The purpose of this note is to suggest a framework for evaluating different types of players/use cases in the Public Blockchain Ecosystem (BCE) and their viability at the current stage of the BCE development. It is done by identifying key value drivers (KVDs) of the BCE, applying KVDs to find out what use cases have a chance to thrive, and sizing them. We identify “trustless” and “anonymous” as the only two KVDs that matter at this early stage and discuss several use cases leveraging them (see the table below). We suggest that we should expect thriving blockchain use cases where (i) a trusted intermediary is absent, too expensive, or is losing trust and/or (ii) there is a need for anonymity of parties, since there are no practical alternatives to blockchain in such cases.We don’t try to make estimates beyond the near future, as we don’t believe it is possible. Instead, we prefer to update our thinking as the ecosystem evolves.
As always, we’d love to hear your feedback and comments.
With the crypto tokens’ prices falling across the board we thought it makes sense to discuss what we see as the main point of confusion about the public blockchain ecosystem (BCE) and its value.
Current discussions of the BCE value gyrate between
- broad “top down” assertions that blockchain will replace the world’s financial system, reinvent the internet, or maybe even political structure;
- and skeptical observations that BCE is a massive bubble that so far failed to demonstrate valuable use cases outside of wild speculation (and linked activities like borrowing cash/coins to go leveraged long/short) and outright Ponzi schemes.
While not trying to predict how the BCE will ultimately unfold. Different use cases will make sense at different stages of its development. Below we discuss what use cases make sense at the current stage of the ecosystem, using the framework of KVDs. Our goal is to help founders identify ideas and target audiences most likely to serve as a foundation for a thriving service.
Defining key value drivers
In this 2 minute video, Bill Gates explains the internet to David Letterman. David struggles to understand the value of a baseball game translation, and justifiably so. The internet has so many properties, as a communication system and it was easy to focus on the wrong ones when estimating its value.
Some of the properties are: multiformat, instantaneous, cheap, global, reliable, many-to-many form of communications — synchronous (live) or asynchronous.
One can focus on any property, and David chooses “live”. But “live” is not a new property, TV and radio are live. So it is not a KVD for our purposes. KVD should be unique to the ecosystem. Bill brings up “many-to-many”, mentioning a chat room for cigars aficionados. This property is unique to the internet. There was no good way to communicate this way before the internet. And it drives a lot of value, so we consider it a KVD. Other internet KVDs are “instantaneous”, “global” and “multi-format” (specifically the ability to transfer data, not just sound and video). It makes sense that the first use cases to thrive will be leveraging some of these key properties, like many-to-many (email, chat rooms, forums), instantaneous (getting critical information about business or topic), global (communicating with people around the world — from relatives to business partners and fellow hobbyists), and multi-format (like sending files).
Focusing on KVDs is important to assess the first wave of ecosystem development as they offer something that was not possible at all, not just a slight improvement. As the ecosystem matures, other use cases, leveraging weaker drivers are likely to develop.
After all, we are now able to watch live baseball games over the internet although it is a more expensive (infrastructure-wise) way to do it.
We describe blockchain as a set of records. And more elaborately as a
multi-format, instantaneous, global, distributed, trustless/permissionless, immutable, verifiable, anonymous, durable, fast, cheap, chained set of records with computation.
There are quite a few properties here. However, after applying the criteria of KVD, we are left with only two.
“Multi-format” and “instantaneous” don’t fit. One can make such records without blockchain. “Global” — too, it was possible to make records globally thanks to the internet. Same for “distributed” — itself it doesn’t seem to have value, rather it is an enabling mechanism. Neither are properties like “verifiable” (one can verify records by e.g. connecting Plaid to their bank account), “durable” or “immutable” (can be done by putting a copy into physical/digital storage or by entrusting it to a third party), “fast”, “cheap”, and “chained” (one can make such records without blockchain). Computation on top of the records can be done without blockchain as well.
The logic above leaves us with:
It can be argued that each of the discarded properties above doesn’t fit the KVD definition on its own, but combined with other discarded ones will. We’re looking into this as a separate study.
For now, though, we take the properties above as a first draft and apply them to figure out the use cases that should be first to take off.
Based on the key drivers above, we should expect thriving blockchain use cases where:
- A trusted intermediary is absent, too expensive, or is losing trust
- There is a need for anonymity of parties
since there are no practical alternatives to blockchain in such cases.
“Trusted” here means an intermediary that is reasonably believed by all parties to be and stay in the future accessible, reliable, censorship-resistant, and neutral.
One way to test this statement is to ask, both of these prerequisites lacking, is there a practical reason (there can always be an ideological one) to prefer BCE over the incumbents? We haven’t identified such a reason.
At the same time, these prerequisites explain well the frustration of developed world observers trying to understand the value of the BCE. Most of the observers have neither issue.
When analyzing a use case — ask if it requires one or both of the conditions above to work. If it does the BCE should be a great place to implement it.
Below we list the use cases that leverage identified KVDs and some top-down order-of-magnitude estimates of their size. We definitely missed some of them and look forward to updating this list.
When sizing the opportunities we looked at the near future (~5 years) potential rather than the theoretical global TAM.
The last segment is the most tricky to estimate. A few years ago NFT marketplaces and other NFT-related services would have been sitting there, as very few people could predict their emergence. It makes sense in retrospect, though. NFTs did not have a trusted intermediary (unlike another digital asset — songs — that had iTunes Store) so BCE makes perfect sense for them. We estimate the size of this group as one order of magnitude bigger than the enabling segments, using (somewhat imperfect) internet analogy as a guide.
The progress in each segment can be evaluated by tracking the value metrics of that segment, such as the amount/value of cross-border transfers, the number of digital assets owners (excluding speculators), the space leased (for a distributed storage company), and so on. Some of these metrics are completely obfuscated by speculation, but as the current environment cools down, the picture should become clearer.
It makes sense to assess infrastructure services (L1s, L2s, bridges, etc.) based on their contribution to the use cases. Being horizontal, these services power multiple use-cases and share in their value creation.
It is important to note that the potential is only one input for valuing a specific entity within the BCE. Just like with the development of the internet there will be many losers for each winner.
Another important question for the valuation exercise is whether the successful entities will share value flows with passive stakeholders (as opposed to validators, team contributors, and other active participants) or operate as non-profits. We lean to the former for the majority of the entities, since raising startup capital is harder for a non-profit. Though there likely will be many in the second camp too (led by the example of the community-built Bitcoin network).
Here we intentionally do not discuss coins/tokens’ value as a medium of exchange, saving these topics for future.