YWR GP: Chain Street (Part 3) - Open vs Closed

Born too late to explore and conquer new lands and too early to explore space, I guess I will have to settle for playing a small role fixing the financial system.

This is part three of our guest post series on Chain Street from Jason at Etherbridge Crypto Asset Management

Chain Street (Part 1) - The Opportunity
Chain Street (Part 2) - The Challenges

What are we even doing here?

I am writing Part 3 after a massive correction in crypto prices. Phone ringing off the hook. Fundamentals up and prices down. Fear, uncertainty and doubt all over my social media timeline.

When I need to remind myself of why I do what I do, I always come back to this Erik Voorhees Video. If you are confused about what crypto is, what is being built and why it matters so much, take 30 mins to watch this speech.

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The History of Open vs Closed

The battle between open and closed systems is ancient. Throughout history, profiteers have attempted to curate and capture the future, while open design advocates have sought to standardise and remove friction for all. The pattern repeats across centuries, with outcomes favouring openness.

One of the earliest examples is the Silk Road, a legendary network connecting Europe, the Middle East, and Asia. Owned by no one, it routed around the Roman Empire’s controlled network of roads and enabled an explosion of trade between distant lands. Roman roads existed to serve Rome’s military deployment and tax-collection purposes and were constrained by centralised control. The Silk Road, on the other hand, served everyone’s purposes. This is the fundamental beauty of open networks, by removing the frictions and hidden extraction of an owner, they make our world smaller and our economies bigger.

The pattern continued into the industrial age. Prior to 1886, there was no agreed upon standard gauge (the distance between the two rails of track), so where one track ended and another began, there was enormous friction. For the private railway companies, this was a feature, not a bug. If you controlled the only railway serving a region, forcing cargo transfers at your borders meant you could charge monopoly rates for that service. Furthermore, the incompatibility protected you from competition as rivals couldn’t simply extend their tracks into your territory.

But in 1886, North American railways finally agreed on a standard gauge. Standardisation transformed a collection of isolated walled gardens into a continental transportation system that unleashed economic value that benefited everyone, including the railway companies.

The shipping container revolution of the 1960s followed a similar path. Before Malcolm McLean’s stroke of genius, global shipping was a chaotic mess of different packaging, handling procedures and loading methods. Different ports, ships and cargo types were incompatible. McLean introduced a standard shipping interface, the universal shipping container. I was blown away when learning about this small but profound example of standardisation’s power. After its introduction, shipping costs collapsed by over 90%, and it directly enabled the global supply chains we have today.

This pattern has only accelerated with the rise of computers. In the 1980’s, personal computers were much like railways before standardisation, every PC manufacturer had their own closed design. Apple made computers that only ran Apple software. Commodore made computers that only ran Commodore’s software. Buying these PC’s locked you into the manufacturer’s ecosystem forever.

Then in 1981, IBM did something unexpected, they published the technical specifications of their computers and used off-the-shelf parts. This meant that companies could build clone PCs that were “IBM compatible”. This gave rise to companies like Compaq, Dell and dozens of others who made hardware that could all run the same software. The combination of Microsoft Windows (software) and Intel processors (hardware) became known as Wintel.

This ignited a Cambrian explosion in software. Software developers could now write one program and sell it to everyone and anyone with a Wintel PC, whether they bought it from IBM, Compaq, Dell or a no name brand. The market for software all of a sudden became enormous. More software made PCs more useful, which led more people to buy them, which in turn led more developers to write software. This virtuous cycle fed on itself, crushing closed systems.

Better technology didn’t matter in the case of PC’s. Apple’s Macintosh was easier to use and more elegant, but Apple’s stranglehold on its ecosystem meant it couldn’t grow as fast as the open Wintel ecosystem. By the mid-1990s, Wintel PCs had over 90% market share, while Mac was relegated to designers and schools.

Linux pushed openness even further. While Wintel had opened up hardware, Windows itself remained proprietary, closed-source, paid-licensing, and controlled by Microsoft. Linux went all the way by being completely open source, free to use, free to modify, and free to distribute. Despite being “free” in every sense, Linux now powers the majority of servers, all Android phones, and increasingly the critical infrastructure of global commerce. Microsoft’s Windows dominated desktops but lost the war for servers, mobile devices, and embedded systems. Even with Microsoft’s massive resources, a swarm of thousands of developers improving a shared codebase eventually won out.

The last battle between open and closed belongs to the internet. Perhaps the most powerful validation of open systems in human history. To put the open internet’s success into perspective, the Global Web Index (GWI) estimates that the average person will spend almost a third of their life online.

The internet’s only competitor is that of sleep.

The internet is a collection of open protocols such as TCP/IP, HTTP and SMTP. Early alternatives to the open standard, like CompuServe, AOL, and France’s Minitel, believed they could control access and curate experiences. But the internet, like today’s blockchain ecosystems, offered chaos and freedom. In less than three decades, the open internet has grown from a research project into a substrate of modern civilisation.

Why Does Open Win?

The victory of open systems isn’t random or ideological. Like gravity, openness wins because of fundamental advantages that compound over time.

Network Effects and Permissionless Innovation

When a system is open, anyone can build on it without asking for permission. Openness unleashes human ingenuity, manifesting as innovation on a scale no centralised organisation can replicate. The internet has millions of developers building applications, services and businesses without needing approval from any central authority. Compare this to AOL and CompuServe, where new features required corporate planning, approvals and implementation.

How can an organised, closed system attempting to curate the future compete, while its open competitor innovates at exponential rates? Over time, the linear progression of the closed and the exponential progression of the open creates a gap that can never be closed.

Network effects amplify this, we see this in the victory of Linux and the open internet. Each participant in an open system increases its value for all existing participants. Each new Linux developer made Linux more antifragile. Each new website made the internet more valuable. Closed systems, on the other hand, are so focused on capturing enough value to justify their control that it eventually leads to limits on participation. Herein lies the key difference between the two, closed optimises for extraction, while open optimises for growth.

It was never a fair fight to begin with.

Efficiency Wins Short Term, Resilience Wins Long Term.

Closed systems often appear more efficient and convenient initially. They are optimised, coordinated and free from the chaos of competing standards. The Roman roads at the time were engineering marvels, far superior to the rough tracks of the Silk Road. But that efficiency came with fragility. When Rome fell, the network of roads deteriorated. The Silk Road, on the other hand, endured for centuries because it lacked a central dependency, it belonged to everyone and no one.

In modern technology, this principle of resilience beating out efficiency is demonstrated repeatedly. The smooth user experience of Microsoft’s tightly integrated Windows also meant that a security flaw in a single component could compromise the entire system. On the other hand, Linux’s modular antifragile design meant that problems could be isolated and fixed without the risk of cascading failures.

Resilience in open systems extends beyond mere technical robustness, open systems are politically resilient because they don’t depend on a single entity’s survival or good behaviour. Governments can’t easily censor truly open systems. Companies can’t easily co-opt them. Special interests can’t easily capture them. The right feature to optimise for is resilience, efficiency comes later. It’s this emphasis on resilience that makes open systems grow stronger in the face of stressors.

Sovereignty and Self Determination

We are in such an interesting moment in history. Born too late to explore and conquer new lands and too early to explore space, I guess I will have to settle for playing a small role fixing the financial system.

Humans have an innate desire for sovereignty and self-determination, and in this desire is the deepest reason open systems tend to prevail. People and organisations ultimately prefer control over convenience. When the convenience gap is enormous, they will tolerate closed systems, but as open alternatives mature, sovereignty considerations dominate. It’s why open-source software has captured vast territory despite often being initially inferior to proprietary alternatives.

Organisations particularly value this sovereignty. Minimising external dependencies is just good business. No company wants its critical infrastructure dependent on a competitor’s goodwill or priorities. No country wants its digital infrastructure controlled by foreign corporations.

Open systems offer an exit option, if the current stewards fail, the community can fork and continue. Closed systems offer no such guarantee.

Why Decentralised Blockchains will Win.