Decentralized Platforms and Web3
Management without managers?
Platform Papers is a monthly blog about platform competition and Big Tech. Blogposts are written by prominent scholars based on their research. The blog is linked to platformpapers.com, an online repository that collects and organizes academic research on platform competition.
This blog is written by Ying-Ying Hsieh & JP Vergne
In 2009, a new organizational form, which we call the decentralized platform, began to diffuse without relying on managerial authority and without having to employ anyone. The most well-known decentralized platform, Bitcoin, has millions of users, thousands of contributors, and a market valuation never achieved in history by an organization without a CEO nor shareholders.
Based on this novel blueprint, Web3 has quickly emerged as a new way of interacting with the Internet. Unlike Web 2, where coordination between digital platform participants is orchestrated centrally by a corporation, Web3 is rooted in the idea that users should own and exchange their data without relying on corporate intermediaries. To achieve direct coordination, Web3 requires decentralized platform infrastructures that can facilitate exchange activities without the intermediation of centralized platforms (e.g., Gmail, Uber.com, Instagram).
How do decentralized platforms operate?
Decentralized platforms provide an alternative to corporate platforms for coordinating the exchange of digital assets, but without the “visible hand” of corporate managers, how does such coordination happen exactly?
Our study “The future of the web? The coordination and early-stage growth of decentralized platforms” demonstrates, based on in-depth qualitative and quantitative analyses of twenty blockchain platforms, that Web3 platforms combine three components for operating in the absence of managers:
(1) Decentralized Algorithmic Coordination. In the absence of a manager, participants must rely on algorithms to coordinate tasks. Instead of residing in contracts drawn out by corporate managers, platform rules are encoded in blockchain algorithms that define how participants interact and share data representing value. As long as one has trust in the algorithms, then potentially, one need not have trust in any other individual or organizational collaborators. One can then transact without having to know the real-world identities of their counterparties.
Specifically, blockchain algorithms encode design rules and programs within a shared space and time, thereby regulating routine task performance (e.g., when to perform a specific task with required resources) and rewards distribution (paid out in cryptocurrency). Design rules include how information shared across the network is verified and validated, thus providing a consistent basis for trust in the algorithms.
(2) Decentralized Social Coordination. Despite the absence of managerial orchestration, social coordination among key contributors remains indispensable to ensure ongoing maintenance of the platform. On decentralized platforms, social coordination follows a similar structure to open-source software development (OSSD)—a common format for the developer community to coordinate their contributions to software upgrades. While in centralized platforms, proprietary development typically involves corporate employees only, decentralized platforms are developed by voluntary contributors who self-select into the project, much like Linux and Wikipedia contributors. In addition to development, decentralized platforms differ in that the verification and validation of routine tasks are performed by network validators (e.g., “miners”, “stakers”), rather than by middle managers. Social coordination ensures that sophisticated checks and balances are in place to account for the respective interests of developers and validators.
(3) Decentralized Goal Coordination. While traditionally, organizational goals are set by central authorities (e.g., the CEO), in the absence of managerial orchestration, decentralized platforms sometimes rely on nonprofit foundations to corral everyone’s efforts. Despite having no formal authority, for instance, the Ethereum Foundation can offer a coherent vision of how various classes of platform participants might fit together to achieve long-term goals. Based on its vision, a foundation can then offer knowledge and resources (e.g., developer toolkits and grants) to platform contributors who buy into this imagined future and are willing to help build it.
Coordination Configurations: A Balancing Act
The three mechanisms depicted above do not work in isolation, nor can they be added arbitrarily to the design of decentralized platforms. Without a centralized authority to provide a stable structure, participants must negotiate decentralization by themselves, leading to a fragile equilibrium that ideally should deliver the kind of accountability, predictability, and common understanding necessary for sustainable coordination. Finding the right balance is key to making headway to early-stage growth.
Our findings suggest that, to fuel early-stage platform growth, platform contributors should either empower a small group of core developers or create a foundation to provide a guiding vision. Intriguingly, we did not observe any decentralized platform that grew successfully by decentralizing all three components of coordination at the same time. We also did not find evidence that fully decentralized algorithmic coordination was sufficient to bootstrap a platform. That said, we did find that insufficiently decentralized algorithmic coordination could cause instability and lead to early-stage platform decline.
So, what do decentralized platforms mean for businesses and organization designers?
Fundamentally, blockchain is a coordination technology that requires group adoption. Organizations can only benefit from adopting decentralization technologies and decentralized platform business models if they understand the limits of decentralization. This understanding is particularly important for organization designers, as the adoption of a decentralization technology entails fine-tuning the degree of decentralization across different platform layers to optimize coordination.
As the first iterations of decentralized platforms, cryptocurrencies have grown beyond their initial use cases to help allocate tasks, resources, rewards, and information across a range of industry sectors. As a result, blockchain-based decentralized platforms provide infrastructure for bourgeoning Web3 applications such as DeFi, NFTs, and DAOs. Those DAOs (for “decentralized autonomous organizations”) increasingly populate the Web3 space, but already experience the limits of decentralization first-hand as centralizing forces spontaneously resurface amidst their disengaged token holders, who end up relinquishing control to a few insiders—those with the resources, competence, and time to participate in every aspect of decision-making.
Having diffused beyond cryptocurrencies, decentralized platforms will warrant closer attention from industry, academia, and regulators alike as they embody a new class of competitors in the digital economy.
This blog is based on Ying-Ying and JP’s research published in the Strategic Management Journal, which is included in the Platform Papers references dashboard:
Hsieh, Y. Y., & Vergne, J. P. (2023). The future of the web? The coordination and early‐stage growth of decentralized platforms. Strategic Management Journal, 44(3), 829-857.
Platform-Paper Updates
It’s been a relatively slow month in terms of new platform papers being published, but there have been plenty of intersting developments in the ‘real world’:
Last week, the inaugural summit of the European Digital Platform Research Network (EU-DPRN) took place at Bocconi University in Milan. EU-DPRN aims at bringing together European scholars studying platforms from across different disciplines (e.g., strategy, marketing, information systems, economics, etc.). The first summit was a success; it featured a PhD workshop, ten paper presentations, six poster presentations, a keynote and two stimulating panels. Next year, the conference will be hosted by the UCL School of Management in London!
The competition law community is increasingly interested in so-called ecosystem theories of harm. When large platform companies increase their scope by acquiring a target in a complementary or unrelated market, this can both benefit the acquiring firm in novel ways as well as potentially disadvantage competitors. The question is, do we need new theories of harm to analyze such acquisitions? It’s not an easy question. Recently, two insightful CEPR columns (1 & 2) got published on the topic and earlier this week the British Institute of International and Comparative Law (BIICL) hosted a roundtable debate on the topic.
Platform Papers is curated and maintained by Joost Rietveld.