Decentralized Consensus Technology: Enabling the World of Networks
Today, we live in the platform economy age. But what’s next? Will deep networks in decentralized ecosystems shape the future?
The blockchain ecosystem is maturing in front of our eyes. While some of the early hopes and visions might not have manifested themselves (at least so far), the overall progress from the earliest days is undeniable. But what is the takeaway after the first decade of blockchain/crypto/DLT/web3 and where are things headed?
In the following piece, I synthesize my recent thinking that is based on observation, work in the field and many, many dialogues with people within the industry. And, of course, I heavily draw on the many exchanges with my great colleagues at Untitled INC.
From Bitcoin to Decentralized Consensus Technology
We are in year 11 after Satoshi Nakamoto published the Bitcoin white paper and, thereby, gave birth to two important innovations: Cryptocurrencies and Decentralized Consensus Technology¹. Here’s a brief recap that highlights some key developments that unfolded in the turbulent decade since:
The small, initial group of early Bitcoin enthusiasts grew and became the crypto community (in fact a very heterogeneous group of people, ideas and ideologies). Decentralization turned into a system design premise for networks of a new generation (as well as into an omnipresent buzzword). The idea of cryptocurrencies, understood as digital money, was subsequently refined and iterated on by several projects (both serious and dubious ones).
Network founders began to use scarce cryptographic assets within their systems to achieve various goals: some just wanted to meet their funding needs, others hoped to overcome the bootstrapping problem, and some used them to solve coordination and trust problems that exist between the targeted participants. This all led to the formation and proliferation of a new discipline called cryptoeconomics (also tokenomics). Today it takes elaborate classification systems to understand the different types of tokens and token-based systems, e.g. the Untitled INC Token Classification Framework.
We subsequently witnessed another concept’s birth, rise to prominence and eventual collapse: Initial Coin Offerings, in short ICOs. At peak ICO craze, the concept earned a bad reputation as many offerings simply went after “dumb money” without ever actually aspiring to build anything of value.
On the constructive side, people began to realize that decentralized consensus technology allowed us to build incentive alignment systems on steroids. That is, the technology provided a powerful toolkit which enables us to create and grow networks in complex environments where coordination and optimization problems present some of the most prevailing challenges. This line of thought created an entire experimental playing field for what I now refer to as decentralized consensus technology.
As you can see, the crypto space has been developing and moving at a rapid pace. So fast actually that stating “crypto years are dog years” is a commonly used phrase among people active in the field. As such, it would be easy to continue the history recap for many paragraphs. However, the central message should be clear by now: the crypto/blockchain/web3/DLT ecosystem is still very young — just barely past infancy — yet it has already inspired a lot of people, attracted enormous investments (including wild speculation), and developed into one of the most dynamic and fascinating spaces within the tech world. Plus, it’s an interdisciplinary field that already attracted many of the smartest minds from various disciplines like computer science, finance, economics, and law.
Hence, I regard the current stage still as largely experimental with most projects building innovative technology but not yet market-ready solutions. But this is about to change. A myriad of ideas and use cases are currently being tested across the globe. It is hard to predict where exactly the most value is going to accrue eventually — however, there are many reasons to be confident that the blockchain/crypto/DLT/web3 space is going to see significant growth over the next decade. The main reason to be optimistic?
Decentralized consensus technology can significantly shape how value is being created, distributed and subsequently flows through a highly connected world of networks. Let me explain.
The Networkization of Everything
The internet, complex systems, and network businesses
One of the trendlines we have been witnessing over the last two decades, both in theoretical thinking as well as practical application, is the shift from static hierarchies and linear models to dynamic networks and complex systems.
While this shift is as much cultural as it is technological, the internet is certainly its main catalyst. It brought upon us the necessary technology to build networks at formerly unbeknownst scale. Thereby, it shaped our thinking and understanding of the world: the internet’s advent kickstarted a development which I call networkization. It describes the disintegration of linear, often hierarchical, structures and their replacement (or sometimes enhancement) with more dynamic, adaptable network structures.
Networkization is a technologically driven development but goes far beyond tech. Professor Albert-lászló Barabási, the Director of the Center for Complex Network Research at Northeastern University, describes its impact perfectly:
“We had Worldwide Web, which was all about the links connecting information. We had the Internet, which was all about connecting devices. We had wireless technologies coming our way. Eventually, we had Google, we had Facebook. Slowly, the term ‘network connectedness’ really became part of our life so much so that now the word ‘networks’ is used much more often than evolution or quantum mechanics. It’s really run over it, and now that’s the buzzword.”
The internet presents the largest information network mankind ever possessed. Before its invention, information was bound to either individuals — enabling them to leverage information asymmetries to their financial and/or political advantage — or to physical media — which, due to the complexity and limits of physical distribution, was not easily accessible. Nowadays, more information than ever is freely and permanently available — to every person with an internet connection.
Once the internet’s basic infrastructure was in place, new market structures and business models that leveraged the networked nature of the internet emerged. They are known today as aggregators and platforms. Prominent examples range from Google to Facebook, from Airbnb to Uber. They all built network businesses which are highly successful and immensely profitable.
As the internet became increasingly ubiquitous — especially thanks to mobile connectivity — the second generation of network businesses started to address physical world problems of increasing complexity. Google, a first-generation network business, is a pure internet service: it was built using data about a network of websites. Facebook went one step further and digitized information about the relationships people had in the offline world.
Airbnb and Uber, founded in 2008 and 2009 respectively, are second-generation network businesses. As such, they are more specialized and closely intertwined with the physical world. Airbnb is a network of rooms, room owners, and traveling room-seekers. It created an entirely new market by facilitating the creation, distribution, and usage of data which formerly didn’t even exist²: data about unused room capacity as well as data about the trustworthiness of strangers. Like Airbnb, Uber, too, is deeply integrated with the physical world. The ride-sharing service is using real-time location data to power its network; it is a type of data that wasn’t even broadly available before smartphones became commonplace about eight years ago. Hence, Airbnb and Uber perfectly illustrate the progressing networkization of our world. Yet, the trend doesn’t stop there.
Deep Networks, Value Networks & Blockchain
At Untitled INC, we see another generation of networks emerge. We refer to them as value and/or deep networks. These networks are designed to create, distribute, and exchange value (value networks) while tackling increasingly complex problems, markets, and ecosystems (deep networks). So far, the most successful networks have been consumer technology with a business model that relies on maximal adoption. Deep networks, in contrast, target smaller addressable markets which, however, provide a significantly higher value for and per participant (e.g. in terms of ARPU). These deep value networks can be consumer- as well as industry-focused — the latter presents a particularly interesting, high-upside playing field.
Decentralized Consensus Technology (DCT) will be a key building stone for deep value networks and unlock their wealth-generation potential. The different components of DCT — particularly distributed ledgers, scarce & cryptographically secured digital assets, token-based incentive systems, and cryptocurrencies — will enable us to digitize more complex, real-world networks and to eventually build new networks in environments which are defined by a lack of trust and security.
Imagine you want to build a network that enables different car component manufacturers to closely collaborate and coordinate in order to build a self-driving car which they then sell to a ride-hailing service. Basically, you want to build a network that, in many respects, fulfills the function of today’s car manufacturers. Some of the participants might not even be companies in the traditional sense but machines that autonomously work together.
A scenario like this will only come to fruition if you build a network which solves several issues, in particular:
- Coordination among independent parties
- Trust in an environment where trust is limited or non-existent
- Network governance that minimizes platform risk
- Measurement of every entity’s value contribution & subsequent distribution of value created by the network
All these issues are best and most conveniently solved with components from the decentralized consensus technology stack.
From platforms to cryptonetworks
As a result, there are reasons to expect that the next group of extremely valuable, high-impact networks won’t be platforms or Facebook-style aggregators but decentralized cryptonetworks. Famously, Marc Andreessen proclaimed at the beginning of the cloud/mobile/social era: “Software is eating the world”. In the same vein, I think that the updated version should read: “Cryptonetworks are aggregating the world”. As the physical and digital world increasingly merge, cryptonetworks can provide the fabric that interweaves them.
The aware reader might have noticed that I haven’t spoken about crypto’s impact on FinTech and the financial system. Indeed, a lot of interesting developments can be found in the field of cryptoassets. Many of them have a lot of potential (I’ll address some of them in the follow-up). But I indeed believe that, in an interesting twist of history, the lasting impact of the world’s first operational cryptocurrency might turn out to be in the realm of value creation, not finance.
In the follow-up piece, I will dive deeper into what this means in practice and where to look in order to see early manifestations of this trend now and in the near future. If you don’t want to miss this, follow me on Medium or subscribe to the Untitled INC newsletter below.
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¹ A term proposed and introduced by Daniel Jeffries which we happily adapt, not without giving due credit of course: https://hackernoon.com/radix-and-the-death-of-blockchain-22dab6d98d0e
² Most likely it didn’t exist because, in the absence of a networked market a la Airbnb, such data was simply not valuable to anybody