Historically, building a successful technology product has required an entrepreneur with an idea to form a corporate entity composed of a small group of owners and decision makers. The decision maker is the CEO and the CEO is generally governed by a board of directors and a small group of shareholders. Ownership of the traditional entity is accessible to a limited group of people (founders, employees, institutional investors and high net worth individual investors).
Bitcoin fundamentally changed the traditional organizational model in two ways: it distributed decision-making power so that there was no decision-maker with absolute power, and it opened up ownership so that anyone who wanted to be an owner could be an owner (by mining BTC or buying BTC). While the merits of the first change are still subject to debate (as evidenced by the current Classic vs. Core conflict), opening up ownership to anyone is undoubtedly a big reason that Bitcoin has been so successful. I like to call it the network ownership effect and it is Bitcoin’s secret weapon.
The Network Ownership Effect
A network ownership effect is present when an individual’s ownership of a product becomes more valuable when more people use the product. As more users use Bitcoin, the network becomes more valuable for all participants. The fact that anyone in the world can easily become an owner of Bitcoin and benefit financially from its success has allowed it to build an extremely passionate group of users who double as unpaid employees (developers, marketers, sales reps, etc).
The network effect is a well-known phenomenon in Internet businesses. Facebook is the most famous example — when more people join Facebook, it becomes more useful to users. The difference between networks effects for Facebook and Bitcoin is that early Facebook users did not have financial ownership and the value of their ownership did not increase as adoption grew. Early Bitcoin users do have financial ownership, and the value of their ownership and the usefulness of the product both increase as adoption grows. This allows Bitcoin to compete with companies that have thousands of employees.
Smart Contract Enabled DAOs May Bring Network Ownership Effects to the Mainstream
A decentralized autonomous organization (DAO) is an organization that has no centralized governance structure or restrictions on ownership. Bitcoin is the first successful DAO, but in the future DAOs built using Ethereum smart contracts will make it easy for anyone to launch a DAO. Consumers will prefer funding DAOs over Kickstarter and Indiegogo projects because they can benefit financially from the projects they believe in. Entrepreneurs will prefer DAOs because it will be the best way to build distributed teams from scratch and gain passionate users and workers at no cost.
It’s still early days for DAOs (and there are many reasons to suggest they will never work) but this is an important phenomenon to watch. The Slock.it
team is at the forefront of DAOs and I encourage you to check out their blog and Slack group if interested in learning more.