Cycles of innovation in information technology
The world’s most valuable companies are born during platform shifts. During platform shifts, new entrants have the opportunity to build services that make use of the new functionalities provided by a new platform. Today’s web incumbents (GAFA) managed — exceptionally — to thrive over two platforms as the primary business model (gathering data and selling ad space) remained the same over both the Internet and Mobile eras. When a new computing platform changes the prevailing business model, new entrants have an opportunity to dethrone the incumbents. Blockchain technology changes the primary business model for online businesses by making data open.
Computing platforms are the infrastructure of information technology. A new computing platform introduces new features and opens up new distribution channels. The computing power of PCs enabled the creation of tools such as the spreadsheet and the word processor; the Internet as a global information network connected the PCs into one shared communication network; and the smartphone made PCs mobile and added new features such as location-based services and the camera.
The development of information technology 1990–2020.
Blockchain technology is a new computing platform. Blockchains enable a global community to create and maintain open and shared databases. Companies have traditionally been tasked with processing and storing data, and maintaining databases. Transferring this responsibility to a global community means that businesses can now be operated in a peer-to-peer network, without the involvement of a traditional company. Businesses that are operated by a peer-to-peer network offer better services than their incumbent competitors. The services provided by blockchain protocols are superior due to their openness (open source), cost-efficiency (global competition), and distribution (the Internet).
Blockchain protocols concentrate the supply and demand of a specific service into one place. The marketplaces maintained by existing companies are often siloed due to geographic and/or regulatory reasons. Blockchain protocols enable the creation of worldwide marketplaces on the Internet. The Internet created a global marketplace for information — blockchain technology does the same for value. The rules for value transfer are programmed straight into the blockchain protocol. The programmability of blockchain protocols means that they can provide any kind of digital service directly to a global audience.
A blockchain protocol as a global marketplace is the most cost-efficient way to provide a specific service. Concentrating the supply and demand of a specific service into a single place leads to most competitive prices. Due to the open and global nature of the Internet, competition among blockchain protocols means that the winning protocol is only able to extract the bare minimum fee required to keep the network secure. However, from an investor’s point of view, this is not an issue since blockchain protocols operate at unprecedented scale. Creating a payment network owned and used by 7+ billion people has not been possible before.
Blockchain protocols operate at unprecedented scale compared to traditional companies.
Blockchain protocols have powerful network effects. End user applications purchase a specific service from the blockchain protocol that provides it for the most cost-efficient price. This means that in the end, there will only be a few winning blockchain protocols for a specific use case. Investing directly into blockchain protocols is financially a better alternative than investing into the end user applications built on top of them. This is because the blockchain protocol that wins its vertical is bound to aggregate traffic from all of the end user applications built on top of it. This is comparable to if one could have invested in the SMTP (email), HTTPS (web request encryption), and TCP/IP (packets) protocols in the 90s. Each incremental email, web request, and information transfer would have made these protocols more valuable.
Ownership in a blockchain protocol is acquired by purchasing tokens. A blockchain protocol can be thought of as a company registered on the Internet. This Internet-native company is maintained and operated by a global employee pool and provides its services in the most cost-efficient manner using the worldwide distribution of the Internet. An investor can take part in the value appreciation of these Internet-native companies by purchasing tokens (comparable to shares) in a blockchain protocol. The blockchain protocol that provides a specific service in the most cost-efficient manner will eventually become a part of the core infrastructure of the Internet.
A token gives its owner both economic and governance rights. Tokens can be programmed to possess both economic (profit participation) and governance (voting) rights. It is in the interests of the tokenholders to grow the blockchain protocol into becoming a global and cost-efficient infrastructure component, on top of which anyone can build their own end user application. Similar to traditional shares in a company, tokens are created to encourage their owners to participate and contribute to the development of a blockchain protocol.
A tokenholder’s role is similar to a shareholder’s.
The more there is demand for a blockchain protocol’s service, the more valuable its tokens are. The goal of blockchain protocols is to provide a specific service as reliably and cost-efficiently as possible. The blockchain protocols that emerge as winners of their respective verticals become part of the core infrastructure of the Internet. The potential for value appreciation is significant because winning blockchain protocols should eventually mediate all value transfer on the Internet. Tokenholders are compensated by the value accrual of their tokens, which appreciate in value the more (non-extractive) fees are paid by those using the blockchain protocol’s service.