The insane world of cryptocurrency may be chock full of schemers, scammers, and sharks, but there is more to the world of blockchain than crypto.
In fact, the blockchain story is bifurcating, with crypto and all its craziness on one side, and enterprise blockchain on the other.
While it may be fun to poke our stick at the former, Intellyx’s focus is on enterprise digital transformation – which means that bona fide blockchain-based business models are a key part of this ongoing story of disruption.
Regardless, we receive numerous pitches every day from all manner of blockchain-based companies, from the most serious to the silliest.
When we set up a briefing with one of them, we need to quickly determine which camp it belongs in: serious enterprise play or crazy crypto?
We’re not alone. If you’re interested in this space, regardless of whether you’re an investor, participant, or potential customer, you’ll need to separate the wheat from the chaff yourself.
Here, then, are our seven criteria for evaluating such companies – criteria you may find useful as you navigate the turbulent waters of blockchain.
If a company is saying something like ‘blockchain is cool. What can we do with it?’ then you know they’re already on the wrong track. The first step for any new business idea, blockchain or no, is to identify a problem – in particular one people will pay you to solve.
It’s surprising how many blockchain business ideas fail this most important first step. Don’t waste your time on them.
Just because a company might be able to use blockchain to address the business problem from #1, that doesn’t mean that blockchain is the best approach. After all, blockchain is still largely on the drawing board, and is potentially only well-suited for certain problems involving multi-party transactions.
There are reasons why so many Internet-based businesses have centralized transaction processing: it works, we know how to scale it, and it’s a money-maker for the processor. You’d better have a very good reason for walking away from such benefits.
Blockchain at its core is a decentralized, distributed ledger system. To make any blockchain-based business work, therefore, there must be a sufficient number of participants to drive adequate value for other participants to join.
In other words, blockchain is a classic example of Metcalfe’s Law: the value of the network goes up as the number of participants grows.
The problem with Metcalfe’s Law, of course, is the tipping point problem. If there aren’t enough participants, then no one else wants to join. As a result, any blockchain business must have a plan for attracting such participation ahead of this tipping point.
Going viral is one approach – but if a company is betting on virality, run in the other direction. There’s no good way to plan for virality, and it’s virtually impossible to reproduce.
What’s left? Spending money. Lots of it. And regardless of how deep the pockets, success is still far from guaranteed.
In the crypto world, the transaction processors who run the distributed nodes are called miners, because Bitcoin and most other cryptocurrencies reward them for processing such transactions.
In the enterprise blockchain world, in contrast, transaction processors may or may not receive such rewards directly from the blockchain infrastructure itself. The question then arises: who will execute the blockchain transactions, and what’s in it for them?
Remember, blockchain business models are almost always decentralized, which means that such miners must step up to the plate on their own – so there had better be a plan for attracting and compensating them.
Every blockchain business essentially creates its own token economy. Such tokens may have true monetary value – in other words, cryptocurrency. Other tokens have utility, meaning that they are basically just coupons a holder of the token can exchange for a product or service.
Utility tokens would typically have monetary value as well, just as grocery coupons do – but regulations in the US and elsewhere treat them differently. In any case, most enterprise blockchain businesses appear to be leaning toward utility tokens.
You have to ask yourself, therefore, how such tokens will actually work once the business is up and running. If someone is supposed to trade a token for a product or service, then will the recipient of that token value it sufficiently to actually provide that product or service?
Do they have monetary value, and if so, how would people cash them in? Are they subject to the speculation that has driven such obscene volatility in the crypto markets, and if so, will such volatility reduce the tokens’ utility?
There are bound to be plenty more questions, but this is a start. See if you can think of more.
Let’s say the company with the brilliant blockchain business idea is able to pass the tipping point, and now there are plenty of ‘buyers’ and ‘sellers’ willing to exchange tokens for goods or services, and plenty of miners willing to conduct the transactions.
So far, so good. Now ask yourself: how will the original company make money? Remember, the entire kit and caboodle is decentralized, so no one is in charge, including the company that got the thing off the ground.
Will they be happy simply being one of the miners? Do they consider themselves a software company, charging participants in this new blockchain economy a licensing or subscription fee for using their software? Given that much of the blockchain software in the works today is open source, then selling software won’t do. So what’s left?
Today, many such companies are focusing on their initial coin offerings (ICOs), also known as token generation events (TGEs). The idea behind an ICO is to create a large number of tokens out of thin air and sell them to speculators and future users of such tokens in order to fund the startup phase.
Sure, this ICO puts money in the coffers of the company to start, but then what? There has to be a business model (i.e., a way to make money) beyond the ICO itself.
You know what I call a company without a business model? A hobby. And what do I call a company with a lucrative ICO and no business model? A scam.
The company that founded this new blockchain ecosystem cannot remain in charge of it for fear of defeating the entire purpose of a decentralized business model in the first place.
Who, then, runs the show? If, say, someone discovers a problem with the underlying technology, who makes the decision how to fix it?
The answer: a consensus of the participants. Consensus, however, is far trickier than you might think.
First of all, who gets a vote? Just the miners? Or do all the ‘buyers’ and ‘sellers’ that participate get a say? And if they do, does their vote count for as much as the miners’ votes? Do all miners get the same vote?
Even if you solve those problems, how many votes are necessary to make a decision? Some systems have a ‘majority rules’ approach – but such an approach leads to the ‘51% problem,’ where the majority can make any changes they like, regardless of the protestations of the minority or the participants without a vote, for that matter.
Another popular system is the ‘unanimous’ approach. No voters are left in the cold with this approach to be sure, but now everyone has veto power. What if there’s one bad apple in the bunch? That party can now veto all decisions, including the one to vote them out of the gang.
What, then, is the best approach to consensus? The answer: nobody knows. This entire area is so new – not just the technology, but the business models as well – that there are numerous unknowns.
Plenty of blockchain business have figured out #1 and #2, and a few have reasonably good, but still risky plans for getting around #3, the tipping point.
But #4 – #7? Nobody really knows what will work long-term. The issues with Bitcoin mining have illustrated that its approach isn’t going to work for enterprise blockchain businesses (and I predict it won’t keep working for crypto much longer, either). There are plenty of alternatives out there, but none of them have been through any kind of trial by fire.
As for tokens? Even Monopoly money is good for playing Monopoly, which tokens aren’t.
The consensus challenge, however, is perhaps the knottiest of all, as there’s an easy downhill path to centralization for all these businesses. Centralized decision making is just so much easier.
And regardless of which consensus model an ecosystem picks, they can always simply vote to put someone in charge and be done with it.
So, skeptics we are and shall remain. Will Intellyx continue to cover the enterprise blockchain space, in spite of our skepticism? Absolutely.
Are we ready to point to any business idea as a leader? Not even close. We’re hardly out of the starting gate.
Copyright © Intellyx LLC. Intellyx publishes the Agile Digital Transformation Roadmap poster, advises companies on their digital transformation initiatives, and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. The author does not own any cryptocurrency, nor does he intend to own any in the future. Image credit: public domain.