Decentralization is a Populist Value But Will It Scale?

Tuesday, August 15th, 2023

Decentralization is a centrifugal force in technical and societal systems. While a natural occurrence in, say, planetary formation, it is emergent in technical ecosystems (central servers to desktops to mobile, for example).

As it relates to human affairs, is this a pendulum, or an inevitability.

People do seem to have an aversion to the bad things that come from conglomeration and the concentration of power and resources. Whether it is the typically bad work cultures for large centralized entities, the negative externalities caused by the concentration of data at Facebook and Google, the toxic financial results when big banks and credit agencies collude to achieve higher profits, or risks to health and food supply chains due to Big Agra.

The question is whether decentralization, as a phenomenon and value, can become a sufficient force to counter the concentrated resources.

I believe defining the why behind decentralization and whether decentralization is a value in and of itself or a means to an end will shape the outcomes.

But ideals don't often scale sustainably.

Usually mass adoption appeals to typical consumerist values: low price, convenience, status.

For example, many electric cars tried to appeal to the pro-environment buyer; but it was an industry upstart, Tesla, that made the EV vehicle a status symbol. It did so not by continuing to drum on the environmental benefit; it delivered a better car. It is delivering its mission of environmental friendliness, but environmentalism was not the vector it used for mass adoption.

Decentralization has some of the same idealism as environmentalism does; and I suspect that the killer app needs to find ways to appeal to more traditional values systems.

There are adjacent benefits from decentralization. One of which is reducing dependency on conglomerates like Amazon, Google, Big Banks. This is a very real and well-publicized problem.

So reducing concentration of power is a related benefit.

But is that really a value proposition that scales?

Despite the media outrage, most consumers don't articulate a desire to reduce concentration as big reasons to seek alternatives.

Concentration and centralization can actual deliver benefits to consumers that they care more about.

So what are the adjacent or enabled values of decentralizations?

• Ownership
• Permissionlessness
• Removal of counter-party risk
• 24/7 availability

Let's work through a thought experiment that illustrates the nature of centralization: tax preparation software.^[1]

Intuit reaps huge benefits as a centralizing force (by virtue of scale) providing tax preparation software. Their power is such that they could effectively lobby the IRS to prevent free tax preparation software being made available widely.

Intuit fights mightily.

Even if tax preparation were only made free to those who qualify based on the government Free File Act (primarily an income threshold of $66k per year at the time oft he article impacts students, retirees, those on disability, minimum wage works), that would be a $1.5 billion hit in revenue.

The article describes the lengths of influence peddling and deception Intuit has been willing to go to preserve this business line -- $1.5B is a large incentive.

To me, this illustrates an aspect of centralization not often discussed: the concentration of power creates negative externalities motivating the influence over regulation and the limitation of competition.

As in this example, many many people have been hurt by this dynamic.

And yet...little has changed. The principle of reducing concentration of power AND making fairer access to economic tooling to those who need it are good ideals, but they are not going to be fulfilled.

Does the rise of web3 change this?

As a thought experiment, there could be a world where crypto assets are private but on a blockchain, and a "public good" was made available that provided tax preparation for free to those on an income bracket, and this would not be stopped.

If such a dApp provider wanted to do this, other than the gas fees and query fees, they could make such a dApp run for "free" indefinitely and unstoppably. But would they? And this is still not free, the query fees and gas fees would need to come from somewhere to make it sustainable.

Decentralization dramatically reduces the profit incentives that we find in large publicly traded companies. But other actors need to participate in the ecosystem sustainably, and decentralization doesn't eliminate real-world costs of running systems.

But more importantly, the driver to adoption would not be the belief and ethos of decentralization by the mass consumer. It would be the availability of a near-free (or potentially actually free) solution that could not be stopped. It's the low cost, not the ideal, that would motivate users.

That being said, sometimes leaders and innovators need that idealism to build the things that mercenary entities then appropriate to cross the chasm.

The early believers in the Internet envisions a world filled with free education, global connectivity, and the flowing of ideas and expression. Some of this occurred, but the big winners who leveraged the decentralized Internet have been Amazon, Google, eBay, and Facebook. They leveraged zero-cost distribution and accrued the benefits of rent-taking to themselves.

What I think is more likely to drive, both because of the tangible benefit and because it does tap into universal human ideas is ownership.

Big Tech and nearly all tech unicorns use their low-cost distribution to deliver value at scale and capture value for themselves. This created the massive rise of wealth for the FAANG and their executives/employees.

A decentralized version would distribute the ownership and rent-seeking into income and revenue streams for a wider set of participants in the ecosystem. This incentive to really own a piece of infrastructure and applications can become appealing.

However...how is this different from the stock market? Isn't that technically owning a piece of a company?

And here is where I think the real rub is. Owning stocks is often seen as a bit of a casino where the ones who run the table are the large funds with billions of dollars driving prices. The "voting machine" dynamics makes it fraught with insider or news cycle driven rollercoaster rides in value.

Potentially by genuinely owning a slice of the revenue streams generated by decentralized companies, actively participating in earning more rewards where possible, perhaps more people will be economically empowered than the stock market has, and hopefully the design is closer to a "weighing machine."

Decentralization across many commonly accepted institutions -- education (Blockchain is the New University), finance, corporations (Uber Shuttles as a Public Good, Node Operators - A Return to Pre Industrial Farming for the Digital Age -- will be better for the broader public. However, the value must be driven by the adjacent values of ownership and sovereignty, as well as traditional vectors like UX (broadly meant as experience, from brand, onboarding, pricing, feature delivery).

The battle is with conglomeration or large-scale centralization, and while we see in many cases ways it can go wrong to live in a world powered by "Too Big To Fail" entities, is it enough to drive a populist revolution?

Related Thinking

The Future is Decentralized Verifiable Compute
Node Operators - A Return to Pre Industrial Farming for the Digital Age

TLDR;

• Decentralization is a value that can improve society. But is it a benefit that will draw in mass adoption by businesses and consumers?
• The EV industry prior to Tesla sought to build a market around another social value - environmentalism. But there was little traction.
• Tesla is making lower gas consumption a reality; but consumers largely buy because of status, experience, convenience, and performance - it's a better car overall. Mainstream adopters aren't buying to express pro-environmentalism.
• A superior car across many dimensions is the vehicle which Tesla uses to bring the rest of the world into its pro-environment values
• Decentralization is a value and a natural force, but if, in and of itself is not experienced as a benefit, a product that delivers benefits (eg cheaper, faster, more streamlined, higher status), ideally in a way only possible by decentralization, will be needed to accelerate the market

Banksy is an anonymous England-based street artist, political activist, and film director whose satirical street art and subversive epigrams combine dark humor with graffiti executed in a distinctive stenciling technique. Banksy's identity remains unknown, adding to the intrigue and rebellious spirit of his work.

As a street artist, Banksy operates outside the traditional art world, able to create public work anonymously and without permission to spread countercultural messages. With roots in underground cultures like punk rock and hip hop, Banksy's provocative work aims to critique society, authority, capitalism, and the mainstream art world. His stenciled pieces on city walls, bridges, and other public spaces skirt the edges of legality and champion more decentralized, democratic forms of expression.

Banksy's murals thus embody the independent, anti-establishment ethos at the core of decentralization. (by Claude.ai)