The U.S. economy is less dynamic than it was two decades ago, and with this shift has come massive concentration in market power and control.
Industrial concentration has risen. More workers than ever work for very large firms. A handful of major investors own a greater percentage of public companies. Fewer companies (and individuals) decide what we consume, where we work, how much we earn and even how our government is run than they have in the last half century.
Blockchain advocates support the technology as a means by which to mitigate this ever increasing concentration of power. On their face, products and features such as decentralized governance, personal data management apps and DeFi offerings promise to disrupt monopolies and redistribute control of valuable assets to the people. Blockchain, they say, is the antidote to the monopolistic (and monopsonistic) tendencies of the modern economy.
This is a tempting promise, but like many "silver bullet" solutions, it is not as foolproof as it initially appears.
Blockchain applications currently do not wield economic and political power as brazenly as major tech companies because they have yet to achieve any comparable user base. Large-scale adoption (and the accompanying attention and money) is a prerequisite for accumulating power. It took decades for the World Wide Web to evolve from the decentralized invention of Tim Berners-Lee to the basis of massively profitable and powerful social media apps such as Facebook and Twitter.
The essential question is, therefore, whether, if and when blockchain finds its own killer apps that those services will be meaningfully more decentralized than the current options. And the answer is – unless the blockchain industry proactively works to prevent it – probably not. There’s a good chance that in a decade or two we’ll be complaining about the evil nature of “Big Blockchain” in the same way we complain about Big Tech today.
Blockchain already exhibits early evidence of the same economic forces that have driven consolidation in the broader economy. Ethereum’s first-mover advantage means it has yet to be unseated as the most popular protocol to build on, despite fervent attempts from competitors. Bitcoin Proof-of-Work mining rewards feed a “rich get richer” dynamic, with block rewards awarded to the equivalent of only 10 addresses. Stablecoins – one of the most promising use cases – have powerful network effects that encourage winner-take-all market dynamics. Regulation, both nationally and internationally, is limited and totally unequipped to take on problems regarding antitrust, market power and other related issues.
But won’t decentralized governance prevent consolidation? Not necessarily. Modern tech companies have governance that is more decentralized than many people care to admit. All five companies that make up the acronym known as FAANG – Facebook, Amazon, Apple, Netflix and Alphabet (once known as Google) – are publicly traded. Any individual who wishes can purchase Class A shares, which confer voting rights. Aside from Facebook, none of these companies has a single individual or entity with majority control. And yet, this distributed control and public participation has not prevented any of the problems that consumers and workers grapple with today.
The modern economy is still figuring out how to undo the damage done by allowing the internet – whose invention was funded by public money – to become dominated by a handful of private companies. To avoid a similar fate, those working in blockchain will need to make some major industry-wide investments over the next decade.
The critical question is thus: In 10 years, what institutions or mechanisms will prevent Vanguard from accumulating voting power by buying up governance tokens – or whatever other mechanism is in place at the time – in exactly the same way it has done with stock?
At a minimum, blockchain founders and investors need to recognize that many of the fundamental economic forces that are driving consolidation across the economy will also apply to blockchain-based applications. Distributed ledgers are not immune to “winner takes all” market dynamics, the increased globalization of markets, and more lax regulation and weaker antitrust enforcement simply because they are distributed. Thinking deeply and realistically about the economic similarities between blockchain and other industries now will help the industry to anticipate potential problem areas.
Second, as I've discussed previously, blockchain presents a new environment that requires custom-designed decentralized governance. As of now, governance systems are far from ready to oversee complex, billion-dollar products. Hundreds of years of insights in economics, political science, law and business must be translated and adapted into collective decision-making processes suitable for blockchain and resistant to consolidation.
A massive influx of investment into developing this public knowledge – by government agencies, ecosystem funds and even individual protocols – has the potential to reap huge benefits to the entire industry in the next decade.