The Business Case For Dapps: Decentralization as a Strategy

Can Dapps actually be profitable? If your code is free, and your data is free, what left is there to sell?

Vitalik Buterin thinks that there is no killer Dapp. Instead, he sees Dapps as having marginally better qualities among certain dimensions, like uptime and automation – and marginally worse qualities along other dimensions like privacy and speed.

He see's a long tail of apps that will slowly be replaced as people realize that the upsides in those cases marginally outpace the downsides.

Paul Sztorc thinks that Dapps can never be a viable business model. If other Dapps can steal your Dapps code and data, then those Dapps will be like parasites, removing money from the value creators – and disincentivizing new creators from creating on the platform.

Both Paul and Vitalik are deep thinkers, and I think that both of their ideas will come into play with the future adoption of Dapps. However, this exact conversation has played out before, with Open Source Software – and it turns out that OSS proved that there was a third factor that would push adoption of the OSS model – strategy. But before I get into that, I should digress and give a brief history of the OSS debate.

A Brief History of the Open Ideology

The philosophical split between traditional development and the OSS style of development can be traced back to a single, influential essay (and the project it was based on, Linux), called The Cathedral and the Bazaar.

Many consider it to be the bible of the hacker philosophy – small, independent developers working together to solve their own problems can compete with – and ultimately beat – larger companies with less participants who don't care about what they're programming.

If you read through the essay, you'll find the same sentiment that underlies a large portion of the crypto-community today: The sentiment that decentralization has so many benefits that overtaking the centralized establishment is only a matter of time.

Meanwhile, there was another camp saying that OSS would never take off. The argument went that projects need money to survive long term, you can't make money if anyone can fork your code for free (and sell it for cheaper), therefore OSS will lose out in the long run. This is similar to the parasitic model of Dapps that Paul Sztorc has.

Finally, there was a third, more moderate camp. This camp said that OSS had strengths and weaknesses. It would do well in areas where security was paramount, but user experience wasn't, such as protocols. Again, you'll notice that this argument has the same structure as Vitalik's argument.

What The Open Ideology Couldn't Predict

What all three of these ideological groups were doing was looking at what types of software they thought OSS could sustain, then predicting the ecosystem would grow around these applications.

And if you read through these again, you'll notice that none of them predicted the success of Android – an open source OS supported by a for-profit company that gained significant market share against a closed source competitor without completely taking the market.

That's because all of these ideologies were based on the characteristics of open source software, and NOT on the characteristics of the ecosystem that OSS supported. Because of this, none of them predicted the use of OSS as strategic gameplay that could be used depending on the strategic landscape.

Schizophrenic Open

Several astute writers have noted the schizophrenic nature of companies like Google and Facebook to open source. One minute, they'll espouse its merits, the next, they'll lock up their data and their code and sue anybody who uses it in a way they don't want.

And an even more astute group have noticed that these aren't just random instances of opening up their codebase. There's a pattern there.

Open as a Strategy

One of my favorite tech strategists, Simon Wardley, codified these patterns into a series of strategic plays, and realized that only those companies which used open source strategically were actually gaining market share.

What Wardley noticed was that even if the company couldn't make money directly from the software, what they could do with the software was directly affect the gameboard, thus putting them in a situation where they could make money in other ways, such as with their core product.

Android's Open Strategy

Android is a prime example of this. Apple had a closed ecosystem with iOS, and Google knew that the more marketshare iOS smartphones gained, the more likely that Apple could shut Google (as a search component that lived on TOP of that platform) out of that market.

Google bringing in a new, closed system wouldn't get create enough of a coalition to take on an entrenched monopoly.A new closed system is too much of a risk for any partners to take on, and without those partners, taking on a clear market leader becomes nigh impossible (see also: Google+).

The solution to this conundrum is to open source your product, which takes out a lot of the risk for partners of being tied to a losing brand – or even worse, supplementing one market bully for another. Android compatible phones could continue to survive, even if Google's specific initiative died or Google became too restrictive in the market. Open sourcing Android allowed Google to credibly commit against being another bully like iOS.

At the same time, Google, being the leader of that project, could steer the project -using unofficial or official standards – towards a point that was beneficial to them. And indeed, to this day most Android phones use Google as the default search.

This insight – that open allows different market dynamics, is at the heart of why OSS is so prevalent today.

The Open Strategy Demystified

So open allows a coalition of companies who are being bullied by a monopoly to work together on the product that can take that monopoly down.

Wardley identified several other areas where open could succeed based on changing the gameboard. Here's the whole list, all of course based on my own understanding of Wardley's work:

1. Open can bring a particular value chain function (eg Word Processing) to a more evolved(e.g. commoditized) state, therefore making it cheaper for companies that use that function, or creating a more favorable ecosystem for other forms of strategy.
2. Open can be a source for talent recruitment
3. Open can be a credible commitment against bad behavior (for a limited time, until network effects give power back to a project), thus allowing for stronger cooperation in a market.
4. Once one of the previous strategies are used, open creates holes in the value chain where money can be made, by unbundling services that were previously bundled(e.g. before Ubuntu, the OS and support were bundled).
   What I think both Paul and Vitalik are missing in their analyses is that what open did for products, blockchain style decentralization can do for every aspect of the value chain.

Decentralization as a Strategy

I expect Dapps to eventually allow these types of gameplay on every level of the value chain. But before the technology can relevantly effect the lower levels of the value chain, it will start on the level directly below the product itself – the data. The first wave of strategy driven Dapps will be all about open data.

First, I want to acknowledge that the concept of open data isn't something that's unique to Dapps or Ethereum. It's something that people have been trying to do for a while.

But until this point, a single group still had to curate the data and foot the bill for hosting it. Never has their been a git like mechanism for data where it's hosted without cost and guaranteed to be accessible to everyone. Where an API for reading and writing the data is built in to the protocol as a feature.

So what happens when companies can use open data in the same way that they can now use open source?

Data-Monopoly Busting

First, you get a way to take on data monopolies by credibly committing to treat your ecosystem with respect (so they don't fork you with a parasite contract). Google's Knowledge Graph and Facebook's Open Graph are two big examples that will become even more relevant in the coming years. Dapps will create a way for smaller companies who get bullied by these two companies data monopolies to create open alternatives in a way that won't directly make them money, but will save them money in the long run.

Furthermore, big companies will to provide support and direction to these Dapps, in order to drive them towards a favorable state for that company, similarly to what Google did with Android and Chrome.

User-Friendly Business Models

Second, because of the level of transparency and "forkability" (for lack of a better word) at every level of the value chain, Dapps get to a point where they can make credible commitments not only about their ecosystem, but about other consumer oriented concerns such as business model. This means we're going to see a lot of user run/user funded companies that provide similar services as existing companies but provide users with more favorable terms.

Dapp Infrastructure Support

Third, we're going to start seeing even more holes in the value chain that can be filled in by companies. There will definitely be a service gap, just like with open source. And initially I think we'll see a lot of Ubuntu type models where companies provide support for free Dapps.

But what's more interesting to me in terms of value chain holes is the interesting opportunities that user run/user owned companies provide. We're going to see a lot of Dapps that are great products, but need help with infrastructure/regulations/etc and don't have the inhouse expertise to even know that they need those things. I think we're going to be seeing a lot of interesting business models around this idea of Business-Infrastructure-as-a-Commodity.

Recruitment

Fourth, I think we're going to see a lot of companies creating Dapps for recruitment and branding purposes, putting something out there with their name on it that the whole world can use.

Cost Savings

Fifth, we'll see Dapps being used in areas that aren't a companies core business, in order to move lower level value chain functions to a cheaper state for the company to use, or in order to make the gameboard more favorable in other ways (e.g. by driving demand up against a competitors constraint)

Traditional Products

Sixth, I agree with Vitalik, we'll see a long tail of Dapp products that are simply better on the blockchain than off, just like we saw an explosion of low level protocols with open source.

The Risk of Dapps

All that being said, I also agree with Paul. Dapps offer some unprecedented strategic play- but if companies aren't careful, they could end up foolsmating themselves.

What Dapps do is essentially create an ILC environment for the entire ecosystem of Dapps, where the system could take any innovations built on top of smart contracts, leverage that data, and then commoditize the innovation. If companies don't have a strategy for when THEIR section of the value chain gets caught up in that cycle, then ultimately they're playing with fire.

In my next post, I'd like to explore a bit more of the ILC dynamic I see evolving in Dapps, some good strategies companies can use to remain profitable, and counter strategies that Dapp developers interested in breaking large monopolies can use to fight back.