17/May/2019

Cryptonetworks will challenge infrastructure monopolies

Amazon Web Services (AWS) impact on the global economy and the startup ecosystem has been transformational. In the 1990’s, “in order for a web-based company to exist, the table stakes were about $2-to-$3 million.” according to Om Malik. Today, AWS allows you to rent a server for less than $100/month. Ben Thompson says it best in his Amazon Tax post:

“..developers would have access to enterprise-level computing resources with zero up-front investment”

This has opened the floodgates for startups to test and iterate on their ideas at light speeds, increasing the rate of experimentation and innovation. That being said, AWS and Azure control about 70% of all applications launched on the cloud today. In 2016, Chamath Palihapitiya commented on the power of AWS’s monopoly:

“AWS is a tax on the compute economy. so whether you care about mobile apps, consumer apps, IoT, SaaS etc etc, more companies than not will be using AWS vs building their own infrastructure. ecommerce was AMZN’s way to dogfood aws, and continue to do so so that it was mission grade. if you believe that over time the software industry is a multi, deca trillion industry, then ask yourself how valuable a company would be who taxes the majority of that industry. 1%, 2%, 5% — it doesn’t matter because the numbers are so huge — the revenues, profits, profit margins etc. i don’t see any cleaner monopoly available to buy in the public markets right now.”

It was estimated that AWS owned 31% of the cloud computing market when Chamath wrote that comment in 2016 — today that figure has risen to 40%. AWS controls a significant part of the infrastructure (like Bell and telephone wires) by building enterprise-scale data centers all around the world. The sheer scale at which AWS operates is difficult to grasp. Ben Thompson highlights the power of economies of scale in Amazon Tax (He also quotes Chamath):

“The monopoly Palihapitiya is referring to is based on the scale effects I noted above: the larger AWS becomes, the greater advantage Amazon has in pricing AWS’ services, which means they can earn ever more business, which increases their advantage even more. The net result is that for all but the largest cloud-based companies this advantage, combined with the flexibility AWS affords (which is critical both operationally and financially), will lead to the inevitable conclusion that Amazon ought to service all their infrastructure needs; the payments they make for this service are Palihapitiya’s “tax”.

What is worth considering, though, is the possibility that just as AWS’ effect on developers spread out into the broader startup ecosystem, it increasingly seems that AWS’ impact on Amazon itself goes far beyond its already substantial contribution to the bottom line. Amazon may have started as, to use Stone’s title, “The Everything Store,” but its future is to be a tax collector for a whole host of industries that benefit from the economies of scale, and AWS is the model.”

Not only that, but the recent IPOs in the technology industry are massive wins for these providers as they continue to widen the gap. Lyft is going to pay AWS $300MM over the next few years. Snap is paying Google billions for GCP. Slack will pay AWS $50MM a year for the next 5 years. The billions of dollars of investment in global physical infrastructure by Amazon, Google and Microsoft are a by-product of their main businesses, and as a result, new startups in these spaces cannot compete. History is on track to repeat itself, with eventual consolidation between the 3 largest providers at this stage likely to continue.

The following paints a picture of how censorship-resistant cryptonetworks may be able to change this narrative. The same way how Facebook could never have built Snapchat, or how Amazon is struggling to compete with Walmart on groceries, this new open source design is fundamentally opposed to current incumbent’s business models. This will be done through a bottom-up approach, proving a fundamental difference in how they compete.

Evaluating Infrastructure Investments — AWS vs. Cryptonetworks

Defined by Joel Monegro, “Cryptonetworks are online micro-economies organized around a specific service, and regulated by a cryptoeconomic protocol.” We are at the beginning of massive investments into open source physical cryptonetwork infrastructure that will challenge the current status quo. This paradigm shift is occurring for these reasons:

  • Increased opportunity and incentive for consumers to run servers (i.e. full nodes, light clients)
  • Increased competition from smaller generalized mining server farms specialized in open source networks
  • Decreasing costs for censorship resistant, global coordination

Increasingly, there are protocols being worked on that pay people for running full nodes. Handshake for DNS, Althea for mesh networking and Filecoin for storage to name a few. Layer 2 solutions like Lightning and Raiden require individuals to run full nodes and provide supplemental income. As these protocols mature and become easier to use, we will start to see a greater proliferation of DAppNode and Ethernode style “plug and play” full-node boxes in consumer homes. These boxes will lead to a consistent, passive income by providing important utility for decentralized networks.

We saw the first boom in data center growth for decentralized networks in bitcoin mining. Throughout the world, entrepreneurs sought out the cheapest places to mine through cheap electricity. We are on the precipice of a second boom, but through Proof of Stake networks and generalized mining crypto-economic designs. An entire industry of experts specializing in decentralized infrastructure to deploy capital for investors and high throughput PoS networks is being funded. While many may run on AWS, Azure or Google Cloud today, cost savings will lead to more local data centers being built that aren’t related to the major providers.

With bitcoin, the costs of coordinating a global, censorship-resistant cryptocurrency are high. Proof of Stake aims to bring those global costs of coordination significantly lower. Further, generalized mining brings even more efficiencies by ensuring that block rewards are directly tied to work being done. We are seeing blockchains that prioritize light clients like Ava and Polkadot. This trend of global, decreasing coordination costs opens up opportunities for anyone running nodes to participate in consensus and earn.

Incumbents like AWS will be forced to participate and compete in cryptonetworks that deploy power tokens or face the risk of losing direct connections to their customers, over time. As more of these networks mature with valid economic models, individuals will have more reasons to run these servers in their homes. This will continue fueling the boom in data center creation and utilization as the arms race of providing more computation for these networks mirrors that of Bitcoin mining.This increased investment in public, open source infrastructure through cryptonetworks will continue chipping away at the dominance of today’s providers, reducing them to commodities.

The ability to scale, in a decentralized fashion, will only improve over time. AWS spends millions of dollars a year in R&D for specific servers that reach their business goals. This new economic paradigm of cryptonetworks, while not as efficient as centralized networks, will incentivize the same research for open source hardware to unlock benefits near impossible for a private monopoly.

These developments provide a path to challenge not just AWS and Azure as infrastructure monopolies, but potentially any industry that benefits from economies of scale. The economic experimentation in the blockchain industry is exponential, and cryptonetworks are a new way to coordination humans and global investments for the public good. While existing monopolies have many decades of a head start, the investment in physical open source infrastructure will lower margins and ensure that the end user benefits from the success of these public goods through the cryptocurrencies needed to access them.

P.S to learn more about Pocket Networks approach to decentralized infrastructure check out our recent post regarding our latest release of Pocket Core.