Traditional networks are based on physical connections. Because of this, their growth is limited by resource requirements associated with expanding physical infrastructure. Protocol networks are software-based, which means that their growth is essentially constrained only by negative network effects, much of which are rooted in developer attempts to extract value from the network.
As we’ve seen, this extraction imperative tends to accelerate as network growth tapers off, which creates a negative feedback loop: As more participants leave a network due to feelings of exploitation, the developer is moved to intensify value extraction to preserve its revenues. Barring a major change in circumstances, the end result can be the slow death of the network.
Economic Protocol Networks (EPNs) are more insulated from this effect simply because they bind the concept of value directly into the network protocol itself. EPNs allow for the fair, transparent and in many cases automated resolution of transactions that require the exchange of value. And in a commercial Internet — where time, effort, attention and data all have value — that means virtually every transaction between users and businesses, and even between users as peers.
EPNs point to the future of networks — one in which there’s no distinction between network operators and participants, and in which rather than the former being focused on extracting value from the latter, the two parties will be aligned to do what is best for the network overall.
The key innovations that enable this alignment are blockchain protocols and tokens, which work together to align the incentives of network operators and participants and generate superior network effects compared to legacy alternatives.
The terms “token” and “cryptocurrency” are often used interchangeably. But in actuality, while “native” payment tokens like BTC and ETH are defined at the protocol level, other types of tokens are built on top of a protocol, defined by code that identifies what the token represents — a physical good, a digital good, a security, a collectible, a royalty, a reward, a ticket, a right to vote — how it can be used and how it can be transacted. Often this code is embedded in “smart contracts,” which are programs that self-activate based on preset terms or conditions being met.
The most common implementation of the smart contract is ERC-20, a technical standard used to generate tokens on the Ethereum Network. For example, BAT — the Basic Attention Token — is an ERC-20 token used with the Brave web browser, which is designed to provide a fair and automated way to reward engagement with digital advertising. As Brave users consume published content and are exposed to ads, they earn BATs, and so do the publishers. Advertisers get a precise and efficient means of tracking who’s seeing their ads and for how long. And users get paid for their attention while supporting the publishers whose content they enjoy.
Economic Protocol Networks are designed to encourage these win-win-win situations, where all parties are stakeholders, and activity is incentivized in every direction.
Want to learn more about the differences between EPNs and traditional networks? Read our in-depth article here.