Economies of Governance — A new Economics paradigm for Blockchain
Today, every other system is changing. Some include more complicated stuff like AI or Blockchain or as simple as Cloud or Big Data. Every system is going under an upgrade, whether tangible or not. It is not about the Technology sector but every sector that has been directly or indirectly related to the Tech. Sounds like: Yeah! We have heard it before. Is there something to add to this?
And with that notion in mind, I started exploring a new domain, completely out of my league, Economics. I’m not a commerce student but have studies Economics or at least the basic principles of it during my school and college days. (PS: I’m not that old. I’m talking about the time after 2010)
And I’ve seen how businesses and their models of making money has changed over time, in terms of ways to raise capital, investments, profits, losses, etc. My vocabulary in economics is not that huge so, I’m going to stick to a few of these only over the course of the article.
I’ve come to realize that the process of doing business has also changed drastically, be it new avenues of money or new forms of payments, etc, etc. And inside this huge super set, one thing that has changed for good, is the process or methodology behind making profits.
We basically learnt two ways of making profits in the longer term, or rather making the business profitable, Economies of Scale or Economies of Scope. Just to give you a little background, Economies of Scale is when the quantity of your product sold by your business helps you be profitable. For example, toothpaste. The more the toothpaste is sold, the company remains profitable. What is does? Keeps our teeth clean. That’s its only job. The more the quantity of the product scales, the more profit you earn, considering you’re above the break-even point. Another thing is, Economies of Scope, where the more functions or use-cases your product can solve, it is likely to make you profitable. For example, a Swiss Knife. It is just not a knife, but a bunch of other tools in the same thing to solve a bunch of other things. And that is where it makes it profitable, because it is a single product, solving a number of things and hence, attracting people towards your product. (This is just a brief definition, not the final one. But mentioned here to provide the reference on what we are going to talk next.)
Most of the technology companies worked on these 2 principles and have been quite successful in terms of what they have delivered to us. But, a small section of the companies, where we are seeing Blockchain adoption is going to have a hard time selling to its customers when it comes to using either of these principles, in near future. Blockchain Applications or DApps have been in a blast. People put in the core technology and blockchain, only to explode the existing software to deliver something which is decentralized. The people building the software have sought to either of the two to deliver themselves to the market, making it a more traditional approach. And there is nothing bad about it. Actually, that’s how companies have functioned in the past and they will do so in future too.
But, I think, Economics is going to take a leap from these two principles when it comes to DApps and make it more difficult for the companies to sell their product to the market. Their applications are not going to be evaluated on how well their product sells, rather how their product functions in the decentralized world. Which means that, the more the decentralized their product is, they have a better change of adoption in the market by the users. And eventually, raise money from the VCs or Angels. This sounds like an impossible thing but I personally believe that we are heading their eventually.
How your application achieves consensus? How does it get to the final state? How easily can a user join the network? How easily can the network be managed? How well the application uses the benefits of the network?
These are some of the questions which are asked even today when evaluating a DApp but not in its entirety. I think this paradigm is going to shift and make the companies re-evaluate or re-design their DApps to make it more decentralized for people to accept and pay for it. This might only be done by the tech community as against the general public, who might not know the intricacies of Blockchain or Decentralized Architecture. As it is now a cake walk for a 2 year old kid to use a Smartphone, over the course of 5 years, people’s notion of selecting the product will also change and their evaluation criteria will shift eventually.
And this is what is termed as “Economies of Governance”.
A business model which leverages the decentralization aspect of the application to deliver product to the market and become profitable.
PS: Please mention your thoughts in the comments section below.
