Why are Smart Contract Platforms Important?

Note: Data in this section last updated August 26th, 2022

On their own, smart contract platforms are actually terrible computer networks. They are very slow, require more resources than centralized systems and don’t have customer support.

But they do one thing well that no other network in existence can do – smart contract platforms can operate without being controlled by a centralized third-party, and this is extremely important.

The Problems with Centralized Economies

Our economy is currently dominated by centralized institutions:

• Central banks, such as the The Federal Reserve have sole control over the money supply

• Banks, brokers and exchanges regulate the financial system and control the flow of capital

• National and local governments are the only entities with the power to create and enforce laws

• Companies such as Apple, Amazon, AT&T, Comcast, Disney, Electronic Arts, Facebook, Google, Netflix, Spotify and Sony dominate entertainment, with over 60% market share in a variety of verticals such as publishing, music, gaming and video

• Amazon, Microsoft, Google and Alibaba rule the internet and control over 67% of cloud infrastructure

While these institutions have historically benefited us in several ways, they also cause several problems including:

• Third-Party Ownership of Assets: In our current financial system, you don’t really hold your funds – the banks do. This means that they can freeze and even seize your assets at will (while this may seem far-fetched, consider that in 2013, the Government of Cyprus seized 47.5% of all bank accounts over €100,000 to bail-out its failing banking system)

• Censorship: Our economy is ripe with censorship. Social media platforms such as Facebook and Twitter can deny you access and / or censor your content and ISPs can choose to remove websites that they disagree with. In one of the worst examples of a centralized entity abusing its power, Instagram co-opted a woman’s “metaverse” username for themselves (Instagram’s parent company, Facebook, had recently changed its name to Meta), and only returned it after the press got involved

• No Privacy: Banks must collect detailed personal information to adhere to KYC, AML and CFT regulations and require credit scores for borrowing. The internet giants constantly collect data on our income, behavior, interests, location and online activities. To make matters worse, this data is often sold to third parties

• Expensive and Inefficient: Companies such as Netflix and Spotify take the majority of profits from artists. For example, at the turn of the century, a musician could expect to earn over $1.20 for each CD she sold (and that is with the 47% cut taken by her label). But entrance of digital distributors such as Spotify has now plunged this share to between $0.006 and $0.0084 per stream

• Central Point of Failure: Centralized services are vulnerable to hacks and denial or service attacks, and also vulnerable to government intervention, regulation or outright banning. This could prove to be a major risk for the “gig economy” as an interruption in service could cost millions of lost wages and a government ban could eliminate millions of jobs

The Benefits of Decentralized Economies

Smart contract platforms such as Ethereum offer the promise of a decentralized economy – one where users can deal directly with one another without needing middlemen.

This can yield a host of benefits, including:

• User Ownership of Assets: In a decentralized economy, users control their assets. As such, there’s no one to seize their funds, limit withdrawls or tell them where they can and can’t spend their money. This is a very important development and forms the basis of DeFi, which we cover in depth in the article: LINK

• Censorship-Resistant: Blockchains are permissionless, which means that anyone with an internet connection can use them. You can’t be denied based access based on income, geography, gender, etc… You also can’t be censored – since there is no central authority that controls blockchains, you can post anything you want at any time you want

• Privacy: In the decentralized economy, users can remain completely anonymous. No personal data is required to make payments, receive money or access any website or service

• Cheap and Efficient: Innovations such as NFTs will allow artists to deal directly with their consumers, cutting out middlemen like Netflix and Spotify and greatly increasing profits. For example, an artist could create an NFT of a song, sell that to fans and write a contract that distributes the profits from song streaming directly to the owners of the NFT

• No Central Point of Failure: Because blockchains are hosted across multiple computers around the world, service disruptions are very unlikely and important data is backed up multiple times. In addition, because there is no central authority or access point, governments will not be able to shut down sites

The above benefits aren’t just theoretical, as we have already seen them play out in several industries. As of August 2022, there’s nearly $60 billion flowing through the DeFi space (with a peak of almost $200 billion in 2021), NFT sales are approaching $40 billion, and there has been a flight of talent from Silicon Valley to Web 3 companies.

Smart Contract Platforms Will Lead the Next Wave of Disruption

The concept of “disruption” is overused and often misunderstood — many writers, consultants and researchers use the word to refer to any situation where a new player enters a market and starts to displace incumbents.

But the academic theory is much more nuanced — disruptive technology isn’t necessarily “better” (in fact, it’s often worse), it’s just so fundamentally different from the status quo that it can’t be replicated by incumbents or competitors. This gives it the ability to gain a foothold in an industry and, as technology improves, gradually eviscerate the market.

For a real-world example, we need to look no further than AT&T — one of the original disruptors.

In the late 1800s, Western Union dominated communications with a huge infrastructure of network cables and a massive consumer base. Although early telephones were largely inferior to the telegraph because their signals only traveled a few miles, the technology was much cheaper for short-distance communication and was therefore rapidly adopted by local businesses.

In a textbook case of disruption theory, Western Union couldn’t react because serving these local businesses would be unprofitable. This gave AT&T the niche they needed — as telephone technology gradually improved they were able to continue to take share from Western Union, eventually rendering the incumbent all but obsolete.

I believe that smart contract platforms will follow the same path of disruption. Although they currently have several problems, their ability to free us from the problems of centralized control will continue to carve out an important niche in the economy. This foothold will create room for further technological innovation, allowing entrepreneurs to improve the technology and create a system that is infinitely better than the one we have in place today and change our lives in ways we can’t even imagine.