• by William Mougayar
    Venture advisor, 4x entrepreneur, marketer & strategist. I live in Toronto, curate a lot, blog a bit, and help startups.

With Decentralization, Where is the Money?

1478-14842-1-PBIf we are to strictly follow Bitcoin’s first principles of decentralization, then very little to no money should be made by the centers.

Bitcoin- the system, is itself the quintessential decentralized and autonomous ecosystem today. And its center is poor, because it is non-existent as an entity. All of the revenues/profits are being made at the edges of the Bitcoin network.

So, if we are to mirror Bitcoin, we need to stay true to its decentralized characteristics & properties; not just as a matter of principle, but as a matter of operational integrity.

As it evolves, decentralization is not something that is categorically there or not there. It’s not a black or white situation yet. There are different flavors, shades and degrees of decentralization. It is becoming something we aim for and reach over time, not overnight. I’ve already described the “ideal” framework for distributed autonomous organizations, and it’s not that easy getting there.

The Nature of Centers

It used to be that nothing happened without central authorities, or central powers, or central regulations, or central approvals. With decentralization, it’s the opposite. Everything happens at the edges, and at the nodes near the peripheries of the overall network.

With decentralization, you don’t install a center first. You install a platform that enables the network to flourish where the “center” of attention (used figuratively) and activity are the nodes and the peripheral users.

We should not bastardize or compromise on the decentralization concept by picking and choosing which of its characteristics we want to adopt and which ones we reject.

The vision brought by Bitcoin includes:

  • Speed of money / transactions transfers
  • No intermediaries between transactions
  • Flat organizational structures
  • Trust inside the network
  • Resiliency of the network against attacks or censorship, with no central point of failure
  • Decisions and changes based on reasonable consensus processes
  • Fluidity from peer to peer

And “peer to peer” means “peer to peer”, i.e. without anyone in the middle to buffer, delay, or try to simulate P2P.

What Will Bitcoin Enable Us to Do?

Compare Bitcoin to the Internet, in terms what we are being empowered with. Arguably, it was the ability for anyone to become a publisher of content. Whether you are sharing a photo, a comment or a blog post, you are publishing something and expressing yourself freely on the Internet.

What is that equivalent (big) thing that Bitcoin will allow us to do really well? Is it to be our own bank? Is it to run legal contracts between each other without third party clearinghouses? Is it to earn value and cryptocurrency on our own, as a new type of work?

For Decentralization to take full effect, we would need to see:

  1. Decentralized Content Distribution and Exchange Networks (maybe for digital goods initially), without central authorities that tax it or control it.
  2. Decentralized Transportation Services, based on peer to peer services, without companies like UBER taking excessive fees at the center.
  3. Decentralized Storage, where we earn money by sharing unused capacities, without companies like Dropbox in the middle.
  4. Decentralized Computing, without companies like Amazon Web Services serving it.
  5. Decentralized Banking, where we control our money ourselves & wrap rules around how we spend it, without central banks.
  6. Decentralized Gambling where trust is baked in, and without a house that’s not always so trusted.
  7. Decentralized Exchanges for trading financial instruments or products, without central exchanges.
  8. Decentralized Titles Transfers or Real Estate Transactions without central authorities that control the issuance of deeds.
  9. Decentralized Public Registries for documents such as marriages, without going through government registrars

[For more Blockchain-based decentralized applications, I suggest checking the book “Blockchain: Blueprint for a New Economy”, and here’s my review on it.]

It’s Not Easy Being Decentralized

Apple’s iTunes is the typical centralized marketplace. If it were decentralized, first of all, Apple wouldn’t take a 30% cut on revenues. Second, whatever value is derived from app sales or via other monetization would be spread across users who use or promote an App by sharing their own stats for example, and Apple wouldn’t deserve that 30%. Of course, this is a hypothetical scenario, that is barely half-baked; but the nugget behind it is that the value is at the edges of the network, not at its center. Nothing happens without users that add value, so why not re-circulate a (large) part of that value back into the network to make it stronger?

It’s not easy to become decentralized. But it’s easier if it’s in your genesis, or if you are influenced to believe that way, or when you start a new organization from the ground-up as a decentralized network, platform, service, currency, or marketplace.

The challenge becomes: where is the monetization behind decentralized models? Often, a decentralized construct is based on two foundational components: a protocol and a marketplace. The (technical) protocol is like the operating system, and monetization is hard there, but the marketplace is where the network lives, and you need to search for innovative monetization models inside the marketplace, especially with user features and services that overlay themselves on that network.

And we must also ask for whom is the value transferred- the instigators or the participants? It’s very possible that value starts with the users who are the key actors in the decentralization organism. If the users benefit personally, then the network benefits collectively, and that spills over to whoever started the network.

The concept of “central operations” is shattered, because maybe it shouldn’t exist. The underlying protocol enables decentralized operations, and that is where the activity and value should reside.

My conclusion is that we are still learning and experimenting with business, revenue and value appreciation models behind decentralized networks, markets and organizations. One thing is for sure: the centers and operators should make less, and the collective of users/stakeholders/participants will make more.

  • I think you are right that decentralisation and networked models will be a big part of the future. Ultimately I see networked organisations overtaking large corporations as the dominant form. I am far from convinced that Bitcoin is the model for this development. Lack of trust and transparency will eventually overwhelm it. Block chain technologies may well be important but not as presented today is my view.

    • Thanks Kenny. Can you elaborate on the last part of your comment- “not as presented today”- how so?

      • I guess it is a polite way of saying that I have considerable doubts about the ethics and integrity of Bitcoin. My opinion is that it will take a different product or service before block chain technology becomes widely accepted.

        • Got it. I think some of the weak parts will mature and get better eventually.

          • Thomas Cocirta

            is Ethereum the possible alternative? Or La Zooz?

          • Well, they are different. Ethereum is an emerging general-purpose consensus/blockchain-based platform for running smart contracts and Dapps, whereas La’Zooz is a vertical-specific protocol and peer to peer service for the transportation market.

          • Thomas Cocirta

            From what I understood, La Zooz will be more than a ride-sharing application: they want to propose the building blocks for DAOs, so anyone be able to configure their own DAO as easy as a Facebook group. (This is what the founder Matan Field is explaining). My interest is in building my own DAO for my start-up: a p2p mobility solution, integrating the electric trike and the user community for p2p renting or sharing. If you have 3 minutes, please check mobotiq dot com. Your feed-back would be highly appreciated.

          • Salut Thomas- Vous etes francais?
            True that La’Zooz is 3 parts- a protocol, marketplace, and DAO construct. I’ve spoken to Matan.

            I like what you’re doing. C’est genial. I’d like to learn more. Feel free to email me at wmougayar AT gmail. Thanks!

  • We have been spending a lot of time discussing this at USV. Decentralization at the protocol layer will definitely prevent excessive value capture. It doesn’t mean though that there won’t be some fairly large businesses that get built on top. One example is the existing domain market. While there are some hurdles to starting a registrar (and that has limited competition) it is also clear that some registrars have executed a lot better than others and have built sizable businesses as a result.

    • yes, some businesses will figure this out.
      the added complexity is that you need to first “install/deploy” the protocol, or some layer above the network, and then the monetization happens on top. but that will also come with new choices for monetization with features/services that are enabled by the protocol and that maybe weren’t possible before.

      • That’s why I think the current protocol pioneers may not necessarily be the ones reaping the ultimate benefits. We saw the same cycles for other technologies.

        • Good point, but some of these players can own deploy both the protocol and the platform above it which enables these monetization models. But I agree that the ultimate benefits might escape the protocol owners if not carefully rolled out.
          I think this may have a better chance potentially as special-purpose “vertical protocols”, i.e. for transportation, e-commerce, etc.

  • sidney zhang

    Definitely agree with the thesis of this article. Money will be at the edges and not the center. I would like to pose a further question.

    In a decentralized world, where would defensibility come from? Two-sided marketplaces are defensible for network effects. The defensibility is so strong that it often leads to a monopoly/duopoly. If the center was decentralized then what new opportunities will emerge to allow companies to build similar defensibility. (If there is an opportunity at all)

    • That’s a valid question, and one that Albert also alluded to (see our discussion here).
      I believe the first point of defensibility is in adoption at the protocol level. But that’s not enough if the protocol is disconnected from the deployment of the platform. It’s a tricky balance to keep the protocol open, but also be able to have some advantage on monetizing what goes on top of it, IMO. That said, there can be a lot of added-value services that are native to the network and protocol, and these can be monetized by the protocol owner.

  • Points of disagreement:

    as a general observation, (and I don’t think I am being unnecessarily pedantic) you are not drawing a clear enough line between ‘decentralized’ and ‘distributed’, and as a consequence, many of the assertions and discussion points are confusing
    to say the least. Some things in particular to comment on are:

    1. Quote: “Bitcoin- the system, is itself the quintessential decentralized and autonomous ecosystem today.”
    #comment: No it is not.. There are many quasi-centralized aspects to the Bitcoin network, (miners, exchanges etc) and ‘decentralised’ as a term actually denotes some centralised components, see: http://bit.ly/1E5qBA8 the term’Distributed Networks’ denotes a lack of centrality.

    2. Quote: “And its center is poor, because it is non-existent as an entity.”
    #comment: If it’s center “is non existent” how can it be described as: “poor”.

    3. Quote: “All of the revenues/profits are being made at the edges of the Bitcoin network.”
    #comment: Bitcoin by nature feeds/rewards miners, and miners are not at the edges of the network, individual transactions by unaligned actors are a more precise definition of an ‘edge’ in the bitcoin network, and this is not where the majority of revenues and profits are being made. Actors that have organized themselves into quazi-centralized vehicles, (exchanges, arbitrage services, syndicates, mining pools, etc etc) are where the most revenues/profits are being made.

    4. There are problems with your list: “The vision brought by Bitcoin includes:”
    a) miners are any many ways “intermediaries between transactions” they canignore smaller translations and do cooperate to enable the integrity oftransactions.
    b) Bitcoin in itself, does not oblige “flat organizational structures”. That socio-political notion has crept into the general narrative, but is certainly not a given.
    c) “Trust inside the network” ..in fact its about a lack of need for ‘Trust’, that is the key point.
    d) Peer to Peer “without anyone in the middle to buffer, delay, or try to simulate P2P.” for Bitcoin has not yet fully been achieved due to significant latency in transaction processing, and selectivity based on size of transaction, issues. (as mentioned before)

    As regards: “What will Bitcoin enable us to do” there’s a big difference between what are seen as ‘Bitcoin’ or ‘Blockchain’ systems.. there’s an overlap, but there are important distinctions. So, the 9. point list may have been much easier to accept without the specific reference to “Bitcoin”.

    Finally… yes, success in this general area is about centralized models giving back power and control to users at the edges of networks, but retaining just enough control to make sense of the centralized components/services that they provide.

    To say that all centralized aspects of networks will disappear is naive and will just not happen. This popular meme (in crypto circles) that all centralized elements in networks are going to become redundant is IMHO a misleading, unsubstantiated, (ideologically led), fallacy.

    • Hi Simon,
      You’re technically right on the distinction between distributed & decentralized. I know that of course (and shared that same graphic in a previous post), but I’m writing here to a general audience. Yes, Bitcoin is both distributed and decentralized, but it’s the best large scale decentralized ecosystem we have.

      I was drawing analogies that are understandable to people that need to understand not how Bitcoin works exactly, but what it means. With that in mind, I can’t totally agree with all your rebuttal points, especially #4. Miners are just another form of intermediaries for now, but their relative power will probably go down with time. I’m certainly not a decentralization radical, and I’m a realist pertaining to how long and how hard the road will be (as I’ve already written in other posts).

      It would be great if we got acquainted in real. Feel free to email me at wmougayar AT gmail, and we’ll schedule a chat! Thanks.

      • Thanks William.. yes, I guess I am just on a mission to try and add clarity where I can, because there’s a lot of conjecture out there, and this can muddy the already confusing scene. I’ll be in touch directly in due course I have a very busy few weeks ahead as I’m relocating to EU from Australia, so lots to organize.

  • I wonder if you could help me understanding something – I am interested how a decentralised marketplace fits energy supply and demand and whether it could be a “blockchain nirvana”.

    Let me introduce whats happening (in different countries at different rates)

    The old power industry design was:
    very hierarchical (utilities make and sell to consumers – who consume (who would have guessed?) and then buy (in that order).
    Most consumption was 100% price insensitive, (at medium term resolution)
    Supply was tied to forecast aggregate demand (very price sensitive)

    In a new world – renewables:
    Not hierarchical – more peer-2-peer – in the new world geographically random nodes are added to the existing network (where-ever the wind blows or sun shines)
    Not well-matched to demand – you often have to transport energy a way to the point of use and weather is VERY regional and unpredictable.
    Zero marginal cost of production (renewables sell before traditional supplies even see the price and if not regulated (with feed-in tarrifs) are simple price takers at the margin)
    100% price insensitive

    New game – Demand Response – to overcome the above, price elasticity must be brought to the market (otherwise the mismatch between price insensitive generation and demand causes pseudo random spikes – yes in Northern Germany last Christmas you could get paid 200 time the normal price of consumption to burn off energy – because the old traditional supply market has massive transaction overheads. Switching in or off a power station is very expensive).

    So a new market has interesting characteristics despite some “heavy” nodes:

    The marketplace is widely distributed, it is becoming peer-to-peer, automated trading is evolving (“the smart industry” – a dishwasher runs when its cheapest before a desired particular time).
    The financial transactions are abstract from the physical exchange points (you dont “go” to buy electricity, but you “send” money via tcp/ip).

    Energy retail and brokerage is rapidly de-regulated and the markets are opening.

    So the question:

    If you decentralise transactions removing brokerage (the entire energy retail marketplace !!! ) and enabling peer-to-peer – do you or do you not lose market pricing information (demand and supply were aggregated – but have now become geo-specific) – Is there existing a means to bridge the information gap or must you (as I believe) bridge the decentralisation with a virtual market to reflect the old cost and capacity limits of transmission? (This happens at national and regional levels via clunky adjustment markets) If so who can mine that ? and is it a monetisation proposition?

    It seems that a blockchain contract of A produces, B sells and A and B pay C to deliver is needed and must be geo-tagged with end points and published. C must have incentive to remove transmission bottlenecks, which are volatile and move with new market entrants. The edges of the market have become the suddenly growing market and C is the gatekeeper, but how do you distribute Cs interests?

    C is de-facto centralised (a grid infrastucture – the power carrier) and necessarily regulated

    We assume we dont want Anna Bob and Charlie building their own grids. But why not given a sufficiently comprehensive protocol ????

    • Don’t start with the “blockchain” as the solution, rather start with the “new system as you see it” as the solution, and it feels to me that you’re already imagining a decentralized P2P ecosystem around this. The blockchain could come in as “part of the solution” if it helps to expose data that would be otherwise trapped in central/control sources.

      I’m not I fully understand the part about losing market pricing information, but I would say that theoretically, these new P2P decentralized markets don’t start perfectly. They do start incomplete and missing something, but the key part that should be nailed initially is the underlying operating protocol (not sure what your analogy would be); and then you build new types of value-added services on top of that.

      • Thanks William.
        This is not a work in progress more acknowledgement that the trustless contract will prove to be a necessary part of an efficient whole.

        I am simply trying to see how the world that effects me (and everyone who uses the grid) might evolve In an ideal world.

  • bruno cecchini

    Great work,

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