The Economic Value of Decentralized Identity — Part 3
Future economies that an identity and trust meta-platform will facilitate
[ Note: this is a version edited down from a longer whitepaper titled “Decentralized Identity as a Meta-platform: How Cooperation Beats Aggregation,” published by the Rebooting the Web of Trust biannual conference, available here in its canonical form. It was written collaboratively by Michael Shea, M. Smith Samuel M. Smith Samuel M. Smith Ph.D., Carsten Stöcker Ph.D., with editing and contributions from Juan Caballero Ph.D. and Matt G. Condon. ]
In the first installment in this series, we sketched out an abstract theory of “the meta-platform,” and in the second, we zoomed in on trust and reputation as the focal point of this economic quantum leap. Now we will apply these theories to the industries we have been analyzing in business related articles, thinking through the economics of the futures of these industries. These concrete examples of trust savings at various scales are informed, in many cases, by Spherity’s experiences over the years, researching and building identity systems for our clients.
On Competition within Meta-platform Ecosystems
A participant-owned meta-platform governed by open standards has mechanisms or “antibodies” that deter a single entity from controlling it, creating a lock-in, or monetizing transaction data. The value transfer within the interoperable meta-platform ecosystem is controlled by the participants. Furthermore, there is no administrator or aggregator, at least not at the meta-platform level, that controls value and monetizes transaction margins.
As a consequence, there is no real foothold at the core of the meta-platform for a single party to monetize or establish monopolistic control. Instead, these kind of organic, cooperation-incentivized conditions are favorable to:
- Interoperability, whereby previously unknown parties can transact in a trusted way
- Secure, business transactions, verifiable to a relatively high degree to outside parties without special access or permissions
- Economically viable nano-transactions (lower overheads and transaction costs)
- A more authentic “sharing economy”
Device Combinatorics on the Internet of Things (4th Industrial Revolution)
So far in this series, we have been speaking about a network-of-networks effect in positive terms, but from the perspective of communications, it is also a dizzying escalation of the scale of some technical problems, in particular that of addressability. Today, the Internet is probably best described as a network comprised of all interconnected objects, of which the lion’s share were traditionally human users and computers. When you add in the so-called Internet of Things (IoT), the number of addressable elements is reaching the tens of billions already, with many analyses predicting at least a tenfold increase within a decade.
The resulting “combinatorics” (sometimes called “matchmaking complexity”) of possible connections within any given subgroup is an impossibly large number. Yet in today’s user journeys or business environments, agents (whether human, machine, or software) increasingly need to access, control, or transact with a diverse group of these interconnected objects to achieve their goals in both the digital and physical worlds. This requires a straightforward and ubiquitous method to address, verify, and connect these elements together.
There are about 30 billion devices connected to the internet already. These devices are managed by thousands and thousands of different platforms. For the majority of the devices, it is quite unpredictable in which context they will be used: changes of ownership, geography, use case, machine-to-machine interactions, and other factors are inherently unpredictable. There are (N×(N-1))/2 possible peer-to-peer (P2P) connections among the devices possible, i.e. O(n²). This results in ~10²¹ possible connections. There are O(n³) possible connections for connecting three systems and so forth.
At some point, this staggering network-of-networks complexity will be equally pertinent in all business verticals, but today it is most keenly felt in businesses dependent on supply-chain management because of the large number of actors and multi-vendor components likely to be involved there. The main impediment is that it is cumbersome for each agent to have innate knowledge of the wide assortment of different addressing nomenclatures and protocols. At some point, it could go from impracticable to categorically impossible.
Human or object identities are stored in multiple centralized and/or federated systems such as a government, ERP, IoT, or manufacturing systems. From the standpoint of cryptography-based systems of trust and/or verification, each of these centralized authorities serves as its own root of trust, tightly controlling all identities’ access to one another’s credentials and trust information. An object trailing along a supply chain is interacting with multiple systems and platforms.
Consequently, a new actor in any given value chain has no method to independently validate credentials of a human or attributes of an object, except through the locally-governing central authority. Even then, the audit trail they can access rarely extends back much further than the jurisdiction of that authority unless data has been forwarded along in parallel to the human or object’s trajectory.
Therefore, a trust verification system and associated interoperable meta-platform protocol, built on some kind of universal addressing system must be utilized. To be a truly global solution, easy-to-use and still safe from hacking, censorship, and other sovereign interference, such a meta-platform scheme must be independent from any vendor-defined naming API or otherwise centralized namespace, yet they usually need to be one-to-one mappable onto such APIs and namespaces.
A participant-controlled meta-platform based on decentralized identity solves the problem of addressability and trust verification across participants involved in a given value chain transaction. The potential of enabling these devices to interact across a network-of-networks is inconceivably broad in scope. It may well prove to be many orders of magnitude broader than Facebook as an aggregator for human interactions and an enabler of new connections and networks.
Such a platform will be of particular value for the Fourth Industrial Revolution (4IR), i.e. the fusion of technology bridging the biological, physical, and digital spheres across industrial domains and societies. 4IR is moving our world into one big convoluted cyber-physical system in which everything is connected with everything else. In this digital fabric, there is ubiquitous network connectivity among IoT devices and digital agents establishing dynamically defined cooperation across interlinked digital value chains. We believe that an identity meta-platform is a prerequisite to establishing trust and cyber-physical security for dynamically defined cooperation in the 4IR. This lack of dynamism could make a huge difference in the timeline and amortization of 4IR investments currently seen as too ambitious or optimistic.
Secure Logistics Systems (Global Trade)
Multiple global logistics consortia are trying to establish so-called “secure logistics systems” for verifiable shipment tracking, process automation, and verifiable business transactions across multiple organizations and jurisdictions. In many ways, this hinges on a similar problems of scale and addressability: how can all these actors across the world find each other, verify each other, and share information securely and intelligibly?
Despite the fact that global logistics companies are attempting to leverage decentralized technology, they are still constrained by their confined partner-system/ecosystem boundaries that prevent full decentralization in their implementations or substantial cooperation on a global scale to foster interoperable standards.
Let’s assume the following scenario for verifiable logistics transactions which is based on a real-world example:
- UAE logistics is using a decentralized Hyperledger implementation
- EU logistics is using a consortium-governed Ethereum Quorom system
- Nordic logistics is using Maersk/IBM’s TradeLens
In this scenario, the three logistics companies have challenges to establish transactions across entities on the three divergent platforms. A typical approach is either
A.) to convince the other partners to join one’s own platform or,
B.) to implement complex federation gateways between platforms.
This latter, it’s worth noting, adds another player (the gateway) to the list of parties that need to be trusted, and potentially creates more transaction costs.
An identity-based meta-platform has the potential to solve this problem as it can establish trust among the participant entities, verifiability along the supply chain, and externally trustworthy business transactions:
- Credential-based trust for on-boarding a previously-unknown actor
- Verifiable consent and business transactions
- Data provenance for trace-and-track along a logistics supply chain
Here, as throughout this paper, the importance of open standards (arrived at by transparent governance) is hard to overstate. An identity meta-platform structured by such standards might well encourage and incentivize similar standards to develop as “on-ramps” to such a system, of the kind the accelerate information-sharing elsewhere in the international supply chains that are the economic basis of international logistics.
Monetization of Sharing (Mobility)
As we have detailed in our article “An introduction to Automotive Identity 4.0” on the subject, the economics of car-sharing and other forms of micro-renting are complex and difficult to predict from the standpoint of today’s legal and liability frameworks. We believe that as accurate and valuable data becomes easier to share across many stakeholders, risk will shrink as predictive maintenance and self-diagnosing cars will make it easier to account for the life and value left in a car after years of renting. It will also create more lightweight and distributed concepts of ownership and liability, and new ways to account for risk.
It’s important to note how different this model is from current models (for example, the centralized ride-sharing platforms of Uber and Lyft). Autonomous vehicles are poised to eliminate the cost of human drivers, while decentralized meta-platforms may similarly eliminate many of the middlemen that matches customers with rides, charging a transaction fee and setting terms and conditions.
Corporations will establish successful business models “at the edges” of this kind of meta-platform not by competing on margins or efficiency or proprietary IP, but by instead competing on:
- User experience
- Algorithms and analytics
- Implementation and auxiliary services
- Service level and guarantees of quality
- Hardware and infrastructure
Mobility systems built on a decentralized meta-platform may well become one of the most visible examples of a true sharing economy. It might be more precise to call this a “zero-marginal-cost” economy, because the owners of everything from homes to cars could, with less effort and risk, rent them out when they are not in use. This would naturally drive the marginal cost of most overnight stays or trips closer and closer to zero over time. In a world so molded by cooperative economic drivers, trust, reputation, and sustainablity become valuable and monetizable as a less zero-sum form of capital.
At a macro level, the cooperative approach using portable and trans-contextual trust as the primary vehicle for trans-contextual value transfer also makes the associated economic systems more resilient in the event of shocks to sub-segments. Multiple independent but cooperating networks contribute network-effect value to each other. This contributed value bolsters the network and smooths out the effect of a shock to a given sub-network. This is a decentralized version of so-called “ergodic” economics, in that it leverages participant-controlled cooperative network-of-network effects to reallocate or share value.
Conclusion
In this series we laid out some compelling economic reasons for corporations to join the cooperative meta-platform in question and perhaps many other such meta-platforms yet to come. At first glance, it might seem to some an impractical upfront infrastructural investment that would run counter to the incentives of existing power structures. Others might see such decentralization as unrealistic in a time when the most valuable and powerful companies in the world are low-overhead tech conglomerates dominating platforms that did not exist twenty years ago. But from another perspective, this recent excess of monopolistic tendencies and winner-take-all platform plays might be a growing pain, or catalyst of a cultural and economic pendulum swing, after which we return to a drastically different mood and set of economic norms.
Indeed, many would argue the pendulum has been swinging throughout the history of technology. Many leveling technologies, such as communication networks, first started as decentralized but then become more centralized over time with the associated value capture eventually becoming concentrated into a few very large business entities with higher rates of value extraction.
This historically cyclical behavior is well-documented in The Square and the Tower and the Master Switch [9][10]. One can argue that the internet, which started as a great leveler due to decentralized networking, has now resulted in most of its value being concentrated in a handful of companies, namely, Google, Apple, Facebook, Amazon, and Microsoft, each with valuations near one trillion dollars. Once centralization occurs, innovation and value creation decrease and value extraction increases to the detriment of the average user, according to either price or diversity metrics.
One way to combat such centralization is with regulation. The breakup of AT&T and the injunction against Microsoft’s predatory bundling are two largely successful examples of a regulatory approach to restoring more decentralization. Both debatably resulted in demonstrably more innovation, lower costs, and overall greater benefits to telecommunication users and operating system ecosystems. Regulatory approaches, however, often come with deleterious or unpopular side-effects. These are beyond the scope of this article, and there is no shortage of argumentation on the subject elsewhere.
Many prefer more market-driven decentralization, in addition to or instead of regulating information industries by direct means. While the technology and its concomitant economics are still largely immature, appropriate applications of blockchain technology may enable such market drivers. The authors agree that blockchain-anchored decentralized identity infrastructure is one such application. The transcontextual cooperative network-of-networks effects enabled by a participant controlled identity meta-platform may provide sufficient market force to break the long-entrenched cycle of centralization.
Stay sphered by joining Spherity’s Newsletter list and following us on Linkedin and Twitter.
