Decentralised platforms are moving beyond their cryptocurrency roots to offer an alternative to hierarchical management in a range of industries. New research shows how the decentralised coordination that underpins these platforms can provide organisations with novel design tools to achieve critical early-stage growth
At their core, most conventional organisations are run in a similar way: a managerial hierarchy provides instructions, resources and rewards to staff, who carry out tasks. However, the rise of cryptocurrencies over the past decade has brought into focus an alternative organisational form: the decentralised platform.
Decentralised platforms work without managers and without employees bound by corporate contracts, and yet have seen their earliest exponent Bitcoin (followed by programmable smart contract implementations such as Ethereum) achieve an unprecedented market capitalisation, with millions of users and thousands of core contributors.
Understanding how these platforms develop and grow offers important lessons for businesses, particularly as Web 3 is gaining traction by enabling users to interact directly with decentralised platform infrastructures. Users will be able to own and exchange personal data, critical information and financial assets directly, without intermediaries. However, previous research on how platforms operate has been largely limited to looking at their centralised counterparts sponsored and operated by corporations and has focused on mature examples. Rarely have insights been offered into how decentralised platforms initially grow after launching.
Our research on the coordination and early-stage growth of decentralised platforms fills this gap, exploring how decentralised platforms coordinate their activities to achieve growth after launching. Findings point to three key coordination mechanisms that underpin this novel organisation design:
- Decentralised algorithmic coordination
- Decentralised social coordination
- Decentralised goal coordination
This research explores what they mean, the implications they have for businesses, and how they can be linked in different configurations to support early-stage platform growth.
Decentralised algorithmic coordination
Decentralised algorithmic coordination is about encoding organisational rules, routines and processes in software protocols to ensure stability and predictability for platform participants. In traditional organisations, this is achieved using time zones, fixed working hours and physical locations, allowing coordinated completion of tasks. For decentralised platforms, this is less simple.
For example, network latency means messages sent simultaneously may arrive at different times, creating uncertainty in information flow. Meanwhile, the emergent nature of the network – with its ever-changing participant landscape – makes it difficult to apportion tasks accurately when information processing can be arbitrarily extended.
Rarely have insights been offered on how decentralised platforms initially grow after launching
For decentralised platforms, blockchain algorithms can solve this problem. The blockchain algorithm standardises and automates patterns of interaction between participants to enable coordination. This includes, for example, rules that specify the processes by which data should be verified and validated, and the speed at which information should be uploaded – despite the changing composition of participants. Algorithmic coordination protects against the instability created by members joining and leaving, which would otherwise alter the available computing power and disrupt the platform’s steady pace of information processing.
In addition, algorithmic coordination specifies how tasks are divided and how work is rewarded. That is, algorithmic coordination defines how participants are selected to fill the blockchain with transaction data and how they get paid. This is effectively done through automated voting, which can be determined by proof-of-work (where a participant’s voting power is determined by how much computing power they contribute) or proof-of-stake (where voting power is connected to how much of the relevant cryptocurrency a participant owns).
In this way, decentralised algorithmic coordination enabled by blockchain technology makes it possible for platforms to coordinate without managerial orchestration while ensuring the stability and accountability of transactions.
Decentralised social coordination
On the other hand, participants need to make collective decisions on which code to implement and, consequently, to upgrade. In the absence of a central authority, decentralised social coordination creates a sense of common understanding between platform participants. Social coordination affects two main parties: developers (participants who collaborate on making changes to the platform’s rules) and validators (participants who volunteer to monitor and enforce the platform’s rules).
Developers in a decentralised system coordinate through informal channels such as forums and social media, and formal documents such as improvement proposals, in which they propose new features. In both cases, social coordination fosters diversity of conversation topics explored (without any centralised management) that determines the extent of decentralisation. Coordinated development advances when new ideas are translated into code in the platform’s shared repository.
Validators, meanwhile, are concerned with daily operations of relaying information among platform participants to align their shared understanding of who is transacting what and with whom. They volunteer resources like electricity and in exchange they earn rewards that are determined by algorithm, rather than by a human manager. The more validators a platform has, the greater its degree of decentralisation. Therefore, decentralised social coordination pertains to the development and implementation of the platform rules.
Decentralised goal coordination
When it comes to goal setting, developers and validators can be coordinated through a foundation, which implies reduced decentralisation. Participants in decentralised platforms typically have diverse interests and differ on how their platforms’ goals should be defined and coordinated over time. The decentralised option is to have participants interact informally until they reach agreement. However, this is very time consuming, so some platforms choose to have a foundation as an external entity to guide the development of goals.
Foundations have limited influence in the platform’s day-to-day work, but provide a means of communication and information for newcomers, educate users, and reward developers and validators. The latter can be done by establishing the foundation as a nonprofit, able to receive donations and provide grants (similar to those used in academia). When these rewards incentivise particular projects, foundations effectively narrow the breadth of a platform’s goals. In other words, they offer a way to coordinate goals through a degree of centralisation.
These three mechanisms – algorithmic, social and goal coordination – work together to help decentralised platforms achieve early-stage growth. Interestingly, though, results suggest that no existing platform has done this by strongly decentralising all three factors. Rather, there are two particular configurations associated with early-stage growth, driven either by core contributors or by foundations.
As the name suggests, "core contributor-driven algorithmic growth" relies on strongly decentralised algorithmic coordination, in combination with more centralised social coordination of participants through small-scale communities. This allows for information to be processed and allocated without much influence from developers and validators, who focus instead on platform development and daily operations. It also means there is less scope for disagreement between participants, reducing the need for a foundation and allowing focused groups to drive growth by coordinating participants at pace.
The second configuration is called "vision-driven algorithmic growth". This relies on larger, more decentralised groups of developers and validators, with a foundation in place to provide an overall vision. The foundation can also help to arbitrate between disagreeing groups of platform participants. Growth is driven by the foundation incentivising development projects and rewarding consistency.
What are the alternative structures to centralised platforms and corporations?
Through these two growth configurations, this research shows that platforms can operate and grow without relying on a platform owner as the orchestrator. Some degree of centralisation appears to be associated with early-stage growth, as opposed to complete decentralisation, but it’s clear that the conditions now exist for organisations to break free of what Alfred Chandler called "the visible hand of the manager".
Decentralised digital platforms are already making this a reality. Decentralised autonomous organisation platforms such as MakerDAO and Aragon, for example, are leveraging blockchain-enabled decentralised architecture to coordinate voting and governance. As of April 2022, there were 5,000 active DAOs in operation, and this number is only likely to grow rapidly in the coming years.
Other decentralised applications include decentralised finance, non-fungible tokens (NFTs) and blockchain gaming platforms. These rely on decentralised coordination to enable users to directly interact with the platform and with peers through digitally owning and exchanging personal data and assets. This offers a plausible form of coordination as an alternative or a complement to the centralised corporate model that has dominated the business world for decades.
This article draws on findings from "The Future of the Web? The Coordination and Early-stage Growth of Decentralized Platforms" by Ying-Ying Hsieh (Imperial College London) and Jean-Philippe Vergne (UCL School of Management).