Decentralized Protocol Monetization and Forks
The Decentralized Protocol Monetization Model: A New Era of Economic Innovation
In the past twenty years, we have witnessed a growing centralization in the protocols that underlie the internet, with the rise of proprietary chat systems and social networks like Facebook. A large part of the reason for this trend has been the need for monetization; if Facebook was cryptographically secure and decentralized, the developers would have no way to make money by data mining their users' activities and taking a 30% cut of their internal currency. However, with the emergence of decentralized protocols, we have discovered a new mechanism for monetizing them: create internal assets, and sell them to pay for the development of the protocol.
The Power of Internal Assets
There are two classes of "internal assets" that can be sold in this way: first, the idea of creating an internal token system, a crypto-fuel with a floating price that has some value in the network; and second, one can introduce name registrations. For example, a decentralized Twitter might fund itself by building in its own decentralized username registration mechanism similar to Namecoin and selling off the 1-4 letter names. This new monetization model is powerful, and in the first of the two above-described implementations already has a number of proven successes.
The Concern of Forks
However, in this model there is one concern that many people have raised, and that is the question of forks. In short, if one releases a new decentralized protocol that is based on a token system, why won't someone else release a fork with either their own token system, or a token system that is somehow tied to an asset with an existing userbase? If one releases a decentralized Twitter with a built-in name registration system why won't someone release a fork that points to their own name registration system, or even the original Namecoin?
Traditional Business Solutions
In traditional business, there are two solutions to the problem. One is to give up the idea of making everything open-source, and keep at least the latest version of the client proprietary. The other is to release the protocol for free, and then sell services. However, both approaches have their own well-understood flaws. In the context of a decentralized blockchain application, most of the benefits of decentralization are lost when the code becomes proprietary – with a proprietary mining algorithm, for example, there is no way to prove that it does not have a backdoor for its developers, and is therefore equivalent to the developers simply running a centralized server and asking the community to trust them.
The Social Coordination Problem
Theoretically, it is entirely possible for all of the employees at Snapchat, Tinder, Twitter or any other such startup to all suddenly agree to quit and start their own business, completely rebuild all of the software from scratch within months, and then immediately proceed to build a superior product. The only reason why such companies have any valuation at all is a set of two coordination problems: the problem of getting all employees to quit at the same time, and the problem of getting all of the customers to simultaneously move over onto the new network.
The Decentralized Protocol's "Moat"
In the abstract, this may seem like a flimsy justification for why tech companies are valuable; when thinking about something that represents billions of dollars of value, one naturally expects that value to be backed up by something tangible like physical resources or government force, not just some ethereal instantiation of the fact that it's hard for large groups of people to suddenly move from one social configuration to another. However, even physical resources and government force are backed by nothing but a social coordination problem – if 70% of the victims of a dictatorship were to simultaneously rise up against their dictator, the government would get toppled pretty quickly, and yet most dictators even running rather brutally oppressive regimes are quite comfortable sitting in their lofty thrones knowing that such a thing will almost certainly not happen.
The Team
Every project has a core development team, and in the case of a decentralized token system, this aspect is actually stronger than in a traditional tech company. While in a traditional tech company, there might be only a very small number of people with shares in the company and who are thus incentivized to stick with it and see it succeed, in the case of a decentralized token system there are dozens or even hundreds of people holding tokens associated with the project; in fact, many people actually choose to be paid predominantly in tokens.
Network Effects of Exposure
The simplest reason why people will use the original blockchain and not a fork is simple: it's the default. People hear about Bitcoin first, so they go to bitcoin.org and download the Bitcoin client, and use Bitcoin to buy and sell goods and services, notBitcoin Scrypt. For the same reason, people use the official version of most open-source projects and not any of the thousands of forks, buy music, books and movies instead of trying to download them via torrents, and use popular Bitcoin wallets instead of less popular ones.
Moral Pressure
Another important reason why the original version of a protocol is more likely to gain media attention than a fork is plain old public morality: people believe that the developers of a project deserve to get compensated, and so a fork which is developed with the primary purpose of depriving the developers of compensation is likely to be viewed negatively, or at least less favorably, by many people.
Network Effects of Currency Unit Liquidity
One argument that is often raised against forks of Bitcoin is the idea of liquidity, or specifically market depth: smaller currencies are inherently weaker than larger currencies because there are fewer people buying and selling them, and so you will move the price much more if you try to sell a large amount. However, this argument is only important up to a certain point; once a currency reaches a sufficient size, it has enough market depth to cover all ordinary usage, and so additional depth provides little value.
Ecosystemic Network Effects
An important feature of decentralized protocols, and social protocols in general, is that they also build ecosystems. On a social network, for example, there is a one-dimensional network effect: a social network is more useful if more people use it. With a currency, that effect becomes two-dimensional: a currency attracts more users if there are more merchants, and more merchants if there are more users.
Bugs and Attacks
There is always a risk that either the protocol or the client implementation will be flawed in some way. As hard as the Bitcoin developers have tried, the bitcoind source code has had problems crop up over the years, and twice in Bitcoin's history (specifically, the integer overflow exploit in 2010 and the fork in 2013) such problems have even led to a consensus failure that required manual resolution.
Protocol Upgrades
Ethereum 1.0 is far from perfect, and between our discussions on the development roadmap and the Hard Problems of Cryptocurrency we have been very open about admitting this. There are plenty of ways that blockchain technology could be improved, ranging from research on price-stabilized currencies to better fee structures, alternative consensus models and, as a holy grail, multi-blockchain architectures or SCIP.
What's the Point?
Finally, the most important argument of all is, what's the point of a fork? In the case of Bitcoin, there are many reasons to fork the code – you might want to add support for more transaction types, change the currency supply, replace the currency with a centralized alternative backed by the US dollar, or change the type of cryptography used. If a protocol is correctly generalized, however, there simply is no way to improve that can't be replicated inside the protocol itself.
Conclusion
Decentralized protocols lie in an interesting place in the modern economy. On the one hand, much like Bitcoin itself, they are in a very clear way "backed by nothing". On the other hand, they actually have quite a powerful backing underneath, and one that is difficult to unseat; in practice, we have seen very few examples of any open source software fork unseating the original, both in the cryptocurrency space and outside of it. Nothing has unseated Bitcoin, nothing has unseated Litecoin and nothing has unseated Dogecoin. The only forks that do gain serious community acceptance are the ones that add a large body of new features, and these forks always succeed in carving out a niche of their own. Fortunately, we still have many decades to go in seeing exactly how the decentralized protocol ecosystem is going to play out.
Source: https://blog.ethereum.org/en/2014/04/30/decentralized-protocol-monetization-and-forks
