Fat Protocol and Thin Application & Network Effects — Part 1

Abstract

This is the first part of a series of articles explaining some concepts that became critical in the blockchain cryptospace. The article starts with a brief definition of organization and it proceeds to describe how this has changed as we transitioned through a sharing economy to finally end up in a decentralized crypto economy. Protocols have also had their fair share of transformation. As capital slowly flows from today’s apps distributed by private corporations to mostly decentralized protocols developed by open-source projects.

You have probably heard these attributes at least once during your blockchain learning journey. As the century is facing the advent of Millennials, whom by nature are a generation demanding accountability and challenging existing hierarchies, questions about centralized authority are at the center of the discussions shaping the future.

With authority we mean any organization, be it public or private, that has some sort of influence in shaping the choices of the participants to the benefit of the same centralized organization.

In recent years, we have observed the nascent sharing economy taking off, which really was a transition period to the decentralized cryptographic economy, ruled by smart contracts, where all numbers are well kept and recorded in distributed ledgers. If the internet protocol as we know it today was just a spring board for applications to thrive in a medieval fashion of “strategize and conquer”, then decentralized protocols in the crypto space are the military encampments from which these strategies are being carried out. In other words, the point of focus is shifting, from apps to protocols.

Loyalty of the previously untapped younger generation costs hundreds of millions to maintain and a big portion of those accumulated points gets probably lost somewhere in the system or expired with zero value. A bit like those 100,000 unclaimed NEO tokens that will be returning to the rightful issuer should they not be swapped out for their new token later next year.

Well, blockchain is converting all those loyalty points into exchangeable value. What apps previously hoarded, blockchain protocols liberates and enables the transfer, exchange and aggregation to a sizable amount that will increase global customers’ satisfaction. Essentially, blockchain-based protocols are requesting apps to go for a diet as they have gotten too “fat” over the years.

Joel Monegro from USV, first awarded the attributes of “fat” and “thin” to describe protocols and applications back in August 2016. According to Monegro, during the sharing economy era, value is disproportionately distributed to applications, to the point that protocols are mere silhouettes with unspeakable names made of random consonants that do not ring a bell no matter how many times it is repeated to you. Owing to the virtues of decentralized protocols, applications developed on top of it can only empower what is underneath it, without superseding the importance of the infrastructure used to build it. The protocol stands to benefit from the parts that are being added to it.

Blockchain technology is overturning this outdated template. Protocols are now “fat”, and this is possible for a couple of reasons:

1. Destruction of data silos

2. Token speculation

Data silos always created huge barriers to entry for application founders. And in a widely deregulated market, where the treatment of personal information issue was not tackled by governments around the world, until recently, data including those airline miles accumulated when you went for a short weekend trip could be forgotten and lost when they expire. Through cryptography, the exchange of value becomes simple and seamless. Bartering miles for an ice-cream won’t be a dream just like the first pizza transaction was made in exchange of 10,000 almost worthless BTCs.

Token speculation is in no way to be underestimated. Speculation does not exist without potential, which may or may not turn into reality. This is true with a lot of things in life. Think about the effort students put into their studies, where the more time you invest the higher the chances of landing a great and rewarding job. That’s right. Students are speculating about their future and slowly adjusting their expectations as they get closer to graduation. The same logic is applied to asset or token speculation, where the holders (developers) will be incentivized to contribute and spread the virtues of the project, attracting further speculation around its potential, which spurs more development further increasing the network value. This is the virtuous feedback loop that token speculation has generated so far.

It is true that there are companies that are tokenizing their points, but how do they stack against the larger competitive field populated by gigantic apps that are finding themselves more and more entangled in privacy-oriented policies, antitrust indictments and falsehood dissemination concerns. These are all ongoing issues that will keep the previously hailed sharing economy applications distracted from doing what is right to keep itself “fat”.

To be continued

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