In the wake of Facebook’s Libra cryptocurrency announcement, which has its own regulatory challenges and governance issues, more and more “traditional” companies are evaluating how to embrace blockchain and crypto to achieve their financial and strategic goals. This is especially true in the retail commerce industry, where decentralization driven by blockchain and token economics has the potential to disrupt many different parts of the centralized business model.
Since well before Facebook announced their Libra efforts, commerce behemoths like Amazon have been experimenting with blockchain to cut costs and drive supply chain alignment. Meanwhile, companies like Overstock are trying to exit retail altogether and transform into a blockchain company while Walmart seems to be following in Facebook’s footsteps. Blockchain as a technology seems poised to become a competitive advantage for many commerce companies, but the question remains whether any of these companies can truly decentralize.
The Value of Decentralization
As Chris Dixon expressed in his deep look at decentralization, centralized platforms follow a predictable life cycle. In the beginning, they are growth-focused, attracting users, developers, and suppliers to their platform in order to kickstart the network effect and make their services more valuable. At some point in their growth, though, the power balance shifts and growth comes at the expense of their users and collaborators. The inevitable bait-and-switch feeling and backlash from those users and suppliers is harsh but typically falls on deaf ears as the network effect is well-entrenched so that it is nearly impossible to abandon that now-dominant platform.
Centralized platforms’ relationships with participants change over time (Source: Chris Dixon)
Decentralization uses many different technical and incentive mechanisms to avoid that power balance shift and resulting bait and switch. The open-source nature of cryptonetworks ensures transparency between the platform and its participants, while the tokens within those cryptonetworks can provide both shared governance and shared value among all token holders. As a result, as a decentralized platform grows, the incentive for all participants is to continually grow the platform. That growth increases the value of the underlying token, immediately allocating that value to the users and suppliers that share ownership by holding tokens.
The Challenge of Moving from Centralized to Decentralized
Even with the alignment and growth benefits that come from decentralization, centralized platforms cannot just snap their fingers and decentralize. Centralized business models engender their own cost structures, corporate cultures, and financial obligations. Every business school student in the world studies these disruptive changes, as hindsight makes such a clear case study in how today’s top companies can become tomorrow’s dinosaurs hit by the proverbial business model meteor.
Successful centralized platforms, especially public companies like Amazon, Walmart, Facebook, Uber, Overstock and dozens of others, do not have the incentive to shift their business models. The horse is out of the barn. They have already achieved the network effect. They have already sold equity in their business to fund the early growth and now have shareholders who expect returns. They have built supply chains and developer ecosystems and advertising revenue streams that take advantage of the success of their platform. Through the lens of centralization, blockchain and crypto represent a way to cut costs or differentiate an existing product offering, or in many cases, simply represent a PR opportunity. If these centralized platforms truly wanted to decentralize their network, they would essentially have to start from scratch in reconstructing their business model and network effect.
Will Decentralized Platforms Win?
Decentralization still faces a number of technical, marketing, and economic obstacles that will need to be overcome before decentralized cryptonetworks and platforms can really take on the centralized leaders in their industries. However, while better technologies do not always win, better business models tend to. And decentralization undoubtedly creates a better business model and fosters the kind of ongoing growth that all companies strive for. As a result, it seems like decentralization will be just the kind of disruptive innovation that business school students will be studying well into the future.