Ethereum
Ethereum needs competition
As I never tire of pointing out in meetings, there is nothing you can do with blockchain that you can’t do faster and more cheaply with traditional centralized IT infrastructure. Although blockchains have generated some very exciting new approaches to products and services, including tokenization and smart contracts, they can all be replicated in a centralized system. The essential and irreducible value proposition of a blockchain is true decentralization. Everything else is optional.
For business users, I believe the value proposition is tied to a well-founded fear of the power of centralized market operators and the path they typically take from helpful utility to predatory monopoly. This is why private blockchains remain such a stupid idea. The theater of decentralization does not change the fact that the operator of the system is only a potential future predatory monopolist.
Paul Brody is EY’s global blockchain leader and a CoinDesk columnist.
From ridesharing to consumer products, the history of the digital economy over the past decade has been marked by the rise of these near-unshakable so-called digital monopolies. Along the way, some of these companies may have increased the share they take of the transactions executed on their networks. This typically happens when a market’s value proposition shifts from “it’s a better system” to “it’s just a bigger system” and finally to “it’s the only system with efficient scale to reach your customers or suppliers.
Although the world of Web2 is still (historically speaking) new, it is not a new problem and we have already solved it, not with decentralization but with regulation. In 1895, there were approximately 6,000 local telephone companies in the United States. Each company could set its own tariffs and had to conclude agreements with each other for interconnection. Much like the so-called digital monopolies of today, the big ones have grown in size. Eventually, only one dominant player remained, AT&T, the eventual successor to the American Telephone Company founded by Alexander Graham Bell and his father-in-law in 1885.
In order to “regulate” AT&T and create a level playing field for competitive small businesses in the telecommunications industry, the Communications Act of 1934 decreed that telephone service was a public utility and that participants in the business were public operators. To be designated a common carrier, a company had to offer its products and services to all members of the public on equal terms, including interconnection. In this world, the operator with the largest network could not exclude smaller players or charge them high fees to connect calls from one network to another.
Imagine if public operator rules were applied to private blockchains, supplemented by mandatory interconnection rules and fees. In this world, any user of any private blockchain could interconnect and transact with any other user or any other private blockchain. Regardless of chain size, larger operators would not be able to attract market share simply by being bigger. They should be better. Maybe it means faster, more secure, or more reliable.
There are great attractions for this type of approach. Most importantly, in many ways it can produce a much more competitive and vibrant market. Centralized private blockchain operators would compete to be the best. The downside is that the nature of this competition is limited. For a token or smart contract to be interconnected from one private chain to another, they must be fundamentally the same or so similar that they are indistinguishable in most cases. Just as ISPs are largely reduced to competing on speed and price, the nature of competition between public operators tends to be quite limited.
In 1984, the Bell System was split into a series of regulated regional carriers, separated from the long-distance telephone calling business. Subscribers paid monthly fees for access and local calls, and long distance calls were billed by the minute. Consumers and businesses could choose any long-distance provider they wanted, all of which had equal access to the local telephone network through common carrier rules. The result was a competitive transformation that lowered the cost of long distance calls by 40% in a decade. Eventually, the precipitous fall in networking and computing costs brought these costs close to zero, where they have remained ever since.
Why is all this important? Because warm, friendly, community-centric Ethereum may not be far from becoming a global digital commerce monopoly. Ethereum is already far more valuable than any other blockchain ecosystem and has the most developers and users. This makes it increasingly difficult for viable competitors to emerge, no matter how good they are. Over time, the power of this network will only grow.
Ethereum is unlikely to become a predatory monopoly, raising fees and stifling users. I also don’t foresee the Ethereum Foundation commissioning a large headquarters tower in New York anytime soon. However, regardless of good intentions and how democratic governance may be, lack of competition can shape culture and behavior. Complacency and complacency could ultimately be just as detrimental to the pace of innovation.
Having competition around your neck is good for all organizations, even nonprofits. Regulation of public operators could transform the world of private blockchains from irrelevant to competitive overnight. As good as Ethereum is, serious and continued competition would make it better and keep it that way.