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Tag: network effects

The Networks They Are A-Changin’

time changeThe slow one now Will later be fast As the present now Will later be past – Bob Dylan (from the 1964 song, The Times They Are A-Changin’)

Technology is this amazing thing that keeps changing, and within these changes, it changes us. But amidst all the ongoing waves of technological innovation, there are typically lots of small changes, coupled with a handful of big changes. While small changes are like the individual trees in a forest, the big changes help us to see clarity through the fog of the future, as they reveal new fields where a new variety of crop and trees blossom.

Let’s take the concept of decentralization, as powered by peer-to-peer technologies. Decentralization is a meta-theme that is enabling a number of other big changes. We already know that peer-to-peer approaches offer a radical departure from the central, command-and-control hierarchical structures, and now that we’ve had over a decade of tinkering with some base technologies, we are starting to see the big waves of decentralization emerge more clearly.

Three such big changes come to mind. The decentralization of Money, Trade and Applications.

1. Decentralization of Money

I’ve said this before. Bitcoin is not just money on wings. It is wings for any money. Bitcoin’s blockchain offers a better network for moving money around, whether it is cryptocurrency or not. The biggest innovation behind Bitcoin may well be its network topology, not its currency. For the first time we have a globally overlayed financial network that is publicly available, and not owned or operated by the big financial institutions, like SWIFT or FIX. Money movements and multi-asset trading settlement and clearing can operate on blockchain-enabled networks, a lot more openly, and more “swiftly” than on the existing global networks.

2. Decentralization of Trade

E-commerce has brought the power of buying and selling anything via the Internet, and we are getting accustomed to buying and selling via powerful central e-commerce hubs. But as big as e-commerce is today, it has only made a dent into the global trade (about 6%). What if peer-to-peer commerce opened a new untapped market for e-trade around the world that could touch people who didn’t previously partake in the first wave of centralized e-commerce? What if there were no centers, or less centers, and all the activity, inventories, products, and services were evenly distributed, allowing anyone to discover them and engage in trade, without barriers, fees, or artificial regulations? The essence of that vision is actually embedded in the emerging standard e-trade protocol OpenBazaar. OpenBazaar will allow anyone to directly jump into peer-to-peer commerce by embedding information, trust, contract terms, payment and transaction processing inside single “smart containers” that know who they are, who manages them, and what they need to do.

3. Decentralization of Applications Development

Back to history, the mainframe brought us centralized computing when IBM introduced its first model in 1964. A few years later, mini-computers distributed that computing, but with less power. Then, client-server chopped it up by mixing and linking distributed networks of mini computers, coupled with less powerful workstations. Personal computing brought everything closer to the users. About ten years later, the Web mashed-up PC and client-server into a Web architecture where PC-based clients processed some code locally via Javascript, but interacted with web servers. With the blockchain, the latest evolution for writing software takes another step towards increased decentralization via a Web3 architecture, implemented by Ethereum, and focused on writing a new breed of decentralized applications, called DApps. A DApp can be viewed architecturally as being similar to a traditional web application, with one difference: the programs run smart consensus logic on the blockchain’s virtual machine code, and client-side code runs in a special client software inside the browser.

So, we have a new decentralized network for money, a new decentralized network for trade, and a new decentralized platform for software development.

New Protocols Enable New Networks

What is common to these 3 waves is that underlying each one of them lies a Protocol, as a key technical and organizational enabler.

Protocols aren’t just about connecting computers or technical stacks with one another. Protocols facilitate peer-to-peer relationships between autonomous entities, and decentralized protocols can take this to another level of depth and breadth.

Protocols rely on a key concept of layering, allowing data to find its way into the right application. Protocols are meant to be deployed over networks, and therefore they touch other entities laterally at the peer-to-peer level, and not only as a vertical stack. Newer protocols that specifically promote decentralization have a wider wingspan and reach new types of networks that overlay on top on the Internet. The end-result is a new generation of market players that might compete with the incumbents who are holding on to currently known web models.

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Therefore protocols are not just a software development enabler, but also as an enabler for business, and societal change. Protocols contain a political or philosophical message in addition to technical code. The 3 types of new protocols mentioned above are different than previous lower level technical protocols we know (e.g. IPv6, TCP/IP, SMTP, HTML, etc.), in that they are a little higher in the “stack hierarchy” sense.

Protocols are important because they are powerful. Protocols embed complexity but imbue simplicity. Protocols have relationships with the underlying networks, but they in turn create other networks on top of that, based on the protocol itself.

All these changes are based on the Internet as the underlying network that serves everything, but new user networks get formed on top of it. Protocols empower users, developers and all participants beyond the layers of the protocol itself.

Enabled by the blockchain, there are some other new protocols that are in the making and have potential, but they may not be as developed, matured or propagated yet:

  • decentralized content (publishing, storage, retrieval)
  • decentralized identity
  • decentralized reputation
  • decentralized messaging

There will be new businesses built on top on new protocols and some of them will threaten or replace existing businesses built on existing protocols.

Decentralized protocols are going to be very important in the future, and I plan to continue writing about their impact.

The protocols they are a-changin’.

And if you are reminiscing about that good old song, here’s a video of Bob Dylan singing, The times they are changin’ in 1964. He will always be right.

[Disclosure: I’m an investor and board member of OB1 (the company leading the development of OpenBazaar), a board advisor for Ethereum, and an investor in Bitcoin companies.]

The Crypto-Tech Platforms Landscape via a Network Effects Lens

I’m expanding on the Network Effects question that I introduced in my previous post, It’s Too Early to Judge Network Effects in Bitcoin and the Blockchain.

Some of my thoughts are in the below Tweetstorm, Is Bitcoin Really TCP/IP. But we need to realize (and accept) that the “One Currency-One Blockchain” paradigm is being challenged.

There are five variations on Crypto Technology Platforms that are emerging, as depicted in the following diagram: Screen Shot 2015-01-13 at 5.52.12 PM

And to complicate things further, some of the platforms like Truthcoin have two currencies: a native currency and Bitcoin. Others like Ethereum allow you to create your own cryptocurrency.

I’m going to ask some questions, without totally answering them, but you will see my bias towards Blockchain Apps as the ultimate Network Effects leveler, and not Bitcoin users as we see them today.

Yes, currency effects bring liquidity, but Blockchain effects bring the Apps. Both have users. Will currency network effects drive blockchain network effects, or are blockchain network effects more related to the blockchain apps specifically?

Is Cryptocurrency Fuel or Toll?

Keep in mind that today, 99% of the revenues in the Bitcoin network are mining related. But going forward, that ratio is expected to shift towards transactions.

How about Developers?

Although a cryptocurrency needs users, I think the important thing for a blockchain will be developers. They will ultimately be the ones creating these Apps.

How about Interoperability?

Eventually, we will see a degree of interoperability between blockchains, and we will see more inter-liquidity between Cryptocurrencies. Of course if Apps are on the same blockchain, it will be easier for them to interoperate, and there is some gain in network effects, but that may not be the dominant factor if blockchains interoperate nicely. And as for cryptocurrency liquidity, that will be achieved fairly soon via exchanges, allowing you to easily convert from one currency to another.

So, back to the main question:

Which Network Effects are more Important: Cryptocurrency or Blockchain?


It’s Too Early to Judge Network Effects in Bitcoin and the Blockchain

“Nothing is stronger than the powers of a network whose network effects have come.”

shutterstock_237870838The concept of “Network effects” in the Bitcoin and Blockchain contexts is a misunderstood one, because its inner makings are difficult to grasp accurately. The inherent network effect factors are multi-dimensional, and there aren’t too many people who had the luxury of direct experience in creating viable businesses with large network effects. As consumers, we are mostly users of these networks, and we think we understand them from the outside, but that’s not enough to judge whether network effects exist or not.

The network effect topic often comes into play when discussing Bitcoin vs. “other” activity in the cryptocurrency ecosystem, as observers get the illusion there are “Silos” as Vitalik Buterin aptly described, while others already declare Bitcoin’s network effect supremacy based on its current  currency liquidity and ongoing mining activity.

So, let’s roll back judgment on network effects and start by understanding the various components of “network effect” sausage-making.

I’m going to rely on the best overall definition of network effects I know, as provided by the venture capital firm Union Square Ventures in this post, Investment Thesis @USV. I’ll paraphrase, revise and summarize the various criteria as follows:

  • Size: Must be large and have scale (relative to the problem set or target community).
  • Inter-connectivity: Must exist between groups or systems inside the network (a basic requirement).
  • Engaged users: A good percentage of overall active users (about 30%) comes back often to use the service, at least daily, if not weekly.
  • User experience: Must be unique, original, and enable some new value creation while users are on the service.
  • Network effects: The value of the service increases for each user, as others use it or join it, and that value is propagated on the very network that was created.
  • Defensibility: Barriers to entry are gradually erected and strengthened by virtue of growing the service while it gets more valuable with each new user, also resulting in high switching costs.
  • Monetization: As the network matures, one or several atomic value units emerge and become the basis for sustainable economic activity.

Unpacking the Ecosystem’s Network Effects

In order to properly evaluate the network effect puzzle, we need to look at the ecosystem along three key dimensions:

  1. Network effects criteria

  2. Ecosystem components

  3. Players and actors

Screen Shot 2015-01-04 at 1.22.14 PM

Vitalik Buterin wrote a long post titled On Bitcoin Maximalism, and Currency and Platform Network Effects, where he eloquently dived into the numerous factors surrounding the network effect topic, and I agree with the substance of that article, although I’m proposing a more granular inspection of network effect factors (as depicted above).

The second dimension relates to the targeted ecosystem components, and I see them comprised of:

  • Currency liquidity, including stability and low volatility.
  • Consensus engine, including the underlying protocols that govern it or support it (e.g. mining).
  • Blockchain platform services, including the software tools and external linkage capabilities.
  • End-user Applications, including wallets, special browsers, smart contracts, pegged services or being part of DAO.

(I’ve already written in more details about the various segments of the cryptocurrency ecosystem, and also on why the blockchain is the next database paradigm.)

The third dimension includes the various players and actors,- whether they are based on the Bitcoin blockchain or another one, the Bitcoin currency or another one, or a fully independent platform.

We could place all of this in a matrix, as depicted below, and if you evaluate your favorite players and actors inside each intersecting box, you will find there are a few holes, plenty of opportunities for improvements, and lots of works-in-progress. So, I don’t see how we could arrive at network effect conclusions so early in the evolution of this market.

Screen Shot 2015-01-04 at 1.10.33 PM

But wait, there is more to the makings of network effect. You also need to count on:

  • Number of Apps or Services
  • Number of users on these Apps
  • Market capitalizations
  • Number of developers
  • Security
  • Scalability
  • Reliability
  • Marketing

Even if you evaluate Bitcoin proper (because it has revealed itself the most, so far), you will find that it is ahead as a liquid cryptocurrency (although with an undesirable volatility), has a stable consensus process, and a developing blockchain platform environment, but its future evolution may face a few blind spots pertaining to its scalability, and it still lacks a large number of engaged/active users that depend on it, on a daily basis.

Romantic Notion of Bitcoin

The romantic notion that a very large network of Bitcoin (currency) users and Bitcoin-enabled services would vindicate the case for a single blockchain backbone is a stretched promise at best. The flip side of the singularity argument is that the Bitcoin network doesn’t need to replace the Internet, because the Internet is that global network. All what Bitoin (or another cryptocurrency player) has to do is to overlay itself on the Internet with its own set of services, and to achieve network effect within those services and applications, based on their own merits. There is a strong case to be made for keeping Bitcoin (or any other blockchain) as thin platforms and to not bloat them excessively, rather let them enable a multiplicity of use cases on top of all of that.

Look at what happened to the mobile App space. Although we rejoice at the multitude of app availability on each side of the iOS and Android spectrum, for developers it is a divide, and we lament that deep division, as it splits the market in two.

Let’s hope we don’t create an Android vs. iOS situation where the chasm between operating systems, apps and app stores has become the mobile industry’s Achilles’ heel. With crypocurrency-based developments, if we stay within the silos, we might end-up not with just two app stores, but maybe at least a dozen ones, and that’s not a very desirable thing. Instead, let’s keep working with a little bit more hegemony, and a lot more goodwill to make that happen. Maybe we’ll end-up like the cellular carrier industry where you can pick your carrier, plans and phones with a reasonable degree of independence.

Imagine that if you used a certain browser, you would only have partial access to the Internet. That would be awful.

Another plausible end-game scenario might resemble the social media landscape we currently have, i.e. 4 dominant platforms (LinkedIn, Twitter, Facebook, Google+), and multiple other apps that rely on social features (e.g. Foursquare, Tumblr, Buzzfeed, Pinterest , Instagram, Snapchat, Reddit, etc.). “Social” ended-up being a layer and a frame of mind. Maybe the blockchain construct ends-up being an inspirational frame of mind and layer for a new generation of applications and services.

While Bitcoin’s real network effect may continue to get better, that doesn’t mean we can’t have network effects in others. We need to think of the Ecosystem with a big “E”, not a small “e”.

I know several developers that are writing their app services to be blockchain-agnostic in the future.

Let’s not see the multiplicity of work around blockchains and related technologies as as distraction or fragmentation. Rather, we should see it as a multiplicity of innovation and experimentation, and we should celebrate it and support it. Of course, I don’t expect all current players to survive, as in typical startup fashion, many won’t or might get acquired, but even in failures we will learn.

This is not about Bitcoin maximalism, nor is it about an anarcho multi-pluralism. I’m for a dose of reality and for accepting the powers of market forces. Embracing other viable cryptographic solutions and platforms doesn’t necessarily presume Bitcoin’s demise. Bitcoin may end-up as a reference or reserve cryptocurrency of sorts, but only if the value of that currency can sustain itself based on the underlying activity directly related to its network [that’s a loaded statement, btw]. And that’s not because of some technical limitations that Bitcoin has. I’m sure some of them could be resolved over time.

The reality is that the crypto-led computer science revolution is giving us concepts that go way beyond a one-currency type of scenario. Yes, Bitcoin is programmable money, but the Blockchain is also programmable value, programmable governance, programmable contracts, programmable ownership, programmable assets, etc. And we have barely scratched the surface on these applications.

It is too early to tell exactly where will the cryptocurrency landscape will end-up. Maybe it will be like social media ended, with 4 new giant platforms, dozens of large players, thousands of other companies as beneficiaries, and of course, millions if not billions of end-users.

In closing, as I outlined previously. we need to keep sight on a user view of the cryptocurrency landscape, and not just a technology stack one.

So, let’s not forget the basic golden rule of network effects:

without users, there is no network effect.


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