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This article was published on October 20, 2017

How the blockchain economy aligns incentives and reduces costs

How the blockchain economy aligns incentives and reduces costs
Ben Dickson
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Ben Dickson

Ben Dickson is the founder of TechTalks. He writes regularly about business, technology and politics. Follow him on Twitter and Facebook Ben Dickson is the founder of TechTalks. He writes regularly about business, technology and politics. Follow him on Twitter and Facebook

The economy that supports the internet is one of linked costs. Take Amazon, for instance. The world’s biggest cloud provider spends huge amounts of money to maintain its data centers, costs it passes on to its customers, the Netflixes, Ubers, Upworks and other small and large websites and services. Those services in turn pass on those costs further down the chain to make their business sustainable and profitable.

Netflix imposes subscription rates on users and takes cuts from the revenues of content producers. Upwork and Uber take up to 20% in commission from freelancers and drivers. Other services and websites bombard their users with intrusive ads to cover their costs.

In this model, interests stand in divergence and conflict. The entities that comprise the online economy stand to gain from making unfair use of each other’s services. Publishers and content distributors game social media algorithms and create clickbait (and sometimes fake) content to maximize traffic and ad impressions. Consumers of online content resort to piracy to avoid paying for services. Users install ad blockers to get rid of noisome ads. Freelancers engage in side deals with employers to avoid commission costs.

Is there any way to rearrange the online economy to promote collaboration and fair use of each other’s platforms and services?

Blockchain, the technology that underlies cryptocurrencies, provides a solution to align the interests of all parties involved. In blockchain, a distributed network of stakeholders replace centralized authorities and gatekeepers that previously owned services. Providers and users mutually own and maintain services that run on blockchain. In return, they share the profits that the services generate.

ico, blockchain, cryptocurrency

Many companies are exploring this concept to create platforms where fair use is in the interests of everyone. An example is Flixxo, a decentralized video distribution platform that runs on blockchain. Users need to acquire Flixx tokens, Flixxo’s proprietary cryptocurrency, to view video content on the platform. But while they can always purchase Flixx tokens with money, they also have other options.

This includes taking part in the platform’s storage network. Flixxo does not store its video content on centralized servers. Instead it relies on the free disk space in the computers of its users. Users earn Flixx tokens by sharing their storage resources with the network to host videos. The platform uses the BitTorrent protocol to store and share content between users, and a system of peer-to-peer payments powered by blockchain.

There’s a clear incentive to sharing and monetizing content on the blockchain. When video hosted on a user’s computer is consumed, the user directly earns a share of the revenue in cryptocurrency. This is an example of how service providers and users can both benefit from the fair use of a platform.

Flixxo also incorporates a system of ads that puts users in control. By opting to view ads, users will be rewarded with Flixx tokens from advertisers. This is beneficial to users, who will be compensated for their attention, and for advertisers, who can rest assured that the money they spend on ads won’t go down the drain by being blocked or ignored by annoyed users.

Papyrus is another blockchain company that aims to change digital advertising, a landscape that is plagued with endemic animosity between involved parties. Papyrus is using smart contracts, bits of code that run on the blockchain, to create an ecosystem for fair exchange between users, publishers and advertisers.

How the Papyrus system works

The Papyrus platform is designed for dApps, or distributed apps, a new category of applications that use blockchain to enable users to preserve their privacy and ownership of data. Blockchain-based advertising enables users to set specific policies on what ads they see and what information they share with the system. In contrast to traditional ad-tech, which hides all details and data collection policies behind a walled garden centralized system, blockchain-based advertising is totally transparent to the users. Users see less intrusive ads and receive cryptocurrency as compensation for sharing their data and interacting with the ads.

There are two general benefits to replacing the opaque brokers that run current digital advertising platforms with a blockchain-powered system. First, it removes the intermediary costs, which means advertisers spend less and publishers earn more. Second, everything is transparently registered on the blockchain, which means both publishers and advertisers have a clear view of how many ads are displayed and how dividends are doled out.

Publishers also benefit by immediately receiving payments instead of waiting out long periods enforced by ad platforms. And advertisers will enjoy greater conversion rates because ads are only displayed to users who have opted to see them.

Similar ideas are being explored in other domains. For instance, in the music and entertainment industry, blockchain enables artists and their fans to directly interact on blockchain and create an economy where both can benefit without being constrained by intermediaries. This will help reduce piracy and help artists receive their real due for their contribution to creating works of art.

As technology expert Kyle Samani explains in this Forbes piece about cryptographically bound peer-to-peer networks (the name he uses for blockchain), “We finally have a way to coordinate large numbers of disparate parties trustlessly across the globe in real time through the use of economic incentives.” Samani further explains how the structure of blockchain will reshape the economy and challenge the centralized structure of capitalism.

As these and more examples show, aligning interests results in a much more productive economy, and one that encourages collaboration instead of competition and dishonesty. While current centralized systems have failed to create such an environment, blockchain might prove to be the key to fulfill this goal.