The Age of Blockchains or Why The Ecosystem is The Product
Disclaimer: this is a corporate blog explaining our ideas, conjectures, and hypothesis around the blockchain and our business. We are currently developing a blockchain-based venture capital organization and, consequently, think a lot about the why’s and how’s. Having said that, please feel free not to agree with our views and share your comments and critics with us.
The Equity Model
Today, products and services are typically associated with a business. By selling their products they make their profits and numbers. Think of iPhone and Apple, Kindle and Amazon or Google Search and Google.
To develop and produce their respective products businesses hire people and pay them accordingly (hopefully). Because it’s their brainchild they often protect their products with patents and trademarks. Within the tech industry, those brainchildren are called Intellectual Property and they are often considered by management and investors as the most important assets. Hence, they usually treat ingredients as well as recipes business secrets and behave protectively. One of the obvious results of this protective approach is the ocean of IP litigations the tech industry is swimming in. The continuously increasing number of IP litigation, in turn, stimulated the creation of a new industry — the litigation funding industry (more info: Trend Global Patent Metrics). Consequently, a significant (and growing) part of a startup’s budget has to be devoted to IP protecting issues to keep founders and management save and investors happy. One could argue that this “litigation reserve” is kind of unproductive money, right? Let’s call this approach, just for the purpose of this post, the Silicon Valley Model or Equity Model.
The Open Source Community Model
Besides the Equity Model, there has been another model around now for more than 2 decades. It came up with the Internet back in the 1980's— the Open Source-based Community Model. Admitted, the sharing of source code on the Internet already began when the Internet was still relatively primitive, with software distributed via UUCP or Usenet but the term Open Source was coined by the Free Software Movement in the 1980’s. Actually, in the 1950s and into the 1960s almost all software was produced in collaboration between developers and often shared as public domain software. The software industry was open then which spurred its development.
Among the best-known Open Source evangelists is Matt Mullenweg who founded the Open Source publishing platform WordPress some 14 years ago. Today, more than 400 Million Unique Users per month visit the global WordPress Community with its more than 74 million websites, accounting for over 23% of the Internet traffic (Source: ManageWP).
Thanks to a vibrant global developer community WordPress is available in 56 languages. The WordPress community is home to more than 12,000 developers and many businesses that earn their living with the community. They developed more than 51,000 plugins for WordPress users, most of them are available free or in a freemium model.
Moreover, on the marketing and sales side, WordPress has established itself as a highly efficient environment for affiliate & referral systems. Hence, WordPress represents a huge socio-economic platform for a new generation of the “digital working class”, as well as a role model for the dawning Token Model.
Transition to a Token-Based Ecosystem Model
Until recently, investors typically were much more interested in technology, IP rights (IPR), patents and marketing strategies than in business models or community development.
To these equity investors, Open Source feels kind of “wrong” and even “counter-intuitive” or “post-communistic”. And, yes, from their distinctive point of view they are right. When it comes to valuation of tech startups in the equity model, IP is the critical success factor. It is the source of future revenues and cash. Equity investors learned that IP can be licensed and licensing technology is a straightforward business model. For Equity Investors the best startups are those that develop innovative technologies, protect and license them. In the “equity context” building communities is something for the big players like Amazon, Apple or Google. That’s expensive, takes a long time and extends the exit period for investors.
It’s all about perception based on the legacy learning curve. Equity Investors take a look at the valuation of patent-driven Apple and compare it with the WordPress. See the difference?
Apple’s market capitalization is more than US$ 750B whereas WordPress is driven by the WordPress Foundation, a charitable organization founded by Matt Mullenweg to further the mission of the WordPress open source project:
WordPress Foundation: People and businesses may come and go, so it is important to ensure that the source code for these projects will survive beyond the current contributor base, that we may create a stable platform for web publishing for generations to come.
Even regarding corporate structure and community governance, we definitely can take WordPress as role model and proof-of-concept for Open Source-based Ecosystems in the pre-blockchain era. On the one hand — the equity side — we find Automattic Inc, a for-profit technology company with 565 employees and on the other hand, there is the WordPress Foundation, a non-profit organization, responsible for the governance of the WordPress community. The WordPress Foundation is registered by Matt Mullenweg and owns the Trademark WordPress. This legal structure around the WordPress community has proven its legitimacy over the last 5 years with an impressive performance. Hence, we do not have to reinvent the wheel when thinking about appropriate structures for blockchain-based Ecospheres. We simply have to evolve the “WordPress Model”, right?
Apparently, in the prevailing Equity Model and founders and their startups have to make the fundamental choice between money and personal wealth or the greater good of their (future) community — IP protection/leveraging versus Open Source. A tough choice to make and — in our opinion — a crazy one because the wealth of founders, startups, and investors alike is actually created by the startup’s future community. Where would Apple be without its evangelists and its loyal community? I agree, in the pre-blockchain era it’s a bit of a “hen-and-egg problem”. It first needs investors to provide the money to develop the technology and (more expensive and unpredictable) the community development around the technology. That’s a demanding job! I, too, agree that it’s much less complex to simply develop technology, protect and license it.
This scenario is going to change with the Token Model. Tokens and blockchain concepts provide the means to involve the community in the process of value creation from the very beginning thus unlocking productive potential without having to spend investor’s money. Token holders become co-creators and kind of volunteers that expect their compensation from the future value of the Ecosphere and their tokens.
[Ecosystem = Community plus Blockchain plus Community Token]
Tokens provide a way to incentivize community members to contribute to the community without having to run expensive marketing campaigns. In their very self-interest, token holders will contribute to the Ecosystem to increase the value of their token. In the Token Model, customers buying/holding tokens become co-investors of the community.
By involving the Ecosystem around the company into the process of creating value aka wealth the goals of the different stakeholders — founders, startups, investors, customers, and community — are (at least theoretically) aligned with a single common goal — to successfully develop the Ecosystem.
We can call this approach an enhanced community model or, to make a difference, the “Ecosystem Model”.