Expert Insight

Cryptocurrencies, communities and power structures

Open communities are a central part of the cryptocurrency sphere, as they enable protocols to be fully decentralised, permissionless and straightforward open to anybody who wants to participate

Open communities are a central piece of the cryptocurrency sphere, as they enable protocols to be fully decentralised, permissionless and straightforward; open to anybody who wants to participate. Of course, until a few years ago, nurturing decentralised communities was considerably harder than it is today, due to less effective tools for communicating, organising and sharing value.

The role of organisations

Organisations were created to facilitate the capture and the exchange of value between peers and to allow humans to enter agreements for lengthy periods of time.

The two most common organisations are centralised ones, where decisions are made by a central authority, and decentralised ones, where power is distributed equally among all participants.

Infrastructure represents how data is distributed, while governance represents how decisions are made.

Open communities exist within the decentralised organisation sphere, as there is no formal organisation structure so members just randomly organise themselves, there is no central authority and changes only get through with the majority’s approval.

Nevertheless, centralised organisations still represent 99% of all existing ones; however, the shift from centralised to decentralised, open governance models hasn’t happened sooner, because the incentives aren’t there yet.

Incentives within communities

Incentives play a major role in the overall outcome of how organisations are structured. For a successful and long-term network growth, the right set of incentives must be put in place, as if there is a misalignment of rewards between peers, power struggles are likely to appear – which ultimately leads to more centralisation and the downfall of the network.

If you look at the way Wikipedia worked in the early days – anyone could contribute to it. Contributors’ incentive was, in essence, their reputation (much like on GitHub or Stakoverflow).

How did the market react? Wiki’s main competitor, Britannica, began to struggle because it couldn’t compete with the power of an open network, which grows at the pace of the square root of its users, according to Metcalfe’s law.

With the rise of tech giants, other types of networks started to grow, focused in centralised distributed models, where data is spread across many servers and regions redundantly, but is owned by an institution/company. This can be demonstrated by social networks like LinkedIn, Twitter and Facebook.

The no-incentive problem

There is, however, a bottleneck with this organisational structure type, which is a single point of failure. The Cambridge Analytica scandal the first of many that will come in the future.

I would argue that distribution without decentralisation is pointless for the end-user’s benefit.

What is missing in these networks, and the reason why they need to be centralised, is a lack of incentives. Because access appears to be “free” (users don’t spend money to access social networks), the users’ relation to the platform changes. As an end-user, you take that the final product is the platform, although that couldn’t be further from the truth.

All centralised platforms have the same product and business model: to profit from end-users’ data; users are the product and the platform is the means for companies to sell their product to their customers (user data is sold on).

I believe that when there is no clear incentive and rewards for users, power tilts to the side of the decision-maker (usually, the platform owners).

Why incentives matter

Online communities are key to the successful development of crypto-projects. Because cryptocurrencies exist, there are clear gains for end-users who can benefit financially and through open and distributed governance participating in decision-making.

Open communities can leverage considerably more benefits for the end-user, the person participating in the actual network, than traditional centralised structures. Those advantages come from the incentive systems implemented that distribute rewards to agents who participate in the community.

 

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