WEB3 Business Models Series
The series of 12 videos about different blockchain business models and their applications; 30-40 min long; 5,000-5,500 words per episode; case study format (where possible).
Series Introduction
Introduction
Since Satoshi Nakamoto’s Bitcoin protocol was created, there has been a rapid increase in blockchain technology adoption. Traditional industries such as banking and finance, supply chain management, and social media are now dominated by private and public blockchains.
This guide will explore the different types of blockchain business models that are available in 2023.
Let’s dive in!
1. Understanding Blockchain
With no central authority, blockchain refers to cryptographically secured, decentralized ledger technologies (distributed ledger technology) for electronic transactions. An electronic account of all stores and balances is kept in accounting systems or databases that are located on different computers without any one centralized authority (“decentralized”).
On a blockchain infrastructure, transactions are grouped together in blocks. These blocks are encrypted data strings that chain together to form larger chains—much like nodes on a graph.
The financial services world has also produced a comprehensive ecosystem to give merchants, consumers, and enterprises access to blockchain technology.
The blockchain system has three core elements:
1.1 Decentralization
The first key advantage of a blockchain is that it is decentralized, meaning that money laundering and system failures are greatly reduced in comparison to closed, centralized services that run on only one platform with servers owned by a single entity. Rather than a central authority, Blockchain employs a distributed network of computers (known as nodes) to store data and software. This allows each node to process transactions independently, without relying on another party.
1.2 Immutability
Because the Blockchain is decentralized and guarded by cryptographic codes, no transactions can be deleted or changed without damaging every other copy. A fresh blockchain strategy will see all former entries safeguarded in their integrity.
1.3 Transparency
In addition to being secure, Blockchain technology is also transparent. All participants on a network can see the entire public ledger in real-time, which offers protection for sensitive data.
2. Let’s Build From the Ground Up: Blockchains are Ecosystems
In order to give you a better understanding of blockchain ecosystems, let’s break it down into layers.
The participants of this layer are miners and validators. This layer also uses peer-to-peer networking protocols to allow communication and agree upon the state of the network among all parties. As you come to understand blockchain technology, you’ll realize that there is no centralized government on a blockchain network.
All network participants collaborate in the consensus layer, and their peer-to-peer algorithms come to a unified conclusion concerning the state of the blockchain computer they are supporting – for instance, how much cryptocurrency one participant in this system possesses.
Moreover, this layer empowers members to formulate and consent on protocols in their network to manage their mining activities together, such as Proof of Work Protocol or Proof of Stake.
Developers have come up with a new solution to the consensus layer that is not too taxing on the network, referred to as “full-node computers”. These models can be customized in such a way that they adjust dynamically according to the computational requirements of various blockchain networks such as Bitcoin, Ethereum, and Binance.
Smart contracts are sophisticated computer programs that can authorize and authenticate activities set by a party. They store the information of each participant to ensure its validity, while private chains provide an added layer of security since access is restricted only to authorized parties with ID cards or key cards.
Furthermore, smart contracts are built to be triggered and enforced when their creator’s predetermined criteria is met. A state machine executes this process by providing each participant a path for execution with specific data that will lead them to carry out specified actions once the program has completed all of its steps.
In this layer, we come to know the world of protocols and people. The client interface works as a bridge between the blockchain platform and industry tools/interfaces. To make it user-friendly, machine learning algorithms are combined with cryptography programming languages that guarantee secure data transfer.
Additionally, this layer supplies multiple strategies for essential activities such as consensus-building, authentication, and enforcement.
At its core,
Blockchain platform design involves three essential components: a verifiable data storage system ranging from the base layer to applications on third-party chains; an architecture that seamlessly integrates all of these elements into one comprehensive environment with user interfaces; and finally, a state-machine based programming language which activates smart contract conditions.
We can conclusively conclude that there are three distinct macro levels of blockchain architecture composed of different layers:
- Input (Baselayer) – data storage
- Layer 1 & 2 – smart contracts
- Layer 3 – client interface to industry tools/interfaces.
Notice how each layer functions as an input (base layer) or output (layer two), all securely stored in the base. Layers 1 and 2 are formed of data structures, intelligent contracts, and client interfaces with security at their core. Additionally, layer 3 is part of the architecture design where inform-at-rest and verify things out at rest can be enabled for maximum protection.
3. What is a Blockchain Business Model?
An effective blockchain business model builds a value-driven atmosphere around cutting edge technology, unifying various technical processes and commercial components across three distinct layers.
By employing Blockchain platforms, businesses are able to store cryptographic data securely within peer-to-peer distributed systems. All blocks in the system are connected by encryption code on attributes that comply with certain regulations. Through secure storage and proof of origin, such as timestamps depicting its creation and value, the material stored can serve as an audit trail for financial documents and chain transactions. This ensures trustworthy preservation while providing a reliable record of origin.
Blockchain data storage is equipped with multi-layered security that initiates when the ‘save to chain’ trigger event occurs and which further escalates through consensus protocols. These protocols determine whether incoming blocks are accepted or rejected, providing one level of interaction between users. Moreover, blockchain technology does not provide any additional layers beyond its source code’s inherent principles.
By leveraging a blockchain business model, users can access an extensive digital marketplace to purchase goods, services, and media from any other parties with ease. This efficient method allows users to communicate directly with the data in order to make smart decisions about their financial transactions.
4. Classification of Blockchain Business Models
4.1 Peer-to-Peer Blockchain Business Models
4.2 Blockchain as a Service Business Model (BaaS)
4.3 Token Economy- Utility Token Business Model
4.4 Blockchain-Based Software Products
4.5 Development Platforms
4.1 Peer-to-Peer Blockchain Business Models
4.1 Peer-to-Peer Blockchain Business Models
Blockchain technology is inherently peer-to-peer, allowing end users to collaborate with one another. The potential for profits lies in tokens, BaaS (Blockchain as a Service), fees from transactions and more. Filecoin and IPFS are two popular platforms that leverage this business model by offering an alluring solution for data storage and exchange.
4.2 Blockchain as a Service Business Model (BaaS)
4.2 Blockchain as a Service Business Model (BaaS)
Blockchain technology can seem daunting for some, however, the Blockchain-as-a-Service (BaaS) model allows you to outsource all of your backend operations and focus on what really matters: the front end. With BaaS, building a blockchain ecosystem is easier than ever before.
Blockchain-as-a-Service businesses typically offer a wide array of services, including authentication for users, remote updating and push notifications (smartphone apps), cloud storage as well as hosting. Due to its convenience and efficiency, BaaS is one of the most sought-after business models in blockchain today. End-users are usually not individual consumers but other organizations or companies – who don’t have to worry about hardware infrastructure or how blockchain works so they can conduct research and experiments without hassle.
4.3 Token Economy- Utility Token Business Model
4.3 Token Economy- Utility Token Business Model
Today, the utility token business model is becoming increasingly popular amongst startups, companies, and e-commerce websites. A utility token has three defining qualities that enable it to drive functionality into a business: role, feature, and purpose. Through the use of tokens that facilitate network activities, businesses can benefit immensely from this innovative system. Every role has its own distinctive features and purpose:
| Role | Feature & Purpose |
|---|---|
| Right | By owning a specific token, the holder is granted certain privileges within the ecosystem. |
| Value Exchange | Tokens establish an internal economy that facilitates and encourages trading activities among buyers and sellers, thereby maximizing value within the ecosystem. |
| Toll | It acts as a secure, convenient gateway to access specific features of a system |
| Function | With the token, holders can elevate their user experience to new heights within any given ecosystem. |
| Currency | As both a tangible form of value and a medium for exchanging goods and services, it is an asset that can be leveraged for transactions in any environment. |
| Earnings | It ensures that the profits and rewards generated by a project are shared equitably among its investors. |
4.4 Blockchain-Based Software Products
4.4 Blockchain-Based Software Products
Blockchain firms supply solutions and services to larger businesses and organizations, plus continued post-implementation assistance. Notably, these major companies do not want the hassle of recruiting gifted personnel, rendering this arrangement advantageous for all sides. Utilizing a pre-made blockchain solution is far more convenient than having to tailor one from scratch. Proven blockchain technology can be highly lucrative for organizations, such as Spotify with their successful purchase of MediaChain’s platform.
4.5 Development Platforms
4.5 Development Platforms
As blockchain technology is still in its infancy, the ecosystem requires more developers to enter and contribute. Consequently, numerous startups have ventured into the space by creating decentralized applications (DApps) on various development platforms. If you want to comprehend the correlation between advancement and network value, Metcalfe’s Law is here for your rescue. This theory ascertains that a network’s impact increases proportionally relative to the number of users connected. Put in plain terms – as more people get involved, the worthier it becomes.
Nevertheless, what can business models contribute to the cryptocurrency industry? Three distinct approaches come into view:
| Network Fee | In relation to the blockchain, a network fee is imposed on users for executing various activities. Ethereum charges gas fees, NEO requires GAS tokens and Golem requests golem tokens – all of these being nominal costs that come with utilizing the platform. |
| Auditing | This model offers two approaches: the creators of Dapps can either employ an auditing company to study their smart contracts or post a reward for independent developers and auditors to inspect the code. This is essential as Dapps manage significant amounts of money, so any tiny bug could cause enormous damage. |
| Other Sevices | For blockchain businesses, much of the workload entails website creation, content writing, and frameworks. To save both money and time while starting up a business in this sector, many choose to invest in freelancers or agencies that specialize in these specific services. It is an attractive model for those with specialized skills who wish to make use of them professionally. |
5. Blockchain Business Model 1: A Multi-Sided Platform
Blockchain technology crafts a multi-sided platform that offers users a full suite of services, granting them access to countless more. This platform features decentralized processes and distributed data storage across three separate layers. Each element includes an end-user and its own application with product functions that come together for one comprehensive business solution.
Ready to explore the workings of a multi-sided platform? Let’s take a deep dive!
5.1. What Factors Impact the Functionality of a Multi-Sided Platform?
To begin with, let’s discuss layer one: the Flywheel. The founding and core team of the business is devoted to creating a holistic multi-sided platform for all customers. This layer encompasses founders, developers, and an external investor group that supplies financial backing.
The founding team, along with external assistance, can construct the protocol and generate some initial token value. As soon as that happens, it motivates miners and validators to utilize their hardware & software capabilities in order to bring the enterprise into action. This is beneficial for both parties: The organization gains access to appropriate resources while those providing them receive a powerful incentive – the tokens’ worth!
Important: Layer one of the business provides a jumpstart to essential processes such as product launches, marketing campaigns, startup planning, and incorporating users into a market’s network through partnerships with existing platforms. This preliminary thrust increases the utilization of tokens in data exchange across various applications for products. It is anticipated that new apps or updates will come out during their early phases.
The value-added paradox illustrates why the price at which an asset was bought is not a good guide in determining whether or not it makes for a wise investment. This helps us understand why some businesses are still successful despite their investors reaping huge profits from skyrocketing crypto-currency values, and also sheds light on the reasons behind certain ventures’ failure.
Cryptocurrencies have seen a surge in investment, leading individuals to overlook hardware purchases. Computer hardware has become more affordable than ever before for businesses taking advantage of token values as opposed to expending money on costly machines and equipment. Mastering the first two layers is still critical, but those who jumped aboard early can find greater reward from these projects than someone simply investing millions into new technology advancements and ideas.
When discussing the value-added paradox, we can examine how strong a model is. This strength or defensibility of a model can be determined by its effectiveness in utilizing tokens and having perceived utility value between them.
Layer one’s extraordinary defensive capability is generally associated with a project’s token economics, where purchasing allows users to reward those who support and promote the venture by creating more demand, without having to adhere to burdensome obligations such as voting rights. As cryptocurrency is open-source software, each token holder can evaluate the code and examine how decisions are made within a project or how voting works.
As a result, there is no value in implementing intricate regulations that force everyone to collaborate on projects; success will still mostly depend upon those who comprehend and promote their ideas. This means more protection but also much risk as one can never be sure if the idea is secure from within. It’s unlikely that any incentives for continuous capitalization of the project would exist should it get dropped due to various reasons.
This is primarily important for projects like Initial Coin Offerings (ICOs) and takeovers. However, with a dependable defense system in place, even these riskier ventures can become appealing to new investors – instead of establishing another traditional model, simply because it promised a similar financial gain without proper analysis.
As more customers and users join a product or service, its value increases drastically through the phenomenon known as network effects:
5.1.4.1 Same-Side Network Effects
Network effects of various products can be traced back to other networks. Centralization and decentralization both refer to how economies are structured; centralized ones give power largely to one entity, while decentralized ones rely upon collective collaboration. This sort of interconnectedness allows for mutual benefit and the creation of same-side network effects: advantages that all members share, rather than those generated by a few at the expense of many others.
5.1.4.2 Cross-Side Network Effects
Cross-site network effects are not necessarily mutual, yet they contain a certain property that obligates one side to engage with the other. As an example, if there is another radio station playing music, more people will likely choose to listen in than before. These network effects appeal to both sides of the equation economically and further bolster economic barriers that may impede market players from accessing them due to various reasons.
5.1.4.3 Economies of Scale
By taking advantage of economies of scale, validators can create a defensive system where every component is integrated into the entire ecosystem. From tokens being put in wallets and exchanges to practical applications that are linked to the network and useful features being added to protocol specifications, ‘decentralized’ organizations gain from making sensible decisions.
6. Blockchain Business Model 2: Smart Contracts
Smart contracts are complex, multi-faceted platforms built on layer-one systems. Put simply, this grants them the ability to quickly and easily construct far more comprehensive applications arising out of their inherent combination of layer two through four features alongside economic incentives for both parties involved in any contractual agreement. By designing appropriate micro-markets and providing the right incentives, intermediaries can be eliminated, thus stimulating dynamic creative energy among competitors.
6.1 How Smart Contracts Influence Blockchain Models
By leveraging smart contracts, blockchain models are revolutionized by enabling application layer owners to sell applications through a competitive yet cooperative marketplace. This gives all users more decentralized options for components, services, and complete solutions as there is no risk of manipulation from entities acting as gatekeepers. Ultimately this allows individuals to take back control over how their projects are built without the fear of being taken advantage of. Various blockchain protocols are utilized across industries to revolutionize projects of all types, such as banking software and asset management platforms.
7. Bottom Line
Combining blockchain technology and business models is a powerful way to revolutionize existing practices. Cryptocurrencies are now seen as an independent form of currency that can be managed without the need for banks or other financial institutions, which allows communities to manage them on their own terms. By introducing blockchain-based solutions into your business you have the opportunity to optimize processes in more efficient ways than traditional methods ever could.
Crafting the perfect blockchain business model is like any other creative process – no two models are alike. Ultimately, selecting an appropriate one will depend on your enterprise’s purpose and desired outcomes.
Are you ready to take your business into the promising world of blockchain? If so, seize this opportunity and book a call with us now!