Four Fundamental Reasons There Is More To Crypto Than Its Price: Part 3— Business Model Innovation
In part three of this series I am going to cover how crypto introduces a new business model. If you would like to read the other three parts you can do so here, here and here.
The biggest economic disruptions in history happen when a technological innovation is coupled with a business model innovation. Take a look at the biggest tech companies today. Apple not only made the iPod and iPhone (tech innovations) they pioneered iTunes and later the app store (business model innovation) that disrupted the music industry and the phone industry. Google wasn’t first to build web search, but Larry and Sergei did build a better search engine (tech innovation) and layered in a bidding system known as AdWords (business model innovation). Facebook created a better way for people from the around the world to connect and share pictures (tech innovation) but it was the creation of the News Feed that made advertisements seamlessly integrated into other content rather than using annoying banner ads that propelled its revenue growth (business model innovation). Netflix leveraged streaming (tech innovation) to get into nearly 200 million homes but was initially built on a subscription service that eliminated late fees (business model innovation). The cloud enabled much better scaling (tech innovation) but also ushered in SaaS business models (business model innovation) which lowered costs and better aligned incentives between buyers and sellers.
In comparison to these shifts, while the move from web to mobile was without a doubt a monumental technological innovation, it did not come with a business model innovation. As such, Facebook was able to make the transition from desktop to mobile and still retain its dominant position. Google is the most used search engine on desktop and mobile. Despite raising billions of dollars, Quibi was unable to dethrone Netflix in streaming content on your phone. In fact, the shift from desktop to mobile only strengthened many of the incumbents’ dominant positions.
Which brings us to Cryptocurrencies and Blockchain. Crypto is another technological innovation that also introduces a business model innovation. Historically, there were basically only two ways to build products and create value. The first is to build those products and sell those goods or services as a centralized corporation. This has the advantages of clear ownership structure, ability to take in capital in exchange for that ownership, and other legal rights and protections. However, there are countless examples of how misalignment can be created between the company, its employees, its customers, and its shareholders.
The second option to create products in the world is through an open source model. Open source projects have created enormous value but aren’t able to directly capture any of that value. As such there is no economic incentive to build, maintain or continue to enhance these projects. These products were created by developers whose motivations aren’t financial and instead, have an ideological belief that software should be free and available to everyone. Instead of sales, these projects rely on donations, support from companies that determined supporting that particular ecosystem is good for business or providing support services around the use of the free product.
Now there is a third option for developers and entrepreneurs. Crypto is a mix of the open source model with the economic value capture of a corporation built into it. That mechanism that captures the economic value is also referred to as a token. William Mougayar defines a token as “a unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.
The key is structing the token usage relationship between the product and the user in such a way that it allows the users of the product to also participate in the economic value creation. Think about how different that is from today. Despite our entire economy being driven by consumers, very few (if any) actually benefit financially from their own consumption. If you frequently buy a certain brand of ice cream, I seriously doubt you get any economic benefit from making those purchases. Maybe you can invest in that ice cream company (assuming you are an accredited investor, or the company is public) but the economic value comes from the investment, not your individual consumption of the product.
This is in part why several DeFi companies who have issued tokens to their customers have grown faster than any other companies in history. The “shareholders” and users are one in the same. NFTs are another great example of this. ICOs were even a good example of this concept. Yes, the ICO boom in 2017 was full of scams. It was early, little to no rules or norms had been established, and there were a lot of bad actors that took advantage of the situation. However, the concept of raising money from your user base still has merit and there have been some very valuable projects that have come out of ICOs, most notably Ethereum.
Just because a company is built in the crypto space doesn’t necessarily mean it would benefit from having a token. However, there will be a number of projects, if structured properly, that will see enormous benefit, adoption and value creation from having this token feature.
