Many critics fail to understand the value of blockchain. But I can’t say it’s entirely their fault. As I often tell my clients, anything you can do on blockchain can be done better, faster, and cheaper using a centralized system. Why bother using blockchain?

Blockchain is a ridiculously complex system where everyone is checking everyone’s work but themselves. If you think public key encryption is a hassle, then zero-knowledge proofs are simply incomprehensible. Honestly, I’ve given up on trying to understand everything and have decided to believe what the EY (Ernst & Young) R&D guys are telling me.

So, what is the value of public blockchain? What’s the point of going to such trouble?

The answer is decentralization. Decentralization is a unique feature that cannot be obtained in any other system other than a public blockchain.

Less talked about is why decentralization is so important to the long-term prosperity of every company on the planet, and of all of us. The value of decentralization is estimated to be around $1 trillion a year in the US alone, and that number is growing every day.

A time when decentralization was the norm

Decentralization has always been important, but it used to go unnoticed because that’s how the world worked. In the past, there was a much higher degree of decentralization than there is now.

As a child, visiting my grandparents in Europe was like visiting a wonderful world that was almost the same but somehow different. Blaupunkt radio, Grundig television, Marks & Spencer clothes. There were many things I didn’t see in America. What I thought would be the same wasn’t the same. The Ford Escorts that ran in Europe bore no resemblance to the Escorts sold in America.

This decentralization required no planning or conscious effort. In the past, it was virtually impossible to run a global organization. Before there were global companies, there were multinational companies. A multinational company was a company that operated in many countries, each of which was a unique company.

Products were different all over the world. There was no real-time data network for design collaboration. At a time when a 5-minute international phone call cost as much as a family’s dinner, building a global design or engineering team was unrealistic. There were no global software products or data networks.

Era of global monopoly due to digitalization

However, the world where regional products and variations existed gradually disappeared. Digital technology has enabled scale and integration. Over the decades, large-scale production and digitalization have wiped out thousands of small brands and businesses. This was good for all of us. In today’s global economy, radios, televisions, and clothing are much cheaper than in the past.

But while scale has centralized manufacturing and made things much cheaper (and uniform), digitalization has also ushered in a new global era of centralized digital monopolies and cartels. This was not a good result.

The root cause is that digital marketplaces are almost entirely the result of natural monopolies, and software and networks are transforming almost everything into digital marketplaces.

Let’s take the simple experience of riding a taxi as an example. When I was a kid, the experience of riding a taxi varied depending on the location. Expensive luxury in London. Affordable and convenient in Athens. An unavoidable cost in New York, especially when it comes to getting to and from the airport.

Everything was different and unique. But now it’s all about ride-sharing digital marketplaces. Two companies dominate this industry globally.

Software and network economics make this situation inevitable. Whether it’s messaging or ride-sharing, the value of a network increases as it has more users. The more users there are, the more attractive it is to join the network. Over time, catching up with the market leader becomes increasingly difficult, and eventually becomes almost impossible.

Don’t get me wrong. This process is extremely valuable for business transformation. The early stages of investing in digitizing and perfecting your marketplace are extremely difficult, but yield tremendous value.

Developing a real-time system to match drivers and passengers in nearly every city, integrating GPS maps, navigation, pricing models, rating systems, and payment systems is a monumental task. The resulting system is so great that it feels like magic the first time you use a rideshare. All you have to do is get in the car, have it take you to your destination, get out of the car, and drive away.

Adverse effects of monopoly

In the early days of digital integration and marketplace development, there is great value for both buyers and sellers, but things start to go awry over time. At some point, emerging monopolies begin to behave more like exploitative monopolists than developers of valuable ecosystems. Prices and fees begin to rise, and companies begin a never-ending cycle of data mining and marketplace exploitation.

I’m not complaining about the high fares or the sometimes dishonest drivers I encounter. Academic evidence is accumulating at both the micro and macro levels. Large retailers, which dominate the market, are receiving an increasingly large share of third-party sales. Ride-sharing companies have significantly increased their prices and share prices in recent years as the market has consolidated.

At the macro level, technology-driven corporate profits and industry consolidation are at their highest level since the guild monopoly era of the 1920s. We are living in a global golden age of centralized monopolies, many of which are supported by technology.

Not all network-enabled technologies create exploitative monopolies. Decentralized networks have an impressive track record of being monopolistic without being exploitative.

The Internet is a typical example. TCP/IP, the core technology that powers all of our Internet communications, is free to use and requires no permission. Internet use has become extremely cheap in much of the world. Email is also a decentralized protocol. These networks do not have monopolies because there is no central company with an obligation to maximize value for shareholders.

Why pay 30% of the price of a shared ride to a software company when we have a global network for near-instantaneous communication that is incredibly stable, extremely cheap, and has operated flawlessly for decades? Does it have to be?

The Internet as a whole is much simpler than ridesharing. The only real difference is that one is operated by a small number of centralized companies, and the other is a decentralized, open network. This is not a story about resisting capitalism and free markets, but about the damage that monopolies and monopolistic corporations do to human flourishing.

Monopoly costs and solutions

There are three options to avoid a world of endless monopoly. The first is to stop the advance of digitalization and networking. The second is to thoroughly regulate all monopolistic companies. The third is to develop a decentralized system that prevents monopolies from becoming a monopoly.

The first is not a true option. The second option is a political nightmare. The third option is called Ethereum. It’s the TCP/IP to business value, a path to digitalization without the risk of becoming the global taxi company for ride-sharing.

How does this fit into the larger picture of economics and policy? Monopolies seeking to maximize commercial profits generate “dead weight losses.” In other words, a commercial profit-maximizing monopolist will price its products at a level that maximizes its profits, regardless of product costs. Naturally, the price will be higher than in a competitive market, and less of the product will be consumed.

It’s not just about wealth being transferred from customers to monopolists. Of course, monopolies make more money, but because they produce and consume less overall, the economy as a whole becomes smaller.

How much will these cost? Thomas Philippon, a professor of finance at New York University, estimates that monopolies cost the average American household $3,600 a year (approximately 500,000 yen, equivalent to 140 yen to the dollar). They are forced to pay the sacrifice of This is about 5% of US production. For the U.S. economy as a whole, the cost would be nearly $1 trillion. As the world becomes increasingly digital, that number will only grow.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original text: Decentralization Is the Point, and We’re Not Talking Enough About Why