Blockchain for Business Series: Blockchain Protocol Commercialization: A “BizTech” Agenda

It has been an interesting past few weeks, where I have expended a lot of time and energy on digital assets, their lifecycles, valuation models, and general concepts around fungibility, fiat conversation, and audit requirements in a blockchain-powered business network. This post is inspired by many frustrations I have around business modeling, monetization strategy, and understanding and devising an economic model around a blockchain business network. While I expend time and energy in deciphering the various complex structures, technologies, and motivations around various components, I wanted to go back in time and source a thesis from the evolution of Internet protocols and its related economic structure, which began with curious innovations and ended in not only disrupting and revolutionizing many industries but also creating new business models that never existed before. I suspect we will witness such a disruption once again, perhaps on a different scale and driven by motivation surrounding the inefficiencies of today’s economic infrastructure and ever-changing valuation structure of things we possess or aspire to acquire, whether real or digital. As digital goods begin to take center stage in our evolving economic system, the infrastructure that enables the creation, distribution, and exchange of these digital assets seeds the curious innovations that are constantly changing our perceptions (and subsequent realizations) of value. It is like any other system that is making itself up as it goes along, just like weather, evolution, and vibrant economies that aren’t inert and stangnant;1 since these systems are in a constant state of change, they aren’t predestined. Not being predestined, the digital economic system isn’t predictable, making this a very interesting and perfect breeding ground for amazing innovation.

As we dare to envision a world with decentralized control and governance based on distributed technology challenging every business model and governance structure built upon centralized business structures, we do have to ponder on not just the shift but the motivation, incentive, and monetization elements that will fuel and power the economic infrastructure to move things of value, thereby keeping up with changing our perception (and subsequent realization) of value. Thus, taking a few pages from the success of Internet phenomena and the early days of the Internet evolution and monetization of various layers that exemplify the Internet, where each layer is more abstract than the lower layers, enabling a robust and modular system design where . While there is a tight dependency between each layers, any one layer can be upgraded, patched, or completely replaced, with an impact on adjacent layers.

In this post, I will attempt to decompose blockchain into essentially four distinct layers to better understand and categorize technology, security, scalability, service orientation, and collective economic contribution to the blockchain application design. While there are many layers and approaches proposed to simplify our understanding of complex blockchain technology spaces, the intent of my discussion here is to focus on the commercialization of blockchain protocols and its collective impact on overall costs of not only solution designs but also on the operational elements of the blockchain network. And while many of the innovations in the foundational transaction protocol (layer 1), their enhancements around security and scale (layer 2), and core services that utilize these (layer 3) manifest their economic model and strength with some kind of token, be it a crypto asset or crypto currency governed by a crypto economic system in the blockchain network (mining, transaction processing, etc.), all of the collective constructs of underlying layers and their respective token models feed into layer 4, which is the business application that creates a tapestry from services provisioned in layer 3 and extend the benefits of decentralized (or quasi-decentralized) blockchain networks in the form of speed, cost, transparency, and trust to network participants. Drawing an analogy with Internet protocol layers, ideally these layers from a system design perspective should be abstracts and modular and easily swappable, enabling business applications and underlying services to take advantage of innovations and their resulting (hopefully improved) costs structures at lower layers.

In my post discussing the governance structure of blockchain networks, I describe how the governance structure was fundamentally being based on devised economic incentives driven by consensus in hopes of governing the network. This leads to defining governance—a body (centralized or decentralized) whose sole responsibility is to make binding decisions in a given system by establishing a set of laws or rules.

While the genesis of blockchain, which was largely permissionless (e.g., crypto-asset based networks such as Bitcoin, Litecoin, etc.), relied upon technology-based systemic governance comprising incentives and mechanisms of coordination, this systemic governance has its own set of challenges in the enterprise business networks attempting to exploit the tenets of blockchain technology. In the enterprise world that is largely regulated and relies upon (mostly) permissioned blockchain models, the checks-and-balances system is complicated by transactions between competing entities, often with regulated data and a fiduciary responsibility, which can neither account for the tangible or systemically generated incentives (crypto-assets) nor have network-wide mechanisms of coordination due to privacy and confidentiality issues. So tokens as a digital assets or crypto assets represent a vital part of the economic consideration at every layer, and most likely every layer either utilizes some form of token economy and establishes a monetization strategy either in the form of utility as an incentive structure or leverages a service-driven model that fuels the exchange of tokens as a fungible unit between the various participants in a network. While most token economic models thrive in truly decentralized structures, and many permission or rather quasi-decentralized models have seen the emergence of use of non-fungible tokens or software as a service model to commercialize protocol, business networks and their business models that serve an ecosystem should determine the right model that fits initiation and sustainable growth of the network while preserving the modularity of the solution design.

Most blockchain monetization strategies include (but are not limited to):

1. Token-based models: Operation fees write to the blockchain-powered business network’s distributed database.
2. Tokens as a medium of exchange : Lending or selling a token as a “step-through” currency.
3. Asset-pair trading: Monetizing margins.
4. Commercialization of the protocol: Technology services, including cloud and software labs and consulting services.
5. The Power of networks: Also extrapolating the power of networks and exponential power of co-creation models, leading to new business models and resulting economic value. 

Figure 1: Blockchain protocol commercialization layers

1.    Layer 1: Foundational trust and transaction layer: This layer provides the foundational framework and the much-needed basic infrastructure to facilitate the network of trust and transactions technology. Similar to the basic networking layers (Ethernet/TCP/IP) that laid the foundation of information networks, a base trust layer, protocol, and standards are essential in order to move value, preserve the integrity of assets, and promote asset accountability on the network participants as they transact, and just like the Internet, these are global networks, implying that the burden of trust, availability, and resilience are immense, making the standardization of protocols vital.

Components:

Consensus

Data standards

Cryptography and security standards

Smart contracts: definition and composition

Asset definition: control and audit

Monetization Thesis:

a)    Token-based model or utility tokens: Operation fees write to the blockchain-powered business network’s distributed database. Transaction volumes drive utility and usage, leading to demand.

b)   Tokens as a medium of exchange—Native currency: Lending or selling tokens as a “step-through” native currency that acts as a utility, usually confined to a network currency or token denomination that represent a thing of value.

c)    Commercialization of the protocol: Technology services, including cloud (licensed software or as-a-service offerings) and software lab and consulting services.

2.    Layer 2: Protocol optimization layer: Drawing similarities from the Internet, this layer provides useful protocols and standards that leverage the foundational network trust and transaction layer. While the focus of layer 1 is on infrastructure, a set of layer 2 protocols provides an avenue for modularity as demanded by use cases and addresses core issues that are either impossible to address at the base layer due to complexity and bloat or simply are not the focus area of base layer protocols. Some examples include offline storage, privacy, and confidentiality of users, assets, data, and protocol optimization for performance and usability, and, most importantly, interoperability between various layer 1 protocols and standards.

Components:

Scalability protocols

Privacy and confidentiality

Storage services: data and assets

Interoperability: assets and chains

Monetization Thesis:

a)    Token as a medium of exchange: Lending or selling tokens as a “step-through” or native currency that acts as a utility, usually confined to a network.

b)   Asset-pair trading or bridged assets (tokens): Monetizing margins or simply using a bridged asset to provide interoperability between blockchain or different asset types. Transaction volumes drive utility and usage, leading to demand.

c)    Commercialization of the protocol: Technology services, including cloud (licensed software or as-a-service offerings) and software lab and consulting services.

3.    Layer 3: Blockchain business service layer: At this layer, we begin to see the emergence of business services and components that again build upon layer 1 and layer 2 and provide necessary components that are not only interoperable but adhere to composable designs, enabling the business application to leverage layer 3 services to conduct business and drive transactions on to the network(s). These services provide singular units of a business service, such as identity, KYC, audit tokens, etc. While today these services manifest in the form of dAPPs or smart contracts, these services should be abstracted from the underlying layers, making them agnostic to underlying layer 1 and layer 2 and their respective token economies. It is also possible that the same services may exists in various layer 1-driven ecosystems to provide ubiquity, similar to mobile apps in various device-driven ecosystems.

Components:

Asset tokenization

Token interoperability and standards

Asset transport and integrity

Identity services

Verification and validation services

Asset exchange services: exchange and fungibility

Audit and compliance services

Monetization Thesis:

a)    Tokens as a medium of exchange: Native token-driven model: Operation fees write to the blockchain-powered business network’s distributed database. Transaction volumes drive utility and usage, leading to demand.

b)   Bridged tokens or utilizing native tokens: Monetizing margins or simply using a bridged asset to provide interoperability between blockchain or different asset types. Transaction volumes drive utility and usage, leading to demand.

c)    Commercialization of the protocol: Technology services, including cloud (licensed software or as-a-service offerings) and software lab and business consulting services.

d)   Business optimization services: Provide consulting services around new business models and the co-creation elements of the platform.

4.    Layer 4: Industry/business application layer: Layer 4 is where blockchain tenets come alive and the true value and promise of blockchain technology is realized. For any industry to ramp up blockchain-powered applications, business services layer (layer 3) services are woven together to create a tapestry of industry-specific solutions and give birth to new business models and new industry participants and roles. This layer should ideally harness the innovation-led evolutionary business models and focus on business architectures that rely on the technology choice frameworks and modularity enabled by lower-layer protocols. While most token economic models thrive in truly decentralized structures and many permissioned or rather quasi-decentralized models have seen the emergence of use of non-fungible tokens or software as a service models to commercialize protocol, business networks and their business models that serve an ecosystem should determine the right model that fits initiation and sustainable growth of the network while preserving the modularity of the solution design.

Components:

Industry-specific consortia

Identity linkage services

Asset exchange and fiat fungibility

Asset custody-led services: ETFs and secondary markets

Monetization Thesis:

a)   Network effect: Extrapolating the power of networks and the exponential power of co-creation models, leading to new business models and resulting economic value.

b)   Transactional model: Transaction volumes drive utility and usage, leading to demand and the creation of additional services.

c)    Network growth: Includes onboarding new participants and exploiting the resulting growth in business transactions and avenues for new business models.

d)   Costs efficiencies and new business models: Due to co-creation and platform approaches.

5.    Adjunct business layer: Business linkages to any of the core four layers: There are many layers not linked with the above broadly defined four layers that may be essential to providing support services to some or all layers. This layer can be viewed as extensible services to the blockchain protocol commercialization landscape with blockchain specialization.

Components:

Blockchain business model services

Business structure and legal services

Blockchain network operation services

Audit and compliance services

Monetization Thesis:

a)    Network effect: Extrapolating the power of networks and the exponential power of co-creation models, leading to new business models and resulting economic value.

b)   Network services: Specialized services to networks, consortia, and network participants.

c)    Network operation services: Provide a neutrality to the network operational functions by managing technology services and business (continuity) services.

Devising Modularity to Avoid Lock-In Linkages

As the technology evolves, so does the business economics tied to it. It is therefore vital to devise a business architecture to be modular, enabling a key capability for the technology frameworks (mainly layers 1 and 2) to remain flexible and extensible. It is vital to understand the components that are grouped into these defined layers, which serves as a rubric to compare the various infrastructures, services, and frameworks in their respective layers and with their respective peers. This approach also aids in a componentized model for business network solution design with varying degrees of quality of services (QoS) and trade-off options available to address the design specifications demanded by the use case and industry. Modularity and isolation of these layers provide a linked economic structure where the choice framework of every layer is tied to the cost structures and economic models of other dependent layers.

Conclusion

The intent behind blockchain protocol commercialization is to focus discerning levels of services and their economic impacts with their own monetization theses and their collective impacts on overall costs of not only solution designs but also the operational elements of the blockchain network. And while many of the innovations are in foundational transaction protocols (layer 1), their enhancements around security and scale (layer 2) and core services that utilize these (layer 3) manifest their economic models and strengths in some kind of token, be it a crypto asset or crypto currency governed by a crypto economic system in the blockchain network (mining, transaction processing, etc.). So tokens as a digital assets or crypto assets represent a vital part of the economic consideration at every layer, and most likely every layer either utilizes some form of token economy and establishes a monetization strategy either in the form of utility as an incentive structure, or leverages a service-driven model that fuels the exchange of tokens as a fungible unit between the various participants in a network. While most token economic models thrive in truly decentralized structures and many permissioned or rather quasi-decentralized models have seen the emergence of use of non-fungible tokens or software as a service models to commercialize protocols, business networks and their business models that serve an ecosystem should determine the right model that fits initiation and sustainable growth of the network while preserving the modularity of the solution design.

References and Interesting Reads

1.    Jacobs, Jane, Nature of Economics, Unpredictability, P.137

2.    https://www.dhirubhai.net/pulse/blockchain-business-series-models-nitin-gaur/

3.    https://www.dhirubhai.net/pulse/forging-ahead-blockchain-2018-my-focus-technology-industries-gaur/

4.    https://www.dhirubhai.net/pulse/blockchain-business-series-understanding-governance-networks-gaur/

5.    https://www.dhirubhai.net/pulse/blockchain-power-business-co-creation-platform-thinking-nitin-gaur/?published=t

6.    https://medium.com/@coriacetic/the-four-layers-of-the-blockchain-dc1376efa10f

7. https://blog.ethereum.org/2014/04/30/decentralized-protocol-monetization-and-forks/