Why decentralization could prove the most disruptive tech megatrend of the next decade.
“We have to do it now. It’s a historical moment.”
The following article was originally published in “What I Learned This Week” on October 11, 2018. To learn more about 13D’s investment research, please visit our website.
The above quote comes from Tim Berners-Lee, inventor of the World Wide Web. On the first of this month, he launched Inrupt, a startup that provides developers tools to construct decentralized applications (Dapps) on the platform Solid. The foundational innovation of Solid — which Berners-Lee and his colleagues at MIT have been building for years — is personalized data control. All of the data a user creates or uploads on the platform exists within a “Solid pod”, solely under the control of that user, thus out of reach of corporations without user permission. “The intent is world domination,” Berners-Lee told Fast Company, “…a complete change where [Facebook’s and Google’s] business models are completely upended overnight.”
With crypto euphoria last year, decentralization became a buzzword du jour — repeated to the point the concept appeared the exclusive domain of the crypto revolution. This obscured the bigger picture. It is not just about bitcoin or even blockchain. More and more, decentralization is emerging as the innovator’s panacea for nearly every technology-driven ill of the Digital Age, whether the consolidation of corporate power, cyber security, or even climate change.
The following diagram, while hardly nuanced, provides a basic shorthand to understand centralized versus decentralized versus distributed systems:
For decades, centralization was the most efficient and profitable way to scale technologies. Yet, centralized hardware and centralized data inherently have centralized vulnerabilities. Facebook’s Cambridge Analytica scandal was a wake-up call. The Equifax data breach was a wake-up call. And Hurricane Maria’s devastation of Puerto Rico’s energy grid was a wake-up call.
To be clear, decentralization is not just a technology movement. As we explored in WILTW September 21, 2017, the centralization versus decentralization battle has been waged politically since the dawn of civilization. The first central currency was introduced by the British monarchy as a way to control the decentralizing tide of the merchant economy. The Teddy Roosevelt-led antitrust movement was aimed at reversing the centralizing tide of industrialization. Today, rising antitrust ambition in the E.U. and the U.S. is set on forcing much the same. Even Donald Trump’s trade war is a move to push global trade towards a decentralized system — away from distributed-supply-chain interdependence and towards nation-by-nation manufacturing independence.
Yet, especially in an era of cratering trust in institutions, innovators won’t rely on politicians alone to solve the problems. From Berners-Lee to Marc Andreessen, Chris Dixon, Alexis Ohanian, and Elon Musk, tech luminary after luminary has espoused the pressing need for decentralizing innovations. These innovations are not all rooted in grand ambitions like rendering fiat currencies obsolete or reconstructing the internet’s foundation. Today, disruptive decentralizing innovations are already being deployed that demonstrate the concept’s practicality and immediacy. In the years ahead, we expect the companies that author key decentralizing solutions to emerge as huge new winners. Meanwhile, those companies that are inherently dependent on centralized systems to fuel their profits could be vulnerable to seismic disruption.
Identity authentication is one example we often cite when explaining why decentralization is not just some pie-in-the-sky crypto ideal. Since the internet’s proliferation, passwords and PINs have been the default mechanism for confirming a user’s identity, whether accessing an email account, a payments platform, or a corporate workstation. These passwords and PINs are then kept on a central server, and if that server is breached, all the stored records may be exposed.
This vulnerability has led to a global cyber-security crisis. In its 2018 State of the Internet Report, Akamai highlighted the rising threat of “credential stuffing attacks”, which involve botnets hammering websites with stolen or leaked login credentials to hijack accounts. Between just November 2017 and June 2018, Akamai recorded a staggering 30 billion malicious login attempts.
Biometrics could provide a decentralizing solution — there are now more than two billion smartphones in circulation globally that have biometric capabilities. This is the possibility driving HYPR, a New York-based startup with partnerships already in place with Mastercard, Samsung, and Pinterest. On a topline level, their idea is simple: your phone confirms your identity via thumbprint or iris scan and then communicates that confirmation to the portal you’re trying to access. The portal’s central servers never have access to your biometric data — that’s stored locally on your phone, meaning the only way to steal it is to hack or steal your phone. As HYPR co-founder Bojan Simic wrote for Forbes in July:
“Decentralizing credentials by encrypting and isolating them onto commonplace mobile devices eliminates the risky practice of storing credentials centrally. It also puts mobile devices to their highest and best use by employing those biometric sensors and other capabilities for total password elimination.”
Solar energy is another clear example of decentralization in action. Hurricane Maria’s devastating impact on Puerto Rico reinforced a point alternative energy advocates have been making for years: centralized energy grids are too vulnerable in the age of global warming. By April of this year, Maria had already led to the second biggest blackout in the history of power on earth, with 3.4 billion lost customer-hours. Puerto Rico’s problem, as reported by Wired: “Essentially, the generating capacity is overly centralized, which ‘puts a lot of requirements on a few large fossil-fueled generating units.’ When one fails: poof.”
Since the storm, sales of residential solar panels in Puerto Rico have spiked, nearly 60 community solar-storage systems have been completed or begun, and corporate-led efforts have resulted in solar installations on fire stations across the island and in industrial parks. As the globe continues to warm and disastrous hurricanes hit more places with more frequency, we expect governments, businesses, and consumers to increasingly embrace the benefits of “microgrids” — electricity options that can operate in “island” mode, meaning they can deliver electricity while being disconnected from the larger utility grid. In turn, decentralization will prove one of the most significant tailwinds for the solar and battery industries.
Then there’s blockchain. Even with the technology in its nascent stages of development, we’re beginning to see decentralizing possibilities with short-term disruptive potential. Consider the gaming industry. As Dapp.com CEO Kyle Lu told technode recently: “Right now, we are seeing studios and publicly-traded companies allocating their resources into the development of decentralized gaming.”
Today, roughly 70% to 80% of Dapps are gaming-related. The advantages of decentralized gaming are two-fold.
First, there’s immutability — the fact that characters or objects in a game can be owned and traded like physical objects. Second, there’s open-source collaboration — because those characters and objects exist on a blockchain via smart contracts, any developer can write new gaming experiences around those characters and objects. In 2018, gamers will spend an estimated $137.9 billion globally, up 13% year-over-year, according to research firm Newzoo. The viral success of CryptoKitties last year demonstrated that decentralized gaming has the potential to seize significant market share.
The point being, decentralization is not just an ideal, but the framework around which the industries of the future will be built. Blockchain is no doubt the key-enabling technology and major scalability breakthroughs are required to achieve some of the decentralization movement’s loftiest goals, whether frictionless transactions or a truly decentralized social network. However, decentralizing innovations are already being deployed. Everything from gaming, energy, and cyber security to fintech and healthcare appear ripe for short-term decentralizing disruption. To identify the technological winners and losers of the next decade, no theme may provide a better roadmap sector-by-sector than decentralization.
This article was originally published in “What I Learned This Week” on October 11, 2018. To subscribe to our weekly newsletter, visit 13D.com or find us on Twitter @WhatILearnedTW.
