Union Square Ventures' Joel Monegro believes Bitcoin has the potential to change much more than just finance, and will likely disrupt current business models.

All around the world, teams are building next-generation technologies and applications that leverage the blockchain to undo many of the paradigms that dominate the software business today, argues venture capitalist Joel Monegro in a blog post.

Monegro is part of the investment team of New-York-based VC firm Union Square Ventures (USV). USV, who counts Fred Wilson among its partners, is well known for having invested in numerous successful startups including Twitter, Tumblr, Feedburner and Zynga.

"We spend a lot of time looking at everything that’s going on with Bitcoin and the Blockchain," writes Monegro. "Being exposed to all these has allowed us to identify certain patterns and trends that are helping us build an image of what’s coming."  

Monegro used these patterns and trends to develop 'the Blockchain Application Stack,' a diagram representing what he thinks would resemble the architecture of Internet applications 10 years from now.

The said architecture can be divided into 3 main layers: the shared data layer and the shared protocol layer, which are decentralized, open source, and cover about 80% of the entire stack; and finally, Internet applications, which are built on top of these open and decentralized technologies. In the case of Bitcoin, the shared data layer is the blockchain, and the decentralized protocol part of the shared protocol layer is the Bitcoin protocol.

Taking the examples of Counterparty and sidechains, Monegro argues that developers are starting to build networks working in parallel of the Bitcoin blockchain, using the technology to perform tasks that the initial network can't. He explains:

"Whatever form these overlay networks take, the one thing they have in common is their connection to the Bitcoin blockchain, and how they benefit from its network effects to achieve liquidity without having to bootstrap their own alternative cryptocurrency and/or blockchain like alternative solutions."

Monegro believes that Bitcoin and the blockchain technology pose many interesting challenges for developers, entrepreneurs and investors, notably due to the open source nature of the blockchain, making information freely available to any individual wishing to build something on top of it.

"The best example of a decentralized protocol on top of a shared data layer is Bitcoin," he notes. "And we're already well aware of how it's affecting money and finance."

While many tech firms such as Microsoft and Apple also offer technology platforms that developers can build upon, the Bitcoin blockchain differs in the way that it is not controlled by any entity.

"This is where the traditional architecture of software businesses begins to break down."

Online giants like Facebook, Ebay and Uber, benefit from the network effects of keeping user information corralled in centralized systems, while taking a cut of all transactions. "Facebook wants to own and store the data that is relevant to their operation. So does Google, so does everyone else," he told Business Insider.

"The data they store, they control it. The algorithms they run, they control it to serve their own purposes. A system like this, the protocols you build are open, not controlled by anybody. They work like a machine. They don't discriminate."

Many projects have been emerging to disrupt current business models, he continued. These projects include La'Zooz, a real-time ride sharing with the potential of disrupting Uber, and OpenBazaar, a “decentralized offspring” of eBay.

According to Monegro, not only will this new architecture foster innovation, it will also offer many benefits to end-users, such as individual ownership of data, consumer market power and lower to nonexistent take rates.

Applications will work similarly to the ones we are familiar with, he explains. However, the main benefit for consumers is that apps, which will be built on decentralized protocols, "will be able to talk to each other, just like different e-mail applications and Bitcoin wallets can interoperate."

Finally, Monegro concludes by stating that most significant technology revolutions have been built on similar bottom up processes, and emphasizes the fact that this new architecture should impose very interesting challenges to all participants.

Did you enjoy this article? You may also be interested in reading these ones: