Decentralization megatrend: What you can learn from it for your industry.

Trends are always very popular. They help decision-makers to become more confident in their decisions. And they help advisors to create consensus and yes, they provide small talk beyond the weather at all kinds of aperitifs. There are different trends. Those that are obvious (“Digital is becoming increasingly important”), those that are mainly created for advertising reasons (“10 trends that will help your business break through in 2016”) and there are the actual drivers.

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How, decentralization?

I believe that one of the biggest and most significant consequences of digitalization is the possibility of decentralizing technology, society and the economy. Sounds abstract, I know.

To understand why decentralization is so important today, we need to understand why centralization came about in the first place over the last few centuries.

The main driver of centralization is the pooling of strengths. If 10 people join forces to accomplish something, they can achieve more than if everyone fights alone. This is how we have been organizing ourselves for centuries and have created these huge structures in politics and business that pool strengths and therefore power.

Negative effects of centralization

However, the more people join forces, the more negative effects there are. For example, an enormous coordination effort is required in order to exploit the advantages of pooling. This effort can sometimes exceed the positive effects of centralization. A good example of such systems are very centrally organized states. The bureaucracy is gigantic, not primarily because people like it that way, but because there was no other way with the existing resources. Anyone who has ever had a business in France knows what I’m talking about.

Another huge disadvantage is the vulnerability of such a centralized system. All the coordination threads come together at comparatively few points. If these points fall, the entire system is suddenly damaged or in existential danger. A good example of such a system is the power supply or the financial system.

Centralized systems also have cultural disadvantages. Think of large corporations that have to be managed with an ultra-tight hierarchy and in the process create a culture that no longer serves the company at all. You know the examples from your own experience.

We also see the same effects politically. For example, in the party economy. Originally intended to coordinate interests within democracy, they have now become real “democracy inhibitors”. Instead of promoting democratically organized consensus, they harm the country through their undifferentiated culture of struggle. The question has long since ceased to be: how can we improve the situation in a country? This is because the parties’ activities are increasingly focused on the conflict between the parties. A frontline war instead of intensive solution workshops, if you like.

There was no other way.

It is not as if the actors were unaware of the disadvantages of centralization. And if you ask yourself why centralization has been promoted over the last few centuries, the answer is simple: there was no other way. Otherwise the incredible achievements would not have been possible. The advantages outweighed the disadvantages. And for quite a long time, people were not even aware of the disadvantages.

New technologies create completely new possibilities

This is where the new technologies, including digital to a large extent of course, come in and will fundamentally change the rules of the game over the next few years.

This is because the use of technology will make it increasingly possible to benefit from the advantages of centralization and bundling without the disadvantages.

And in certain areas, the bundling of strengths is only possible to this extent through the use of technology.

I think Facebook is a good example of this. You may think what you like about it. However, it is indisputable that Facebook promotes and facilitates the exchange of ideas between people like nothing else in the world. Which thoughts you consider relevant, beneficial or dangerous or not is secondary, subjective and therefore up to you.

Objectively speaking, every thought is equally important: the funny cat video, a serious discourse on values, an outpouring from an AfD protagonist or whatever. The key thing is that people communicate with each other. It creates a sense and awareness of community, not to be confused with unity. Globally and historically, this is an enormous advantage that we are currently building. Globally, of course.

New technologies make it possible to solve existing problems

I can imagine that you find the Facebook example far-fetched and theoretical. Fair enough.

Energy industry

So let’s look at something more concrete. For example, the electricity supply. A centrally organized electricity supply has many disadvantages. For example, a high allocation effort, a high loss of supply and a relatively high security risk. Three “new” technologies that can be used to completely reorganize the electricity supply are now being introduced to this type of construct.

These are greatly improved battery technology, more powerful and much cheaper and innovative photovoltaic elements and smart grids. This means that a decentralized power supply can be implemented extremely cost-effectively over the long term. Quite simply by equipping every house with photovoltaics, with the batteries temporarily storing this energy and making it available to the grid.

You have to imagine it as a huge sponge that is fed, consumed and managed by an intelligent network of billions of energy producers and consumers. It’s a system that works in much the same way as a distributed data storage system. Decentralized energy storage and generation is the key to a highly efficient energy system that will deliver energy at zero cost over the long term.

Finance

In terms of the financial system, decentralization means splitting the national currencies into private currencies. The reason why the various means of exchange were each consolidated into one currency is that a multi-currency system was not tradable with the technology of the time. The effort required to negotiate the various exchange rates, for example, was too great.

As money also largely serves an informational purpose, namely the indication of comparable prices, the introduction of national currencies was an obvious step. Subsequently, money also became an instrument to enforce national and/or economic interests. However, the system is highly vulnerable, as we can see in various countries.

On the one hand, this manifests itself in the fact that entire countries can fundamentally lose in these monetary policy disputes. On the other hand, the concentration of the centralized monetary system on just a few players makes these players“systemically relevant“.

In simple terms, this means that if one link in the chain goes down, it pulls the whole chain down. If the monetary system is decentralized, this could mean that every company and every private individual could issue their own “currency”. After all, a coin is nothing more than a bond that can be dipped.

The value of this coin is based on the fact that the creditor trusts that the party issuing the bond will be able to service the debt. The greater the trust, the more valuable the bond is. If there were thousands of such private currencies, losses of trust in individual players would be cushioned by the entire system.

Each individual link in the chain can go down without taking the entire system with it. The technology that makes this possible is called blockchain. A blockchain-based technology makes these virtual currencies possible and can completely transform the financial system as we know it today.

In my opinion, however, there is a completely different reason why this will actually happen in the long term: private currencies using blockchain technology will simply reduce transaction costs to such an extent that all previous methods seem nonsensical. An index would simply take over the value indication function in such a model. We could use it to price goods and services. I don’t know of a fairer and more stable method.

Politics

The same effect also applies to political processes. If we create the infrastructure that allows voters to give their opinion on increasingly detailed issues – in Switzerland this is called voting – democracy will become more direct, faster, more transparent and less susceptible to external control and abuse. Parties will become increasingly obsolete in this context. I have already written about this in detail here.

What does this mean for your business?

I believe there are opportunities in every industry to identify such decentralization trends and take advantage of them. Something that almost every company can do is to “decentralize” itself by changing the company organization to a self-managed model. Instead of organizing the company centrally, i.e. top-down, small teams should be able to make their own decisions and organize themselves within guidelines that are binding for the entire company. I have already written about this in detail here. And: Yes, it also works with more than 250 employees.

Away from the beak-of-the-world thinking

When it comes to new business models, recognizing them requires a little more. I often find that companies find it difficult to let go of the idea that they are the center of the business model. Rather, decentralized ecosystems and models are about taking on a role that supports the ecosystem at a certain point.

It may be a little easier to analyze which centralized models can be solved more decentrally with new technology and to offer appropriate tools in this area. Many start-ups are moving in precisely this direction. Without having a specific goal in mind.

I think the next few years will show that the new technology will enable more decentralized solutions. Decentralization also means making full use of network effects. And this is ultimately what all decentralization is based on.