Value Shift in Decentralized Technologies
The first installment of an investigation into value accrual in decentralized technology
For approximately the last six months, I’ve been hyper focused on value accrual in decentralized systems. More recently, I’ve been trying to connect a slew of fragmented thoughts to formulate a full-fledged thesis.
Fortunately, I came across a great explanation centered around this topic in a recent episode of the Unchained podcast by Laura Shin. Her guest for this episode was Joel Monegro of Placeholder VC.
Towards the end of the episode, Laura asks Joel about a recent blog post he wrote on information technology cycles. He continues to summarize how computer-centric technologies were slowly commoditized from the transistor all the way up to the data giants of today.
The Commoditization Phenomenon
For the sake of being concise, I won’t explain every instance of commoditization in computing history as Joel discussed. However, to outline the point, I’ll briefly explain how this phenomenon worked in the age around the creation of the internet and up to the present day.
Prior to the internet, Microsoft had a stranglehold on the computing and software industry.
“If you think about Microsoft’s business, it was built based on proprietary software running on proprietary computers and proprietary distribution because Microsoft had a proprietary distribution network. They could put more CD’s in more shelves across the world than any small computer vendor or independent software vendor” — Joel Monegro
This grip remained tight for most of the 80’s and into the 90’s until we got to the introduction of the Internet and Linux. Suddenly, the world had a free operating system combined with a free distribution network. This fundamentally loosened Microsoft’s grip on the industry and introduced a new era in the cycle.
Software to Data
Following the era of open software and distribution via the internet, value began to accrue to companies focused on the data layer. In this cycle, data is the proprietary asset much like software was to Microsoft.
Over the course of the last 10–15 years, the market consolidated around the companies that obtained the most proprietary user data. These companies monetized by either selling that data (Facebook, Google) or leveraging it to outwork competitors (Amazon).
A New Cycle
Today, we’ve just recently entered the next cycle of this commoditization phenomenon. Blockchains and other decentralization technologies are commoditizing once proprietary data by introducing open data layers.
By default, companies can no longer monetize data exactly as they have for the foreseeable past because anyone and everyone now has access to that data.
What’s Proprietary Now?
I still think it is a bit early to say, for certain, how exactly value will accrue in decentralized systems. However, there are some key trends I’ve identified that may help guide us on where to look.
As I stated above, open data layers are loosening the grip that large tech companies have on today’s market. If data is no longer the proprietary asset, then the value focus must be shifting.
Taking into account my observations over the last 6–12 months, I see a new proprietary asset being the way in which entities or algorithms manage the data available. However, this answer is a slight cheat since ‘management of data’ is multi-faceted answer. To further my point, I will dive in on some data management mechanisms that I believe have the potential to elicit significant value from this technology cycle shift.
Protocol Layer Governance
The first facet that I’d like to address is token models with a governance function built in. People can’t get cryptoeconomics right the first time. The projects that locked themselves in to version 1 of their product are almost certainly doomed to fail. The ones that have novel governance systems and can evolve their protocol without contentious forks and community splits, will be the successful projects.
However, this does not say for certain that a token with good governance will accrue value to the token. To clarify, in 10 years time, 0x protocol could quite possibly be the industry’s default protocol for exchange of digital assets. But, this does not solidify the thesis that 0x token will be worth any more than it is today. The value of a protocol lies in it’s value to the projects that depend on it.
Delegated Work Governance
The second facet to data management is governance in the form of delegated work. One aspect of this decentralized revolution that people get so excited about is the ability to better monetize as an individual.
I could mine Bitcoin, report event outcomes on Augur, or curate a token curated registry.
The issue is, just because we have the ability to give more “power to the people” doesn’t mean that everyone wants it. In theory, it would be great to make a living as a full-time event reporter or registry curator, but the fact is that not everyone is going to want, or be physically able, to put in the work required to reap those rewards.
However, as human nature shows us, people will still want to reap some reward if they have a minimal-input way to do that. This is why I believe delegate work entities will become some of the most valuable organizations throughout this commoditization cycle.
Somewhat similar to a delegated Proof of Stake model, organizations will offer to perform required work on a dapp for token holders. These token holders delegate their work rights to this trusted party to perform the work on their behalf. In return, the delegate entity will take a larger percentage of the profit from performing the work function. The rest of the rewards will be distributed pro rata to the token holder by weight of their delegation.
We’re already beginning to see the seeds of these organizations form. Examples include reporting pools on Augur or GovernX and Nicholas Dodson experimenting with vote delegation on the adChain TCR.
Additionally, if you need some hard proof of how potentially lucrative pooling work could be, check out Bitmain’s profit margins in 2017.
Closing Thoughts
In my mind, it’s no question that the commoditization phenomenon is happening once again. Open data fundamentally introduces an entirely new system of business operation and value accrual. Proper governance mechanisms are vital to ensure long term growth and success of a protocol and its dependents.
Furthermore, the trend towards autonomy of the individual in decentralized systems introduces an interesting business case for delegate entities. If the correct systems can be put in place to facilitate work delegation, these entities could prove to be some of the most valuable organizations to emerge from this technology cycle.
This post will serve as part one of a longer thought piece. Part 2 of this series can be seen here.
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Thanks to Gage Valentino and Vivek Singh for their feedback
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