Most big internet companies are data companies. They give away a free product, and capture value by monetizing the attention of the user. This can only be achieved by collecting data and using it to generate revenue, typically in the form of personalized ad delivery.
Search engines and social media companies have two main defensible resources: databases and user bases. The user base generates the database, and the data drives profitability. Discovery and search algorithms are important too, but these change often and can be mimicked by other services (i.e. DuckDuckGo also has a search algorithm, but Google’s user base makes it more valuable).
The user base creates ecosystems that are built on top of big tech platforms. SEO is an entire industry based on Google, and developers build Chrome extensions. Social media has its marketing gurus and influencers. These ecosystems are hard to build, and they’re governed by network effects. The company with the largest and most valuable community wins everything. Venture capital figured this out a long time ago, and were able to infuse these companies with enough funding to acquire users as quickly as possible to build the largest ecosystem. Facebook, Twitter, Instagram, and Google won the race.
A database is quite different from a community. While managing a user base requires being open and listening to users, managing a database is about risk management and security. A community is something you build: it requires that you go on the offensive. A database is something that you manage: it requires defense.
It takes deep technical expertise to effectively manage the amount of data that social media companies generate. Billions of dollars in ad revenue depends on it. Data is sensitive as well – you can’t let just anyone have access to Facebook’s user data. There are millions of personal messages and datapoints on consumption habits that live there.
These platforms have made the world a far more abundant place. We have access to all of the world’s knowledge and we can communicate with anyone on the planet because of them. Big tech has created a wealth of opportunity for the world, and we owe these platforms a debt of gratitude.
But, the public now has a strained relationship with how institutions manage our information. America believes that the government and tech companies are spying on them, and their sentiment is not misguided. There is something strange about an institution who has the ability to know what you’re thinking about (search history), who you’re looking at (media consumption), and where you’re located (GPS location data).
The events of 2020 and early 2021 have made this situation more complicated. Big tech has chosen to de-platform individuals who they believe may be a threat to society. And while some cheered the suspension of Trump’s twitter account, the suspicious shutdown of the r/Wallstreetbets Discord server and halting of trading on Robinhood during the $GME craze has people of all political beliefs questioning the power and technical capability of these institutions.
There might be a solution to all of this. It’s one that’s bad for big consumer internet companies, but potentially great for society: blockchains.
Let us revisit the traditional big consumer internet product. We said that the 2 main assets of a large consumer internet company are community & data. They technically have a third resource, but it’s not enough of a differentiator to make these companies successful alone: application logic (i.e. how does the app work):
Consumer Internet Companies (Google, Facebook, Twitter, Snapchat)
Application logic: can make a company stand out, but doesn’t matter if the company can’t build a user base
Community: attracted to the application, and is incredibly important. If the application is free, they are the product. If a company can’t find a way to monetize this user base, it dies.
Data: created by the user base. The more users the application has, the more valuable this data becomes. Consumer internet companies use this information to drive profit.
Blockchains work differently. What a blockchain does is unbundle the application logic from the database. A traditional database is a walled garden that is managed by a centralized entity. In that walled garden lives highly sensitive user data and the ability to delete that data.
Instead of keeping data behind a walled garden, a public & permissionless blockchain like bitcoin or ethereum hides the identity of the user in the database and gives a copy to everyone. In fact, a decentralized blockchain can only be successful if it gives the data to everyone, because the community, not a centralized entity, is in charge of managing the database. These databases are also write only – you can’t delete data from a secure blockchain.
In this way, an application that is built atop a blockchain is measurably different than an application that is built on top of existing technology infrastructure.
Application logic: can make a project stand out, but doesn’t matter if the project can’t build a user base (just like traditional tech companies)
Community: attracted by application logic, but may have the opportunity to monetize along with project creators and investors through tokens. They are not the product, but can benefit from the application.
Data: created by activity from the user base, but is completely open and visible to anyone. Individual actors are incentivized to maintain the database through tokens. The value of the network should accrue to the holders of tokens, instead of a company who monetizes a private collection of data.
We don’t know what will happen when apps are unbundled from their data. If these decentralized services gain traction, it won’t be good for the profitability of big consumer tech companies. It changes the model of internet services from one in which a centralized player can monetize based on user data, to one where value is captured through tokens that incentivize the management & development of a blockchain.
The financial victors in a blockchain project are different than those who typically win in internet business. It might be outside speculators on the value of a token, developers who launch an ICO, or maybe even users who are incentivized with native tokens to use the network. Tech business changed when software moved to the cloud. It will change again when the cloud is disrupted by blockchains.
“Yes, You May Need a Blockchain” by Balaji Srinivasan
Placeholder VC Investment Thesis by Joel Monegro and Chris Burniske