Why Blockchain Will Lead to Centralisation

This blog is focussed on personal computing, but the artefacts we sit down and use everyday are impacted by changes elsewhere in the tech ecosystem. I’ve spent the last 5 years working in the blockchain space, and I think it’s maturing to the point where we can start to see its impact on our computing environments. This post expands on a Twitter thread.

Note that I use ‘blockchain’ throughout as an umbrella term for a lot of interesting work on provable data structures, distributed protocols, smart contracts, and the like. Early on, some of us tried to popularise ‘distributed ledgers’ the umbrella term, but it doesn’t seem to have stuck. However, I still see disagreements between people who are using the ‘blockchain-the-umbrella’ or ‘blockchain-the-data-structure’. So it goes…

I sometimes see an argument along the lines of “blockchains were designed to decentralise technology, but if we’re not careful big organisations will use it to centralise even more”. I don’t think this is quite right: in my opinion blockchain technology will increase both centralisation and decentralisation at the same time.

I think this is actually true of all communications technology as it drops transaction costs. Roy Bahat has a really interesting article pointing out that companies in the US are getting both bigger and smaller since 2000. The average company is smaller (especially when you only measure those under 500), but take an employed person at random and they’re likely to work at a larger organisation. It’s polarisation — there are more small companies than before, but the big ones are a lot, lot bigger. As Roy puts it:

As those transaction costs go down — reputations are shared online, so people trust each other, marketplaces help you find ever-more granular business services, communication becomes free — the corporation could disassemble into its components, with one small firm (or even a person) doing each task and coordinating with others.

The trick is that those same falling transaction costs can also make it easier to do business within a company, too (Intranets instead of employee manuals, Slack instead of a phone tree, etc.) — which might make some companies bigger as they’re capable of managing bigger staffs.

I think looking at the impact of blockchain with that in mind is valuable. The first question is decentralising what exactly? Simon Wardley recently pointed out to me that decentralisation of infrastructure can happen independently of decentralisation of power: if Amazon launch delivery drones, it may be decentralised in terms of each drone acting on its own local knowledge and goals, yet the fleet as a whole is owned by Amazon for its profit. I personally believe the decentralisation of infrastructure is somewhat inevitable: the more interesting question is the decentralization of power.

As I see it, in the decentralisation of power camp there are some really interesting strands of work going on in the around incentivising coordinated behaviour (e.g. mechanism design) and community governance (e.g. Elinor Ostrom’s work). With suitable technology behind them — for example, encoding governance in smart contracts — future decentralised communities will act with a purpose and coherence that previously was only achievable by the best organisations.

At the other end, I think the super-organisations of tomorrow are going to look very different from those of today. I think they’ll be open platforms supporting large ecosystems, with a hazy line between the core organisation and the partners and customers around it. Simon Wardley has sometimes referred to the process of ‘gardening’, which I think is apt — tending a platform ecosystem like planting, weeding, and watering. Key is that these platforms will be enabled by exactly the same technology that underpins the decentralised platforms: the only difference will be the power structures behind them.

A question remains: which industries, companies, or use cases will end up being decentralised and which centralised? I don’t think it’s as easy as saying all large organisations will get larger. It's likely that certain problems will be better suiter to one model or the other. My guess is that organisations will need to keep moving up the value chain as that anything that looks like it should be common infrastructure will be targeted by decentralised communities.

The really interesting thing is when you step back and look at this polarisation as a user — it might not really be possible to tell one end from the other. The large decentalised efforts will have sophisticated incentive alignments and governance (and branding), and the super-organisations will be amorphous and fluid. I’m sure there’ll be a lot of horizontal transfer of good ideas. There are a few regulatory changes which give incorporated entities the edge for now (e.g. corporations have coordination rights denied to non-corporations) but it's possible for that to change in time. Perhaps it’s less two ends of a spectrum and more like separate paths toward some unified future state. Should be a fun ride…