When Protocols Replace Companies

It’s better when things cost less, and monopolies can’t extract.

The “middleman” gets a bad rap for adding unnecessary costs but most middlemen provide a useful service for a reasonable price which is held in check by competition.

However, when being the middleman means having exclusive control over a network effect — aka when a middleman is a gatekeeper, not held in check by competition — both the supply and the demand side of that network suffer. Unless, of course, that middleman is a protocol. Protcols are not greedy — and that simple fact is remarkably important if the middlman becomes a monopoly.

For some foundational operations of the Internet, we’ve given the middleman role to protocols instead of companies. Protocols like SMTP give us email and HTTP (Hypertext Transfer Protocol) gives us webpages, all without anyone controlling access. That’s a wonderful thing. It’s changed my life for the better.

ICYMI, that link above is to Chris Dixon’s excellent piece Why Decentralization Matters , which you’ve probably already read if you’re reading this. Worth checking out if you haven't.

Protocols, of course, are less capable than full fledged companies, so, many middleman jobs still require a company to perform them. However protocols, very recently, have suddenly become a lot more capable. 10 years ago, some anonymous person figured out how to transfer value from one person to another, digitally, with a protocol in the middle, not a company or a goverment. More recently, Ethereum has come along as a platform to create increasingly capable protocols using that same underlying technology. Unlike the basic communication protocols used to form the Internet (HTTP, SMTP, RSS, etc.), protocols created on Ethereum’s platform can execute complex code, store data, and hold and move value from one place to another.

That’s interesting.

The degree, speed, and cost at which Ethereum protocols can do those things are in the early stages of their ascent up the optimization curve, however already these protocols are much more capable than before. It’s common to compare the cost of Ethereum to the cost of AWS — the latter obviously being much less expensive for computation and storage. But it’s the wrong comparison. More apt is to compare the cost of a protocol on Ethereum executing a middleman service to a company doing the same. Someone else can do that analysis, but, fair to say: the protocol wins, hands down, and the potential for future orders of magnitude improvements remains high.

Which current company-in-the-middle (or government-in-the-middle) scenarios will be replaced by these new super capable protocols; and, what new services are now possible that just never would work with a company? Those are the most interesting questions in technology right now, in my opinion. I’ll wrap this up with an illustration using the case study that I’ve done the most thinking on.

Spotify, and consumer content bundles.

My company, OpenBundle, is building something that we think would never work as a company — a protocol for written publications to take advantage of a bundle’s consumer attractiveness and it’s economics. “The Spotify for words” you might say.

Spotify, it turns out, is an interesting company-in-the-middle case to evaluate. Although sometimes its relationship to labels/artists is rocky, the industry is, for now, living somewhat peacfully with a company playing the middleman role. This makes sense for a little while longer, because within the job description of that role is hosting and streaming all of that music, tracking plays to calculate splits, and, curate all of that music to help people discover new stuff they’ll like. Ethereum is poised to be able to accomplish each of those tasks, however, not in a way that’s good enough yet. Once the capabilities are there, however, it makes a lot of sense for that middleman role to be decentralized, avoiding Spotify’s healthy cut of the profits, and for software developers to compete to build better and better thin clients to access, discover, and organize the network’s music. Spotify provides a valuable service today, but, I know I’m not buying any of their stock.

In our case, we think written content is ready for this now. The job description of the middleman role for a written content bundle has three important differences. First, centralized hosting is not necessary; publishers are already hosting their own content in the open web, which is how it should be. Second, we don’t need access to page view stats to calculate revenue splits. And lastly, subscribing to new publishers has a lower discovery burden than the daily rhythm of finding new music, and thus can be handled well by the thin clients, with the key relevance signals being stored on chain for all to utilize. That leaves 3 key jobs for the written content bundle middleman:

Economic coordination (routing subscriber payments to publishers) State management (tracking who has access to which publications) Ongoing governance (evolving the rules of the network over time)

Ethereum, in its present state, is great at all 3 of those. Work on the protocol, and publisher recruitment, is now underway. If you’re a publisher or know one that might be interested, get in touch.

Which other company-in-the-middle scenarios are ripe to become protocol-in-the-middle instead, and in what order? Evaluate it case by case by distilling companies down to the services they provide, and compare that to the existing or likely future capabilities of blockchain based protocols. It will be interesting to watch, and will leave us better off, with stuff that costs less, and monopolies that can’t extract.