Centralization vs Decentralization: a broader consideration on Value Chain Layers

After having introduced a first breakdown of how the main existing patterns of token design map with platforms, and ecosystem, it’s worth to add a consideration: mapping platform strategies (and additional design tools such as crypto-tokens) with the layers of the value chain.

FThe first question one should ask is: what’s the advantage in using such crypto tokens, and more generally, permissionless-ness and decentralization, in the process of designing a platform strategy? Some point out to the automation of bureaucracy that smart contracts and on-chain governance may offer but this is, in my opinion, looking at the finger, not the moon.

Trustless may soon be the only trusted system

Today, there’s a broad — and sensitive — debate about trust, especially related to the over dominating role of, network effects driven, centralized corporate-backed platforms. Beyond the obvious Facebook’s scandals, the emerging “serverless” trend, for example, is pushing innovative, and competitive, companies worldwide to transform their IT infrastructures so to be able to run in centralized serverless environments, currently dominated by Google and Amazon. Despite it’s easier to understand platform centralization when it comes to Amazon and IT, it should be also intuitive that centralization and related trust issues might come up in any sort of industry. Biases are an issue embedded in the Ubers and Airbnb’s of today, and other issues might soon arise related to the centralization of data for emerging markets such as autonomous driving, or AI.

Should one trust centralized platforms then? What is the alternative? Token-based, permissionless blockchain based systems may well represent an alternative on the longer term, though centralization still bears some advantages, at least in some industries. Trusting transparent and trustless systems, essentially removing the need of trust in favor of enhanced transparency might be a rising pattern of the future, supposing that we can guarantee the trustability of so-called “oracles”: the nodes that sample reality and write on blockchains (e.g. sensors) leveraging on encryption and anti-tampering. Let me make an example: in ensuring that the cold-chain is respected for a certain fresh food delivery would you trust a centralized company or a transparent ledger (see what Zeto is doing)? What if you could be cryptographically sure that the devices used to track the temperatures and write on the public ledger, weren’t tampered? Same thinking would probably apply to trust that your data is not tampered with, and that you can access it at any time (see Sia Tech example we did before), or that you’ll be always able to access and leverage on your public reputation in short-term rentals marketplace.

What’s the point?

Embracing blockchain enabled, crypto tokens powered architectures is not an easy task, therefore the choice needs to be backed by some real reason, and the design needs to thoughtful. Adopting these technologies adds up a whole new dimension to your systematic design capabilities but essentially introduces rigidities in design, some sort of “design immutability” that may be hard to manage for a company, organization: once such designs are out in the wild, amending is not easy, sometimes impossible.

If, for example, your design integrates some smart contract extension (common in advanced token economies design, for example for staking schemes), updating that part of your strategy will require most likely the agreement of the nodes of the network (miners and/or validators) and a likely a hard fork. Also when it comes to advanced policies for mining, distributing and controlling the token price (token sales, auctions, airdrops): these are impossible to change, and therefore call for deeply conscious decisions. This also conflicts with the paradigms of leanness, and discovery. Lot’s to think about upfront, lots of assumptions to make, lots of potential risks.

As a result of these rigidities, and of the distribution of the platform architecture (among distributed nodes), governance becomes a key topic. Forcing people to sign strangling and dictatorial terms of service relegating users to passive subjects, is not possible in this context: you need users and ecosystem entities to be involved and engaged in the governance.

Why decentralizing then?

Who cares about decentralized, transparent architectures then? Where does centralization play a role in the value chain? In an interesting recent post, world-renowned scalability expert Todd Hoff made a reflection on the topic. Todd identified a few things that need to happen to really make decentralized systems (or subsystems) win versus centralized ones. Among the few items he identified, I point out three: superior applications (vs centralized versions), cheaper cost basis, and deterioration of trust (avoiding centralization becomes a necessity).

Certainly Free speech, and Freedom of participation are topics: no centralized system can be trusted to provide those elements, and a growing deterioration of trust towards centralized players may well create the need for the radical openness, and transparency that characterizes decentralized systems, or layers of them (see what OpenBazaar is doing with Freedom of Trade, for example).

Transparency of data layers might also become an important topic to enable data-powered business models: imagine having to bill your product — as part of an open product ecosystem — based on use, measured by secure IoT devices (crazy e.g,: billing shoes on steps made); suddenly it all becomes more attractive if the data layer is transparent and untamperable. This connects with the other key application field of token-enabled distributed apps besides Freedom of speech: evolving value chain layers. This is a topic for another (upcoming) post, but, intuitively, in value chain layers where distributed resources, assets, and potential trumps centralized ones — essentially where it’s impossible or costly to centralize — these mechanisms might become further enablers of evolution towards cheaper patterns of consumption (utility). DAOs might then become essential enablers of distributed, and open access, layers of the value chain in certain cases.

Short-term rentals are a good example: while brand, browsing, and booking (being heavily dependent on user experience) are clearly unique (Airbnb’s flagship), actual room inventory is a decentralized utility in reality. The question is: how long is Airbnb going to be able to control identity and reputation as centralized services? Future holds an answer. More on the Value Chain, platforms and blockchain soon on this blog.