Amazon, Facebook and Google have had tremendous success for the greater part of two decades. To add to this, businesses that have similar characteristics, Airbnb and Uber, are now worth more than Hilton and General Motors respectively. What do these companies have in common? And can they be compared to Bitcoin and Ethereum? I’ve been thinking about this for the greater part of 2018 and in this post, I’ll share some of my learnings and end off with a short look into what excites me about Bitcoin and Ethereum.
What is a platform business?
To start, let’s look at the companies that we are all familiar with – Amazon, Facebook, Airbnb, and Uber. Each of these is a platform business.
When a business is a platform, it does not itself produce the value that we associate with it. Rather, a platform business creates a plug-and-play infrastructure that enables producers and consumers of value to connect and interact with each other in a much more efficient manner than they would have in the past.
The platform’s service (value proposition) is the enabling of interactions between value producers and value consumers. It is not in designing and producing the item that you bought off of Amazon or creating the post that you read on Facebook, or owning the room that you stayed in while you were away or owning the taxi (and employing the driver) that took you to your destination. In this way, a platform’s business model is different from that of a traditional business where the value is created internally and pushed to the customer.
A platform business works when it creates value for the demand side as well as the supply side. The interaction between producers and consumers involves an exchange of value for some form of economic or social currency.
In the case of Amazon, Uber and Airbnb, identifying the currency that is paid by the demand side is relatively simple because it involves the exchange of money from shopper to retailer, rider to driver, or guest to host.
In the case of social platforms, it is more nuanced because the currency is social and not economic. On Facebook, friends like and comment on posts. On Twitter, tweets receive likes and retweets and tweeters acquire more followers. Instagram is also very similar. In all of these instances, participants on the supply side create value (content) in exchange for social currency (attention, reputation, influence or goodwill).
Successful platform business creates value for both the producers (supply side) and consumers (demand side).
Bitcoin and Ethereum – platforms?
Bitcoin and Ethereum are software systems with rules that incentivize participants to act in a certain way. They include the capabilities of cryptography (which includes Proof of Work) and blockchain to deliver the value proposition or utility that they promise to deliver. Similar to the platforms mentioned above, these systems only provide utility if there is participation on both the demand and supply side.
In the case of Bitcoin, the value proposition that the demand side is after is censorship-resistant sound money. Censorship-resistance happens when digital payments can be executed without having to rely on a trusted third‐party intermediary (a traditional bank). Sound money happens because the predetermined supply of Bitcoin’s native currency, bitcoin (lowercase b), cannot be altered by any party without everyone on the network consenting to the change of the supply.
Supporters of Bitcoin explain that when the supply of a money increases, the wealth of holders is expropriated to the benefit of those who ‘print’ the money or receive it first. Bitcoin supporters do not believe that anyone should have this privilege.
Just like with a platform business, the Bitcoin system provides the plug-and-play infrastructure required for value to be provided by the supply side and consumed by the demand side. Network participants (referred to as miners) use their computational resources to clear and settle the transactions by Bitcoin users. Miners do this by including transactions in blocks and solving the math problem that has to be solved before a new block of transactions can be appended to the existing chain of blocks. The economic currency paid to the miner who successfully solves the math problem comes in the form of the transaction fees paid by users as well as a reward of newly created bitcoin. Currently, the miner who solves the math problem receives 12,5 bitcoin. This is known as the block reward.
With Ethereum, the value proposition is smart contracts. A smart contract entails the automatic execution of an agreed outcome when predetermined conditions are met. It is automatic because the other party’s cooperation is not needed to execute the agreement. The conditions are predetermined because the performance required to trigger the execution as well as the consequences upon execution are agreed at the time that the contract is created. Combine these two properties together and we have a scenario where you don’t need to rely on the other party to keep to their side of the deal and you don’t have to rely on the legal system to remedy the situation if they don’t.
In a similar way to Bitcoin, Ethereum provides the infrastructure that enables the value to be provided by the supply side. Miners use their computational resources to execute the smart contracts and are rewarded with a certain amount of value for doing this work. The Ethereum system uses its own native digital token called Ether. In addition, and in a similar way to how miners on the Bitcoin system receive transaction fees, miners on Ethereum also receive a fee (called Gas) for performing the computational work.
Food for thought
Since the 1990s the companies that have leveraged the capabilities of the internet have changed our lives for the better. Probably the biggest impact of the internet is that it has enabled people to enter into mutually beneficial interactions that they would not otherwise have entered into, because they had no way of knowing about the other person’s existence or their desire to enter into the mutually beneficial interaction.
Bitcoin is nine years old and Ethereum is only approaching its third birthday. We are still in the early days. The promise of these broadly distributed blockchains that link information using cryptography is truly exciting and I can’t wait to see what the next 20 years have in store for us. With these systems, we will be able to do all the things that we have always done except now we will be able to reduce our vulnerability to the harmful actions of other participants, outsiders or intermediaries.