The web and application worlds are going through a revolution and in the coming years we will see a shift in the way these platforms are built. The Internet era of the 1990s brought a new means of accessing information, entertainment, and commerce. The mobile era of the 2000s built on this to solidify the Internet as an embedded part of our lives. With new distribution and commerce channels created and monetized, some of the most innovative companies ever were formed. These companies built groundbreaking products on powerful, centralized platforms and leveraged gold mines of data. However, in the late 2000s, something changed. A digital asset, Bitcoin, emerged and its underlying decentralized blockchain technology is now seeding a new wave of disruption.
Today, an emerging group of startups are re-imagining existing Internet infrastructure using blockchain technologies. Leveraging the distributed power of the network, these organizations are developing products and services intended to unbundle or eliminate many of the centralized applications that consumers and businesses use. What does this mean?
· Imagine full data sovereignty, where you store only the personal information you want to store, fully encrypted of course, and control and share it where and when you want. Simple sign-on across the web, with no third-party retaining or exploiting your information.
· Imagine commerce, insurance or benefits systems that fulfill obligations independent of any central entity that created the system. Take your insurance with you wherever you go.
· Imagine a social network where users retain ownership and control of their data and share in the monetization of that data if they choose to contribute it.
These are just a few of the seemingly unlimited use cases on the realities (and benefits) of decentralization.
Welcome to Decentralization
The decentralized web can be characterized by fundamental developments across three core components: (i) new applications that use (ii) open token-based protocols built on (iii) a new infrastructure.
Infrastructure and computational resources power the decentralized network including delivery, processing, hosting, storage, token/mining, and security. Browsers and devices provide an entry point to the world of these apps, while the core back-end technologies provide the foundation. These fundamental elements of the ecosystem are evolving quickly and several startups are making significant progress towards a state of a fully decentralized infrastructure, fueling applications that can run independently.
The base infrastructure for most decentralized applications is Ethereum. In this context, think of the Ethereum blockchain as a decentralized computer, with no single point of control and no single point of failure. The most prevalent use of Ethereum to date has been the creation of digital tokens. The details of each token contract govern how many tokens there are, when and how many new tokens will be created, and when and how tokens can be transferred or destroyed. Once launched, the rules for these tokens cannot be changed, even by the creator.
This certainty regarding clear ownership of digital tokens has enabled new business models for rewarding people and entities for providing infrastructure services. Because of this, entities have created decentralized building blocks that can be used in more complex applications. For example, InterPlanetary File System (IPFS) connects computing devices to deliver distributed storage, and its associated token (Filecoin) controls and rewards usage.
As shown above from an end-user point-of-view, storing files is identical. However, in the centralized version one entity is paid and provides the storage, whereas in the decentralized version multiple entities are paid with tokens and provide the storage, with no single entity controlling the transaction. The end-result is that a decentralized version of Amazon’s AWS, Microsoft’s Azure and Google’s Cloud has been created. Similarly, another promising project, GOLEM provides a token-based CPU renting network, where any Internet user can rent out their excess processing power to the network. There has been a significant number of startups offering base infrastructure services built on token payment.
The protocol layer is the software that governs the rules, operations and communications between network nodes. Today’s Internet runs on a layer of protocols such as TCP/IP, SMTP and HTTP. These protocols establish rules for computers across the network to follow in order to communicate effectively. Similarly, on the blockchain network, a number of emerging protocols are being built to support application development. Following suit in the ethos of the blockchain network, these protocols are considered open source and are not controlled by any one entity — the communities around the technology drive the protocol direction and development, giving power back to the users themselves.
One of our favourite examples of just such a protocol is OB1’s OpenBazaar, the future of open source commerce. OpenBazaar allows buyers and sellers around the globe to transact using cryptocurrencies, removing third party intermediaries from the transaction. In turn, this makes the transaction more accurate, faster and cheaper for both parties. Not only will protocol layers enable data security, it will also advance collaboration and convergence.
Another example is OpenMined, an open-source community that is developing a private and secure deep learning technology using blockchain. Users can choose to contribute their personal data to an AI algorithm, and if their data makes the algorithm smarter they are rewarded for having provided that data. Incorporating federated learning, homomorphic encryption and smart contracts, OpenMined ensures the security of a users’ sensitive data. A powerful use case for OpenMined could be a decentralized health network that leverages multiple data sets to enhance AI computation.
Finally, applications sit at the top of the stack. Decentralized applications are making headway in numerous sectors, including commerce, social networking and media.
The most straight-forward decentralized application is a smart contract, essentially an automated contract that will execute if the appropriate conditions are satisfied independent of any third party. For example, exchanges such as Decentralized Ethereum Asset Exchange (IDEX) utilize smart contracts to enable trading in a secure environment. A contract is established on Ethereum, ether or other tokens are deposited by a potential seller, and the tokens are released only once a buyer fulfills certain requirements (such as depositing another type of token to be exchanged). The decentralized nature of this exchange built on a smart contract means that once the contract requirements are fulfilled, the exchange happens independent of any participant. Likewise, bonds can be created using smart contracts with automated regular payments baked into the appropriate contract code.
Smart contracts can also be used to amplify the efficiency and transparency of gambling, as shown by applications such as Etheroll and SportCrypt. For example, two bettors agree on a particular bet, deposit their respective tokens or currencies of the bet AND agree on what service will provide the resolution of the bet (for example a final score in a game); once the resolution information is provided to the smart contract by the agreed-upon third party, the appropriate tokens are released.
And, as mentioned above, OB1 seeks to use the OpenBazaar protocol to create an eBay and Amazon like experience, but in a decentralized manner. Sellers use the OB1 client to post goods for sale and manage their store, and transactions are done using cryptocurrencies for a fully decentralized commerce experience.
Decentralized applications are making their way into social networks. Steemit was one of the first social networks built on the blockchain. Users and publishers on Steemit are rewarded for their contributions, hence providing a mechanism to monetize content and data. Unlike Facebook — which extracts and retains value generated by its users — Steemit users benefit from their time, attention and actions within the network. An increasing number of social networks such as Steemit or Sapien (a social news platform built on Ethereum) are gaining momentum and may eventually disrupt business models of Facebook and Google.
A next-generation social network is Decentraland, a virtual reality / social platform. Users can purchase land (with immutable record of ownership) in a virtual world and build, experience, and monetize content via a native token. Although early in its development, DCL has all the right ingredients to drive user engagement, community collaborations and network effects. For more on this project — check out this blog published by DCG, an OMERS Ventures portfolio company.
Social networks can be built that allow individuals to control their postings and content, and decentralization would mean that no single entity could abuse that content or connection data for economic gain (or would do so only if that gain was shared with the consumers posting the content).
Next, because blockchain can provide assurance of uniqueness and custody, digital collectables have become possible, independent of any corporate or control entity that can arbitrarily increase or decrease supply. Applications such as CryptoKitties proved that companies can build an on-ramp, via gamification, for mainstream consumers to participate in a digital collectibles economy powered by blockchain. Since a digital collectable is managed by the blockchain, an owner can be assured that their copy is the official copy and thus the good can accumulate value just as any other unique collectibles. This is also true for media creators, who now have the ability to publish a song or movie to the blockchain, and a smart contract could govern the playback and use of that content.
Although the above applications are small in size when compared to behemoth applications such as eBay and Amazon (e-commerce) or Facebook and Instagram (social networking) or Spotify and Netflix (media), they have the potential to disintermediate and disrupt the business models that we are familiar with today.
Challenges and Opportunities
We are in the early stages of a decentralized web. Currently, many startups are solving three significant and related challenges: user experience (UX), adoption and scalability. While the technology is truly disruptive, UX and ease of use are far behind what most consumers have come to expect from their apps. Moreover, infrastructure scalability issues continue to impact application performance. However, these problems are quickly being solved, and we expect that decentralized applications will see mainstream adoption sooner than the incumbents think.
OMERS believes that a new technology paradigm has emerged where disruptive applications are being built on a decentralized infrastructure. Our investment thesis focuses on investing in startups developing applications and the core building blocks of the decentralized web.
If you are interested in discussing the future of web, please join us on June 5 in Toronto as we deep dive into this reality with the help of industry leaders and investors. Visit the registration page here.