Many people haven’t heard of the decentralized web yet, but it brings with it a huge shift in how internet companies will be built, and one day, we’ll all be using it. But even among the decentralized web’s most ardent supporters, many people don’t understand why we’ll all be using it. Supporters will tout “censorship resistance”, “controlling your data” or “freedom” as the big advantages. As I’ll explain, the real reason decentralization will win is simply economics. It changes who owns the “inventory” of a marketplace from any particular company to all companies (ie. a common data backbone), which will lead to more competition, and naturally create better products and lower prices that consumers will love. A “decentralized Airbnb” might only be able to take 1% instead of 15%. A “decentralized Craigslist” might be forced to have a pleasant design.

This will happen because the decentralized web solves the natural tension between marketplace industries that tend toward monopoly, and the problems of monopoly companies. This will affect a huge swath of industries from taxis (Uber), to vacation rentals (Airbnb), loans (LendingClub), auctions (eBay), and more. Basically all marketplaces.

A house for rent on a real decentralized P2P marketplace, just like Airbnb, except 25% less expensive than normal.

Primer

When I say “decentralized web”, I, and others, are referring to the web of “decentralized applications” and protocols that are built on top of any blockchain, such as Ethereum, or Cardano. The term “decentralized application” (‘dapp’) doesn’t have a rock solid definition yet, but for our purposes, it means an app that primarily uses data stored on the blockchain. It might otherwise look and feel just like a regular app.

Blockchains are a way to save data and do computations on that data through a distributed network of computers that aren’t fully controlled by any one central authority. In today’s world, if Facebook updates their app, and you don’t like the update, your options are to accept the update or stop using the app. Those are drastic choices. But in a decentralized world, if the Ethereum foundation puts out an update that people don’t like, then participants of the network have a third option. They can keep running the existing version, just like they did before. Ethereum can’t force anyone to upgrade. This effectively gives participants in the network a “vote” on every upgrade. Thus the control of the network is much closer to a democracy. Everyone can trust the network, without having to trust any particular central entity, and hence you get the term “decentralized”. As we’ll see, this change of power dynamics is critical.

Start screen of a decentralized browser which can block ads and automatically give micro payments (through crypto currency) to content creators

Decentralized apps and browsers exist today. They’re clunky and no one is really using them yet, but a substantial community of developers and investors are actively working to change that.

If you’re curious for more blockchain background, I encourage you to Google around after reading this article. The internet provides.

What people are getting wrong about the decentralized web

The hype around the “decentralized web” is pretty lofty. It has been described by Wired as a “digital Garden of Eden that can restore freedom”. An MIT report on the topic touts “censorship-resistance as a major benefit”, and Tim Berners-Lee, the man credited with inventing the internet, “envisions [a new web where] users control where their data is stored and how it’s accessed”.

These are laudable goals, but all evidence suggests that consumers don’t care about these ideals nearly as much as the technologists who tout them. You can achieve most of those goals right now if you really wanted to. DuckDuckGo provides a great search experience without taking your data. FastMail provides excellent email service without your data. Millions of teens use Jott to text over a mesh network (no central server) for free. But they use it because they can’t afford data plans and they don’t have access to wi-fi in school, not because they need to evade government censorship. If consumers really cared about these things then those products would be the mainstream, not the alternative.

Fixating on freedom and censorship is a classic example of what Paul Graham has called “the mistake you [startup founders] will make”, which is getting caught up in the “vision” — privacy and freedom in this case — , while forgetting what your customers really want. Not everyone is getting caught up though. Chris Dixon gets it. He talks about it from a developer perspective. He says decentralized systems will win because they’ll win the “hearts and minds” of developers. He’s right, but let’s take this further, to what I would say is the even more powerful force — consumers. One thing Internet Explorer taught us is that, despite being hated by developers, those same developers still spent countless hours making sure their app worked on Internet Explorer 9, because consumers used it. Apple’s 30% tax in the App Store quantifies just how much power is wielded when you own the consumer. So until we’ve articulated why consumers will want the decentralized web, we won’t have the full picture.

The truth is that for most consumers, the technological “garden of eden” isn’t one that’s free from censorship. It’s one that’s easy to use. It’s one that has all the shows you want, has every apartment to rent, has all of your friends. And ideally, it’s free or cheap. This last part is exactly why the decentralized web will eventually win. Let me explain.

Shifting The Network Effect

When you want to buy and sell local things, you kinda have to use Craigslist. It doesn’t matter that their design sucks or that support is non-existent. Such is the power of the “network effect”, which can be defined as a product getting more valuable as more people use it. And so it is with Facebook, eBay, Airbnb, Uber, AdWords, and the list goes on. It’s not that someone can’t compete with them, it just wouldn’t make sense to. Two-sided marketplaces like these are actually better when there’s only one, or a few, places to go. Because then all the “inventory” of a given market (cars, homes, your friends, etc.) are in one place. Searching is expensive and the consolidation reduces that overhead. It’s inefficient to post your couch for sale in 25 different places. Having the industry agree on one place saves you that cost. It also allows for an “ecosystem” to develop around the center, like 3rd party apps, integrations with partners, etc. These all add value.

But if we all agree on one place, or company, then we effectively crown that company a monopoly, and monopolies are bad, right? Yes, without question.

Well damn. What we have here is a natural tension. On the one hand, consumers want the inventory for these industries in one place because it reduces search cost, and lets ecosystems add value. But on the other hand, consumers do not want monopolies because monopolies will, in the long run, over charge you or underserve you. So why not break up the monopolies? Well you could, but recall that doing so is actually worse for consumers, because you add search cost or reduce ecosystem value. How much worse are these added costs compared to monopoly? It’s hard to quantify, but as an upper bound, we can say Uber charges about 20%, Apple 30%, and Airbnb roughly 15% (of entire multi billion dollar markets) [1].

When I hear “why is the decentralized web going to win?”, I’m reminded of the famous James Carville quote, “it’s the economy, stupid!”

The blockchain, however, resolves this natural tension. The decentralized computing and storage offers a way for the inventory to cheaply be shared by all, while being controlled by no one. We get all the inventory in one place, without the monopoly. Said another way, the blockchain shifts the network effect away from any one company, and onto the decentralized web, allowing any company to be built on top of the same data.

What would happen to vacation rentals if any site had full access to every home on Airbnb? No one can say for sure, but it could cut costs, eliminate them, or even entirely shift business models. While there aren’t great examples today of industries built on truly public data, we do have a couple industries where some large subset of data is at least commonly shared by all competitors, and looking at those industries is super interesting in this light. Online home sales is one example (eg. Trulia, Zillow, Redfin). Each have partial access to the MLS database of homes, plus public data (eg. crime and school info). Zillow and Trulia, perhaps surprisingly, consider themselves “media” companies. They make money from ads, not commission. Redfin has their own agents, but they’re paid salary, and Redfin’s sale commission is 1%, about 1/3rd of typical agent rates. So there we have 2 with entirely different business models from traditional agents, and 1 with cheap rates.

Texting apps may be another example. In this industry, the “inventory” is your contacts. But unlike normal social networking, all the inventory is just stored on your phones sim card, accessible by any app. And this industry sees a plethora of apps, without any monopoly controlling the market. There are numerous players including Signal, Messenger, Telegram, Textra, WhatsApp, and I regularly use all of them. I don’t use 5 versions of Facebook.

It’s fascinating to consider the implications, but I don’t want to speculate too much. The key point is we’re talking about many multi billion dollar companies who’s fees may go down 10x (30% -> 3%), or potentially be eliminated. When I hear “why is the decentralized web going to win?”, I’m reminded of the famous James Carville quote, “it’s the economy, stupid!”

Example: The Lending Industry

For fun at a recent work hackathon, I built a demo app on top of a decentralized lending protocol called Dharma (I have no financial connection). It helped spur many of my thoughts here, so I’ll use it as an example to make the above concepts more concrete.

First, a primer on Dharma. Think of Dharma Protocol as a program that runs on the Ethereum blockchain just like Garage Band is a program that runs on Mac. Dharma’s purpose is to model the lending industry in such a way that others could build run-of-the-mill, centralized, profit-maximizing businesses on top of it. Imagine if eBay or LendingClub didn’t take any fees, and instead gave full, realtime access to their database, and then allowed others to build their own versions of eBay or LendingClub on top of that same database. This is something like what Dharma and other blockchain protocols enable with data that sits on the blockchain.

Screenshot showing a handful of the dapps and protocols currently available that are built on the Ethereum blockchain.

Dharma is actually one of thousands of protocols already built on top of blockchains. The term “protocol” here just means a set of agreements and concepts enforceable through code. Dharma contains concepts that other businesses can plug into. Concepts like “debtor” and “lender”. It contains concepts like a “marketplace” (which they call a “relayer”), and “underwriters” (who determine the risk level for a given loan request). It also automatically handles things like enforcing loan repayment contracts, and collecting collateral. Built into these concepts is the ability for each player to specify a fee. As in, the relayer can say they’ll take 0.5% of loan request value, and Dharma will handle it for them and deposit the money automatically. And all the data it receives, and computations it performs are available on the blockchain, for all [2].

If you’re asking how Dharma makes money, that’s a fair question. I asked them that too, and they told me they’re going for an “open core” model, which means the “core” product is open source and free, while they would eventually try to sell services to large enterprise clients. This model actually has strong precedent in the tech world, including RedHat (just sold to IBM for $34Bn), and Docker ($1.3Bn valuation). The dust hasn’t settled yet on protocol business models, but others are trying “bonding” (sort of like membership fees), ICO’s, transaction fees, and more.