifiers. The protocol has built-in fees which users pay to market makers and verifiers (called Reporters).

Ethereum miners (and soon to be network validators) get ETH for securing the network. Prediction market creators are rewarded for creating interesting, popular markets and providing liquidity. Reporters who verify true outcomes are compensated for being truthful. Users also have the opportunity to profit off correct predictions. Additionally, third-party developers can create applications on top of the Augur protocol, providing their own select markets and running for-profit enterprises. Users can then interact with the Augur protocol directly or through third-party Augur dApps.

Here are a few unique things that happen in the Augur ecosystem because it is not a centralized platform:

1. Augur cannot ban users or censor prediction markets that users want to create.

2. Augur cannot decide which third-party apps are able to access its code and data. They cannot arbitrarily prohibit a third-party app from building on top of it.

3. Augur does not aggregate and hide user data for profit.

4. Augur does extract value out of the network for itself but rather acts as a facilitator of value for all the different stakeholders in the network.

Here we see that platform risk is almost eliminated. Any third-party developer that wants to build on top of Augur or somehow incorporate Augur markets into their own application does not have to worry about all the risks mentioned earlier.

This is just one example, but the concept can carry over to many different types of platforms. Ethereum and other smart contract platforms (EOS, Cardano, Lisk, etc.) are, in a way, like decentralized app stores, where anyone is can build on permissionless. One can also imagine other possibilities, such as a similar permissionless social network or a decentralized goods marketplace.

While it unlikely that these new possibilities will displace centralized platform giants soon, crypto networks with much lower platform risk will attract much more innovation from developers, offer better incentives for users, and create better value propositions for businesses. Ultimately, we see these crypto networks a fertile ground for the next wave of growth and innovation for many different sectors.

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