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Preparing for the Protocol Economy

Another wave of digital transformation appears on the horizon. Maturing and developing technologies such as machine learning, blockchain, edge computing, and virtual reality are driving this wave. We can already hear it growling through the buzz about NFTs, Web3, and the Metaverse. Sure, the hype is real, but also filled with lots of hot air. Still, one should not underestimate the underlying systematic changes brought about by this wave.

The digital transformation of the past decade has given rise to a new form of economic activity: the platform. Businesses like Apple, Google, and Amazon have established platforms to cater to consumers’ needs and created what is known as a ‘platform economy’.

Alongside the Web3 paradigm, another type of economy arises. An economic system where individuals or groups can participate in economic activities and earn rewards based on their contributions: the protocol economy.

In the protocol economy, business (solutions) can be seen as a bundle of autonomous building blocks. Each building block is to be regarded as a microbusiness that creates specific value. Building blocks interconnect through open protocols that include value delivery, payment, administration, et cetera. They can be run from within the organization or from the external business ecosystem. When combined, building blocks drive exponential value creation in an ecosystem.

Often, the protocol economy is positioned as the hacker movement, which aims to counter monopolies in industries, like how the Bitcoin-mining network is challenging the financial world. This, however, does not do justice to the broader transformative power of this model.

Signals that show the Protocol Economy is here

There are several technologies currently maturing that form the foundation of the protocol economy. First of all, today, an interoperable digital identity is already available for all businesses and individuals (in theory). From national mobility cards to European eIDAS. This means that value can be exchanged between all kinds of parties, whether financial (e.g., banking), physical (e.g., goods), or IP-based (e.g., art).

Secondly, as Web3 technology is becoming a commodity, it is possible to share the benefits of value creation through a decentralized ecosystem. Technologies such as blockchain and smart contracts allow the bundling of building blocks (services and data) into a new business without a controlling entity (as opposed to the previous platform owner).

Thirdly, Digital Twinning boosts the integration of the physical and digital worlds. Combined with the technologies above, it allows real-world objects to have transactions with other real-world objects. Imagine your central heating at home negotiating a barter deal with your neighbor’s electric car.

Fourthly, the adoption of cloud computing and the trend toward composable architectures allow developers to create reusable components to build applications more quickly and easily. This design pattern has been gaining popularity in recent years as businesses strive to reduce the time needed to develop and deploy new applications.

Finally, there is the societal perspective. We are already at the point where societal pressure on privacy is being transposed into European legislation. It won’t be long before this also applies to topics like ethical Artificial Intelligence (AI) and sustainability.

On top of that, the public is increasingly aware that, in the digital world, most value is created through monopolizing ownership of data. And that this has resulted in a power imbalance among platform companies across industries, resulting in increased social resistance.

The protocol economy offers solutions to combine privacy, (data) ownership, and value creation and can thus, (in theory) tackle societal challenges.

The opportunity the Protocol Economy provides

As described earlier, a business can be seen as a bundle of autonomous building blocks. Building blocks that are operated from within the company or purchased from third parties.

Consider both generic (micro-)SaaS services, such as authentication, invoicing, parcel delivery, and so on, as well as services provided by highly specialized businesses.

This allows a company to benefit from the economy of scale right from the start, as the cost of most building blocks is based on usage (OPEX instead of CAPEX). Since the interconnection of blocks is based on digital standards and protocols, it can be highly automated, improving efficiency. Standards and protocols also lower the cost of value chain coordination.

Furthermore, it is the combination of blocks that provides value for the business’ clients, but not all blocks add equal value. In the protocol economy, a company can focus on the (custom) development of building blocks that allow it to add the most value. Other blocks are integrated from other companies in its ecosystem. Web3 elements allow a decentralized structure of value creation in that ecosystem. When combined, building blocks drive exponential value creation. From ‘winner takes it all’ to ‘winner shares it all’.

What we’ve seen

To illustrate the above, imagine an airport that promises to reimburse ticket costs when travelers are unable to fly because of waiting time at the security desk. The traditional reimbursement process is rather cumbersome. The traveler must provide all kinds of data (copy of identity card, boarding passes, proof of attendance), not to mention the control and enforcement activities that the airport has to carry out.

In the protocol economy, the following digital building blocks would be used to compose this process:

  1. digital identity service that protects the identity of the traveler (think of DigiD).
  2. ticket booking service that links the traveler to a flight (think of Booking.com).
  3. location tracker service that confirms the traveler’s presence in the airport security queue at that time (much like Apple’s ‘Find my’ geolocation service).
  4. A so-called public data oracle that provides the time an airplane leaves the gate (think of FlightRadar24).
  5. A payment service that handles reimbursement payments (like Adyen.com).
  6. Distributed Ledger Platform (like Hyperledger.org) that holds the smart contract on which the reimbursement agreement is registered, verified, and (if true) executed.

Theoretically, only the smart contract needs to be coded to implement this payback promise. All other building blocks involved can be fulfilled by existing, independent digital services, forming a trusted digital ecosystem.

Once implemented, the reimbursement service can run autonomously, without human intervention. The contract will terminate or expire once the airplane leaves the gate (regardless of whether the  traveler is on the flight or not).

Also note that, to process a traveler’s reimbursement, the collaborating building blocks do not need to exchange private data. Mutual trust in the ecosystem is the ‘only’ requirement (together with a bunch of clever Web3 experts).

Advice How to get started

Today:  Start a dialogue

As always, keep cool and separate trend from hype. Start a dialogue on how the upcoming protocol economy could affect your business. Look for examples that emerge in your industry. What standards and APIs are being developed? Map the (digital) ecosystem your company is part of and identify business models where value concentrates.

Tomorrow: Create a vision on product, architecture and collaboration

A company without a vision is a company without a future. So:

  • Outline a product vision that lets you take advantage of the protocol economy. Analyze the modularity of your business; can you identify autonomous building blocks? Can these blocks be unbundled and rebundled? How do they relate to a distributed (Web3) ecosystem of blocks?
  • Outline an architecture vision that allows you to compose your business service(s) from various autonomous building blocks. Can you decompose your IT infrastructure? Which external (micro) SaaS service options are available to help you build your business? What technology stack do you need to integrate those blocks?
  • Outline a vision for collaboration for your future (digital) ecosystem. Which organizations are crucial in your future (digital) ecosystem? What level of trust do you need to make it work?

Day after tomorrow:  Start exploring by doing

The transition towards the protocol economy is not straightforward, nor is it an instant revolution. So, start exploring by doing. Select a (part of a) business service and redesign it from a protocol economy perspective. Implement it step by step.