Distributing the value and power of centralised network effects
The central premise of network effects is that a product or service becomes more valuable to its users as more people use it. Network effects can be so powerful that they have the tendency to become a monopoly. And the centralised organisations controlling these monopolies tend to use their power to increase the costs of using the service. This is not always obvious since many of the services that we are using are “free” to its users. However if you are not paying for a service it does not mean it’s free.
By now it should be obvious that Facebook for example has been increasingly collecting data on its users. Therefore you could argue that the costs of using Facebook are increasing because you keep giving them more data. There are many centralised network effects out there. Youtube for video, Twitter for microblogging, LinkedIn for professional social networks, Mastercard/Visa for payments, and so on. Most of these centralised network effects will eventually use the power of their monopoly to increase the costs of using the platform.
Under normal conditions governments create antitrust laws to protect trade and commerce from monopolies. This often means breaking up monopolies or making sure that companies do not become a monopoly in the first place. It is generally accepted that antitrust regulations increase innovation, and decrease costs for users. But the latest generation of centralised and monopolised network effects span across the world and are therefore difficult to regulate by a single country.
However there is a distinguishing factor that makes the centralised network effects of today different than those of the past. In the past monopolies with strong network effects relied on physical networks such as train tracks, energy networks, phone lines, etc to deliver value to their users. If a company wanted to break into a market with a monopolised network effect this meant creating their own physical network and gain trust to get traction with users. To do both was almost imposible. The centralised network effects of today however rely on the open infrastructure that is the internet. Therefore the barrier of entry in the markets with centralised network effects is much lower, you just have to convince the users to trust you.
Convincing users to switch networks of course is incredibly difficult but trust in the existing centralised networks is declining. And trust is the key to breaking their power. That is a big part of the reason why we are seeing federated (generally Server to Server) apps and distributed (generally Peer to Peer) apps gain momentum. Both Federated and Distributed apps break up the centralised monopolies and distribute the power within the network making sure that no single organisation holds all the power over the network.
The Blockchain protocol is getting a lot of the attention because of the success of distributed apps such as Bitcoin, Bitcoin cash and Ethereum. But in this article I want to focus on the Fediverse, a set of protocols that is much less talked about in business. The Fediverse is a collection protocols that can be used for web publishing (i.e. social networking, microblogging, macroblogging, or websites) and file hosting on federated servers. One of the best known examples is Mastodon explained in this video:
But there are many more examples. Mastodon is an alternative for twitter, Pixelfed for instagram, Peertube for Youtube, Nextcloud for Dropbox and Friendica for Facebook. The beauty of these protocols is that everybody can start their own instance and be part of the Fediverse.
The key in breaking up these centralised networks is trust. As the big networks of today are losing the trust of the consumers we are seeing opportunities for new protocols and technologies to enter the market. When consumers lost their trust in banks the bitcoin protocol became big. Now that consumers are losing their trust in companies like Facebook, Google, Twitter, Amazon, etc it is the perfect opportunity for decentralised protocols to take their chance and grow their user base.