The Blockchain – A New Business Model?

By | Cryptocurrency, Technology

As in any new disruptive technology, there are usually more questions than answers. This, of course, has a tendency to bring out the naysayers and cynics in droves. But does that mean one should just push aside all this Blockchain excitement and momentum as a fad?  All those that reacted to the Internet in a similar way are feeling quite silly about now.

The prospects for the technology are impressive. It has the ability to replace most trusted third parties in a business transaction; therefore there are a very large number of possible applications for it. However, having read a large number of articles referring to all of the possible disruptions that the Blockchain could create it occurred to me that there were very few discussions about business models. After all, anybody building a business around the Blockchain technology would have to consider a business model to create a long-term competitive advantage.

So, what would the business models look like? Right now it looks more like the Blockchain technology has brought to the forefront all the inefficiencies in many different industries, and how it could alleviate them.  You could therefore imagine the number of companies that it will help to completely remove or reduce a number of current costs and fees. Helping a company to reduce these fees and taking a percentage of what you could save them could produce a very profitable business and is in itself a solid business model.

However, if a company uses the Blockchain to charge for their product or service the challenge becomes greater.  A company would need to determine which currency they would use in the transaction. Bitcoin, as well as other crypto currencies are an integral part of the Blockchain. They provide a monetary incentive for the miners to be motivated to verify all transactions.  Therefore the most obvious and secure choice would be the use of a digital currency. However, which one would that be? Bitcoin has been the most prominent, however, many other crypto currencies are now available yet no one can be certain which ones will still be in existence in 1 year.

This would most likely mean you would have hundreds of different currencies fluctuating daily depending on their rate of usage.  It would be up to each business to decide which currency they want to use as a means of exchange in their Blockchain.  Eventually one of these currencies would most likely become the dominating force.  Until this happens, it would create a lot of potential forex exposure. You could make some transactions then find your crypto currency has lost 5% in a matter of hours. This, of course will not deter the most motivated to move forward, continue to innovate and solve these problems. We have already experienced the like.

As we saw in the Internet boom and bust, the regard for the business model went out the window.  Revenues and profits were not something to be concerned with in the short or even medium turn. They would eventually come and in the meantime there was more than enough money waiting to be thrown at every new venture that came to the door.

Due to the rise of commercial growth of the Internet, venture capitalists saw record-setting growth as dot-com companies experienced meteoric rises in their stock prices and therefore moved faster and with less caution than usual, choosing to reduce the risk by starting many contenders and letting the market decide which would succeed. Most company’s business models relied on harnessing network effects by operating at a sustained net loss and to build market share (or mind share). These companies offered their services or end product for free with the expectation that they could build enough brand awareness to charge profitable rates for their services later. The motto “get big fast” reflected this strategy. It was all about “eye balls” and less about profit.

This was, of course, the wrong attitude to have and although there were a few winners in the end, many lost, and lost big. In hindsight we are able to see that speculative bubbles do not turn out well.  The companies that manage to avoid the euphoria and create real value for their customers (as opposed to the attitude of give it away for free and they will come) will develop sustainable profitable business as we move into a new era of innovation.

The Blockchain technology is attracting more and more attention, but as we have seen in the past, it is easy to be blinded by what technology could offer. However, business is business. In order to function, companies need to turn a profit and to do so there has to be a clear value proposition.  So, what will the business models look like?