Thread by @jbrukh

I am working on a post about decentralized resource networks (think file storage or computation) competing with the unit economics of large, efficient incumbents (think Amazon).

Wow, when you write this stuff out on paper, things get very interesting.👇

We tend to think of networks as monolithic protocols that compete with a large incumbents like Amazon as a unit.

But of course such networks are also coalitions of small-to-medium providers that have agreed to follow the network’s rules in order to coordinate.

What they coordinate on is competing with incumbents on weak points: closedness, privacy, censorship-resistance, customer experience, and of course pricing.

They also compete with each other, eroding their margins to nearly 0. (More on that later.)

By definition, these networks of providers cannot achieve *greater economies of scale* than huge incumbents.

However, there are at least two mechanisms by which networks *might* still achieve *cheaper pricing* which, given enough time, can put entire Amazons out of business.

The first mechanism is by crowdsourcing resources — like cloud storage — from global participants. The trick is that because this storage is already paid for, decentralized networks (at least temporarily) might be able to lower costs of service provision below the incumbent’s.

The second mechanism is a lot more interesting. The network might use a token economics in order to subsidize network participants. So even though their *costs* would be higher than Amazon’s, and their *margins* would erode to 0 through network competition. . .

. . .they can still theoretically operate on a “synthetic margin” created by the token value. This of course requires a feasible token model that reasonably, fundamentally captures the value of the network.

That’s not easy, but we do see a few good candidate models today.

So that’s really the hurdle: can we come up with a token economics that can channel enough subsidy to the network for it to exceed the difference between the incumbent’s and network’s costs?

If so, Amazon better watch out.

Do such models exist? How would incumbents react to these shifts in the market? Will Amazon itself have incentives to join the network?

We’ll have to watch in real time. /end