Decentralized Computing Networks Powered by Crypto-Assets Could Eventually Prove Disruptive to the Incumbent Digital Services Providers of Today
By Michael M. Williams
Overview
While there are a multitude of differing business models practiced in the service industry today ranging from the one-time purchase model to the freemium model exhibited in many smartphone apps, by far the most popular is the subscription model. New businesses have generated billions in revenue almost exclusively by deviating their business models from one-time purchases to subscriptions — especially software companies — and many legacy businesses have been forced to adopt the rapidly burgeoning business model or risk testing the unforgiving hand of capitalism. Despite subscription model’s unquestioned success over the last two decades I posit there is a new kid on the proverbial business model block that will be able compete and even overtake some popular subscription services today: the crypto-economy service model.
A crypto-economy is a marketplace of decentralized providers and consumers of a certain service that is codified into smart contracts on an immutable blockchain-based ledger and whose coordination and incentive mechanism takes the form of a fungible crypto-asset (more on this later — for the sake of this paper the specifics don’t matter, just understand that a crypto-economy can provide a service via a decentralized workforce). In order to justify my claim, I first will walk through the evolution of the music service industry to engage readers in high-level thinking about the evolution of business models, and specifically why subscriptions have proven so successful. Next, I seek to identify commonalities in the steady progression of different aspects of the shared economy, namely the transportation and hospitality industries, and predict the next industry to step through this common progression. Lastly, the article will conclude by generalizing the business scenarios most ripe for disruption by a crypto-economic service provider in the not so distant future.
The Evolution of Business Models in the Services Industry
Before the new millennium, new music was largely acquired by going to your local store and purchasing an artist’s album in person. This method sufficed for many decades, however it wasn’t the best option because sometimes people wanted to purchase only a song or two as opposed to the entire album, which is to say there was demand for a better way to distribute music. Steve Jobs sought to capitalize on this inefficiency when he introduced iTunes, the first platform in history on which you could legally purchase only the music you want from the luxury of your home. iTunes proceeded to dominate the online music market for the next decade, although again there was a storm brewing. Consumers were not completely satisfied; while it was great to buy only the music you want, it seemed a little pricey to pay $1.29 for a song you might only listen to once, and it was psychologically taxing to be forced to make a purchase decision for each and every song. At last, in comes Spotify. Spotify was able to overtake iTunes’ incumbency simply by offering a better way to provide consumers with the music they liked: the subscription service model. From the consumers’ perspective, they see only a simple, relatively small recurring fee that grants them access to nearly all the music in the world, so they are happy to move to the new model. From the artists’ perspective, they receive more consistent pay (they are paid per stream over the lifetime of their song) thus reducing their financial risk as well as exposure to more listeners because the friction is removed from the process of an individual discovering new music. In short, both parties benefit from a subscription model, causing subscription-based music service Spotify to win over one-time payment music service iTunes.
The movement towards the subscription model in the global economy today is not an isolated phenomenon, rather it is an unstoppable trend. Almost the entire software industry has shifted from its one-time licensing model towards a software as a service provider, which was instrumental in the creation of new entertainment services like Netflix and Hulu. Even traditionally advertisement-based online news providers like The New York Times and Business Insider have recently succumbed to the economic model. While it may be more intuitive to apply the subscription model to those services, today companies like MealPal, StitchFix, MoviePass (RIP), and others are stretching the boundaries of its feasibility by slapping subscription service models on the restaurant dining industry, clothing shopping industry, and movie-going industry, respectively. Mathematically I suspect a subscription model is only practical down to a certain threshold frequency that a consumer purchases a product, but only time, or more accurately a recession, will tell if those businesses will be able to remain on the fortuitous side of that line in the future. Regardless, it seems that the rest of the business world took notice after a few marquee subscription model successes and are seeking to replicate that success by integrating subscription services into industries traditionally dominated by one-time purchases. All of this is to say that business models are dynamic and ever-evolving, and that those which offer the greatest aggregate benefits to service providers and consumers will ultimately succeed.
The Archetypal Evolution of the Shared Economy
The next leg of this piece delves into an observed progression of several aspects of the sharing economy and how it might lead to the growth of crypto-economy service providers. Our first case study will be the automobile transportation industry. When cars were first popularized, people bought them to provide transportation services to themselves and their acquaintances. Fast-forward to the early 1900s, and people were able to be driven in a car owned by a third-party company at the advent of the taxicab industry. Then Uber sprang into existence, providing the option for riders to be carried in cars not owned by a trusted taxicab company but rather by people they had never met before. This same progression can be observed in the hospitality industry; first homes were built for the owner and his or her acquaintances, then third-party entities like hotels and motels started providing housing services in buildings they owned and maintained, and only later did Airbnb facilitate safe overnight hospitality in the homes of strangers. I’m sure there are many other similar examples, but I suggest the basic archetype of a development map for a branch of the shared economy follows the progression of consumers owning an asset, then renting it from third parties, and finally renting it from strangers. Why does such an archetype for innovation exist? Simply because the progression from asset utilization only by its owner towards shared asset utilization moves from inefficiency towards high efficiency.
With this in mind, I introduce to you the next industry to follow this progression: web infrastructure services like cloud storage and analytics. Before the cloud was popularized, any company that wanted to run a website had to hire their own information technology team and purchase, maintain, and run analytics on the data stored in their own databases and served by web servers, just like a person who wanted to drive from point A to B had to buy their own car before taxis existed. Then Google and Amazon among others innovated the cloud service business in which they handle all those web infrastructure services on their third-party servers and processors for you. And lastly, as you may have guessed, I predict the web infrastructure services will eventually be run on the computers of strangers.
There are several companies currently building the infrastructure to guarantee that web services can be provided safely in a decentralized way, secured by cryptography and coordinated on a public blockchain. While there is still experimentation as to what is the best way to implement crypto-economies, I believe the most effective method is one that uses a Work Token as a work coordination and incentivization mechanism, where a Work Token is a cryptocurrency native to the crypto-economy that earns token holders the right to perform a service in the network. Thus, a service provider must first acquire the native token of the crypto-economy in order to be granted the right to provide services (proportional to their quantity of their deposited tokens) for which they are paid by those demanding their services in the currency of their choice. Hence, anyone with spare computing power or storage can join the network and begin passively generating income in the same way a homeowner not using all of their space might rent out a room on Airbnb. And just as the taxicab industry has been crushed by decentralized ride-sharing apps like Uber, the vast economic profits Amazon is generating from its Amazon Web Services arm will be thinned to near nothing because the crypto-economy will flood the market with supply.
Making Sense of It All
Now we circle back to the subscription model. It seems evident to me that in the same way that businesses today can outcompete their opposition simply by restructuring their business model into a subscription-based service, one day businesses will equally crush their competition simply be restructuring their service in the form of a decentralized crypto-economy. The subscription model has risen to its current stature because it has proven to be preferable to both the provisioner and consumer of a service relative to other business models, and similarly I believe in the future crypto-economies will prove preferable to both sides of a service over even the almighty subscription service. Let’s return to the music industry and Spotify to illustrate my point. Today, Spotify admits it passes along between $0.006 and $0.0084 per stream to the parties who hold the rights to a song, and between record labels, collaborations, and features, many artists find themselves entitled to a mere 15–20% of their song’s revenue. Do the math, and we can see that artists make in the range of a little over one tenth of one penny per stream on the upper bound to nine hundredths of one penny per stream on the lower bound. That is outrageously small. It renders artists who have an aggregate count of a couple million streams across their albums — which is not a small feat to achieve — with a mere $1,800 for their hard work.
Now imagine a decentralized crypto-economy in which people buy music directly from artists, effectively circumventing Spotify’s ballpark 50% cut, and reallocating those funds to artists and listeners. To me, that’s the type of win-win system that will bring the same attention and experimentation dedicated to subscription models to crypto-economies in the future. Admittedly, a major drawback of crypto-economy services will be getting the public comfortable with the concept of sending micropayments for their every interaction with a service, but I believe that will be a cultural shift that happens over time. It is also worth noting that this type of disruption cannot be achieved today on the technology front either because the tech powering crypto-economies today is still immature, but again I believe the tech will grow into itself over time.
In conclusion, we’ve seen that not only do crypto-economies appear to be the next step in the evolution of the sharing economy with regards to web infrastructure services, but also that they contend to offer the same two-sided benefits to both service providers and consumers that led to the proliferation of the subscription model. Moreover, we’ve seen the potential for crypto-economies to disrupt both what I would classify more generally as digital-utilities providers (AWS) and platforms hosting peer to peer interactions (Uber). To elaborate on the former, just as there are utilities like electricity, gas, and water on which we rely to function in the physical world, there are utilities like hard drive storage space, processing power, and device connectivity on which we rely to function in the digital world, and crypto-economies are likely to disrupt these areas first because they are simpler to implement and are more ubiquitously demanded services. To elaborate on the latter, we can rightfully extrapolate the hypothesis that crypto-economies will disrupt other platforms hosting peer to peer interactions to include the likes of YouTube, Airbnb, TaskRabbit, DoorDash, and others. Despite there being a considerable possibility that unforeseen technological issues render crypto-economies less efficient, scalable, or practical than anticipated, both macro and micro economic forces suggest that crypto-economies have the potential to disrupt digital infrastructure and peer-to-peer platform service providers.
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