What is the Most Expensive Part of Building a Cryptonetwork?

2019-03-28

My fundamental reason for being interested in crypto is that history predicts a revolution in information technology is ripe. On top of that, the micro-trends would suggest that that is indeed what is happening.

Given the assumption that crypto will be huge, my head is mostly filled with these questions—

  • where do I believe value capture is going to take place and over which time horizons?
  • what is a good investment strategy today?
  • what are the real business model opportunities in the crypto world?

A few weeks ago I had a fairly clear idea about where value capture was going to take place, but that's been called into question.

My theory was essentially that existing capital – currently held by people with equity in the production of services – will be eroded by distributed technology.

I keep 'services' non-specific intentionally. I don't believe we are only talking about IT services, though those will likely be case studies in disruption through distribution.

I believe that this next phase of information technology will be the most impactful to date. The importance of distributed technology is fundamentally that it reduces the cost of producing networked services.

I think we are witnessing a significant drop in the cost to produce services of all kinds. IT services like social networks, cloud compute and data exchange. But I believe we are also going to see services like credit, medical diagnosis and training all disrupted too.

So this is where I see a devaluation in the capital governing the means of producing such services. No longer will there be monopolies on service delivery. I'm 20-year short on all such services (not literally, but maybe there's a way to be?).

The bigger question for me, given that assumption, is where all the capital is going to drift to and where it's going to be captured.

Intuitively I think that question points to another question which is, how will these services work and what will control them?

As far as I can tell, the answer is that these services will be delivered by vast swathes of individuals and groups working more or less loosely within massive ecosystems. A little bit like we've already seen with Bitcoin and Ethereum.

The story we've heard so far about financial value capture is that it will likely fall to those who can both buy into and do work in these ecosystems.

And maybe that's it – simple as that.

But does it explain the longer-term, probably-inevitable monopoly effect a la The Master Switch?

Where do the spoils actually consolidate, and what is the mechanism behind that?

At first I suspected that he who gathers the most tokens wins. But what I've seen since is that many projects are making it an explicit design goal to avoid plutocracy in governance.

This makes it unlikely that people will be able to accrue enormous numbers of tokens and deploy them in their interests.

Given that, who is going to be able to change the rules in their own favour?

As I ask that question, I realise that political capital – the ability to change the rules of the game – is not the only type of capital at play in these cryptonetworks.

There are other types—

  • work capital – the capacity to do work in the system.
  • social capital – the capacity to sway minds. There's also
  • financial capital – the ability to pick who gets to deliver the network's product

And knowing these things seems to get me no closer to a definitive answer for what's going to underpin consolidation.

Maybe I'm looking at this the wrong way. Yes, almost definitely.

I think the real question is "what sits above services in the tech stack?"

"What is the most costly/valuable thing which sits above, through which the means of production is going to consolidate?"

"What is the most expensive part of building a cryptonetwork?"

I suspect there's one thing which is far and away more expensive than everything else. Like in the previous era – the era of service monopolies – it was data collection.

This time, though, what is it? Maybe it's security? But that feels like a horizontal thing – relevant at all layers of the stack. User experience, similarly.

My suspicion is that it's something like ecosystem or community. That's the theory I'm moving forward with anyway.

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