[Block Crafters Research] Value Chain of the Blockchain Industry (Part 2)
Unfolding Who Creates Value Out of Blockchain Industry and How
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2. Value Chain of Blockchain Industry (Cont’d)
As described in the previous article, value chain of the blockchain inudstry can be summarized as figure 1 below. It consists of four different segments, that is Hardware Infrastructure, Blockchain Protocol Development, Dapp Development, and Product Distribution, for blockchain technology to go through to reach its end users. This value chain encapsulates the core factors, including players, profit factors, and imperative factors in business success, along with standard peripheral function such as marketing, sales, compliance, audit, tax, and acceleration/consulting.
2–3. Dapp Development
(a) Industry Players
Decentralized apps are the key toward the mass adoption of blockchain technology. Based on the blockchain protocol, DApps deliver a specific application or function to end users. The number of DApps and its users has also increased over the last few years. There has been much expectation that the emergence of DApps will ultimately change the landscape of the application market, but these expectations fell short of how the actual market evolved. The market dominance of DApps is skewed towards games or betting. In 2018, an analysis showed that among DApps built on the four most used blockchain platforms, more than 70% fell under games, betting, or other high-risk (pyramid) categories. Another noticeable trend is that the number of DApp users apart from game players is dwindling in these platforms.
One may have to take a different angle, however, to track and evaluate the success of DApps unlike conventional apps. Based on the structural difference between typical distributed applications (P2P-based) and DApps based on blockchains, as shown in figure 8, understandings of DApps and their business models should also change. DApps can be viewed as a variation of P2P-based distributed applications. While the two have dynamic memberships and autonomous decision rules in common, tokenized economy and self-capitalization are what distinguish them from one another. Most DApps are designed with its token economy to govern how participants can earn cryptocurrency as a contribution reward within a network. This suggests that providers of DApp and operation contributors are a separate entity. The central role of these contributors is to participate in a token economy and to create a flow of cryptocurrency and services within a DApp. Moreover, this may include a wide range of service participants, including users, data collectors, and data validators.
(b) Revenue Model
How would DApps make a profit? How much should they earn to cover the total costs? Again, a look at the rough numbers may make it clear why DApps require a clear revenue model. According to one study that calculated how much it costs to run a DApp on blockchain networks in 2018, the study estimated that running on the Ethereum, EOS, and NEO platforms can cost anywhere from $30,000 up to $86,000 per year. The price may additionally increase along with the cryptocurrency price.21 Although the actual running costs of DApps, which is a transaction fee that is incurred throughout service usage, are directly paid by their users, there are other costs paid by DApp providers such as the deployment fees or fixed costs to register or open an account in a blockchain protocol.
Figure 9 describes four different types of revenue models for DApps. First, charging a percentage of the transaction fee that is incurred within a blockchain network can be the main source of revenue for most DApps. In this case, transactions can take place during various actions depending on services provided by DApps, such as earning, buying/selling, auctioning, and more. After transactions occur within a DApp, they are processed and validated by blockchain network operators through which DApps are built. The network operators then demand a fee. When charging users their transaction fee, DApps can include additional charges such as a service fee. For example, CryptoKitties, one of the most well-known DApps within the blockchain industry, charges 3.75% of every transaction fee incurred by user activities. According to a survey conducted in 2018, among 160 DApps, 55% of respondents said that they are planning to monetize DApps via transaction fees.
The remaining three revenue models are very similar to those of conventional applications. This includes a “premium function” model in which users are charged a fee to unlock a premium function within a DApp, which can be a source of revenue for DApp developers. Selling advertisement space within a DApp and paid membership/subscriptions for premium functions are also main revenue models for many applications.
(c) Key Factor
The current DApp market is heavily skewed toward the gaming and gambling categories, which are extremely limited in terms of market diversification. DApp providers first need to focus on building a product that is attractive enough to have an active and extensive user base. To be able to create a “killer DApp,” developers need to understand that most end users will be more interested in its function, not in its technical superiority or characteristics unless it is relevant to specific features offered by the DApps. Furthermore, the network effect and value of a DApp is a gauge for the level of trust and operability of its token economy. For operation contributors, such effects determine their willingness to participate in the network as these effects reflect the value of operation reward.
2–4. Service Distribution
(a) Industry Players
Without a marketplace, a product may lack exposure to its potential consumers, and the blockchain industry is no exception. As we have witnessed in the evolution of the mobile application market, marketplaces for applications such as the App Store or the Play Store have played a significant role in product distribution. They act as a gateway to connect technology to its end users. Currently, there are only a few noticeable DApp markets, including State of the DApps, Dapp.com, and Dapp Radar, with around 2,000 DApps listed on each platform. The number of listed DApps indicates that the DApp distribution market is in the early stage of growth as opposed to conventional mobile app markets; the Google Play Store and Apple App Store have more than 2.1 million and 1.8 million apps listed, respectively, as of the first quarter of 2019.
DApp markets lie in the continuum of building a blockchain ecosystem that invites mass users, which explains why many blockchain protocols are developing their DApp market. In March 2019, the blockchain platform TRON acquired the very first global DApp marketplace, CoinPlay. Another noticeable trend is that cryptocurrency wallets are expanding their business into App Store services to leverage the crypto-savvy user base and increase traffic volume.
(b) Revenue Model
Just as app marketplaces, the main revenue stream of players in dapp distribution market may comprise of four different business models as below.
(1) Advertisement/Promotion fee
(2) Distribution fee
(3) Data consultancy services
(4) Crowdfunding platform
First, the advertisement comes in various ways. Selling the prime advertisement space within a marketplace by placing a DApp higher in search results is the single most profitable and secure revenue model of these distribution methods.
The second stream of revenue is charging DApp providers a distribution fee. The notion is quite similar to the in-app payment/subscription service charge. By allowing end users to pay for different apps seamlessly through one marketplace, app marketplaces can claim a fee for providing such a service to app developers. For example, in 2018, Apple earned 256 million USD solely from charging 15% of all in-app subscription payments on the Netflix iOS app.25 Currently, Netflix no longer supports in-app purchases as its subscription payment. Other widely used applications, including Amazon Kindle and Fortnite, have banned their users from purchasing app services through app marketplaces to avoid this “store tax,” which suggests this is a failing business model for conventional app marketplaces. Although such a revenue model is possible for DApp marketplaces by providing a much lower service fee than app markets, this may not be the best strategy to attract DApps to the market. Because creating a lock-in effect for developers and DAppusers is crucial in early-stage competition, players in this segment of the industry are likely to focus on attracting more DApps without any service fees charged to developers.
The third revenue stream may come from data consultancy services. Through this service, DApp marketplaces can sell user data analysis (e.g., engagement rates, browsing/search trends, and user demographics) to DApp developers and other players in the industry. As one of few contact points for DApp users, such data provided by DApp distributors is extremely valuable to anyone who aims to understand DApp user profiles. By extending the marketplace to crowd-funding platforms or “launch pads” where users can browse through various DApp projects that require the raising of capital, DApp distributors can claim a certain percentage of the total capital raised through their platforms or apply a fixed fee for listing a project.
A new trend of adjusting the revenue model to the token economy is no exception within the DApp marketplace. One of the biggest DApp marketplaces, dapp.com, announced a token generation event in May 2019, stating that its tokens will be used for service fee payments in the launchpad and DApp store payments.
(C) Key Factor
DApp marketplaces need to attract not only end users but also DApp developers because it is a two-sided market. In an effort to grow as a DApp marketplace, service providers must focus on listing various DApps on its platform. Educational/business support for DApp developers is a starting point to create a lock-in effect. The other side of the approach is to attract end users and increase traffic volumes. A marketplace with more visitors attracts more DApp developers, thereby creating a continuous cycle. The DApp marketplace is the last piece of the puzzle that needs to be completed to ensure the mass adoption of blockchain technology. Additionally, marketplaces’ role in gathering end users and DApp developers in one place plays a crucial role in the early stages of the industry’s development.
3. Conclusion
The blockchain technology has grown into a booming industry as reflected in the increasing capital inflow and the emergence of multiple players throughout its value chain. Based on our analysis, some of the highlights and implications for the industry are as follows:
- The hardware infrastructure industry may not last long as more blockchain protocols are adopting a consensus mechanism that do not require massive computing power to process transactions. Under consensus mechanisms such as PoS (Proof-of-Stake), DPoS (Delegated Proof-of-Stake), or BFT (Byzantine Fault Tolerance) that are widely used among blockchain protocols, network operators are often designated by protocol providers and have a contractual relationship that entails the rewards and rights of operating a network.
- Throughout a value chain, blockchain protocols and DApp service providers are the backbones for industry growth. Building “products” that are strong enough to compete with conventional applications is necessary to attract mass users or developers.
- Because most blockchain protocols or DApp providers aim to build independent network ecosystems with their own tokenized economy, front and backward integration of these providers is frequent within a value chain. For example, some blockchain protocol providers have started to develop or acquire DApp markets to have direct access to their end users. Thus, competition in the blockchain industry would emerge across different sectors.
- Fundraising cannot be a revenue model for blockchain services. To sustain a business in the blockchain industry, building a clear profit structure is vital. However, this task is also both unique and challenging. Profit-making for blockchain protocol providers in terms of sustaining and improving a network or providing user support is especially limited as providers cannot claim a proprietary right to open source networks, and it is the network operator who earns the transaction fee. However, this does not mean that generating revenue is impossible. To build a revenue model for a public blockchain protocol, one can refer to the revenue models used by open source software, which suggests that providing paid user support such as educational training is necessary.
Blockchains have shed light on the inefficiencies and weaknesses of many industries, which has prompted many to attempt to solve such issues from new perspectives. The blockchain industry will mature and learn from numerous failures in blockchain protocols, decentralized applications, distribution platforms, or any other related services that may spring up throughout its value chain.
*Disclaimer: The contents provided on this report do not contain any investment advice, financial advice, trading advice or any other sort of advice. This report is intended for informative purpose only. Neither author or Block Crafters does not accept any liability for the actions or decisions of third parties made as a consequence of the contents in this report. This report may not be sold without the written consent of Block Crafters. The opinions expressed in this article are those of the author and do not necessarily reflect the official position of Block Crafters.
