Blockchains Will Upend Economies of Scale

The
ability
to
achieve
economies
of
scale
is
the
foundation
of
much
of
the
world’s
modern
wealth.
In
the
original
Ford
Motor
factory
in
Detroit,
the
company
managed
to
gradually
take
the
time
required
to
assemble
a
model
T
from
12
hours
to
93
minutes.
The
process
of
endless
methodical
improvement
included
everything
from
just
speeding
up
the
production
to
offering
few
or
no
options
(“any
color
you
want,
as
long
as
it’s
black”)
to
finding
a
version
of
black
paint
that
would
dry
faster
than
others.

I
believe
we’re
at
the
beginning
of
a
new
cycle
of
disruption,
this
one
fueled
by
public
blockchains
and
tokenization
of
industrial
processes,
as
well
as
several
other
digital
processes
that
change
the
economics
of
doing
business.

Blockchains
use
standardization
from
tokenization,
and
the
flexibility
which
is
enabled
by
smart
contracts,
to
drive
efficiency
without
firms
needing
traditional
economies
of
scale
to
keep
costs
down.
The
results
will
be
immensely
disruptive
to
industries,
geographies,
and
supply
chains.

Now,
scale
isn’t
the
only
game
in
town.
Diseconomies
of
scale
also
exist.
Government
legislation
routinely
imposes
tougher
rules
and
targets
on
larger
companies.
Larger
companies
develop
bureaucracy.
The
same
systems
that
keep
companies
operating
with
consistency
globally
also
eliminate
local
discretion.

The
CIA
published
a
(since
declassified)
top-secret
manual
in
1944
on
how
to

sabotage
the
enemy.
It
contained
useful
guidance
like
“only
do
things
through
proper
channels,”
and
“haggle
over
precise
wording
of
communications.”
It
is,
sadly,
timeless
advice
on
how
to
succeed
in
many
large
offices.

Very
simply:
Bigger
is
not
endlessly
better.
There
is
a
range
of
scales
as
what
is
“optimal”
–
large
enough
to
take
advantage
of
economies,
but
not
so
large
as
to
be
strangled
in
red
tape.
The
bottom
end
of
this
range
is
known
as
“minimum
economic
scale”
and
it’s
important
because
the
smaller
it
is,
the
more
firms
and
more
competition
you
can
support
in
a
market.

Traditionally,
those
numbers
have
been
big,
and
the
bigger
the
required
scale
of
investment,
the
harder
it
is
for
firms
to
enter
and
stay
competitive.
Some
industries
are
still
headed
in
the
direction
of
ever
bigger
investments
and
capacity
required
to
achieve
scale.
Today,
building
a
new
state-of-the-art
semiconductor
facility
is
so
expensive
–
estimated
at
up
to
$30
billion
–
that
only
a
few
companies
are
left
in
the
business
where
there
were
once
dozens.

Directly
related
to
the
shortage
of
state-of-the-art
semiconductor
fabrication
capacity
is
the
shortage
of
chips
used
to
train
advanced
AI
models.
Many
of
these
orders
are
in
the
$1
billion
and
greater
range;
the
cost
per
AI
model
is
estimated
at
more
than
$50
million
for
the
most
advanced
ones.

Even
as
technology
changes
are
driving
some
industries
to
consolidate
because
entities
must
have
ever
bigger
scale
to
stay
competitive;
others
are
being
upended
in
the
other
direction.
3-D
printing
is
slowly
transforming
manufacturing
by
driving
down
scale
significantly.
Traditionally,
metal-stamping
presses
can
churn
out
a
large
number
of
parts
quickly
and
cheaply,
but
the
fixed
cost
is
high,
and
they
can
only
do
one
part
at
a
time.

3-D
printers,
on
the
other
hand,
can
make
a
huge
range
of
parts.
Each
printer
may
itself
be
slow,
but
you
can
just
add
more
printers.
Research
I
led
at
IBM
showed
that
3-D
printers
can
reduce
scale
requirements
in
some
industries
by
as
much
as
90%.

A
similar
story
is
happening
in
IT.
eCommerce
on
the
Web
enabled
even
the
smallest
companies
to
sell
worldwide.
API-enabled
services
make
it
possible
to
plug
in
everything
from
credit
card
payments
to
shipping
and
tracking
services.

So
far,
API-based
web-services
have
done
a
great
job
of
simplifying
relatively
standardized
systems
and
services.
The
next
big
shift
will
come
from
blockchains
enabling
much
more
complex
and
customizable
integrations
between
firms
using
tokenization
and
smart
contracts.

Systems
integration
–
linking
up
firms
so
they
can
work
in
tandem
–
is
quickly
becoming
the
key
to
maturing
businesses
and
growing
them.
No
company
makes
or
produces
everything
itself.
Instead,
nearly
every
business
is
a
game
of
coordination
where
firms
add
their
most
unique
and
useful
value
to
a
long
chain
of
partners.

Coordinating
all
those
partners
is
very
challenging.
For
example,
if
you
have
a
restriction
on
supply
for
a
critical
component,
there’s
no
point
in
ordering
more
of
other
components
as
they
will
just
sit
in
the
warehouse
unused.
Unfortunately,
there
are
few
supply
chains
that
are
able
to
master
this
complex
process.
Companies
routinely
try
to
advertise
and
sell
products
they
cannot
deliver
because
of
internal
coordination
challenges.

The
more
tightly
firms
are
bound
together
digitally,
the
better
this
coordination
process
works.
Representing
all
products
as
digital
tokens,
enabling
visibility
across
multiple
stops
in
a
supply
chain
would
be
transformational
for
most
companies.
The
world’s
biggest
companies
already
do
a
version
of
this
kind
of
deep
coordination
with
a
blend
of
customized
systems
and
human
management.
With
each
big
firm
trying
to
set
up
their
own
collaboration
hubs,
smaller
companies
find
it
costly
and
challenging
to
keep.

Blockchains
will
transform
this
dynamic
because,
instead
of
having
to
integrate
to
many
different
proprietary
systems,
businesses
can
create
standardized
models
of
their
products
as
digital
tokens
and
then
integrate
into
a
single
location
–
a
public
blockchain,
like
Ethereum.
With
the
addition
of
privacy
technology
on
top
of
Ethereum,
firms
can
manage
which
partners
see
their
information
and
prevent
competitors
or
intermediaries
from
exploiting
their
data.

In
each
industry,
where
the
minimum
scale
goes
down,
markets
can
support
more
competitors.
In
research
I
led
at
IBM,
we
found
that
as
3D
printing
matures,
it
can
enable
scale
reductions
of
up
to
90%
in
some
manufacturing
sectors.
This
means
up
to

10
times
more
companies
can
be
competitive
in
the
same
space.

Imagine
increasing
the
number
of
firms
that
can
be
viable
in
a
range
of
industries
using
blockchain
software
by
a
factor
of
10.
It
would
up-end
these
markets.

When
the
minimum
economic
scale
is
high,
you
end
up
in
a
market
with
few
products
and
very
standardized
products.
When
that
same
minimum
scale
gets
much
smaller,
you
start
to
see
enormous
variety.
In
those
cases,
local
products
that
are
tailored
to
local
needs
start
to
win
out
over
global
options.
Small
businesses
perform
better
than
larger
ones
in
these
environments
as
well,
given
their
flexibility
and
proximity
to
the
customer.

The
most
optimistic
outcome
is
a
return
to
an
era
where
small
companies
provided
local
services.
That
era
feels
like
the
distant
past
today,
and
the
replacement
of
small
firms
in
the
past
with
big
firms
today
wasn’t
malicious.
It
was
part
of
what
has
driven
a
huge
gain
in
living
standards
for
everyone
from
the
resulting
efficiencies.

With
blockchain
and
other
technologies
driving
minimum
economic
scale
back
down,
we
could
be
getting
the
best
of
both
worlds:
locally
enriched
economies,
hugely
competitive
markets,
and
all
running
at
high
operational
efficiency.