Thoughts on monetization in blockchain environments (Part I)

It’s coming, the blockchain. At the time of writing in summer 2018, it feels like it’s coming a lot more slowly than anticipated around the turn of the year, but it is still coming. One of the reasons for it’s reticence may be a lack of clarity around blockchain business models. Blockchain comes with a somewhat different environment in which organisations must operate, and organisations need money to survive.

This two-part series summarises firstly how companies might monetise the user experience, and secondly how they might do likewise for the development of smart contracts.

Before we look at two ways in which an organisation may operate to get revenue, a moderate understanding of the underlying technology is expected in the reader. We also make some important assumptions.

Our first, and key assumption is that blockchain adoption will be driven exclusively through the economic profit motive. Individuals will collude to create companies which offer services on the blockchain on a global scale only if there are financial rewards available. There are certainly other motives to create blockchain-based services (e.g. altruism, professional kudos), but at macro level these will never be sufficient enough to power global adoption of blockchain as a means to deliver client value.

Our second, and less stable assumption, is that in designing data applications, decentralized data will always be more preferable to centralized data (i.e. that contained within firewalled servers of organisations, otherwise known as ‘proprietary’ data). The flexibility afforded by lower barriers to access coupled with the performance of read/write actions will mean that, economically and ergonomically, decentralised data will always be preferred.

Our third big assumption is that the fat protocol idea holds true: most value will be on the blockchain itself. When we say fat protocol, what we really mean is the data, and this data is not gated by any one organisation. This means there is no longer any economic return from controlling data. This is the most profound change to traditional technology services model; under this constraint, how the shape of for-profit companies will change is not clear.

Finally, we’re using the below simplified model of the elements of the blockchain app stack. The Application Front End (or ‘UX’) interacts with the data stored in the Blockchain via one or more Smart Contracts.

Very basic layer model of a blockchain application (created in draw.io)

Monetization of the Application Front End

If the recent lukewarm public reaction to scandals around third party apps using social network personal data is a guide, it appears application users don’t care where the data is. They, instead, are driven more simply by cost and UX. Facebook is, ultimately, just a means for me to access info on my friends. Accordingly, another identical interface with the same info is just as good. Let’s run with the social network example for a moment, taking the hypothetical assumption that in blockchain world, all my data is stored on, and freely available to all, via the blockchain.

Instead of proprietary control of access to both app and data layers, technology companies may have neither. A blockchain-based social network definitely won’t have exclusive dominion over the data, certainly. There is also a good chance that it won’t control the smart contracts used to manipulate it: in fact these contracts may be as open, and as replicable, as the data itself. The only thing under the sole sovereignty of our theoretical social network will be the UX itself. This represents a massive reduction in the revenue that tech companies could generate.

While currently tech companies already control their own UX of course, in a blockchain context the user experience is the only thing users will buy, and to thrive it must truly be a differentiated experience. As such, UX design and evolution may become the core competence of tech companies, and competition will be fierce. Generic, unergonomic user experiences will find themselves quickly redundant. Great news for consumers (choice will mushroom), bad news for investors (tech companies could become much less profitable).

What about tokenised access to services? Currently very popular as a means of financing startups via an ICO, the idea of using paid tokens to access a service could hold water. Users buying tokens would be obliged to spend those tokens with their provider, restricting freedom of movement to competitor services. There appears to be a big danger, however, of usurpation by non-token equivalents. Ultimately, services allowing me to pay simply in the same currency one gets paid in will present the least barrier to entry. That said, it remains to be seen how such non-token projects might succeed in delivering products and services with a presumed lack of investment capital.

Conclusion — a world without tech giants?

The fat protocol thesis suggests that data and a very large part of the application layer could effectively be opened up - removed from the control of private enterprise -with a concordantly large effect on profitability. Tech companies seeking revenue would, under these conditions, be restricted to leveraging their user experience to generate fee-paying customers. This would be inherently less profitable and far more competitive. The age of tech giants would effectively be over.

Whilst tokenisation could help create and retain users as a kind of extension of enticing UX, such services may well be overtaken by non-token equivalents with easier on-ramps.

In Part II, we’ll look at how organisations might monetise the production and maintenance of smart contracts.