Uncovering LINE’s Blockchain Strategies with its White Paper

At present, the MAU of the LINE app — a popular messenger — stands at 187 million, serving as the world’s 5th largest mobile platform (for Androids). Also, it has established a solid market presence in Japan and South East Asia. LINE, a subsidiary of NAVER (Korea’s No.1 search engine) in Japan, has grown up to be a global IT company that leads diverse businesses based on its messenger service — ranging from AI, fintech, e-commerce, contents, to gaming.

At the LINE CONFERENCE 2019 held in June, Mr. Shin Jung-ho, the co-CEO (Chief WOW Officer), stated that “blockchain technology will be the defining fintech paradigm of the next generation”. This meant that blockchain will be LINE’s next strategic business area. In fact, LINE is already hugely investing into the blockchain business. In early 2018, LINE incorporated 8 entities and organizations related to blockchain technology including unblock, unchain, and Blockchain Lab. Furthermore, towards a global expansion, LINE is currently in the process of obtaining licenses and/or approvals as required by different countries.

In this vein, LINE’s next step is garnering much attention and expectations. Nonetheless, only little had been veiled about its blockchain business. This is because the company had pursued its project with a limited public exposure, which is a rare move for LINE. LINE explains that such discrete approach was designed to well-service the users, while meeting with the different rules and regulations of countries. Today, we encounter countless blockchain projects claiming that they will be the one to ‘change the world’. Yet, we have not come across some meaningful results to this point. So, it is difficult to come up with a vision that guides the project overall, on how and where the project should be headed to. Making matters worse, the standing rules and regulations on this technology remain rather unclear. Thus there lies a risk of being asked to switch directions and/or principles of projects during its implementation. In other words, it could send mixed messages to the observers.

Breaking silence, LINE’s released its white paper, ‘LINK: Blockchain, Designed for Everyone’ (v 2.0)’ on September 4th, 2019. Since its first release, there were three updates to the white paper, but it never came close to presenting LINE’s concrete blockchain strategies as this version. Now, it is expected that LINE’s blockchain business will unfold in full scale. With the current version of white paper, LINE presented its intent to shape blockchain into a technology that is well-received to the public, which was something that was thought to be reserved for only a handful of institutional investors or developers. To this end, LINE came up with directions by sectors: the LINK Token Economy, support to dApp development, and governance.

LINE’s Blockchain Ecosystem

LINE’s blockchain ecosystem is based on two pillars: a self-built LINK Chain and LINK(LN), LINE’s nativecoin. LINK Chain is a public blockchain network which is open to both LINE and external dApps alike, aiming to serve as a blockchain portal ‘for everyone’. Consider it as a platform such as Ethereum or EOS.

On the other hand, LINK, is a public asset that can be used for different purposes within the ecosystem. LINK can be used for a blockchain service or to enjoy many benefits that is offered from the LINK ecosystem, while purchasing tangible/intangible goods.

The LINK Ecosystem lays out three principles as follows: 1) Rewarding Contributors; 2) Balanced Economic Model; and 3) Designed for Everyone. The LINK Network provides LINK as a means of reward to the Ecosystem users. This incentivizes the users to enter the LINK Network. Also, LINE adopts a LINK-based Token Economy to its services, allowing for a balanced economic model that is connected to the real economy. The blockchain business is another area where LINE’s key message is reflected; that is, putting usability above all.

LINE’s Token Economy Strategy

More often than not, startups struggle from attracting large pool of users, and attracting investment was more challenging when service usability was low. This all changed with cryptocurrency. Even before the business validation, startups’ ideas could bring them large sums of investment — via ICOs (Initial Coin Offering). In its early days, ICO was a popular way to attract large-scale capital into the company, which in turn could finance and accelerate startups’ business development. With the ‘token network effect’ in mind, countless projects went ICO. ICO and token distribution was considered as an one-size-fit-all solution.

LINE did not join this move, however, and kept LINK to itself. Simply put, LINK business is run based on its own net worth. Such was not a common decision from the blockchain project scene. It is quite known that other messenger-based blockchain projects, namely Ton (Telegram), and Klaytn (kakao corps.) went ICO to attract huge investment sums from the institutional investors.

Why didn’t LINE go ICO? The white paper explains as follows: 1) Avoidance of the excessive token network effect; 2) formation of network value on a global scale; and 3) fair distribution of wealth.

The token economy built upon initial coin sales could cause serious imbalance issues. From a project’s standpoint, it could be a double-edged sword. This is due to the fact that the investment sum raised via ICO is not correlated to the network’s value. Creating the firm’s market value worth of hundreds of millions, or perhaps trillions of dollars could be feasible. But with this sum in increase, it moves further from the network’s actual value. And the risk will have to be born by investors and users in the future.

In addition, token distribution is made under a cap. Therefore, the network’s wealth continues to be concentrated among the few institutional investors from the early stage — which is no different from the ‘capitalism of stakeholders’. LINE, however, have decided to move forward with a structure that distributes the cryptocurrency to multiple users, not to a limited number of initial institutional investors. This strategic decision will enable LINE to boost network’s growth upon the real users.

Eventually, a platform’s worth is determined by the user base it can attract. LINE is following this strategy to increase wallet users, and thus, the token usability. The cryptocurrency wallet, ‘LINK ME’ seems to take the lead. At the 2019 Biddle Asia Event, Mr. Lee Hong-kyu, the CEO of unchain, said that “a simple login with LINE IDs, KYC, and wallet LINK ME with a custody feature is current being beta-serviced” and that “in October, there will be an official version release”. If so, users to messenger will be able to easily create wallets within the LINE app. With the LINK ME integrated to LINE services, many users will be able to enjoy the cryptocurrency experience. Such move will bring blockchain a step closer to our daily lives.

As with any other sectors, IT firms used the investment raised, in order to run their businesses by offering useful product and services to users. In return, stakeholders were given the profits, and users enjoyed the service at an affordable rate or for free. Everything seemed like a win-win game. However, the Internet service was not solely owned by IT firms. Users constituted a part of the service. For instance, on social media, users contribute to the platform’s development by sharing posts or videos. Nonetheless, its profits are conquered by shareholders of global IT giants such as Google or Facebook. LINE’s current success is also attributable to its users. And this is why LINE would like to thank its users for their contribution. The idea is, achieving a fair wealth distribution via the token economy. Conventional LINE service users could also join the LINK network ecosystem to get fair compensation for its contribution to the ecosystem via its token contribution scheme.

LUCAS (LINK User Contribution Assessment System)

LUCAS is a system that assesses the participation level of ecosystem to determine awards to be given. Based on the number of active wallets (users), transaction amount within each dApp, and quantity of LINK from staking, LINK determines the level of contributions. Basically, the more dApp contributes to the network, the more contribution it will receive. Such system is aimed at creating a virtuous cycle among the contributory dApps, rather than to sell tokens.

LINK Usage

LINK could be used on two levels; service and platform. Users will use LINK soon in a service, while dApps will use LINK on a platform. Users can use LINK as a payment means within a dApp service or keep tokens to enjoy additional benefits. dApps can use LINK to pay network usage fees or to secure resources in return for the staking activities.

Typically, a platform coin is used during a protocol stage. Network usage fee payment is case in point. It can also be used to select nodes, or for an on-chain governance voting. But it is uncommon to use platform coins while using dApps, given that dApp provider adopts their own version of tokens. LINE would like to take a step further, and offer general users to use a platform coin. This strategy relates to the common use of LINK as a platform coin.

LINK Issuance Policies

LINK token has a cap to which it can be issued, unlike other platform coins that can lead to unbridled inflation. LINK can be issued up to 100 million units, within 3 years. The number of issued LINK tokens is proportionate to the network’s value enhanced. Only when various dApps with the LINK ecosystem contributes to the network, can it additionally issue LINK tokens. Conversely, even if when the ecosystem is created faster than expected, additional LINK tokens will not be issued. Under such policy, it seems that the fruits from network development will return to the ecosystem’s participants.

LINEAR Network, a Solution for Scalability

Scalability has become the most addressed challenge for all blockchain projects, given that the network’s transaction volume has expanded beyond the processing capacity. Without an effective solution, developers would often avoid addressing the scalability issue when designing services. This has led to other issues in usability. Once, CryptoKitties was praised as a success dApp use case, hinting on the possibility of a blockchain game. However, its excessive transaction meant other dApps were unable to use the Ethereum network, clearing suggesting a limitation of a blockchain network.

LINE is addressing this issue with a LINEAR Network, an interchain method. By adding multiple blockchain networks on to the LINEAR Network, the transaction speed can be enhanced. According to LINE, such decision gave far more stability to the the main net on the interchain, when compared to a single main net with many dApps that run onto it. When the main net’s transactions are compatible with one another, it will not affect other services regardless of the transaction size. Also, there is a sharding technology, a partitioning method to increase transaction processing capacity. The LINEAR Network is composed of a root chain and a leaf chain.

A root chain is a LINK Chain. Also, a leaf chain is used to share the transaction load with the LINK Chain. In most cases, dApp belongs here. This structure allows separate main net for each dApps. While there can be many dApps to a leaf chain, in case of a particular dApp causing an overload, then a separate leaf chain soley designated for that dApp can be created as well. Leaf chains are separate networks, meaning that dApps can set agreement algorithms to network policies that best suits the dApp services.

Supporting dApp Developers

LINE announced that it will offer a ‘LINK Framework’ and ‘dApp Support Program’ to assist for a better developer experience. LINK Framework is a tool with a goal of reducing task load for developers of dApp and its operation, as the dApps facilitate mutual technological reactions with the LINE Network. In other words, it can function as a BaaS (blockchain as a service) to the companies who are developing blockchain services. LINE stated it was their intention to enhance user experience with the LINK Framework, rather than for the developers who were handling development issues. LINK Framework offers various features such as drafting smart contracts, wallet management, and browsing blockchain data.

Later on, dApp support program for promising dApp developers will follow. Once accepted to the dApp support program, then he or she may be eligible for investment and technology support, and consulting service on token economy, among others.

LINE Governance: “Moving towards an Open Network”

Governance is one area that garners much attention from LINE’s blockchain project. Here governance refers to the how the agreement is reached among blockchain network participants. LINE came up with a 3-step roadmap: 1) LINE network; 2) LINK alliance; and 3) Open network. It is similar to any other projects to ultimately aim to be an open network, which is a decentralized decision-making process. However, one difference is that in its early stage, LINE network will be put in place, where LINE makes the decisions. Later on, the network will evolve into a LINK alliance with a consortium format, and to an open network with decentralized governance. This distinguishes LINE from other projects, and even quite unexpected when many other tend to put blockchain and decentralization philosophy on the same page.

Why has LINE decided to go with a centralized governance in its early stage? There are two reasons. Firstly, on compliance. LINE is a global company listed on U.S. and Japan stock exchanges, subject to strict regulations. Nonetheless, the rules and regulation around cryptocurrency remains to be a grey area. This means that if the project is ruled illegal after implementation, the damage will be substantial. So a discrete approach is needed. To lead a business under such uncertainties while meeting regulatory requirements, first there has to be a single decision-making entity. For instance, a consortium type would make it difficult to track who would be bear the liability. Also, there is a concern that it would look like it is avoiding to take liabilities — making a lawful project implementation a challenge. It seems like LINE’s decision try to tackle such vagueness and to have a clear boundaries on liability via a single decision-making entity.

Secondly, making a decentralized network a reality is still at its baby steps. More time is needed to secure a competitive level of technology. According to Dr. Ha-Joon Chang, an economist at the University of Cambridge, has argued in his book <Bad Samaritans: The Myth of Free Trade and the Secret History>, that being exposed to a competitive environment at an early stage makes survival a challenge. There is a 6-year-old son named Jin-Gyu. Jin-Gyu gets help from his parents, while he has the ability to make money himself. What will happen if Jin-Gyu is sent to workplace instead of school? He may end up being a shoeshine boy or even a prosperous street hawker, but he will never become a brain surgeon or a nuclear physicist. Even at a time he is threatened to get shot in the head or offered a 30-billion-dollar offer, there is no way Jin-Gyu can perform a brain surgery. It would take at least another dozen years for him to finish his schooling with parents assistance.

The same goes for decentralization. The current state of blockchain technology falls short of the decentralization values it aims. With more nodes in operation, the network’s performance degrades. Even under a consortium, it can be never catch up an efficient single entity that makes decisions. Not only that, dApp has far more competitors that other dApps, such as YouTube or Facebook. Examples so far indicates that there not many users who are willing to use an inconvenient service. Sticking to decentralization without sufficient preparation thus may have their users leave the network. LINE made it clear that it will not compromise usability over decentralization; no other value comes before usability.

In this given moment, it seems like LINE is committed to offering blockchain technology and cryptocurrency experience to users without undermining usability. Governance is what comes after than. With the development in technology, the market demand will increase, and naturally, LINK network ecosystem will expand. When the time arrives, LINE will move on to LINK alliance, and an open network. After obtaining required licenses from Japan, its major market, LINE will move on to form a consortium with qualified incorporations as partners. When sufficient preparation is made, it will move to the next step in strategy; an open network, where anyone can participate to the network with a node.

the original article in Korean

[Written by Doyun Kim, Translated by Christine Chung]

Doyun Kim is a Journalist for D.STREET. Follow his on LinkedIn. Christine Chung is a freelance KOR-ENG interpreter/translator in Seoul. Her areas of expertise are business, IT(blockchain, smart city), and international relations.