It’s the era of disruption, and traditional business models are under attack …; well, why not? Trends and developments that have hit the business world in recent years have made it necessary to re-evaluate business models and standards.
Banks and Fintech companies have been responsible for the ongoing blockchain technological curve. However, most traditional businesses have been looking for new technologies for survival during this digital age.
The ongoing digital transformation has enabled adopters to leverage Blockchain, the leading disruptive technology in the marketplace. This has allowed them to streamline their business processes, make strategic decisions and implement new business models.
If you’re wondering what the hype about Blockchain is and whether the distributed ledger technology (DLT) has any potential, we’ve got your back. Our article will dive into the potential and benefits of Blockchain, its impact on business models, and examples of companies experimenting with blockchain business models.
The Disruptive Power of Blockchain in Business
Blockchain has disrupted many industries and transformed how businesses innovate, function, and engage with customers. Blockchain-based business models have helped companies to change their strategies and discover new ways to survive in a digital world.
Blockchain-based business models are distinguishable from traditional businesses by adopting the three critical features of DLT, which are:
Decentralization: Data and the records of transactions are stored inside a blockchain and are shared by all networks so that no individual entity has a monopoly on the records.
Immutability: No one can tamper with data stored in the Blockchain, thanks to cryptography promoting the highest level of cyber-security.
Transparency: The ability of the Blockchain to hide a user’s identity via the complex science of cryptography, so a public address only represents them, is at a level that has never been seen before. While a user’s true identity remains obscured, all transactions entered using their public address remain transparent to anyone within the network.
The Three Layers of Blockchain
Blockchain combines cryptographic algorithms, asymmetric-key algorithms, and hash functions. The technology consists of several layers, namely the hardware infrastructure layer, data layer, network layer, consensus layer, and application layer. Let’s examine them closely:
#1. Layer 0
Layer 0 refers to the initial stage of the Blockchain, which enables numerous functions like Bitcoin, Ethereum, and others to operate. It’s Layer 0 that provides the Blockchain’s underlying infrastructure as well as cross-chain interoperability communication within the different layers.
#2. Layer 1
Blockchain’s Layer 1 is a progression from layer 0, where the network’s functionality is maintained. Also called the implementation layer, limitations such as scalability are experienced at this level, while any changes happening on any new protocol on layer 0 directly affect layer 1. Bitcoin, Ethereum, Ripple, Cardano, and several other cryptocurrencies are examples of layer 1 blockchains.
#3. Layer 2
Layer 2 refers to the scaling solution by specific platforms interacting with third parties to remove limitations and challenges experienced at layer 1. Layer 2 solutions are currently among the most popular solutions aimed at solving issues arising from the proof-of-work (PoW) consensus mechanism.
#4. Layer 3
Layer 3 of the Blockchain is also known as the application layer, and it’s what hosts Decentralized Applications (DApps) and other protocols that support different apps. The blockchain protocol at layer 3 can be further split into two sub-layers: application and execution.
The advancement of blockchain business models happened at layer 3, and its successes are facilitated by the technology’s increasing scalability resulting in increased transaction loads and nodes in different networks. Improved scalability enables blockchains to handle the security, scalability, and decentralization trilemma to create faster and more secure networks to make blockchain businesses viable.
The Traditional Business Model
First, a business model is any plan or strategy a firm employs to successfully sell a service or product and earn a profit, depending on its target market. The traditional business model is centralized and comprises owners or shareholders, a company, its employees, and consumers.
In this model, the business offers goods or services through which it earns profits. Once they have created their products, they expect consumers to buy their products or service at a specific rate. The rate will have been set to cover important details like wages and all other expenses the business incurred to deliver the goods or services. Companies operating this model use centralized models, which may differ from one industry to another but include manufacturers, distributors, retailers, and franchises.
The Blockchain Business Model
On the other hand, a blockchain business model comprises the three main characteristics of blockchain technology: decentralization, immutability, and transparency. The nature of business is mainly through peer-to-peer transactions within a reliable and trustworthy network.
The concept of decentralization completely changes the way businesses function. Factors like how profits are made and the flow of transactions and entities are designed differently to help enhance how the businesses and the end-user benefit.
The model introduces decentralized applications (DApps) that can directly execute peer-to-peer transactions by eliminating central authorities and intermediaries.
The entry of DApps into the model eliminates the need for employees and shareholders. The business model is lucrative because users end up becoming owners and workers even though the Blockchain drastically changes their impact and roles. Removing intermediaries reduces the time and cost associated with third parties to strengthen the ecosystem and increase profits for investors while lowering prices for consumers.
Companies that use this model earn their profits by keeping a portion of the tokens for themselves. Initially, the companies used Initial Coin Offerings (ICOs), which were the buzzword around 2017. The founders give tokens a predetermined value and sell them to interested investors. Early adopters of this kind of crowdfunding always have a better chance to make a profit provided such projects become a reality.
Blockchain Business Model Types
The best thing about Blockchain’s universal technology is that while banks and Fintech organizations ran with it initially, it can still be adopted by many fields and introduced to different audiences. That explains the constant development of applications and new business models.
When it’s introduced in different business models, blockchain technology’s decentralized structure takes up the core functions such as business operations, data storage, profit collection, and business growth. The blockchain guarantees end-users that they can enjoy secure and transparent peer-to-peer communications, data management, and transactions. Moreover, it reveals any attempts at cybercrime before they can be executed, thereby making a case for Blockchain as a tool that offers the highest cybersecurity standards.
The following are among the most common blockchain business models and some of their practical applications.
#1. P2P Blockchain Business Model
The P2P blockchain business model refers to businesses powered by the peer-to-peer model that enables end users to interact with each other. The P2P model is a foundation principle for almost all blockchain-based enterprises, and they’re tokenized in different ways, including through transaction fees, tokens, and Baas.
The system is a hybrid between Business to Consumer (B2C) and business-to-business (B2B) models. The model enables businesses to compete with each other using blockchain protocols to negotiate between DApps owners and consumers using smart contracts. The model introduces partial ownership to replace payment when a person re-purchases an item they sold earlier but can’t exploit for any given reason. The Interplanetary File System (IPFS) and Filecoin are this model’s leading platforms.
#2. Blockchain as a Service Business Model (BaaS)
The Blockchain as a Service (BaaS) business model provides advanced cybersecurity services monthly. Users can build, manage and host their respective blockchain apps without creating their nodes. Blockchain users can enjoy working in a safe environment by paying a monthly subscription to access tech support and frequent updates using high-level decentralization and encryption.
The leading examples of Baas include R3, a project that integrates banking institutions with Corda, Microsoft’s partnership with ConsenSys, and PayStand, to name but a few. Since it’s a tall order for many businesses to implement their independent blockchains, BaaS platforms take care of the challenging task of implementing resource allocation, bandwidth management, and cybersecurity.
#3. Token Economy – Utility Token Business Model
The utility token business model creates a token-based economy that enables service providers to offer better services to their clients. They achieve this using blockchain utility tokens that would allow clients to benefit from revenue sharing or bonuses derived from peer-to-peer transaction-based payments.
The system facilitates monetization by introducing apps that allow smart contract opportunities in transactions that use custom software-driven programs available in decentralized browsers. The model uses a smart-contract system to share revenues between clients and providers.
Also known as Tokenomics, businesses running this model hold several utility tokens while they release the rest to facilitate network functionality. The companies make their profits every time the value of their utility tokens appreciates. Users who buy the tokens qualify to become investors or an active part of the marketplace where they can purchase goods and services.
Once they acquire utility tokens, users can employ their tokens to access services and features from other users. They can also use their tokens to take votes on emerging issues on the network, reward their peers on the network, or exchange for cryptocurrencies like Bitcoin.
#4. Blockchain-Based Software Products
This blockchain business model seeks to create relevant blockchain use cases for different existing products and services. The model delves into and aims to improve different products and services, including intellectual properties, physical goods, or any other that haven’t yet been disrupted by technology.
The businesses achieve the aforementioned goals by buying blockchain solutions and then integrating them into their systems. Blockchain startups that emerge offer solutions that they can later sell to bigger organizations. Best of all, the developers of the systems are almost always paid upfront and later when they provide user support after implementations. All this proves that there’s still so much potential that blockchain technology is yet to deliver to different industries.
The blockchain-based software solutions market still has great potential because companies are unwilling to go the whole hog involved in acquiring their in-house blockchain talent. Most companies would rather pay for ready-made blockchain solutions as long as they fit their innate requirements. Blockchain startups offering this model specialize in creating solutions that solve problems that bigger industries experience and also go ahead to support their implementation.
#5. Development Platforms
Blockchain startups that create DApps on platforms like Ethereum are usually discouraged by the initial investment they must invest, which puts most prospective investors off. As a result, emerging companies like Monolith are now looking for alternative platforms that can enable developers to build their Apps without worrying about the effect of price volatility on their developments.
Such models aim to ensure that startups don’t have to spend their earned but limited cash to invest in hardware, software, or even building a team. Instead, they allow the small players to take their services directly to the companies that have already created the basic infrastructure.
The result is that the talented smaller players find an easy way to express their skills without burning holes in their wallets or missing out entirely on a lack of substantial initial resources. This model avails of different forms of professional blockchain services, including auditing, consulting, and developing legal frameworks for blockchain-related services.
Successful Blockchain Business Model Use Cases
If you’re interested to know, the following are some businesses that have successfully implemented the blockchain business model:
Cryptocurrency Exchanges: They’re perhaps the most famous and successful so far. Crypto exchanges propped up as soon as cryptocurrencies became popular, and people needed an easy way to exchange their paper money with digital cash and vice versa. Exchanges are an integral part of the crypto ecosystem and have generated substantial profits for their owners.
Blockchain Hardware: There is an entirely new niche of companies producing specialized equipment used for processing or mining blockchain blocks. The chips they manufacture can be up to 100X faster than your regular CPU, generating POW hashes that generate enormous profits for cryptocurrency miners.
Gambling: Gambling has become a sizeable part of the Bitcoin economy, enabling users to place bets using their crypto for an opportunity to earn more.
Gaming: Blockchain-based Play-to-earn gaming has revolutionized the gaming industry and draws enormous appeal across the crypto sphere. The players derive value from the currency they earn within the different platforms. While every game has its unique model, most of them have native tokens used for trading and in-game purchases, most of which they can redeem for actual cash.
Whether in Fintech, banking, real estate, or just about any business you can name, the blockchain business model has tangible benefits that any business can reap. Thankfully, the value availed by this business model accrues for both business owners and end-users.
Business owners can benefit by attracting investors or receiving payments from all over the world while eliminating intermediaries and other security investments that unnecessarily increase the cost of their goods and services.
On the other side, users will rest assured that their personal data is safe and secure and that they can depend on reliable agreements occasioned by self-executing smart contracts. The blockchain market may still be in its infancy, but it continues to show the tremendous potential that’s still unraveling.
It’s an open secret that Blockchain has an answer to most of our problems, whether it’s cybersecurity or international payments. There is still a lot yet to be discovered, and it only makes sense if business owners and consumers embrace blockchain business models.
Tom is a blockchain, crypto and NFT freelance writer who believes that to make our world a better place, we must invest in incorruptible products and procedures, of which Bitcoin and other cryptocurrencies are leading examples.