Why Decentralization is Important

The First Two Eras of the Internet

In the first era of the internet—from the 1980s to the early 2000s—internet services were built on open protocols controlled by the internet community. This meant that people or organizations could expand their internet influence without worrying about changing rules. Significant network assets were born in this era, including Yahoo, Google, Amazon, Facebook, LinkedIn, and YouTube. During this process, the importance of centralized platforms like AOL significantly diminished.

In the second era of the internet, from the mid-2000s to the present, the software and services developed by for-profit tech companies—most notably Google, Apple, Facebook, and Amazon (GAFA)—rapidly surpassed the capabilities of open protocols. The explosive growth of smartphones, with mobile applications becoming the primary form of internet usage, accelerated this trend. Eventually, users migrated from open services to these more complex, centralized services. Even though users still access open protocols like the web, they often do so through GAFA software and services.

The good news is that billions of people have gained access to amazing technology, much of which is available for free. The bad news is that it has become increasingly difficult for startups, creators, and other groups to expand their internet influence without worrying about centralized platforms changing rules, and taking away their audience and profits. This, in turn, has stifled innovation, making the internet less interesting and vibrant. Centralization has also caused broader societal tensions, as we see in debates about fake news, state-sponsored bots, user “deplatforming,” EU privacy laws, and algorithmic bias. These debates are only set to intensify in the coming years.

“Web 3”: The Third Era of the Internet

A countermeasure to this centralization is government regulation of large internet companies. This response assumes the internet is similar to past communication networks like telephone, broadcast, and television networks. However, there is a fundamental difference between past hardware-based networks and the software-based network of the Internet. Once a hardware-based network is built, it’s nearly impossible to rebuild them. Software-based networks can be reconstructed through corporate innovation and market forces.

The Internet is the ultimate software-based network, consisting of a relatively simple core layer connecting billions of fully programmable computers at the edge. Software is merely the encoding of human thought, thus possessing an almost infinite design space. In general, computers connected to the internet can freely run any software their owners choose. As long as there are appropriate incentives, anything imaginable can be rapidly disseminated on the internet. The architecture of the internet is the intersection of technological creativity and incentive design.

The internet is still in its early stages of development: Core internet services may be almost entirely rearchitected in the coming decades. This will be achieved through crypto-economic networks, which are a generalization of ideas first introduced in Bitcoin and further developed in Ethereum. Crypto networks combine the best features of the first two eras of the internet: community-governed decentralized networks, whose capabilities will ultimately surpass those of the most advanced centralized services.

Why Decentralize?

Decentralization is a concept often misunderstood. For example, sometimes people say that crypto network advocates favor decentralization to resist government censorship, or because of libertarian political views. These are not the main reasons why decentralization is important.

Let’s look at the problems of centralized platforms. Centralized platforms follow a predictable life cycle. When they start, they do everything to recruit users and third-party complementors, such as developers, businesses, and media organizations. They do this to make their services more valuable, as platforms (by definition) are systems with multi-sided network effects. As platforms rise along the S curve, their influence over users and third parties steadily grows.

When they reach the top of the S curve, their relationship with network participants shifts from a positive-sum to a zero-sum relationship. The simplest way to continue growth is to extract data from users and compete with complementors for audience and profits. Historical examples include Microsoft vs. Netscape, Google vs. Yelp, Facebook vs. Zynga, and Twitter vs. third-party clients. Operating systems like iOS and Android fare better but still demand a 30% ‘fair fee’, arbitrarily refuse apps for seemingly arbitrary reasons, and capriciously incorporate the features of third-party apps.

For third parties, this shift from cooperation to competition feels like a bait-and-switch. Over time, the best entrepreneurs, developers, and investors become wary of developing on centralized platforms. We now have decades of evidence showing that doing so ultimately leads to disappointment. Moreover, users give up privacy and control over their data and are vulnerable to security breaches. These problems of centralized platforms may become even more apparent in the future.

Entering the Crypto Network

The crypto network is a network established on top of the internet. It 1) uses consensus mechanisms such as blockchain to maintain and update its state, and 2) uses cryptocurrencies (coins/tokens) to incentivize consensus participants (miners/validators) and other network participants. Some crypto networks, like Ethereum, are general programming platforms that can be used for almost any purpose. Other crypto networks have specific uses, for example, Bitcoin is mainly used for value storage, Golem is used for computational execution, and Filecoin for decentralized file storage.

Early internet protocols were technical specifications created by working groups or non-profit organizations, relying on the coordination of interests within the internet community for adoption. This approach worked well in the early stages of the Internet, but since the early 1990s, very few new protocols have been widely adopted. Crypto networks address these issues by offering economic incentives in the form of tokens to developers, maintainers, and other network participants. They are also technically more powerful. For example, they can maintain a state and perform arbitrary transformations of that state, something past protocols could never achieve.

Crypto networks use various mechanisms to ensure they remain neutral during their development, avoiding the lure and transformation of centralized platforms. First, contracts between crypto networks and their participants are enforced in open-source code. Second, control is exerted through mechanisms of “voice” and “exit.” Participants gain a voice through community governance, including “on-chain” (through the protocol) and “off-chain” (through the social structures around the protocol). Participants can exit by leaving the network and selling their tokens, or in extreme cases by forking the protocol.

In summary, crypto networks enable network participants to work together towards a common goal - the development of the network and the appreciation of its tokens. This consensus is one of the main reasons Bitcoin continues to thrive despite skepticism, and why new crypto networks like Ethereum are also developing.

Today’s crypto networks are limited and cannot pose a serious challenge to centralized incumbents. The most serious limitations are performance and scalability. The next few years will be dedicated to addressing these limitations and building networks that form the foundational infrastructure layer of the crypto stack. Afterward, the focus will shift to building applications on top of this infrastructure.

How Decentralization Can Win

To say that decentralized networks should win is one thing; to say they will win is another. Let’s examine the specific reasons for optimism about this.

Software and network services are built by developers. There are millions of highly skilled developers around the world. Only a small fraction of them work at large tech companies, and among these, only a few are involved in new product development. Historically, many of the most important software projects were created by startup companies or independent developer communities.

“No matter who you are, most of the smartest people work for someone else.” — Bill Joy

Decentralized networks can win the third era of the internet for the same reasons they won the first: by winning over entrepreneurs and developers.

An illustrative analogy is the competition between Wikipedia and its centralized competitors (like Encarta) in the 2000s. If you compared the two products in the early 2000s, Encarta was a better product, with better topic coverage and higher accuracy. However, Wikipedia improved much faster because it had an active community of volunteer contributors, drawn to its decentralized, community-governed spirit. By 2005, Wikipedia had become the most popular reference site on the internet. Encarta was shut down in 2009.

The lesson is that when you compare centralized and decentralized systems, you need to see them dynamically as processes, not statically as rigid products. Centralized systems are often fully mature from the start, but only improve at the pace of the sponsoring company’s staff. Decentralized systems are immature at first but can grow exponentially under the right conditions, attracting new contributors.

In terms of cryptographic networks, there are multiple compound feedback loops involving core protocol developers, developers supplementing the cryptographic network, third-party application developers, and service providers operating the network. These feedback loops are further amplified by token incentives, as we have seen in Bitcoin and Ethereum, which can accelerate the growth of the cryptocurrency community (sometimes leading to negative outcomes, like excessive electricity consumption for Bitcoin mining).

The question of whether decentralized or centralized systems will win the next internet era boils down to who will build the most compelling products, which in turn comes down to who will attract more high-quality developers and entrepreneurs. GAFA (Google, Apple, Facebook, Amazon) has many advantages, including cash reserves, a vast user base, and operational infrastructure. Cryptographic networks offer a more attractive value proposition for developers and entrepreneurs. If they can win hearts and minds, they can mobilize more resources than GAFA and rapidly surpass their product development.

“If you asked people in 1989 what they needed to improve their lives, they were unlikely to say a decentralized network of information nodes connected by hypertext.” — Farmer & Farmer

Centralized platforms often launch with compelling applications bundled: Facebook had its core social functionality; and the iPhone had many key apps. In contrast, the launch of decentralized platforms often presents unfinished products with no clear use cases. Therefore, they need to go through two stages of product-market fit: 1) Between the platform and developers/entrepreneurs who will complete the platform and build the ecosystem; 2) Between the platform/ecosystem and the end-users. This two-stage process leads many people, including experienced tech experts, to consistently underestimate the potential of decentralized platforms.

The Next Era of the Internet

Decentralized networks are not a panacea for all the problems on the internet. However, they offer a better approach than centralized systems.

Consider the comparison between the spam issue on Twitter and that of email spam. Since Twitter’s closure, despite its network being open to third-party developers, the only company committed to handling Twitter spam has been Twitter itself. In contrast, hundreds of companies have attempted to combat email spam, receiving billions in venture capital and corporate funding. Spam has not been fully resolved, but the situation has improved significantly, as third parties know that the email protocol is decentralized, allowing them to build businesses on it without fear of changing rules later on.

Or take the issue of internet governance. Nowadays, on large platforms, irresponsible groups of employees decide how information is ranked and filtered, which users are promoted, and which are banned, among other critical governance decisions. In cryptographic networks, these decisions are made by communities using open and transparent mechanisms. As we have learned from the offline world, democratic systems are not perfect, but they are much better than the alternatives.

Centralized platforms have dominated for so long that many people have forgotten there are better ways to build internet services. Cryptographic networks offer a powerful way to develop community-owned networks that provide a level playing field for third-party developers, creators, and businesses. We saw the value of decentralized systems in the first era of the Internet. Hopefully, we can see it again next time.

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