The Tokenization of Open-Source Software: A New Era of Innovation and Rewards
Early Technology Business Models and The Dawn of Open Source
The business models of the early days of the Internet were primarily focused on hardware and infrastructure. In the 1960s, companies like IBM and Hewlett-Packard sold large mainframe computers and associated infrastructure B2B or B2G. Sales were primarily one-time, and the source code executed by the hardware devices was proprietary in nature. Software was yet to become a business model and the general public was closed off to the code governing their machines.
During the 1970s, software became a business model when AT&T began to sell licenses of its operating system, UNIX, to corporations. Anyone could purchase the software from AT&T, but users could not modify it, and licenses on the software were protected by copyrights and other legal restrictions. AT&T sold Version 6 of UNIX for $20,000 (equivalent to $100,717 in 2021).
In the early 1990s, tech business models changed forever with the developments of Linux and the GNU project. Wanting a version of UNIX for his personal computer, Linus Torvald, a student at the University of Helsinki, sought to develop an operating system that could be freely ported to his personal computer. In 1991, Torval finished developing Linux and published it on the internet, making it the first notable version of open-source software that was freely downloadable and openly modifiable.
After its initial release, Linux was quickly adopted by users worldwide, who began adapting and modifying the software. Copyright law required modifications to be published, leading to an increasingly sophisticated Linux as users built on top of each other’s previous iterations. The community-driven development process led to the popularity of Linux as corporations began to develop around free software and open-source copyright laws. Companies like IBM and HP began to contribute and new distributions of Linux, such as Redhat and Suse, were formed which made Linux more accessible to users and diversified the Linux application set to contain a wide range of software and hardware solutions.
Today, Linux is over 27.8 million lines of code, powers over 85% of smartphones, and powers 96.3% of the world’s top one million servers. The small open-source project started by a Finnish student and anonymously contributed to by community members across the globe grew into one of the largest software development movements of all time that revolutionized computing and software business models forever.
What is Open Source and the Second Order Effects of Free Software
Open Source software is code that anyone can access, modify, and distribute. Open source is governed by licenses that often include “copyleft” or other legal restrictions requiring developers that modify the source code to publish their changes. This keeps open-source software available to all and fosters innovation as software becomes composable and community members collaborate and improve on other people’s work. Some of the largest open-source projects today include Linux (operating system), Python (programming language), Apache (Web server software), and Mozilla Firefox (web browser).
The rise of open source and the composability of software has led to a rapid pace of technological innovation. Open-source software projects has provided new startups with the necessary tools to build highly specialized software solutions with low effort and cost. Companies today no longer need to reinvent the entire software stack or maintain their own servers. Rather, companies can leverage existing open-source infrastructure to build out the majority of their applications and spend their r&d budget on further specializing their software solutions. Today, over 80% of the code in modern applications is open-source. Free, open-source development libraries like Python (programming language), VS Code (development environment), front-end framework (React.js), database (MySQL), and web framework (Django) provide developers with the necessary tools to build web applications for free. This accessible infrastructure has inspired innovation by lowering the barriers to entry in technology and has enabled startups to quickly bring new software products to market.
The Current State of Open-Source
What is currently missing from the open-source model is a framework in which contributors are economically rewarded for the value that they create. Monetizing open source has long been difficult as the core pillars of the movement are free information sharing and community building. Today, the majority of economic rewards from open-source projects are second-order and mainly funneled to corporations that sell products and services that benefit from the free development model. For example, the increasing sophistication of Linux software directly benefits Google as the software is the underlying technology behind Android and ChromeOS. While Google and other major corporations donate millions to fund open-source projects, only a small fraction of the 30 million open-source projects on Github receive the necessary funding and incentives to attract developers. Today, the open-source community and its software projects are responsible for creating immense value through technology, however, the majority of contributors remain excluded from the economic benefits of their creations.
The Future of Software is Tokenized
The promise of Web 3 is to reinvent the Web and the traditional information network by decentralizing and financializing applications. The unique value proposition of applications on Blockchains, as compared to traditional software platforms, is that the software is tokenized and equipped with a native economy that incentivizes participation and contribution. Through tokens, Web 3 applications create strong economic incentives for developers and early users to participate in and contribute to the network. By holding tokens, developers and early users have a vested interest in the success of the network, as the value of their tokens is directly tied to the success and adoption of the platform. This creates a powerful economic flywheel in which core contributors are economically rewarded for growing the network. As more developers and early adopters are incentivized to contribute, the network effects of the application become stronger, further driving up the value of the token and incentivizing more developers and early users to contribute.
Tokenizing Open-Source Through Blockchain — Economically Aligning Core Contributors to Curate User Value
Blockchains, The First Examples of Tokenized Software
The invention of Bitcoin in 2008 marked the first decentralized payment protocol that was embedded directly into the open-permissionless Web. The open-source nature of Bitcoin made the network accessible to developers worldwide, who could examine the code to validate its security, suggest improvements, or fork the software, leading to a community-driven development process much like other open-source projects. However, the presence of the Bitcoin network’s native token, BTC, was instrumental to the network’s growth as the token economically aligned and rewarded developers, early users, and network validators. Incentivized by the potential of future growth of the BTC token, network participants joined the Bitcoin network and added value through network activity. This combination of open-source code and a token-based economic framework unified the community and allowed Bitcoin to rapidly scale its developer and active user counts.
The vision of Web 3 and programmable Blockchains, such as Ethereum, is to make this economic and open framework general-purpose across the open-permissionless Web. Ethereum is a fully open-source distributed compute platform that enables developers to construct decentralized and publicly readable applications on top of a financialized compute infrastructure. Like centralized cloud computing platforms such as AWS or Google Cloud, Ethereum is a virtual machine where developers can build and deploy applications. However, Ethereum is decentralized and different from traditional cloud computing platforms because it is governed by the Ethereum token, ETH, and features fungible/non-fungible token standards (ERC-20 and ERC-721) that allow developers to equip their applications with their own token. With over 5,000 developers currently building applications on Ethereum, the general-purpose blockchain has spurred an entire era of innovation as developers have built highly-scalable software platforms equipped with tokens. The tokenized nature of the software has led to these platforms experiencing rapid user adoption and community-driven development efforts.
A Tangible Solution to the Open-Source Dilemma, Tea.xyz
Blockchain and token economic frameworks present an opportunity to solve the collaboration and monetization problems that currently restrains open-source communities. Puerto Rico-based corporation, Tea.xyz, is developing a first-of-its-kind decentralized system for fairly remunerating open-source developers based on their contributions to the entire ecosystem. The company’s mission is to empower open-source communities by introducing token incentives to package management.
The Tea blockchain, equipped with a reputation system and an immutable decentralized registry, will be the backbone of Tea. This system is designed to distribute value to developers based on their contribution to the ecosystem’s utility and health. Tea’s promise goes beyond being a simple package manager; it will be a “universal” package manager, a universal interpreter, and a virtual environment manager equipped with a registry and economic framework to track and reward open-source contributions.
In the future, contributors to open-source projects will benefit economically whenever software packages are imported to build new projects. Whenever a new web application is built with the majority of the software being open-source libraries, the core contributors to the underlying software can be economically rewarded for the value they are creating through the second-order products and services. Tea’s combination of tools, information, and rewards will incentivize developers to contribute to open-source and build the next generation of software.
Final Thoughts
While the open-source industry has greatly benefitted from big tech investment, the misalignment of economic incentives has stagnated the potential of open-source and software more broadly. Web 2 software platforms are extremely difficult to scale and extract economic value from in a way that is not harmful to end-users. Platforms like Uber, Reddit, Google, Twitter, and other information networks, lack an economic framework that scales proportionally to the networks value. In turn, these networks are extremely capital intensive and require large upfront investments to recruit users and develop the network. In the early days of these platforms, users have no incentive to join the network as the value of the platform is dependent upon the contributions of other users. For example, Uber has no value without drivers and drivers won’t drive without riders. However, as investments in the network allow it to scale, more and more users join the network and its value grows exponentially. At scale, these networks are monetizable through advertisements, small fees, or other methods of extracting value from user data. Shareholders profit immensely yet early users that helped scaled the network are left unrewarded. The early drivers on Uber and the initial content creators on Reddit did not benefit for the immense value they added to the platforms by being early adopters. By introducing economic frameworks into networks, core contributors are incentivized to join and add value. The future of networks and open-source projects will be governed by tokens that economically align contributors to maximize network value.
