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Blockchain Business Model Guide

The blockchain business model consists of four main components: the value model (core concepts, core values, and value propositions of key stakeholders), the blockchain model (protocol rules, network forms, and application layer/ecosystem), the distribution model (amplifying key channels) and its community, and the economic model (the incentives for protocol participants to make money). These elements combine to serve as a foundation for building and analyzing reliable blockchain business models.

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What Does the Blockchain Business World Mean?#

With more and more startups emerging with blockchain technology, it is normal to see the proliferation of blockchain protocols that promise to disrupt any industry. Just as the internet began to go mainstream, thanks to technologies like search engines.

We saw the birth of many search engines, which fragmented the search market; until Google became so dominant that it tamed most of the search market share.

Are we assisting in solving a similar phenomenon today? Partially. However, to understand the blockchain economy and the business models that will emerge from it, we need a slightly different business script!

Business Models in the Internet Era#

The internet has spawned a whole new set of business models. It is no coincidence that the term “business model” has been widely adopted in the dissemination of IT technology companies:

These algorithms learn from data, which can be classified as your interactions on the platform. All this data is stored and processed by massive databases called graphs. Access to these graphs has not yet been opened; it is proprietary.

In fact, this data is the main asset of these tech companies. This is what allows them to monetize their business models, creating unique experiences for users and retaining value in the long term.

Thus, even though the internet era initially provided hundreds of new business models. It also created a winner-takes-all effect. Those companies that were able to capture network effects ultimately gained a significant competitive advantage.

For example, according to the venture capital funding report by CB Insights and PWC, venture capital deals surged significantly in 2017 compared to 2018: these algorithms learn from data, which can be classified as your interactions on the platform. All this data is stored and processed by massive databases called graphs. Access to these graphs has not yet been opened; it is proprietary.

In fact, this data is the main asset of these tech companies. This is what allows them to monetize their business models, creating unique experiences for users and retaining value in the long term.

Thus, even though the internet era initially provided hundreds of new business models. It also created a winner-takes-all effect. Those companies that were able to capture network effects ultimately gained a significant competitive advantage.

For example, according to the venture capital funding report by CB Insights and PWC, venture capital deals surged significantly in 2017 compared to 2018:

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Algorithms learn from data, which can be classified as your interactions on the platform. All this data is stored and processed by massive databases called graphs. Access to these graphs has not yet been opened; it is proprietary.

In fact, this data is the main asset of these tech companies. This is what allows them to monetize their business models, creating unique experiences for users and retaining value in the long term.

Thus, even though the internet era initially provided hundreds of new business models. It also created a winner-takes-all effect. Those companies that were able to capture network effects ultimately gained a significant competitive advantage.

For example, according to the venture capital funding report by CB Insights and PWC, venture capital deals surged significantly in 2017 compared to 2018:

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As venture capitalist Fred Wilson pointed out, these deals are “fewer and larger.” In short, in the last few years of the internet era, investors and existing players are consolidating towards larger deals, which are creating more consolidation, winner-takes-all effects, and high barriers to entry.

Admittedly, by 2019, new internet companies could be born to become the next Facebook or Google. However, it may not be as real as it was ten years ago. The dominant tech companies in the market may use their cash in the bank to buy them.

In short, the internet seems to have produced more open business models compared to the past (which it initially did). Consolidation began, and new “corporate groups” formed in the market.

While this process may be normal in a world taken over by proprietary data-driven applications, it may not be the case in the blockchain economy, so let’s see why.

Blockchain Economy Based on Fat Protocols and Thin Applications

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In other words, the protocols that initially allowed networks to operate did not manage to capture economic value, but rather through applications. In the blockchain economy, the opposite is true. Applications become marginalized compared to the protocols that make them work (think Bitcoin or Ethereum).

Joel Monegro believes that this happens for two reasons:

Shared data layer: In a business model based on the internet, most of the value is captured from a platform or application. This data is proprietary, and therefore access to it will be restricted so that companies (think Facebook, Twitter, or Google) can monetize it. On the other hand, in blockchain-based business models, data cannot be closed and will be shared. This will lower the barriers to entry, making it easier for new players to enter the market.
Speculative crypto “access” tokens: In short, according to Monegro, this aspect creates a token feedback loop where interest in the token generates speculation and increases its value, which in turn only attracts more attention. This phenomenon in turn allows the value of protocols to grow faster than the value of the applications built on top of them.

This theory is significant because it points to how we need to change our thinking about business models. It may also imply a new business script!
Do We Need a New Business Manual?

If we want to succeed in the business models of the blockchain economy (when and how to prove it will work), we need to change our script.

In the infographic on the Visual Capitalist website, you can see how the tech companies that dominated in the late 1990s have become marginalized today:

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For example, as early as 1998, AOL and Yahoo represented the internet! Most web traffic flowed through these portals. In 2018, Verizon created a business unit called Oath (including the acquisition of Yahoo and AOL) and wrote them down for about $4.6 billion!

Twenty years later, who will still be on the list?
New business models may emerge at the protocol level

When Google announced its IPO in 2004, the whole world wanted to know its numbers. Everyone knew Google was a profitable company. However, when it finally opened the hood, the reality was even more spectacular.

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Google generated over $100 billion in revenue and about $30 billion in profit! The web was not just a bubble that burst in the .com era. It turned out to be a whole new world. Business people took notice.

If the blockchain economy can prove to be sustainable in the long term, understanding how the web evolved and how tech companies succeeded will be crucial.

However, we need to look at this phenomenon from a different perspective. We may want to continue focusing on those protocols that will ultimately dominate the blockchain economy, as the value captured may subsequently be there.
Blockchain as a New Business Model Toolbox

As the web continues to grow exponentially, new companies and innovative business models sprout. In this blog, I discuss in detail the innovation introduced by Google’s business model and why I believe this is what makes it so successful.

But paradoxically, this seems to be an innovative business model that a few years ago seemed to have become a recognized standard business model today. Another paradox is that as those tech giants have taken over everything, many business people believe this is how it should be.

When you think of the implicit revenue models of Google and Facebook through advertising. This model worked very well in the internet era because Google and Facebook could retain ownership of all the data generated by billions of users worldwide.

Another business model is too difficult. This is also why it makes sense to manage this data from large centralized data centers.

Blockchain may change this because it ultimately allows for control of data at a decentralized level. Each user can retain ownership of their data, while companies will make money based on their protocols.
Breaking Down the Blockchain-Based Business Model Ecosystem

We can break down the blockchain ecosystem into several building blocks.

Among them, we have:
Layer 1

Layer 1 protocols are the underlying infrastructure that serves as the foundational layer for the entire ecosystem. Examples of these Layer 1 protocols include Bitcoin, Ethereum, Solana, and many other protocols.

These Layer 1 protocols lay the groundwork for building the entire ecosystem on top of them. While Bitcoin is primarily used as a transactional currency and store of value.

Ethereum allowed many other applications to emerge like mushrooms after rain. As we will see, given Ethereum's slowness in scaling, many other scaling protocols (known as Layer 2) have been built on top of Ethereum and other Layer 1 protocols.

Ethereum is an interesting case to understand the complete crypto ecosystem as it supports various applications, layers, and platforms waiting to be built.
Tokens

On top of Layer 1 protocols, tokens can be built.

For example, ERC-20 tokens can be easily built on Ethereum:

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ERC-20 tokens represent “Ethereum Request for Comments,” which is a standard for issuing other tokens built on Ethereum. Based on smart contracts that determine their rules, ERC-20 allows anyone to issue tokens on Ethereum. Because they use a standard, they are interoperable. ERC-20 tokens are crucial for understanding the development of Ethereum's business model platform.

Tokens can have various properties and are typically classified according to several main categories:

Platform.
Security.
Utility.
Transactional.
Governance.

Smart Contracts

On top of Layer 1 protocols, automated contracts can be built, known as smart contracts:
Smart Contracts

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Smart contracts are protocols designed to facilitate, verify, or execute digital contracts without the need for a trusted third party. These contracts follow the “if/when” principle and have some similarities to modern escrow services, but without third-party involvement to guarantee the transaction. Instead, it uses blockchain technology to verify information and increase trust between transaction participants.

These smart contracts enable users to build custom applications on top of the main layer, automatically executing them when the conditions specified in the smart contracts are met.
NFTs

Another application that initially emerged on Ethereum is NFTs:

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These contracts follow the “if/when” principle and have some similarities to modern escrow services. In other words, the purchase price and property ownership are stored in one system and then allocated to the relevant parties simultaneously.
How Do Smart Contracts Work?

Smart contracts use blockchain technology to verify information and increase trust between transaction participants. Each smart contract contains the terms of the agreement written in code form, which is committed to the blockchain and publicly available.

At some point, an event outlined in the smart contract will trigger. When selling a house, this event might be the house reaching a predetermined price. Once triggered, the code executes and completes the transaction.

It is important to note that smart contract transactions do not occur in a vacuum. Regulators oversee contract activities on the blockchain to analyze the market while maintaining the privacy of the parties involved.
Benefits of Smart Contracts

Incorporating smart contracts into ordinary transactions has several important benefits, including:

Autonomy – The individuals most affected by the transaction have complete control over the agreement. There is no need to rely on third parties such as agents, brokers, or lawyers. Autonomy also means that third parties cannot enter the transaction and manipulate it for their own benefit.
Security and Innovation – If written correctly, smart contracts are extremely difficult to hack. Since each record is linked to previous and subsequent records on a distributed ledger, changing one record would require altering the entire chain.
Speed and Accuracy – There is no need to waste time processing paperwork or verifying data errors that often occur in large, complex transactions. The code underpinning smart contracts is stricter than the legal language that supports traditional contracts.

Key Outsourcing:

Smart contracts are digital, automatically executed contracts where the agreement is written into lines of code. This eliminates the need for third-party intermediaries.
Smart contracts follow the “if/when” principle. The code only executes according to the agreement after certain events are met.
Smart contracts grant participants autonomy in transactions, avoiding the possibility of self-serving third parties manipulating them. Based on blockchain technology, smart contracts are extremely difficult to compromise and provide a more efficient way to create robust agreements.

Non-fungible tokens (NFTs) are crypto tokens that represent unique items. Non-fungible assets are those that cannot be exchanged on a one-to-one basis. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin, which has 21 million identical coins, they cannot be exchanged in a similar manner.

A good example is the Axie Infinity game, which utilizes NFT tokens to make its gameplay more attractive to users:

As previously seen, many protocols work in a direct manner, such as Ethereum and Bitcoin.

Other applications located above the underlying layer have many moving parts, some managed on top of Layer 1, some on top of Layer 2, and sometimes outside the blockchain (like the Brave browser's cave or search engines that work as applications outside the blockchain, utilizing BAT tokens as a community incentive mechanism!).

Thus, the ecosystem is developing very quickly, bringing together more and more parts to provide users with increasingly rich experiences.

Several Examples and Use Cases of Blockchain Business Models#

Here are some examples of blockchain business models, analyzed as follows: FourWeekMBA uses the VBDE framework.

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The blockchain business model according to this FourWeekMBA framework consists of four main components: the value model (core concepts, core values, and value propositions of key stakeholders), the blockchain model (protocol rules, network forms, and application layer/ecosystem), the distribution model (amplifying protocols and their communities), and the economic model (the incentives/motivations for protocol participants to make money). These elements combine to serve as a foundation for building and analyzing reliable blockchain business models.

VBDE Blockchain Business Model Template#

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Ethereum was launched in 2015, with its cryptocurrency Ether serving as an open-source, blockchain-based decentralized platform software. It enables smart contracts and builds distributed applications (dApps) without downtime or third-party interference. It also helps developers build and publish applications, as it is also a programming language that runs on the blockchain.

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Steemit is a platform that combines blockchain technology, social media, and cryptocurrency for creating user-generated content and community building. The social community helps produce and curate content while earning rewards in two main cryptocurrencies: 50% Steem Power and 50% Steem Dollars.

Steemit is a platform where users publish content, with Steem being its underlying cryptocurrency and blockchain protocol.

In a blockchain economy, so far, a large portion of the value exists at the protocol level. Therefore, you will have a blockchain protocol with a set of underlying rules (in this case, the Steem protocol).

In the Steem protocol, to reach consensus, its algorithm follows proof of stake (as opposed to Bitcoin's proof of work mechanism).

On top of the Steem protocol, multiple applications can be freely built. These applications will be decentralized because they will be based on a decentralized network first.

In the Steem blockchain environment, Steemit is the largest and most important (Steemit was the first application launched as a use case for the Steem protocol).

This is also why I alternate between using Steem and Steemit here. However, Steem is the protocol (defining the underlying core rules), while Steemit is one of the most important decentralized applications built on the Steem blockchain.
How Did Steem Start? A Brief History of Steemit

The company was co-founded by CEO Ned Scott and CTO Daniel Larimer in March 2016. Both Ned Scott and Daniel Larimer were looking for ways to put blockchain technology into practice to solve real-world problems. The more they thought about it, the more it made sense to build a community around blockchain. In fact, as Ned Scott confirmed in an interview with coinreport.net:

“When the idea of Steem and Steemit really started to take shape, we were exploring several different blockchain-based business models. We were looking at micro-insurance on the blockchain and some other ideas, but ultimately, we kept coming back to the idea that the most useful and powerful thing to leverage around cryptocurrency is community.”

He went on to say:

“Steem was born out of the idea of insurance and mutual aid: the idea that people could help each other in a peer-to-peer network if they were struggling to solve problems or needed help. It quickly grew into a larger vision where Steemit was a place where individuals could earn community rewards for posting and voting on content. That was in January of that year.”

By May 2016, Steemit launched alpha testing with the help of over 150 early adopters. As Ned Scott pointed out in the same interview, the uniqueness of Steemit lies in the fact that everything done on the platform (posts, comments, and votes) is directly on the blockchain. Why is this important? It not only allows for the management of things using a distributed system without central authority. It should also end the old paradigm that has taken over the web for the past two decades, where some tech giants took over the world by having users provide data for free.
What Are the Key Principles Behind Steemit? The Three Founding Principles of Steem

Platforms like Facebook, Twitter, and Reddit derive most of their value from the data created by their users without rewarding them. Steemit (also known as Steem) instead tries to build its platform based on several fundamental principles:

Everyone who contributes to the business should receive proportional ownership, payment, or debt from the business.
All forms of capital are of equal value: In short, whether community members contribute cash or time to develop the platform, they are regarded as capital.
The community produces products to serve its members.

What Does the Steem Community Do?

According to the Steem white paper, its community provides five main values:

A source of curated news and commentary.
A way to get high-quality answers to personalized questions.
A stable cryptocurrency pegged to the dollar.
Free payments.
Work to provide the above services to other members.

The starting point of the Steem community is that the incentive mechanisms created by cryptocurrency can guide social media platforms like Steemit.

As further explained in the Steem white paper (page 13):

“The vast majority of people have more free time than cash. Imagine the goal of guiding a currency in a poor community that has no actual cash but is rich in time. If people could earn money by working for each other, they would be self-sufficient, creating value through fairly facilitated mutual exchanges of accounting/currency.”

It continues:

“Tasks that can be objectively evaluated by computer algorithms are inherently limited, and generally speaking, positive external benefits are also limited...

...To give everyone an equal opportunity to participate and earn currency, people must have the opportunity to work. The challenge is how to judge the relative quality and quantity of work provided by individuals and to do so in a way that effectively allocates rewards to millions of users. This requires the introduction of a scalable voting process. In particular, it requires that the power to allocate funds must be as decentralized and distributed as possible.”
How Does Steem Work?

As stated in the Steem white paper:

“The basic accounting unit on the Steem platform is STEEM, a cryptocurrency token. Steem operates on a one STEEM, one vote basis. Under this model, individuals who contribute the most to the platform have the greatest influence on how contributions are rated based on their account balance. Additionally, Steem only allows members to vote when the STEEM commitment cash-out schedule is met. Under this model, members have a financial incentive to vote in a way that maximizes their long-term interests in the value of their STEEM. Steem is designed around a relatively simple concept: every meaningful contribution to the community should be recognized for its value. When people are recognized for their meaningful contributions, they continue to contribute, and the community grows. Any imbalance of giving and receiving within the community is unsustainable. Ultimately, givers tire of supporting takers and leave the community.”
What Is Steem Currency? Explanation of Steem (STEEM), Steem Power (SP), and Steem Dollars (SBD)

The Steemit community allows for the establishment of an incentive mechanism that enables its development over the long term, primarily existing in three currencies. Each of these currencies has different uses:
Steem (STEEM): The Cryptocurrency of Social Media

STEEM is the cryptocurrency of the social media platform. In other words, it is the blockchain-based unit of transaction that can be easily traded on the market. Of course, its value can change rapidly. As of January 19, 2020, the value of Steem was 15 cents.
Steem Power (SP): The Stock Options of the Steem Community

Stock options for startups are an effective tool to drive their growth by granting ownership to employees; creating strong incentives for development. In the Steem community, the equivalent of stock options is the Steem Power currency. In fact, users earn rewards for their activities on Steemit through Steem Power. This is a currency that previously followed a 13-week vesting schedule. In short, these amounts cannot be easily traded on cryptocurrency exchanges. In short, the more SP you have, the greater your influence on the platform's reward system. The language used when converting Steem into SP reinforces this, and vice versa:

Converting Steem into Steem Power (SP) is called powering up. This is because you are no longer a speculator but have become part of the community. Therefore, you actively participate in community building.
Converting SP into Steem is called powering down. This is because you are no longer a community member and will receive your currency payments over thirteen weeks. In fact, after you “power down,” you will receive the total amount in a vesting schedule over the next week.

As we can see, Steem and Steem Power have two specific goals. Steem is a cryptocurrency with more speculative logic. In contrast, Steem Power is the currency paid to Steemit members. When you convert Steem into SP, you become an active member of the community. Therefore, you are “powered up.” Conversely, by converting SP in Steem to a speculator, you “power down.” Steem Power has another key aspect. As we will see, this grants its holders the power to elect a group of individuals known as “witnesses” responsible for publishing the price feed.
Steem Dollars (SBD): The Convertible Notes of the Steem Community

The primary goal of Steem Dollars is stability. In fact, Steem Dollars can be used as convertible notes. In fact, startups use convertible notes as short-term debt instruments that allow them to finance their operations by returning ownership at rates determined by the next round of financing. The Steem community utilizes Steem Dollars.

As stated in the Steem white paper, SBD:

“Blockchain-based tokens can be seen as ownership of the community, while convertible notes can be viewed as debt priced in any other goods or currencies. The terms of convertible notes allow holders to convert them into supporting tokens at fair market value with minimal notice. Creating tokens convertible to dollars enables the blockchain to grow its network effects while maximizing returns for token holders.”
The Price Feed, Witnesses, and Anti-Fraud Mechanisms of the Steem Community

The new price feed is a mechanism that allows a group of elected individuals to set the price of Steem Dollars. In fact, to maintain parity with the dollar, it cannot be left to fluctuate freely but needs to pay and withdraw interest accordingly. As the white paper states:

“SP holders elect individuals known as witnesses to publish the price feed. The elected witnesses are presumably trusted by those who have a vested interest in the quality of the feed. By paying those who are elected, Steem creates market competition for the right to produce the feed. The more rewards feed producers receive, the greater their losses from publishing false information.”

As defined in the white paper:

“The primary concern of Steem feed producers is to maintain a stable one-to-one conversion between SBD and USD. Any time the trading price of SBD remains above $1.00, interest payments must cease.”
How Does Steemit Payment Work?

When you create content that receives likes and shares, you automatically accumulate rewards. These rewards will be paid as follows:

50% SBD
50% SP

Steem Power (SP) currency can be converted into Steem (power down). If this is maintained, its holders will increase their voting rights and influence on the platform. Steem Dollars (SBD) provide their holders with an instant and more stable currency that can be exchanged on the market.

However, when you publish content, you have three options:

100% Power Up: You will only receive rewards in Steem Power currency.
Default 50%/50%: You will receive half in SP and half in SBD.
Decline Payment: In this case, your payment will be allocated to users.

Steemit utilizes Zipf's law. That is, “If there are 1 million items, the top 1,000 will account for one-third of the total value, the next 10,000 will account for another one-third, and the remaining 989,900 will account for the last one-third. The spending distribution is designed to provide huge rewards for quality content while still rewarding the long-tail contributions of smaller players.”

Why?

As the white paper states:

“The economic impact of doing so is similar to a lottery, where people overestimate their chances of winning a ticket, thus doing more work than expected for their rewards, thereby maximizing the total amount of work done to serve the community. The fact that everyone ‘wins something’ is similar to the psychology that casinos use to get people to gamble. In other words, small rewards help reinforce the idea that there is a possibility of obtaining larger rewards.”
Forks, Protocol Wars, and the Rise of Blockchain Capitalism

Whether Steemit will succeed is hard to say. So far, as we will see, many things have happened that have taken Steem away from its original mission. But I believe this case study is interesting because it showcases how blockchain can be applied to publishing and social media.

The fundamental idea behind the Steem blockchain is powerful. It is about enabling a platform maintained by the community at a decentralized level from the perspective of content generation and investment (Steemit users can earn Steem currency rewards and invest in the platform by becoming Steem cryptocurrency holders).

On January 14, 2020, the Tron Foundation announced the acquisition of the decentralized social media platform Steemit, which at the time had over 10,000 active users daily. In the first two years, Steemit did gain traction, but by 2018, major decentralized applications built on the Steem blockchain had to lay off over 70%. The lack of financial resources may have been one of the reasons for the deal with Tron.

However, the community did not take this well and reacted. Tron founder Justin Sun addressed the concerns of the Steemit community in an open letter, but it did not help. The community feared that the new takeover would turn Steemit into another centralized application. The community reacted by trying to take control of the decentralized application.

This became a real war between blockchain centralization and pure decentralization. The community managed to fork the protocol and create a new protocol called Hive, which later surpassed Steem itself. While this story remains interesting, it highlights the power struggle between those attempting to take over the application and the community.

This dynamic, which may be new for businesses, could become the new norm in the blockchain era, potentially helping to establish a new form of capitalism.

In the blockchain economy, a large portion of the value exists at the protocol level. Therefore, you will have a blockchain protocol with a set of underlying rules (in this case, the Steem protocol). The Steem protocol reaches consensus and follows proof of stake (as opposed to Bitcoin's proof of work mechanism). On top of the Steem protocol, multiple applications can be freely built. These applications will be decentralized because they will first be based on a decentralized network. In the Steem blockchain environment, Steemit is the largest and most important (Steemit was the first application launched as a use case for the Steem protocol).
Key Takeaways and Blockchain “Killer Apps”

What I find most striking about the new blockchain protocols being created is those that allow for experimentation with new business models that challenge the old versions created in the network era.

Those business models may lean towards protocols rather than applications! So far, one thing is clear. The killer app of blockchain is “decentralized trust.” It turns out that tech companies have done a poor job of handling our data (see the Cambridge Analytica scandal).

You will no longer have to trust centralized entities driven by business incentives from data. You will trust a mathematically driven decentralized network. Of course, we should not fall into the “utopian trap” of believing that innovation is better than what exists.

The blockchain economy may also allow for new power centers. Additionally, existing tech companies (Facebook being one of them) are also exploring potential ways to integrate it into their existing technology business models!

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