The Economics of Decentralized Distribution Platforms (and How to Find the Right One)
Developing a successful indie game is not unlike exploring a lost world; the venture can transport you from the glorious high of stumbling upon a lost city to the humbling experience of not being able to enter. Tom is one game Dev on Steemit who knows this saga well. After a year of sluggish interest, gamers flocked to his lost worlds survival game, but now he is ready to abandon not only the game but his studio as well. Operational expenses for the mid-budget sleeper have eaten away at his project funds.
This would have been the end of Tom’s saga — another gaming post mortem to dissect, only to find a decent portion of developers fail to even recover their development costs. But rather than fold shop, Tom is following his peers over to gaming platforms running on the decentralized platforms that utilize distributed ledger technology and blockchain. Instead of running on centralized servers, dapps run on open source, decentralized peer-2-peer blockchain networks, allowing Tom to sell his game assets directly to users.
With no central administrator to take huge commissions, value created in the network is shared among the gaming platform developers and players. Content platforms such as Youtube, iTunes and Amazon, meanwhile, are charging 30 percent or more in commissions while raising the bar before content producers can receive any kind of revenue (e.g. after 10,000 views on Youtube).
Tom’s downfall was having to pay these platforms high commissions on declining revenues for game assets. The blockchain seeks to wrest control from these powerful centralized e-commerce marketplaces seeded with billions of dollars in dot-com financing, and give that control back to users and developers.
Tom’s dilemma is how to value and choose the right gaming platform on the blockchain. The number of decentralized apps (dapps) is expected to more than double from under 1,000 in 2017 to over 2000 in 2018. Dozens of gaming dapps have launched on the blockchain over the past year alone. These dapps mostly use economic models and software protocols whose economic viability have not yet been proven, portending a great reckoning ahead. As thousands of tech startups in the past have shown, many, no doubt, will fail to create value.
However, uncertainty has never been a roadblock for Tom. But at the same time, he needs to consider which of the gaming platforms is going to incentivize players to play his games, and create and distribute enough value among platform users to make his game viable?
A dapp network in which value creation is evenly shared among participants, network effects play an important role in valuation. Also known as decentralized autonomous organizations (DAOs) — organizations whose operations are encoded in smart contracts running on the blockchain — dapps are postulated to one day provide more value within their network than a multinational company. That future is not far off. Some dapps will grow to dominate their space — future Amazons of travel, gaming, ride-sharing, and so on, all running on decentralized apps. Meanwhile, large enterprises are transitioning business functions to dapps running on blockchains (e.g., payments processing, supply chain management, etc.).
Unlike investing in a company, one does not invest in shares in a dapp but in tokens distributed among many token holders. Like dapps that run autonomously with no controlling authority, the majority of tokens are not controlled by a central authority. Less than a majority share of tokens are typically held to compensate the founding team (about 20%), and support developers, operations and marketing.
A dapp, therefore, creates more shared value, and transfers this value among parties through consensus rather than a centralized authority. By investing in a gaming platform token, Tom will invest in the shared infrastructure and receive an equal share of the revenue. Meanwhile, the lower barriers to entry — whereby tokens can buy shared ownership and equal voting rights in a dapp — will stimulate usage of these platforms.
Value on this network is reflected in the value of the currency of this micro economy. Activity on dapp networks is incentivized and engaged by cryptographic tokens — the currency of the token economy. These tokens are used to value the network. A cryptographic algorithm is used to verify value on a node (generally through proof of stake or proof of work). This value ultimately depends on the protocols used to incentivize and reward platform users.
Currently, a high fee per transaction makes micropayments for a song or a game token impractical. But that may eventually change.
Valuing Token Assets
How is Tom to decide to which platform to take his digital game assets? There are a number of variables that may help him decide.
Tokens — the fuel for the platform and the means to value a token economy — can have different functions. As the dean of valuation, Aswath Damodaran notes, it is important to distinguish between a cryptocurrency, which cannot be valued, and a cash flow generating asset such as a dapp, which can be valued.
All dapps use a proprietary tokens to create incentives and activate action on a network. Tokens can:
- Serve as a store of value as the currency, for example, for Type I Dapps (e.g., Bitcoin or Litecoin). Currencies are valued relative to each other. The Bitcoin and Litecoin Dapps do have a value beyond a store of value as a payment service.
- Have a utility function such as Type II and III apps (e.g., ETH providing access to the Ethereum software layer for Dapps). Type II Dapps add a software layer to Type I Dapps to provide advanced functionality upon which Type III apps are developed.
- Be backed by assets (e.g., ATLANT shares in real estate assets or WePower (WPR) selling renewable energy production). Whereas Type I Dapps act as an OS and Type II apps as a software layer, Type III Dapps provide utility through products and services.
The ICO or initial coin offering, akin to an IPO, plays an important role in giving a token a market price. Investors, however, have the highest appreciation potential by investing in the ICO when the market value is the most difficult to establish.
The pre-sale, often only open to institutional investors, provides the highest discounts on tokens. Dapps aspiring to run true meritocracies such as the cross-chain cryptocurrency Metronome and payment service Bulleon are leading the trend in opening up pre-sales to all investors.
But these aren’t the only methods of distinguishing between good dapps and great ones.
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