Why Cryptonetworks Are Eating the World

Decentralization in the Ecosystem Economy

In 2011, Marc Andreessen wrote about why software is eating the world. Business models across industries were being challenged by software, yet tech companies under-appreciated by institutional investors, and people asking “Isn’t this just a dangerous new bubble?” — sounds familiar?

The Ecosystem Economy

Despite the doubts, technology has been killing corporations ever since: The average lifespan of S&P 500 companies has dropped from 61 to just 18 years in past 60 years. Nowadays, 50% of global annual company revenues come from products launched within just the past 3 years.

Dominant businesses used to be resources, products and services companies. New business models that allow companies to stay relevant in the long run have been emerging though. With iTunes and the App Store, platform businesses started to take over, where value is created by facilitating exchange between interdependent groups, usually consumers and producers. And since Uber & AirBnB, exponential organization models are spreading, where new organizational techniques & technologies are used to create output from owned assets 10x larger compared to peers.

Evolution of business models: From creating products to coordinating ecosystems.

The Ecosystem Economy is the next step in this evolution: Companies start integrating core business functionalities with 3rd party networks & platforms. This allows them to scale faster and on-demand, benefit from economies of scale beyond their own organizational boundaries, and potentially get access otherwise inaccessible resources.

Changing Business Models

The impact of this evolution of business models can be easily observed. If you compare the top 10 companies by market cap from 10 years ago to today, you’ll see that the number of companies that have a platform business model and/or are exponential organizations have increased from just 1 to 7 of them. And looking at private companies, 4 of today’s top 5 unicorn startups are as well (ByteDance, Uber, AirBnB, & Didi Chuxing).

Platform businesses among top10 companies 2008 vs. 2018

Even though the Ecosystem Economy are the youngest of these models and most ecosystems aren’t even fully accessible yet, some companies are already seeing 5% or more revenue growth from ecosystem participation. The study’s authors expect that 5 years from now, 80% of the S&P 500 will be engaged in multiple industry ecosystems, and that in 7 years’ time, an industry leader from today will have transformed into a pure ecosystem company spanning multiple markets.

From Centralized to Decentralized

As Chris Burniske recently put it, cryptonetworks are not companies. They are one of the three types of ecosystems that will be powering the Ecosystem Economy though:

  1. Centralized: Created and run by a company; these are the platform businesses of the tech platform and gig economy companies.
  2. Federated: Developed by industry consortia; trusted networks based on (permissioned) blockchain solutions.
  3. Decentralized: Cryptonetworks; emerging economies using a protocol in place of governance, each specializing in a single service

The three aren’t mutually exclusive. Centralized ecosystems have been created and established by the big tech companies, federated ones are being created by groups of industry players right now (although slowly), and decentralized ones are at the tipping point of becoming mainstream.

Three types of ecosystems powering the Ecosystem Economy

There is a natural push away from centralized to federated and eventually decentralized supporting cryptonetworks: No one wants a competitor to run the ecosystem, consortia take a lot of time, and after a few data privacy scandals, at least a little fewer people trust 3rd parties with their personal data. In short, ecosystems require trust, and the ability to create trust limits an ecosystem’s reach and makes adoption slow and tiresome. Decentralized ecosystems on the other hand work under the premise of being trustless (i.e. working without trust) and able to scale from day one.

Growth at Stake

The need for new ecosystems that are accessible at scale from day one is more relevant that how it might appear at first. What’s at stake is not just some marginal value improvement, but our ability to sustain scientific progress and economic growth. Today, more and more of our thinking is happening in parallel, driven by a highly educated and specialized global society, e.g. 90% of PhDs that have ever lived are alive right now. At the same time though, R&D productivity is decreasing exponentially (a phenomenon called “Eroom’s” law, a backwards-reading of “Moore’s” law), which is especially devastating in drug research.

Eroom’s law in action: Declining drug research productivity over time

With efficiencies lost synchronizing our efforts, productivity constantly decreasing, and only so much more resources available to invest, we‘re at risk of hitting a ceiling soon. We need to become more efficient at collaborating, and to do so, we need to build and tap into these new ecosystems.