The five shifts of decentralization

The largest businesses today – Facebook, Google, Amazon, Apple, Airbnb, and others – aggregate entire markets of activity and scale through network effects. By aggregating demand and standardizing the mechanism of value exchange, these businesses achieve scale.

Market aggregation has emerged as the dominant mechanism to achieve scale in solving user problems and scaling business models. Scale in market aggregation – built through provisioning market infrastructure (e.g. Amazon, Airbnb) and/or information services (e.g. Google, Facebook) – enables these businesses to standardize market transactions and drive scale efficiencies across diverse and fragmented markets. Commoditizing and standardizing the value exchange between end market participants enables these firms to scale solutions across diverse contexts.

But the challenges inherent to this approach to problem solving are increasingly becoming evident as centralized platforms reveal the dark side of the platform economy.

We believe there is a better approach to leveraging the power of the platform economy: the building blocks approach.

In volume one of this thesis, we introduced the building blocks approach as a new paradigm for value creation.

In volume two, we explained how solution builders should think about adopting the building blocks approach.

In this third and final volume, we call out five key shifts that the platform economy will make as we move from centralized, extractive platforms to composable building blocks.

The problems with centralized platforms

The challenges posed by centralized platforms emerge because of

(1) loss of context through standardization and ‘central planning’ and

(2) concentration of power through centralization.

Second, this issue is further exacerbated in markets that require not merely transactions but context-rich interactions. Consider the market for primary education where students engage in learning experiences. Standardization of education delivery – a common approach followed by today’s EdTech platforms – sacrifices the context required to deliver an enriching experience to the student.

Standardization at scale leads to a second challenge. Platforms leverage their scale and consequent market power to increasingly commodify and disempower platform users. Consider ride-hailing and delivery applications where the service provider is fully commodified and perfectly substitutable by another service provider. Commodification is also observed in the competition for the Amazon Buy Box where sellers engage in competitive bidding, often eroding margins, to achieve the default position on the Buy Box. Further, platforms often lock-in their users through bait and switch tactics, employing policy changes after users (typically producers) have invested significant resources into building their business on the platform. Developers on Twitter and brands building fan following on Facebook Pages learnt this the hard way when the respective platforms changed their policies, impacting the market reach and available functionality for these businesses building on the platforms.

Here’s a quick summary of the dark side of centralized platforms:

For much of the past decade, we’ve accepted these issues as an acceptable trade-off to benefit from the improved user experience, convenience, transaction safeguards, and choice that digital platforms bring to fragmented and unorganized markets.

But the benefits of market efficiency cannot justify the disempowerment of the ecosystem, or the concentration of power and wealth with a few.

Since the late 2010s, and accelerated further through the pandemic, escalating regulatory action and increasing investments in blockchain-based decentralized solutions demonstrate the growing angst with the platform domination narrative.

We believe the building blocks approach provides a solution to this problem. 

It shifts the locus of solutioning away from a monopolistic and standardized solution to consumer problems and towards empowering the rest of the ecosystem to better solve for consumers.

In part one of this three-part series, we explained the idea of building blocks and how the value creation logic of a building blocks approach is fundamentally different from that of market aggregation.

As explained in part one:

Digital building blocks enable solution design at ecosystem scale. A digital building block leverages digital technologies, enabling greater flexibility in solution design. Digital building blocks are autonomous and hence perform specific tasks and functions independently. But by defining standards and specifications, these building blocks may be recombined towards solution design allowing interoperability between building blocks as well as interoperability between higher end solutions designed using these building blocks. Effectively, digital building blocks enable a ‘system of solutions’ that can plug-and-play across each other, enabling a vast and seemingly unconnected ecosystem of solution creators to more effectively coordinate their efforts towards solving large-scale problems through diverse context-rich solutions.