EPNs — Part 1: Introduction to Economic Protocol Networks

At Forte, we’re dedicated to creating new economic and creative opportunities for billions of players around the world. To accomplish that aim, we’re building a community-owned gaming platform using breakthrough technologies and a new business model that presents an opportunity to change the gaming industry forever. Our commitment is to develop a new and sustainable path forward for gaming that’s open and interoperable; that progressively decentralizes until it’s fully owned by its users; that is transparently and equitably governed by the community that has a stakehold in its success; and that is dedicated to the long-term health and growth of gaming, rather than short-term gain. The core of our purpose is launching new ecosystems that are rooted in Community Economics: Business models that give ownership to all participants, and reward developers, players and publishers for the contributions they make to the health of the game communities.

With this series, we’re sharing our research and observations in order to engage with all those who are also interested in advancing and building community economies within games. If you’re interested in contributing to this series, we welcome your insights. Reach out to us; we’d love to have you aboard!

In our first set of articles, we explored the definition of networks and the importance of network effects, highlighting both primary network effects — those that directly impact participants — and secondary ones — those that emerge in reaction to or as a consequence of primary effects. We found that networks are likely to grow so long as positive primary and secondary effects exceed the “drag” on a network, with the latter often coming from negative secondary effects. We also noted that networks often connect multiple types of participants with contrasting resources and agendas, for example, buyers and sellers, and showed how these differences can produce different network effects for each set of parties, both across groups (“cross side” effects) and within groups (“same side” effects). We then looked at the impact of network effects on games, using the popular game Roblox as a case study, and finally, considered the differences between “open” networks (which have no single centralized developer or manager) and “operator” networks (which are maintained by a centralized entity that takes value out of the network as compensation for its work in running and expanding the network).

In closing that initial set, we (rhetorically) asked the question of whether there was a form of network that would mitigate some of the issues faced by operator networks, by making them “more open” and distributing network value to participants. In this new set of articles, we delve into the answer to that question: Economic Protocol Networks (EPNs), made possible by blockchain technology. In the first article of this set, we look at the emergence of EPNs as a logical next stage of network evolution.

Traditionally, networks and businesses that operated networks were formed around making physical connections — for example, telephone lines and railroads. But over the past 25 years, many of these traditional networks have been supplanted by Internet-enabled alternatives. As Harvard Business School’s Shane Greenstein notes in his book How the Internet Became Commercial, the Internet went from having almost no business or consumer users in 1994, to half of all U.S. households and nearly 90% of medium and large-scale U.S. businesses in 2001.

Internet-based networks move much of the work of making connections from the physical world to software. We call this second type of network “Protocol Networks.” The base layer — that is, the collection of protocols that make up the Internet — allows developers to build other networks and applications on top of it at zero marginal cost, compared to traditional networks. Adding a new connection for land-line telephones required the phone company to string new wire from its existing network to the new node. Adding a connection for an Internet-based phone service simply means creating a new entry in a database.

The rise of Economic Protocol Networks

Traditional networks are based on physical connections. Because of this, their growth is limited by resource requirements associated with expanding physical infrastructure. Protocol networks are software-based, which means that their growth is essentially constrained only by negative network effects, much of which are rooted in developer attempts to extract value from the network. Consider the example of Facebook’s WhatsApp messenger network, versus AT&T’s cellular phone network: WhatsApp’s marginal cost for adding a new user verges on zero, while AT&T’s cost, as we saw in our Network series, is around $350, an expense that effectively serves as a major resource-limited drag on growth.

As we’ve seen, this extraction imperative tends to accelerate as network growth tapers off, which creates a negative feedback loop: As more participants leave a network due to feelings of exploitation, the developer is moved to intensify value extraction to preserve its revenues. Barring a major change in circumstances, the end result can be the slow death of the network.

Economic Protocol Networks are more insulated from this effect simply because they bind the concept of value directly into the network protocol itself.

The need for awareness of value isn’t something the original creators of the Internet were likely to have deeply considered. But it’s something that the complex intersections of individual and entrepreneurial agenda that have emerged since the transition of the Internet into a commercial medium increasingly demand.

Value doesn’t necessarily mean monetary value. After all, the dictionary defines value as simply “the importance, worth, or usefulness of something.” Whatever the units being used, embedding the concept of value into a network ensures that the fairness of transactions can be transparently measured; that incentives of all participants, including both developers and users, are aligned; and that every entity in a network has a stake in its growth and wellbeing.

Economic Protocol Networks (EPNs) allow for the fair, transparent and in many cases automated resolution of transactions that require the exchange of value. And in a commercial Internet — where time, effort, attention and data all have value — that means virtually every transaction between users and businesses, and even between users as peers.

EPNs point to the future of networks — one in which there’s no distinction between network operators and participants, and in which rather than the former being focused on extracting value from the latter, the two parties will be aligned to do what is best for the network overall.

The key innovations that enable this alignment are blockchain protocols and tokens, which work together to align the incentives of network operators and participants and generate superior network effects compared to legacy alternatives.

Blockchain Protocols

The jargon used in the blockchain and cryptocurrency space can be confusing, so to start, we want to make some clear distinctions among blockchain networks, blockchain protocols and their most visible current expression, cryptocurrencies.

As can be seen in the table above, BTC and ETH are cryptocurrencies, a form of digital asset. Bitcoin and Ethereum are networks that settle BTC and ETH transactions, with the terms of transaction settlement determined by their protocols.

The terms “token” and “cryptocurrency” are often used interchangeably. But in actuality, while “native” payment tokens like BTC and ETH are defined at the protocol level, other types of tokens are built on top of a protocol, defined by code that identifies what the token represents — a physical good, a digital good, a security, a collectible, a royalty, a reward, a ticket, a right to vote — how it can be used and how it can be transacted. Often this code is embedded in “smart contracts,” which are programs that self-activate based on preset terms or conditions being met.

The most common implementation of the smart contract is ERC-20, a technical standard used to generate tokens on the Ethereum Network. For example, BAT — the Basic Attention Token — is an ERC-20 token used with the Brave web browser, which is designed to provide a fair and automated way to reward engagement with digital advertising. As Brave users consume published content and are exposed to ads, they earn BATs, and so do the publishers. Advertisers get a precise and efficient means of tracking who’s seeing their ads and for how long. And users get paid for their attention while supporting the publishers whose content they enjoy.

Economic Protocol Networks are designed to encourage these win-win-win situations, where all parties are stakeholders, and activity is incentivized in every direction.

Just how do the multilateral incentives of EPNs operate? We’ll cover that in our second article in this series, about EPNs and Network Effects

Interested in contributing to our Community Economics series? We’d love to hear from you. Comment below or email us here at cec@forte.io.

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