Community-owned companies: Not just a hippie fantasy
Here's how decentralized protocols can win on the free market
Every day, it seems like we’re moving closer to a bleak dystopian future where only a few corporations hold complete power over our lives. Companies like Facebook, Amazon, Netflix, and Google are getting more website traffic, more customer data, and more revenue on a daily basis. At the same time, society is becoming more and more reliant on digital, especially as companies become more open to remote work.
There might be a way out of this corporate-controlled future: decentralization. Instead of having just a few people control important platforms that we all need to live our lives, we can build resources that are owned by the community.
I’m sure some of you are having doubts. The idea that a corporation can be run in a fully decentralized manner sounds like an idea from a stoned college freshman who’s never worked a real job in his life. But nowadays, this type of structure is possible with blockchain-based networks — and decentralized protocols might even have a big advantage over centralized platforms.
What is a centralized company?
Typically, a centralized company has a CEO and a Board of Directors. They’re the ones who set the tone for the entire company and determine long-term strategic priorities. Usually, the CEO is the one who makes the decision on budgets and hiring for different departments.
While publicly traded companies usually give voting rights to shareholders, they typically only vote on who gets to sit on the Board of Directors. The average shareholder doesn’t have much say about the kinds of decisions that a company makes on a regular basis, such as which products to invest in and which areas of the business need to be a focus going forward.
Some businesses don’t give shareholders any say in decision-making. For example, Facebook has a dual-class shareholder structure, where Mark Zuckerberg controls the majority of voting shares and regular shareholders don’t get any votes. That means Zuckerberg pretty much has unilateral control over a social media network that brings news to billions of people around the world. He’s the one who makes the final call on who gets de-platformed and what kind of content the algorithm prioritizes.
It’s kind of terrifying that a few dudes in Silicon Valley can have so much unchecked power and influence. Of course, decentralization might provide a better way forward.
A brief primer on decentralization
To understand how decentralization works, we should take a look at a real-life example. A few months ago, Uniswap, a decentralized cryptocurrency exchange, decided to reward its early users with UNI tokens. While a small percentage of these tokens went to the people who built the protocol and early investors, the vast majority is going to the Uniswap community.
UNI tokens don’t work the way traditional stocks do — the tokens give community members the ability to govern the platform the way a CEO and a Board of Directors would in a normal company. Tokenholders have the ability to vote on how Uniswap’s revenue will be used. They may choose to use this money to give grants to developers who want to build interesting projects or pay out a dividend to tokenholders — it’s totally up to them.
Plus, developers are free to build their own applications on top of the Uniswap protocol. They can then charge interested users tokens to use these services. Theoretically, this should benefit the entire ecosystem. The more interesting projects get built on the protocol, the higher the demand for the UNI token, and the richer all the tokenholders become.
If you’re a strong believer in the traditional corporate structures, you might think that this whole thing sounds like some kind of hippie fantasy and that Uniswap is destined to fall apart. After all, democracies are often slow and inefficient, while the business world is fast-paced. However, decentralized protocols may have the ability to move even more efficiently than centralized companies.
Why centralized companies work so well
Before we talk about why decentralized protocols are so powerful, we should talk about why centralized platforms have performed so well for so long. They’re definitely not going away anytime soon — there’s always going to be certain situations where they’ll perform better. Let’s look at a couple of examples of successful centralized platforms.
Example #1: Coinbase
Before Coinbase, popular cryptocurrency exchanges like Mt. Gox were often subject to hacks and would lose hundreds of millions of dollars worth of their customers’ money. For a while, people were scared to buy Bitcoin because they couldn’t find a secure way to do it.
Then, Coinbase came along and built itself on a reputation for safety and working closely with regulators. Now, the company is worth $51 billion.
You could argue the fact that Coinbase is centralized is part of what made it successful. CEO Brian Armstrong had a long-term vision of what the company could be and hired the right people to execute it. He hired teams of lawyers to work with regulators and made big investments in security from the very start. Plus, he made sure that Coinbase’s user interface was incredibly easy to figure out — the team invested in making the platform easy-to-use for people who were new to crypto.
It’s hard to imagine an entire community of people coordinating around these long-term goals nearly as well. While decentralized exchanges like Uniswap do exist, the user interface is hard to figure out for anyone who isn’t a hardcore crypto nerd. Plus, the protocol doesn’t have teams of lawyers ensuring that they’re staying on top of relevant rules and regulations.
The fact that Coinbase is the biggest crypto company in the world right now is ironic. Even though the cryptocurrency space is supposed to be about decentralization and giving power to the people, the most well-known company in the industry is a centralized platform that’s controlled by a few people. Together, Coinbase’s investors and executives control more than 50% of the company’s shares.
Example #2: Facebook and Zynga
If you were on Facebook before 2012, you probably remember Zynga. Zynga built some of the most popular games on early Facebook like Farmville and Mafia Wars. It was a big part of what brought a lot of new users to Facebook back in 2007 when Facebook was still a startup that was trying to beat the biggest player in social media: MySpace.
Eventually, Facebook became the unquestioned leader in the social media space. At that point, it didn’t really need Zynga taking a share of its revenues anymore. Facebook tweaked its algorithm so that Zynga’s games were harder to discover on the platform. As a result, Zynga’s stock price tanked and didn’t recover for many years.
It was probably a good decision for Facebook to get rid of Zynga. The constant notifications from Farmville and Mafia Wars were incredibly annoying for users. While games were part of what made Facebook great in the desktop era, the mobile News Feed is what really got people hooked.
You could argue that having Mark Zuckerberg in control is what helped the company focus on the long-term — a decentralized community may have included users who liked playing Farmville and didn’t want to see it disappear.
Still, there was a negative consequence. Developers who might’ve wanted to build applications on Facebook’s ecosystem knew they needed to be cautious. Mark Zuckerberg had the ability to kill their business at any time.
The benefits of decentralized protocols
Alright, now that we’ve established some of the benefits of centralization, let’s break down how decentralized protocols can win on the free market. These aren’t just for crypto nerds — they have real advantages that can help them reach more people and build better products than centralized companies can.
The best marketing strategy that you can possibly ask for
Marketing any new business is incredibly hard. The startups I’ve worked for spend a large portion of their marketing budget trying to reach customers on Facebook and Google. While it’s the easiest way to reach users, it’s also a dangerous position to be in. A few changes in the algorithm can destroy the business.
Instead of having to rely on the tech giants, startups can go the decentralized route and offer tokens to early users. Users will then have an incentive to tell all of their friends, family, and social media followers about the service. After all, the more people use it, the more the value of their tokens goes up. It’s an easy way for startups to cut through the noise and reach more people without having to rely on Facebook and Google.
If you want a real-life example of this, check out the Bitcoin and Ethereum communities on Twitter. You’ll see that there’s a large group of people who are incredibly passionate about both projects. These are the types of cult-like communities that any marketing team dreams of building.
Fully aligned incentives
As venture capitalist Chris Dixon wrote in this blog post Why Decentralization Matters, one huge benefit of decentralized services is that it makes all the participants in a network fully aligned. After all, a platform like Facebook will actively screw over developers, creators, and users once it gets big enough.
Situations like what happened between Facebook and Zynga don’t just happen because Mark Zuckerberg is an android with no capability to feel human emotion. They happen because Facebook is a for-profit company and the executive team is supposed to grow revenue and maximize returns for their shareholders. Screwing over developers and collecting more data from users is just part of doing business.
The dynamic is different for decentralized protocols. As I wrote earlier, the value of a UNI token goes up when there are useful applications that are built on top of it. As a result, there's no tension between platforms and developers who build on them — they both want to see each other succeed.
The power of the free market
In the famous Kitchen Debate of 1959, then-Vice President Richard Nixon told Soviet Premier Nikita Krushchev that America’s free-market system had a big advantage: innovation. After all, the average American home at the time had products like the refrigerator and the dishwasher. While the Soviet Union had a central agency that determined what goods and services needed to be created for the well-being of the entire country, the average Russian did not have access to these items.
In America, the process of providing goods and services is decentralized. There’s an incentive for smart people to build their own business — if they’re successful, they could get rich. Even though most businesses fail, the ones that succeed end up creating products that make life better for everyone.
That means instead of a few bureaucrats in a room trying to figure out what everyone in the country would want, there are hundreds of thousands of people who are building innovative products that no small group of people could’ve thought of on their own.
Decentralized protocols may be better suited to serve customer needs for the same reason. In a decentralized system, engineers aren’t just following directives from the CEO on how to make the platform better. There are millions of developers from all over the planet who pursue their own ideas and have the opportunity to make money in the form of cryptocurrency, without the fear that an algorithm change is suddenly going to destroy everything they’ve worked on.
Let’s be real — big tech companies have thousands of employees and some of the smartest people on the planet working for them. Still, decentralized protocols can still have an advantage for the same reason that free-market economies do: they have access to a much wider pool of talent.
A cool example of a decentralized protocol: Alchemix
Let’s take a look at a real-life example of a decentralized protocol: Alchemix. It’s a decentralized finance protocol that allows customers to take out loans that they don’t have to pay back. It’s a radical idea that completely changes the way humans have been borrowing money for hundreds of years.
It works because Alchemix is built on top of an existing decentralized protocol called Yearn, which allows users to stake their money and get interest rates up to 12%. Alchemix works by taking collateral from the borrower and putting it on Yearn, then using the interest to pay off the loan over time. There’s no need for borrowers to make regular payments back to Alchemix — the collateral essentially pays for itself over time.
It’s a great example of one of the benefits of decentralization: developers building on top of each other's ideas to create entirely new products and services. Alchemix built itself on top of another decentralized protocol to create something that no traditional financial institution could have ever dreamed up. It’s a great example of how a decentralized protocol can innovate faster than a centralized platform.
Plus, because Alchemix is a decentralized protocol, developers can feel more comfortable building applications on top of it. They know that there’s no for-profit company that’s going to screw them over in the future.
In conclusion
Centralized platforms are never going to go away completely — there’s always going to be room for the Coinbases and Facebooks of the world. There will always be CEOs with long-term visions that go against the short-term desires of users. Still, decentralization may be the best way to unleash the full creative power of developers all over the world.
In the future, we’ll most likely see more companies build on a hybrid model, where centralized businesses build on top of decentralized protocols. It’s a great way to get the benefits of both systems. Plus, there’s a nice side benefit: a few dudes in Silicon Valley won’t have complete control over our lives.
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