This is to open a discussion about how companies can make money using blockchain technology which is, in essence, open source software and/or protocols. As an analogy, think going back to the early 1990s to discuss how companies could make money from TCP/IP.
Instead of discussing what the blockchain technology is, let’s focus on what this tech enables, on its key functionality: the ability to record cryptographic proof of any piece of information (a document, a transaction, an account balance) into an immutable, shared database. This is only useful in the context of more than one entity needing the information; when there’s an interaction between two or more parties. In such context, the blockchain technology enables verification of information that does not need a trusted third party. There is no need for a notary, an official (land, vehicle, ship, plane, vaccination…) registry or a bank.
In a sense, it’s the next logical step from the shared / cloud model, because now the trusted operator of the system doesn’t exist, so it can’t change the rules the service operates under. Also, the users do not need a trusted operator to validate their own and other user’s information.
This makes things possible that were impossible without blockchain, including:
1) Having instant, verified proof of the current and past states of a business (or any other) process.
2) Having instant, verified proof of fulfilling a contractual obligation.
3) Holding and transferring value in a decentralized way, without the need of a trusted party and without the legal structure of a national state.
4) Creating governance and socio-economic structures independent of a national state or a corporation.
5) Sharing costs and benefits of a business network or an ecosystem.
6) Designing incentives for independent actors of an ecosystem.
7) Combining the ownership, the distribution of the value and the incentive in a single asset (a crypto-token).
8) Combining information like identity, legal status, accounting transaction, payment and probably more (like the physical status of goods) into a single transaction.
Business models vs Technology
The revolution that the internet brought was caused by new business models being enabled by technology, not by the technology itself. Similar will be true about the blockchain tech.
Still, someone has to develop and build the technology: the specific solutions, standards and protocols that will be invisible to the end user and will make new business models seamless and obvious.
A few examples of solutions needed in the technology realm include the basic ones:
– Handling online identity and everything that comes with it, including authentication and privacy.
– Safe, preferably decentralized, integration/interaction of crypto with fiat (all crypto hacks happen on exchanges and other centralized services).
– Integration (enforceability) of smart contracts into existing legal systems.
– Verifying if what is on the blockchain is true (does it match reality).
And more complex solutions that need the basic ones to work:
– Reputation protocols, with staking mechanisms.
– Tokenization of assets, starting with the virtual (invoices, claims, music, movies, brands, website addresses) and expanding to the real world.
– Stable coins backed by real world assets, like money or anything else (including asset tokens).
There are more examples, but as things get more complex, the line between the technology and the business model starts to blur. Here are a few more examples of possible technologies / business models:
– Invoice financing for supply chains.
– Tamper proof product provenance system.
– Tamper proof document control system.
– Loyalty program on a blockchain, with public, tradable perpetual discount tokens.
– Reversed advertising ‘pay-to-pitch-me’ model, where people can create their own ‘ad profile’ sharing verified information about themselves, at their own discretion, and getting paid for reading/watching promotional material.
– Investing directly into startup projects and companies without any financial intermediaries like VCs, stock exchange, mutual funds etc., by buying digital coins. Let’s call this idea an ICO (or STO).
– Community-owned, self-driving cars that work in tandem with public transport.
– Driver and community owned ride-share platform that uses discount tokens and verified reputation mechanics.
So, how do you make money in this space? And how do you go about it? What’s the next logical step?
Let’s start with some observations about the state of the market. It seems there’s a big divide between the crypto world and the real, business world. The crypto world is revolving around exchanges and converting crypto to fiat and vice versa. The business world (with notable exceptions like Foxconn) thinks about private blockchains and shared data models (courtesy of IBM). Both worlds and the people living in them don’t understand the other world and the needs, drives and opportunities there.
The real world is obviously much greater than the crypto world, so startup opportunities (or at least the potentials) are greater. But a reality facing or business oriented startup needs to understand 2 key things: By definition, if it’s doing anything with public blockchain technology (like raising capital through a token sale) it is a part of the crypto works, whether it wants it or not. It needs to respect this world, its rules, customs and ways of doing business. Secondly, any real-world facing project will be initially an educational endeavor; a research project on the way to understanding blockchain application in solving business problems. Ideally, this should be conducted together with potential or actual clients/users. The ‘Build it and they will come’ strategy might now work in such a complex mix of technology, business models and product definition.
Token as a product
Going back to the idea of understanding and embracing the crypto space: selling tokens / coins is one obvious way of making money. ICO funding in 2017 was already higher than VC startup/seed funding (https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass-early-stage-venture-capital-funding.html). The amount of money raised in 2018 is even higher (https://www.coindesk.com/6-3-billion-2018-ico-funding-already-outpaced-2017/) despite the supposedly cold market.
The example of EOS proves that an outrageously successful ICO is possible, as long as it’s done by the crypto world rules, and the token is treated as a product in its own rights. A product needs to have its unique selling point or competitive advantage, clearly defined target market, price point, etc.
One of the key factors that attracts (even serious) investors to ICO is the promise of token liquidity: tokens listed on exchanges are much more liquid than shares in a private company. This should be one of the key features of any token offered. Otherwise, if there is no marketplace for the token, why not offer equity in a private company?
Listing a token on an exchange creates a situation where the price is volatile and might fall below the original ICO price. This happened to a lot of tokens that have no use case or no working product or platform, so there is no demand for the token other than being speculative, or purely sentiment driven. One of the reasons this happens is because projects want to avoid creating security tokens at all costs and want to have a utility token instead. So, in the interim between the ICO and launching the platform/product that uses the utility token, there’s no utility, hence no utility value. A few utility tokens that actually have a use case don’t have this problem (https://coinmarketcap.com/currencies/binance-coin/ ).
One way of dealing with this issue (low token price) is market manipulation by creating an artificial demand for the token (= spending money raised in the ICO to buy your own tokens on the exchanges). Another (maybe radical) idea would be to get over the fear of security tokens.
Most probably, any ICO style capital raised for a completely new idea/project/product/company will be considered a security offering by the SEC anyway. So, instead of designing a utility token that needs a use case to work, new projects could focus on designing their tokens as security tokens that make sense.
Tokenizing shares or creating tokens that resemble stock with dividends and voting rights doesn’t make sense, because stock exchanges and the entire legal infrastructure already exist. But there are at least 2 interesting security token designs:
1. Let’s call it a buyback token: A new project issues tokens to raise capital, to create a business that will be generating revenue. It can be a SaaS platform, a coffee shop, a solar power plant. Once the business is operational, part of the revenue is used to buy back tokens from the market and burn them. Just like with stock buyback. This increases liquidity of the token and limits the supply in circulation. Both factors increase the price of the token. Any holder has the option to exit now or hold longer and wait for further price increases.
2. Let’s call it a virtual taxi medallion or virtual mall token: A new project is working on a platform that will allow others to conduct business and offer their services. For example: a network of independent operators, who use specific protocols to offer liquidity and payment solutions for supply chains. The platform will require from any operator to buy and hold in escrow (as stake) a specific amount of the medallion/mall token. There will be only a limited supply of the tokens, so as the market grows and becomes more attractive, the demand for the tokens increases and so does the price of the token. Just like with a real taxi medallion or mall space.
There can also be an entity that applies these two models and offers ICO rails for impactful, real life projects, something like an Impact Kickstarter on the blockchain. Early stage, risky, but important and powerful ideas, like water desalination technology or ocean plastic recycling could now raise seed/early capital easier. The ICO rails company can offer due diligence, KYC, smart contract development, and access to professional funds, for a fee plus initial token supply.
Part of this business would also be a responsible ICO model where a project would only be able to raise funds based on a proposed budget and the money would be released in milestone payments, based on the evaluation of the progress vs the budget.
I think this idea would be interesting for Binance (https://techcrunch.com/2018/08/23/binance-labs-incubation-program/) or EOS (https://www.econotimes.com/Blockchain-startup-Blockone-announces-1B-venture-fund-EOS-VC-1330074 ).
Adoption and time to revenue
Moving on to the real world applications, there has to be a product or a service that generates revenue somewhere along the way. Selling tokens is not generating revenue. It’s raising capital in order to create something that will generate revenue and eventually the return on the capital raised. The key notion here is that the capital raised needs to last long enough for the startup to generate revenue. The longer it takes or generate revenue, the higher the amount of initial capital is needed.
Another question is the level of adoption required to make a project/business profitable. This is very important especially for a startup that wants to build value based on a network effect. A lot of times a network based business is only profitable at a late stage of maturity and adoption. This creates a situation where the profit is generated during the last mile of a 1,000 mile journey, further increasing the capital requirements and the risk of a project.
The market situation for a real world facing blockchain startup looks difficult: business clients don’t understand the technology or its implications, there is a lot of money needed to develop technology and applications that don’t exist today. Getting market adoption can be long and expensive.
Is there a better way for a blockchain startup other than raising as much money as possible (preferably at least $100M) and hoping it will hit a fast moving market target in 1, 2 or maybe 3 years? Is it possible to start generating revenues faster, while developing the world changing product? One solution would be to have part of the team offering consulting services focused on business model transformation. Another would be to offer joint blockchain research/discovery projects, preferably using an agile approach with sprints, constant feedback loops etc.
However, any blockchain startup approaching a potential enterprise client needs to understand that a Fortune 100 company has the brand power and the financial strength to develop and introduce blockchain solutions (or any other innovation) to their entire supply chain on their own. Just like Foxconn did (https://www.coindesk.com/foxconn-wants-take-global-supply-chain-blockchain). Why would they decide to work with a blockchain startup that doesn’t have a working product/platform or a significant customer base? They could take any interesting ideas presented by the startup and go to IBM or Accenture to develop a proprietary blockchain platform or solutions.
An enterprise would work with a startup for 2 reasons:
1) If there is a team of people there who came up with great ideas (better than anything IBM or Accenture or their internal team can come up with) and can now start working on designing and building products and solutions. People who understand both blockchain/crypto and the real world and can deliver quality software.
2) If the startup has real-life, front-line trenches experience in areas like ICO, KYC, compliance, utility vs security tokens, talking to the SEC, minting tokens, tax implication, and many more.
Hiring a startup would save them a lot of time and money. They could leverage a good team and its experience instead of starting from scratch.
This would be an interesting idea as long as the enterprise could partner/hire/form a JV with the startup to develop solutions tailored specifically for them and not necessarily the original world changing product that the startup is working on. In this model, the startup is working as a consultant/think tank/research company for the enterprise instead.
Such a relationship can be very beneficial for the startup and can be applied to 1) Increase the prestige of the startup, 2) gain more high profile clients, 3) use the work done for enterprises to develop own products, platform and services.
Here is an example of how this could work for a specific business model:
The idea of a discount token that is not spent, but gives perpetual discounts to holders is very powerful. A loyalty program built on this idea is a killer loyalty program.
However, despite the idea of ‘the single ultimate loyalty token to rule them all’ being very tempting, it’s not realistic where there is no working platform and without large marketing budgets. Approaching any company or organization with the offer: “pay me so I can develop my platform on own token “ seems naive, because they can develop their own platform, with their own token, keeping all the benefits.
So maybe there is a business case for a company that starts by developing discount token platforms for third parties, based on white label software solutions that are customized for a specific case. This entity can work for companies like airlines, local communities of merchants, municipalities, energy companies (with a focus more on specific incentives than loyalty).
The offer would include KYC, ICO (I might be wrong, but I think having an existing use case makes it an actual utility token, not a security), a mobile and a web wallet for customers, a dashboard for the program owner. Having this in place, it’s possible to have one wallet that holds any compatible branded tokens, part of different loyalty programs, so the number of different tokens is not an issue from the user experience perspective. Such a startup can charge a fee and keep part of the new branded discount tokens (say 5%). It can even launch its own branded loyalty token program later on based on its own white label development kit.
Taking the idea of doing paid research even a step further, is there a better way of doing business development? Getting paid for talking to businesses interested in blockchain instead of spending money on conferences? Maybe it would be possible to organize a high profile, C-level event (a dinner, a retreat) with a limited number of participants who pay to attend. They would have direct access to the brightest minds in the blockchain space and where no one is trying to sell them anything.
There are already blockchain projects in existence that make money educating enterprises, BRI (https://www.blockchainresearchinstitute.org/ ) being the best example.
Decentralized and open-source
As a side note, any blockchain startup would be smart trying to partner with other blockchain startups in the true spirit of decentralization, instead of trying to do everything in-house. Also, as a lot of the software is open-source, using it, even if it needs adapting, might be a cheaper, more efficient way of doing software developing.
Supposedly “after reading a report about the future of the Internet that projected annual web commerce growth at 2,300%, Bezos created a list of 20 products that could be marketed online. He narrowed the list to what he felt were the five most promising products, which included: compact discs, computer hardware, computer software, videos, and books. Bezos finally decided that his new business would sell books online, due to the large worldwide demand for literature, the low price points for books, along with the huge number of titles available in print.” (https://en.wikipedia.org/wiki/Amazon_(company) )
My personal opinion is that ‘the amazon approach’ today would be to get involved in the ‘security tokens ICO on rails’ project. This could later evolve into a Security ICO Exchange, something like a Nasdaq equivalent in the crypto space: self-regulated, with mature, structured process including project vetting and due diligence.