The Potential of Blockchain Applications
Public blockchain technology allows decentralization of the control of network applications. By enabling the development of new open networks, blockchain may reduce the centralized control of the Internet and encourage innovation. Blockchain applications combine the properties of open and proprietary networks, and are new ways to incentivize open network participants, including users, developers, investors, and service providers.
The digital tokens issued by blockchain applications are intended to align incentives among network application participants. A cryptocurrency, like bitcoin, is a token intended to transfer value. Other tokens are similar but are intended to enable the creation of open, decentralized network applications. For example, they may enable applications that reduce the power of dominant mobile operating systems and social networks.
Tokens combine the societal benefits of open protocols, tools everyone can use, with the financial and architectural benefits of proprietary closed networks like banking systems. Tokens allow for shared computing resources while keeping the control of the resources decentralized.
Blockchain allows coordination and provides incentives for people in the network to operate and grow the network. A useful service creates rising demand, which increases the value of the token. Enthusiasts argue that a token with rising value leads new people to join the network, which increases the usefulness of the network. This result depends on the premise that the network is, in fact, useful. For example, when tokens can be redeemed for computing time on a network, the tokens have real utility.
Tokens also help overcome the financing bootstrap problem by adding financial utility (the value of the token itself) when the application’s utility is still low, when, for example, there are relatively few users on the network. Token-holders also have an incentive to promote the application since promotion will create more demand for the application and thus increase the token’s value.
Chris Dixon has written, “The current state of the art of network development is very crude. It often involves raising money … and then spending it on paid marketing and other channels to overcome the ‘bootstrap problem’ — the problem that networks tend to only become useful when they reach a critical mass of users. In the rare cases where networks succeed, the financial returns tend to accrue to the relatively small number of people who own equity in the network. Tokens offer a better way.”
Token sales referred to as Initial Coin Offerings (“ICOs”) are one of the ways to encourage network incentives. To further encourage the growth of the network, tokens are distributed carefully to all network participants including users, core developers, third-party developers, investors, service providers.
Chris Dixon also makes a great analogy between the value and purpose of tokens and, something that we are more familiar with – Internet domain names, “One way to think about the token model is to imagine if the internet and web hadn’t been funded by governments and universities, but instead by a company that raised money by selling off domain names. People could buy domain names either to use them or as an investment (collectively, domain names are worth tens of billions of dollars today). Similarly, domain names could have been given out as rewards to service providers who agreed to run hosting services, and to third-party developers who supported the network. This would have provided an alternative way to finance and accelerate the development of the internet while also aligning the incentives of the various network participants.”
“Work tokens” allow the holder to conduct work for a decentralized application to enable the application to operate. The tokens incentivize network governance and their value is determined by the fees or goodwill received by the token-holder. “Usage tokens” are required to use a service. “Hybrid tokens” combine the purposes of both work and usage tokens.
Filecoin, a cloud storage network, is an example of a public decentralized network blockchain application. The difference between it and traditional cloud storage is that anyone with excess storage space on their computer system can provide a part of the overall storage. Blockchain technology is also intended to make storage more private and more secure than traditional cloud storage.
New Filecoin tokens will continue to be made but, like Bitcoin, the supply will be limited. The argument is that higher demand for storage will lead to higher demand for the tokens thus increasing the price of the token. Of course, Filecoin storage, like any business, will face competition.
Blockchain encourages the design and development of open networks, combining the societal benefits of open network protocols with the financial and architectural benefits of proprietary networks. The promise of blockchain is that new open-sourced inventions will be possible and participation accessible. The intended result is that blockchain will encourage innovation by entrepreneurs, developers, and other independent creators.