First, let’s look at the problems with centralized platforms. Centralized platforms follow a predictable life cycle. When they start out, they do everything they can to recruit users and 3rd-party complements like 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 move up the adoption S-curve, their power over users and 3rd parties steadily grow.

When they hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum. The easiest way to continue growing lies in extracting data from users and competing with complements over audiences and profits. These are historical examples of this: Microsoft vs. Netscape, Google vs. Yelp, Facebook vs. Zynga, and Twitter vs. its 3rd-party clients. Operating systems like iOS and Android have behaved better, although still take a healthy 30% tax, reject apps for seemingly arbitrary reasons, and subsume the functionality of 3rd-party apps at will.

For 3rd parties, this transition from cooperation to competition feels like a bait-and-switch. Over time, the best entrepreneurs, developers, and investors have become wary of building on top of centralized platforms. We now have decades of evidence that doing so will end in disappointment. In addition, users give up privacy, and control of their data, and become vulnerable to security breaches. These problems with centralized platforms will likely become even more pronounced in the future.

The question of whether decentralized or centralized systems will win the next era of the internet reduces to who will build the most compelling products, which in turn reduces to who will get more high-quality developers and entrepreneurs on their side. GAFA has many advantages, including cash reserves, large user bases, and operational infrastructure. Crypto networks have a significantly more attractive value proposition to developers and entrepreneurs. If they can win their hearts and minds, they can mobilize far more resources than GAFA, and rapidly outpace their product development.

Centralized platforms often come bundled at launch with compelling apps: Facebook had its core socializing features and the iPhone had a number of key apps. Decentralized platforms, by contrast, often launch half-baked and without clear use cases.

Examples

1. An illustrative analogy is the rivalry in the 2000s between Wikipedia and its centralized competitors like Encarta. If you compared the two products in the early 2000s, Encarta was a far better product, with better topic coverage and higher accuracy. But Wikipedia improved at a much faster rate, because it had an active community of volunteer contributors who were attracted to its decentralized, community-governed ethos. By 2005, Wikipedia was the most popular reference site on the internet. Encarta was shut down in 2009.

2. Compare the problem of Twitter spam to the problem of email spam. Since Twitter closed their network to 3rd-party developers, the only company working on Twitter spam has been Twitter itself. By contrast, there were hundreds of companies that tried to fight email spam, financed by billions of dollars in venture capital and corporate funding. Email spam isn’t solved, but it’s a lot better now because 3rd parties knew that the email protocol was decentralized, so they could build businesses on top of it without worrying about the rules of the game-changing later on.

3. Or consider the problem of network governance. Today, unaccountable groups of employees at large platforms decide how information gets ranked and filtered, which users get promoted and which get banned, and other important governance decisions. In crypto networks, these decisions are made by the community, using open and transparent mechanisms. As we know from the offline world, democratic systems aren’t perfect, but they are a lot better than the alternatives.

The lesson is that when you compare centralized and decentralized systems you need to consider them dynamically, as processes, instead of statically, as rigid products. Centralized systems often start out fully baked, but only get better at the rate at which employees at the sponsoring company improve them. Decentralized systems start out half-baked but, under the right conditions, grow exponentially as they attract new contributors

.

First, let’s look at the problems with centralized platforms. Centralized platforms follow a predictable life cycle. When they start out, they do everything they can to recruit users and 3rd-party complements like 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 move up the adoption S-curve, their power over users and 3rd parties steadily grow.

When they hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum. The easiest way to continue growing lies in extracting data from users and competing with complements over audiences and profits. These are historical examples of this: Microsoft vs. Netscape, Google vs. Yelp, Facebook vs. Zynga, and Twitter vs. its 3rd-party clients. Operating systems like iOS and Android have behaved better, although still take a healthy 30% tax, reject apps for seemingly arbitrary reasons, and subsume the functionality of 3rd-party apps at will.

For 3rd parties, this transition from cooperation to competition feels like a bait-and-switch. Over time, the best entrepreneurs, developers, and investors have become wary of building on top of centralized platforms. We now have decades of evidence that doing so will end in disappointment. In addition, users give up privacy, and control of their data, and become vulnerable to security breaches. These problems with centralized platforms will likely become even more pronounced in the future.

The question of whether decentralized or centralized systems will win the next era of the internet reduces to who will build the most compelling products, which in turn reduces to who will get more high-quality developers and entrepreneurs on their side. GAFA has many advantages, including cash reserves, large user bases, and operational infrastructure. Crypto networks have a significantly more attractive value proposition to developers and entrepreneurs. If they can win their hearts and minds, they can mobilize far more resources than GAFA, and rapidly outpace their product development.

Centralized platforms often come bundled at launch with compelling apps: Facebook had its core socializing features and the iPhone had a number of key apps. Decentralized platforms, by contrast, often launch half-baked and without clear use cases.

Examples

1. An illustrative analogy is the rivalry in the 2000s between Wikipedia and its centralized competitors like Encarta. If you compared the two products in the early 2000s, Encarta was a far better product, with better topic coverage and higher accuracy. But Wikipedia improved at a much faster rate, because it had an active community of volunteer contributors who were attracted to its decentralized, community-governed ethos. By 2005, Wikipedia was the most popular reference site on the internet. Encarta was shut down in 2009.

2. Compare the problem of Twitter spam to the problem of email spam. Since Twitter closed their network to 3rd-party developers, the only company working on Twitter spam has been Twitter itself. By contrast, there were hundreds of companies that tried to fight email spam, financed by billions of dollars in venture capital and corporate funding. Email spam isn’t solved, but it’s a lot better now because 3rd parties knew that the email protocol was decentralized, so they could build businesses on top of it without worrying about the rules of the game-changing later on.

3. Or consider the problem of network governance. Today, unaccountable groups of employees at large platforms decide how information gets ranked and filtered, which users get promoted and which get banned, and other important governance decisions. In crypto networks, these decisions are made by the community, using open and transparent mechanisms. As we know from the offline world, democratic systems aren’t perfect, but they are a lot better than the alternatives.

The lesson is that when you compare centralized and decentralized systems you need to consider them dynamically, as processes, instead of statically, as rigid products. Centralized systems often start out fully baked, but only get better at the rate at which employees at the sponsoring company improve them. Decentralized systems start out half-baked but, under the right conditions, grow exponentially as they attract new contributors

.