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The crypto space is rife with examples of failed business strategy, from EtherDelta to the more recent example of 0x. What these failures show us are not that the strategists behind the projects were poorly prepared, but that cryptocurrency is an industry specifically primed for ultra-competitive market forces. This piece will go into some of the details around how competitive forces shift when we compare industries within the cryptocurrency space to their traditional counterparts, and how the levers of power shake out in the open-source world.

Industry Analysis in Cryptocurrency

The first question we have to ask ourselves before we look at industry attractiveness is, what is the ultimate judge of industry attractiveness in an industry that doesn’t necessarily target profit? In any other industry you can get a relative proxy for attractiveness by looking at the profitability of similar firms. If we looked at airlines, we would see that very few companies are strictly profitable and as such the industry is probably not attractive. We may be able to use market cap as a proxy, but considering the lack of fundamental analysis and true user adoption in this market it is unlikely this would give us any sort of relevant proxy for attractiveness. For this reason it makes more sense to begin with a qualitative analysis of the industry, and to understand what the makings of a competitive threat look like for a protocol. …

We take a look at some platform options that are available to cryptogame developers

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Blockchains are not inherently designed for games; they’re far too slow. The main platform for smart contracts, Ethereum, can only perform 15 tps on-chain. This puts a serious hamper on popular game studios as any games they produce have a popularity cap. Cryptokitties is the quintessential example: a game that grew too quickly and actually clogged the entire network. Game developers are largely creating games with the idea that scalability should improve over the next couple years, but there are developers that claim solutions to these problems. Blockchains and second layer solutions alike are working on scalability improvements, and some specifically for gaming. Projects like the Loom network, EOS, and Wax are building blockchains that will be able to process enough transactions to provide gamemakers the ability to create efficient economies in their games. While BitGuild will be using the Ethereum network initially, as it is currently the go-to platform for smart contracts, they have previously stated they are open to exploring other options at a future time. …

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It’s no secret that the music industry is a tough nut to crack. Spotify, Soundcloud, and a host of other music industry startups all struggle to reach profitability despite their vast consumer networks. Spotify has a staggering 70 million subscribers to its service, and yet it still has a cost of revenue of 79%. For every dollar of revenue it makes on its subscription fees, it has to pay 79% of that to record labels (and other assorted costs). This is in large part due to the price setting power of music suppliers. Compared to other aggregators Spotify has to pay far more for its content and has much less negotiating power. Netflix is at a cost of revenue of only ~66% and Zillow has been able to strong-arm its suppliers (Multiple Listing Services) into submission because of their fragmented nature. Spotify, on the other hand, takes virtually all of its supply from only 3 firms; Warner, Sony, and Universal. These firms have huge negotiating power and only recently have generously re-signed their contracts with Spotify to reduce its costs. …

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Recently the concept of token curated registries has seen a lot of buzz from Laura Shin’s interview with Brian Kelley to Mike Goldin’s work, and for good reason. For those who are unfamiliar with the concept of TCRs I highly recommend Mike Goldin’s piece on TCRs 1.0, it gives a great primer and gets a little into the weeds so you can understand the mechanism as well. Mike describes them briefly the following way:

A token-curated registry uses an intrinsic token to assign curation rights proportional to the relative token weight of entities holding the token. So long as there are parties which would desire to be curated into a given list, a market can exist in which the incentives of rational, self-interested token holders are aligned towards curating a list of high quality. …

What would a blockchain version of the game look like?

By now everyone has heard of Epic Games’ blockbuster title Fortnite—a massive multiplayer game where survival is based on stealth, quick reflexes, and a lot of luck. As with any free-to-play game, the developers of Fortnite had to pick the right monetization strategy, and they had plenty to choose from due to the game’s popularity: free-to-play with microtransactions, pay-to-play, subscription microtransactions, etc. They ended up implementing more than one of these; their survival mode is in pay-to-play early access mode, while their battle royales mode has seen the release of microtransactions in the form of Battle Passes and V-bucks.

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The interesting thing about this specific version of microtransactions is that it compensates players who purchase battle passes for actually playing the game by allowing them to ‘Rank Up’ their battle pass and earn more credits to purchase the next one. Because of this, Fortnite’s microtransactions strategy is one of the few of this type that hasn’t come under fire from gamers, making it harder to critique. That being said, there are a number of ways that blockchain can improve the monetization strategy for players.

It’s time for game creators to put the power back in the player’s hands.

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The introduction of assets to the gaming world was a monumental achievement. The first materialization of this concept was ‘cheat codes’, where possessing the code allowed players certain abilities in the game. From then, RPGs were developed, truly introducing personal inventories and valuable items with a hint of rarity. The final form came with the development of the MMORPG, in which these items became competitively valuable. There is no type of video game asset more precious than one that comes with visible bragging rights. This was perfected in games such as World of Warcraft, Runescape, and EVE Online, which would see the most expensive items traded at thousands of dollars. …

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Brace yourselves, I’m going to state my unpopular opinion upfront so you know what you are getting into before you read too far into this. Today’s blockchains are virtually useless. Obviously that sentence has a fair amount of scare tactic in it, but ultimately it is true. Think of the current applications of blockchain and how they are utterly dominated by the leading competitors in each industry. Ethereum executes code; amazon web services executes code at a fraction of the cost and multiple of the speed. Siacoin stores data; AWS dominates it in business scale applications and a simple external hard drive can satisfy the needs of most consumers in ease of use. Disruptive technology does not gain adoption because it is better in principle. There are a lot of arguments as to why cryptocurrency has better underlying principles than regular money. It is not controlled by any one entity, for example. …

Before I scare everyone off, I do not mean to say that Bitcoin itself is doomed to fail. What I am referring to is that I believe the implementation of blockchain solely as a currency is destined to be far less successful than the world believes it to be. This includes the likes of Litecoin and Dash, and less so privacy based ones like Monero and Zcash. The reason I believe this lies in the value proposition of blockchain itself. To start, let’s breakdown what a blockchain really is.

Data Structure > Consensus Layer> Incentive Model

At its core, blockchain is nothing more than a novel structure for storing and interacting with data. The incentive layer is merely a mechanism designed to keep the consensus layer and data structure intact. Its potential to transform the world lies only marginally in its ability to store value, and far more in its ability to link together computers. Let’s look at the tradeoffs of bitcoin vs. a traditional currency. …

More than anything blockchain is a triumph of social computing. It allows a theoretically unlimited number of people to come together and agree on a system through economic incentives. In bitcoin miners buy hardware, are incentivized to operate honestly, and are punished through electricity costs when they fail to do so. But what does ‘honesty’ mean to the blockchain?

There is an agreed upon consensus for honest actions in the blockchain. When transactions are put through the system, an honest miner will check if the signature is accurate, whether the address has the value that they are trying to send, and finally whether their nonce is acceptable to the blockchain. This system makes sense, and is rooted in the concept of ownership that we share as humans. However, the true economic incentives don’t lie with honesty, they lie with consensus. In many ways consensus is the root of honesty in the mind of the public. Whatever most people agree is true is usually true. This, however, has been shown to be true only in the sense of bitcoin mining. There have been few if any successful attacks on blockchains, only on the services that provide access to them. One can say that this is a triumph of the technology, but it is rooted in greed. …

Of all the wild applications that the blockchain is going to have on our world, by far the most fun to think about is its effect on the gaming industry. Blockchain and gaming are such a perfect fit for each other; blockchain allows you to completely digitalize assets and bring them into video games where previously this was all done on eBay. Startups like decentraland have created virtual property rights entirely secured by the blockchain. Parsec Frontiers is developing a virtual currency used for an MMO that will blur the line between gaming assets and real assets. …

Robert Clark

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