It Sounds Boring, But It’s Important: “Platform Risk”

Crypto people have an unfortunate way of making important things sound super boring. Let me try to undo that around one central concept: “platform risk.”

Spend enough time around crypto/Web3 folks, and eventually one of them will bring up “platform risk.” The first time you hear it, your brain gets confused for a second –– is this a problem that Super Mario faces when jumping? Is this why diving boards require regular inspections? –– and then, quickly, bored. 

This is unfortunate, because the concept of “platform risk” is central to the value proposition of Web3: basically, it’s at the heart of why Web3 people think that the tech landscape we live in is basically unfair, and needs to be remade.

Basically, crypto people have been really bad about explaining that crypto could be the very solution to things many people are already upset about.

Correct me if I’m wrong, but most people would probably agree with the following statements:

• Mark Zuckerberg has too much power for one individual

• Central bank executives were too powerful in the years leading up to 2008

Both these examples are part of a pattern in contemporary capitalism: of central figures simply acquiring too much power, creating a situation where the rest of us become dependent on their whims, or on the hook for their mistakes.

Web3 can help mitigate this, by creating new institutions that are managed more diffusely and democratically –– and one of the main consequences of this would be the reduction of what we call “platform risk,” or at least changing the way such risk feels, in a meaningful way.

***

OK, so what is platform risk exactly? This explainer from Startup Illustrated, as well as this one from Analytics India, break it out fairly well. I’ll rely on these partially in this explainer –– but the main thing that I’m of course relying on is my own experience as a startup founder. Startup founders and small business owners, ordinary entrepreneurs like you and me, are the main people who live in fear of platform risk, and mitigating (or simply stomaching) platform risk was a recurrent theme of my own early career as a startup founder, which I wrote about earlier.

A clear case of platform risk is what happened to Zynga, the maker of the FarmVille that was popular on Facebook for a time. Zynga plowed a lot of hard work (and a bit of luck) into a series of games that became wildly popular on Facebook. FarmVille made $235 million the year it was released.

But then came the platform risk. Zynga was dependent on decisions that Mark Zuckerberg (and sure, his most influential advisers) got to make, not Zynga or even Facebook users. Zuckerberg made various changes to its user settings and its algorithms, and suddenly FarmVille disappeared from many users’ newsfeeds. The company’s value tanked. 

Whatever your opinion of the FarmVille game and how it used to show up in your feed (I myself hated it), the principle is clear: Zynga’s fate was not truly its own. 

And of course, on some level, it never is, for any entrepreneur: we ride the whims of the market. But the most central whim that Zynga depended on was one man’s: Mark Zuckerberg’s. And beyond Zynga, countless developers have poured their heart and soul into projects, launched them on massive platforms, only to find weeks or months later that a sudden change in corporate policy at the platform has destroyed their app and effectively caused them to waste some of the most productive years of their careers. (Sometimes it’s a change in corporate policy; sometimes it’s just that the massive platform launched a similar feature. Either way, it hurts the little guy.)

***

In addition to the obvious Facebook example, I also brought up the 2008 financial crisis to help illustrate that “platform risk,” at an abstract level, is really about rethinking institutions and making them more fair by decentralizing and distributing power.

Let’s not forget that Satoshi’s white paper came out in the wake of the massive bank bailouts of 2008; his vision was essentially one of distributed risk, of avoiding a situation where any central institutions were “too big to fail,” and of declaring independence from a few overly powerful financial institutions.

Put another way, “platform risk” was at work through the 2008 financial crisis in the following sense:

• The major financial institutions gradually became so central to the American economy that they became “too big to fail,” they became platforms, essentially

• And yet the executives in those institutions gambled recklessly and introduced risk to their own platforms

• Their disintegration stood to destroy the U.S. economy, forcing the government to intervene with a taxpayer-financed bailout

The banks were the platform, and we were all put at risk by the decisions of a few. Satoshi’s post-crisis whitepaper and the Bitcoin project it spawned had the aura of a declaration of independence from this unfairly structured risk.

It’s no coincidence that Bitcoin’s first block contained a reference to U.K. banking bailouts.

Blockchains, in contrast to large traditional corporations, are decentralized –– and intended to be centralized by design. They are governed more collectively, and to some degree even autonomously (according to principles encoded by the founders). If a massive change is made to a blockchain ecosystem –– as with Ethereum’s fork, for instance –– it is not because one executive made a decision on a whim, but because an entire community did.

Per that Analytics India article I linked to above: “One of the aspects of Web 3.0 is decentralization of platforms, where developers can work without having to worry about a particular company’s plans and policies.” The article cites Ethereum and Dfinity as two ecosystems that reduce the “need to worry about the change in corporate policies,” mentioning that Dfinity “is working to create a new internet computer protocol which will connect data centers across the globe to compete with the infrastructure owned by large tech companies. Such protocols aim to eliminate excessive centralisation of power and platform risk faced by smaller companies and developers.”

***

I want to be clear that platform risk can never be eliminated. (Or at least, it couldn’t be eliminated without resorting to a truly dystopian dictatorship. Where there is only one state-run media channel, then sure, your content is “safely” going to reach a lot of captive viewers… but we don’t want to live in that world. That is a reduction of “platform risk” at severe cost to liberty.)

Web3 simply makes the “market” for platform risk more fair. It makes the risks distributed. It makes the risks more broad and diffuse, rather than predicated on the whims of one or a few super-powerful individuals. It’s not about zero risk. It’s just about fair, legible, and distributed risk.

Concretely: If millions of users organically and gradually migrate to TikTok because it’s cooler than Instagram, that’s fine. That’s their prerogative. It also happens gradually and over time, so if I’m an Instagram creator, I have time to read the tea leaves and diversify, booting up a TikTok channel as risk mitigation. This sort of “platform risk” to Instagram, rooted in the collective behavior of millions of people behaving freely, is intuitively fair to us.

But if Mark Zuckerberg goes crazy and decides one day that he wants to pull the plug on Instagram because he dislikes the color pink, that swift and whimsical nature of the platform risk would not be felt to be fair by the same Instagram creator who now suddenly and arbitrarily sees the demise of their primary marketing channel.

That’s what we mean when we talk about platform risk, and why Web3 helps mitigate it, decentralize it, and fundamentally, make it feel more fair.