Thread by @sanguit

I was among the first to articulate the shift to platforms, 15 yrs back, and later wrote about in my books Platform Revolution and Platform Scale.

I believe #protocols will drive the next big shift in value creation & markets.

Here's why!

A mega thread, with illustrations. 🧵

Protocols will bring about a fundamental redesign in value creation and markets, not just a shift towards decentralisation or read/write/own, as many of the Web1 to Web2 to #Web3 proponents often claim.

To understand the transformative power of protocols, and why this is more than just a shift from Web2 to #Web3, let's go through a quick primer in business history.

cc @BosonProtocol

@BosonProtocol Throughout history, technological shifts and market forces have worked together to drive new paradigms for value creation.

These shifts repeatedly reconfigure:
- Production
- Consumption
- The markets that connect production with consumption

@BosonProtocol With this framework, we look at:

First, the rise of platforms as a shift from the traditional industrial business model

and

Second, the coming rise of protocols as the next shift beyond platforms.

@BosonProtocol Pipelines - the industrial business model - follow a linear, unidirectional flow of value from producer to consumer.

Value is created by the producer and shipped out to the customer, who then pays for the value.

Traditional good/service companies work like pipelines.

@BosonProtocol Three technologies led to the rise of pipelines.

Technologies that shaped:
- Production
- Consumption
- Market creation

@BosonProtocol 1. Production:

Technologies enabling mass production

— assembly lines optimized through factory automation
+
- large-scale, organisation management

allowed us to aggregate production at scale.

@BosonProtocol Together, these gave us the tools of mass production and gave birth to large corporations, particularly during the post-World-War geopolitical shift towards globalisation.

@BosonProtocol 2. Consumption:

Rise of mass media — newspapers, radio, and then television — provided the means for influencing consumption at scale.

+

Rise of cities created markets for mass consumption to meet mass production through retail, reducing prices and improving choice.

@BosonProtocol 3. Markets:

Finally, the shift to globalization and international trade, spurred further by standardization technologies, particularly container shipping, led to the creation of global supply chains.

They connected mass production with mass consumption globally.

@BosonProtocol By perfecting the technologies of mass production, mass consumption, and global connectivity, the industrial era perfected its ability to scale value creation through the pipeline model and benefit from supply-side economies of scale.

@BosonProtocol The rise of the internet created a new set of technological changes and market forces, which again, restructured production, consumption, and the markets that connect the two.

This drove the shift from pipelines to platforms.

hbr.org/2016/04/pipeli…

@BosonProtocol 1. Production:

The tools of production could now be distributed, rather than centralised.

Consider the news industry as an example.

@BosonProtocol To create and distribute news at scale, you had to be a large newspaper company.

But then the internet decentralised the tools of publishing and distribution, so that anybody with access to web authoring could produce and disseminate news.

@BosonProtocol 2. Consumption:

The capture of data at scale

— for instance, through social technologies and subsequently through connected devices

— combined with improvements in machine learning and artificial intelligence

drove the rise of personalized consumption.

@BosonProtocol 3. Markets:

As markets shifted

from mass production and mass consumption to distributed production and personalized consumption,

the internet provided a global connectivity infrastructure to connect the two.

@BosonProtocol Mobile-based connectivity and cloud computing enabled the creation of a new alternative for global value exchange.

Cloud hosting connected distributed production to personalized consumption through a global network.

@BosonProtocol Together, these three technologies drove the rise of platforms as the dominant model of value creation.

Platforms connected producers and consumers with each other allowing them to create an exchange value and facilitating these interactions at scale.

@BosonProtocol By adding more and more producers to these platforms, there was more choice for consumers, enabling these platforms to benefit from demand-side economies of scale.

@BosonProtocol Platforms rearchitected value creation:

From ‘mass production connected to mass consumption’

To ‘distributed production connected to personalised consumption’.

@BosonProtocol 1. By aggregating fragmented markets, platforms reduced search costs — the costs incurred in counterparty discovery.

2. By standardizing transactions at scale, platforms reduced bargaining costs — the costs incurred in negotiating the terms of exchange.

@BosonProtocol 3. And by acting as central intermediaries with market-wide data capture and visibility, platforms reduced verification and policing costs — the costs incurred in imputing trust to transactions by verifying and policing those transactions.

@BosonProtocol Platforms created massive value while also gaining inordinate market power.

Demand-side economies of scale

— manifested through network effects and learning effects —

coalesced entire markets around a few dominant platforms.

@BosonProtocol This brings us to protocols!

Protocols — more specifically, permissionless blockchain protocols — provide a new organizing and governance mechanism to organize actors in an ecosystem.

@balajis has some great threads on this topic.

@BosonProtocol @balajis Unlike platforms, protocols:

1) do not provide end-to-end market infrastructure

2) do not internalize transaction policing and verification.

@BosonProtocol @balajis Since protocols do not themselves provision market infrastructure or internalize transaction policing and verification, they need to set up the economic incentives for other ecosystem actors to provision these services.

More on this: platforms.substack.com/p/unbundling-t…

@BosonProtocol @balajis They achieve this by issuing tokens to reward desirable actions in the ecosystem.

As the value of market activity in the ecosystem increases, the value of the token — tied to protocol usage — increases as well.

@BosonProtocol @balajis As an example, @BosonProtocol leverages commitment tokens to secure commitment of buyers and sellers to a transaction, thereby externalizing verification of the certainty of the transaction.

@BosonProtocol @balajis Protocols have often been dismissed by Web3 skeptics, as hacker tools that will only impact a small community.

Instead, protocols — in combination with tokens — look increasingly likely to power the next generation of market economics.

@BosonProtocol @balajis 1. Production:

Protocols (in combination with tokens) change the incentives and returns on production.

@BosonProtocol @balajis The platform economy has often been criticized for skewing rewards away from external producers, who commit resources to the platform and incur risks, and centralizing rewards with the central platform organization.

@BosonProtocol @balajis Token rewards provide an alternate incentive mechanism where ecosystem producers are incentivized for desirable actions that grow market activity.

These tokens, in turn, grow in value as overall market activity increases, enabling external producers to benefit from returns.

@BosonProtocol @balajis In addition to improving returns on production, protocols — particularly, through non-fungible tokens (NFTs) — also empower producers by establishing, transfering, and enforcing property rights over the assets they produce.

Check out @ljin18 work on this theme.

@BosonProtocol @balajis @ljin18 Well-structured token incentives combined with the verifiability of asset ownership skew rewards of production back to the producer.

Protocols also redistribute value better as @cburniske of @placeholdervc
calls out in his thesis here: placeholder.vc/blog/2019/10/6…

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc 2. Consumption:

Protocols disentangle consumers from the lock-in enforced by platforms.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc Platforms drove market efficiencies by leveraging data to reduce search costs and verification costs.

This involved an inherent trade-off as consumers needed to surrender their data to the platform to benefit from these market efficiencies.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc This surrender of data and attendant lock-in increased:

1) the risks of privacy invasion,

2) loss of agency through over-dependance, and

3) unilateral censorship as centralized platforms could change their policies at will.

@BanklessHQ explores this theme often.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ Blockchain protocols reduce transaction verification costs without absorbing these costs as intermediaries.

Instead, they allow market actors to verify transactions and enforce contracts, while preserving data privacy.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ Since identity and data no longer need to be locked-in to a platform to verify and impute trust to transactions,

1. consumer identity now becomes interoperable and

2. consumers participate across multiple platforms/protocols, retaining custodianship over identity.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ Protocols also bring decentralised ownership, giving creators greater control over what they’re creating.

Alongside distributed production and market access on your own terms, you will now have the property rights to leverage as you choose.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ Protocols allow production to be scaled up even further, especially in markets where ownership of intellectual property is valuable to the creator.

@jessewldn speaks regularly about this at variant.mirror.xyz

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn With protocols, property rights go back to the creator and identity goes back to the consumer.

Progressive decentralization!

For example:

https://twitter.com/ErikVoorhees/status/1415339998740508674

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn But much like pipelines needed standards in global supply chains and platforms needed a global compute infrastructure, protocols require a new operating infrastructure to manage decentralized transaction execution at scale.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn 3. Markets:

Global contract execution becomes very important in an age of protocols.

The rise of distributed ledgers provides a shared view of the history of transactions: who owns what and when.

Smart contracts give a shared infrastructure for executing these at scale.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn Again, technology brings changes in production and consumption together, creating a new mechanism for managing market activity.

cc @naval

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval While it’s now undisputed that there was a significant shift from pipelines to platforms, I believe we are now in the early innings of a similar shift from platforms to protocols.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval Much like the arrival of platforms didn’t signal the end of pipelines, the emergence of protocols will not end the era of platforms.

Instead, pipelines, platforms, and protocols, will co-exist as different mechanisms to organize and configure value in the economy.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval Some parts of the economy will be best managed through platforms, while other use cases will lend themselves to decentralized protocol-based management.

E.g. @balajis observations on the corporate stack:

https://twitter.com/balajis/status/1415337602496876544

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval In the last two years, we have seen a number of tipping points that will herald the arrival of protocols.

Two factors will be key determiners of the speed of this shift.:

1) the need for interoperability and

2) the attractiveness of new reward sharing mechanisms,

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval Decentralised finance and the rise of tokens now provide the financial machinery for new reward sharing mechanisms.

@cdixon at @a16z calls out this combination as the new Web3 bootstrapping playbook: future.a16z.com/the-web3-playb…

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval @cdixon @a16z Similarly, the need for greater interoperability in the design of virtual worlds is another factor that could spur the adoption of protocols.

@ballmatthew's pioneering work identifies this as a key driver.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval @cdixon @a16z @ballmatthew Finally, for all the talk about decentralization, this shift is less about equity and more about value.

@jamie247 of @OVioHQ proposes an excellent playbook on building value around protocols: outlierventures.io/wp-content/upl…

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval @cdixon @a16z @ballmatthew @jamie247 @OVioHQ We will undoubtedly see the major platforms, with scale, leverage protocols to reinforce their current economics.

Meta, after experimenting with Libra, is now investing heavily in protocols more broadly.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval @cdixon @a16z @ballmatthew @jamie247 @OVioHQ It would be naive to assume that protocols themselves will also not attract new modes of centralisation and control.

@timoreilly explains this eloquently as only he can: oreilly.com/radar/why-its-…

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval @cdixon @a16z @ballmatthew @jamie247 @OVioHQ @timoreilly We’re still in the early innings of a massive shift.

One thing remains certain —

The new value will be created, configured, and captured differently from the old.

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval @cdixon @a16z @ballmatthew @jamie247 @OVioHQ @timoreilly That's a wrap!

If you enjoyed this thread, here's the original post at platforms.substack.com/p/pipelines-to….

@BosonProtocol @balajis @ljin18 @cburniske @placeholdervc @BanklessHQ @jessewldn @naval @cdixon @a16z @ballmatthew @jamie247 @OVioHQ @timoreilly 1. Follow me @sanguit for more of these
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