Blockchain and New Financing Model for the Decentralized Internet

In 1974, Vint Cerf developed TCP/IP while working for the US Department of Defense. This technology, which allowed computers to communicate in a common language, has become an important milestone in the development of the Internet. In 1989, Tim Berners-Lee proposed HTTP, a hypertext protocol for connecting pages to pages. It was the birth of the World Wide Web.

Vint Cerf and Tim Berners-Lee created tremendous value for millions of people. But they didn’t get rich on their ideas (although, perhaps, they got rich on the lectures they then read). It was the application developers who monetized the protocols: Cisco, which sells TCP/IP routers, eBay, Google and Amazon, which develop software based on the HTTP protocol.

Historically, the lion’s share of the Internet has been captured by application-level players. Protocol developers of the main infrastructure on which applications are built got only a small part. This explains why TCP/IP and HTTP protocols originated in non-profit organizations such as universities and governments. Only they are able to finance the public good, which everyone can use without paying. And yet, decentralization would change everything.

What is decentralization?

Let’s look at an example of decentralization. If we consider this issue in relation to cryptocurrencies, then Bitcoin should be considered first. According to Coinmarketrate.com Bitcoin is the first cryptocurrency in history, and decentralization here means that no entity can gain control of the network. The network is based on two pillars: individual Bitcoin nodes (so-called “full nodes”), and the computing power of miners.

Basically, anyone can run a full node, the technical barrier is very low. To do this, you install a Bitcoin Core wallet and fully load the blockchain. Then you just start up a computer with a wallet, and you have already contributed to the decentralization of Bitcoin. Since many separate nodes of the network provide storage of the blockchain itself in different places, new transactions can be distributed.

Miners, in turn, make sure that transactions are confirmed. Calculations are performed for this purpose. In order for more than one miner to confirm all transactions alone, many different computers around the world are involved. This is also part of decentralization.

So the bottom line is that no one gets full control over any subset of the Bitcoin infrastructure. That’s why decentralization is very important. It helps to ensure trust in Bitcoin, because it guarantees that the manipulation of individual participants with the blockchain will not take place.

There is also the concept of decentralization in a different context. Namely, when projects want to give the impression that they are also taking advantage of the advantages described above. But this is far from the case. Not everything that forms a network or relies on the cloud protects its own blockchain through decentralization.

The structure of modern IT infrastructure is decentralized. Therefore, the essence of the question is who controls this infrastructure. Therefore, when it comes to blockchain-based technology, the term “decentralization” usually refers to some aspect of security. Thus, the infrastructure is not under the control of any one entity, and therefore one person cannot manipulate it.

Decentralization is one of the most problematic technical aspects. And in a positive way. Trust in cryptocurrencies also depends on how this problem is solved. It is surprising that quite a lot of people are willing to trust blockchain-based technology, even if it is not always decentralized in the full sense of the word.

Blockchain and a New Monetization Model for Protocol Development

When Bitcoin was invented, Satoshi Nakamoto was working at an open source technology. A public good that everyone can use for free. And at the same time, he made a huge financial profit. It is estimated that Satoshi earned about a million Bitcoins through mining, when mining could be carried out at almost no cost. By November 2017, these Bitcoins were worth more than $6 billion. The first members of the development team produced such a number of BTC, that today costs a fortune.

Ethereum, the second major blockchain project, followed a different model. After publishing a “white paper” describing the system and developing a proof of concept, in July 2014 they conducted a massive public sale of several pre-mined Ether coins. They raised $18 million, which was left in the hands of the Ethereum Foundation to fund the development of the protocol. The members of the founding team stored about 12 million Ethers, 17% of the total. At the end of 2015, each Broadcast cost about $ 1. In August 2017, these 12 million were worth about $3.3 billion. Today, this amount exceeds 19 billion US dollars.

The funding model that the Ethereum Foundation adheres to is known as the initial coin offering (ICO). This is a type of crowdfunding for open source projects. This allows the community to contribute to projects they consider valuable. Community members transfer cryptocurrency, and project developers in return give them a token that performs a certain function within the framework of the platform.

After the advent of Ethereum, various projects developed ICOs, and their number grew as more and more people joined this phenomenon. In 2015, the Augur prediction market attracted $5.3 million. In December 2016, the Golem collaborative computing platform raised more than $8 million. In April 2017, another prediction market called Gnosis raised over $12 million. In mid-2017, the ICO phenomenon reached its peak. In June, Bancor raised $150 million. The following month, Tezos raised $232 million.

Should we consider the token model?

The fame that some projects have received with the successful sale of tokens has led to the fact that many entrepreneurs have begun to consider ICO as a form of financing. However, a few explanations need to be made.

ICOs are not suitable for all types of projects. Token models are usually suitable for platforms based on network effects. That is, platforms that connect buyers with sellers, and where the presence of both parties is necessary for their work.

One possible application could be a decentralized organization like Uber. This company connects drivers with passengers. The more passengers demand transport services, the more incentives drivers have to join the network. The more drivers there are online, the easier it is to get a car and the more incentive passengers have to use Uber.

If we wanted to create a decentralized version of Uber (let’s call it dUber), we could create a token specifically for making payments on the network. Drivers can receive a salary in dUber coins. The first users could receive a significant amount of coins for each trip (just as bitcoin miners received a significant amount of coins in the early days). This creates an incentive for users to join the network at an early stage. If the platform is successful, the first users will earn a significant amount of money due to the growth of the exchange rate.

This type of reward for early adopters eliminates the “chicken and egg” problem that platforms usually face. As users become co-owners of the network, they have an incentive to start using it from the very beginning and attract as many people to it as possible.

The founders of the project could sell tokens to raise funds for development, as well as transfer tokens into the hands of users.

As a rule, the founders keep 10-15% of the tokens as a reward for the further development of the product. Another one percent remains in the hands of the organization (usually the foundation), which will be responsible for promoting the development and fulfillment of the promised product specifications. And 60-70% of tokens go on open sale.

If the platform works, the token should grow in value and become a great business for everyone who participated in the project from the early stages. Thus, blockchain makes it possible to reconcile the development of open source projects with the economic incentives of the traditional startup world.

Summing up

As blockchain technology becomes more widespread, it is necessary to emphasize more the difference between creating a decentralized infrastructure and decentralized infrastructure management. This is something that needs to be emphasized sufficiently.

Companies are also betting on cryptocurrencies or blockchain. If they manage to make a big breakthrough, and users of the technology lose sight of its most initial advantages, it can quickly become dangerous.

Best case, power structures and private interests should not play any role when it comes to using this technology. If this concept is lost, nothing will change in the end.