My take on the core value proposition of public blockchains and what will drive the next wave of mass crypto adoption
In the past year or so, I’ve come across many bull and bear cases for decentralised blockchains, and they’ve all been rather polarising. Well, blockchain can’t exactly “change the world” and “be a scam” at the same time right? As a participant in this space, I am naturally more biased toward blockchain adoption, but at the same time, I think that blockchain still has a long way to go before reaching mass adoption. This doesn’t mean it can’t. The ability to hold and weigh both the pros and cons is what will keep you objective and clear. This is my attempt to rationalise my thoughts on the value of decentralised blockchains, and how we can apply them for practical use cases beyond financial speculation.
In this article we will be exploring two use cases of blockchains:
- Blockchain as a censorship-resistant, verifiable source of truth
- The ability for a global tokenisation standard
Some of the arguments against blockchain are that it’s just another expensive database. Being decentralised it’s naturally slower and more expensive to store or retrieve anything from the blockchain. This is why many NFTs don’t have their images stored on the blockchain itself. However, instead of using the blockchain as a storage of information, I think it has better potential as a secure and verifiable layer.
These are probably some words that pop up about the blockchain. The idea is that with decentralisation, a unified ledger is maintained by a bunch of nodes at the same time. To change or reverse an action that has already occurred, one has to edit all existing copies of the ledger, which is objectively harder than changing one ledger. This is great considering assuming that there are incentives for an individual or multiple corporations to maintain that ledger. For the sake of this article, we will assume that the current state of blockchains is sufficiently decentralised and not subject to Sybil attacks.
With this ability, companies can use the blockchain as a “verifying layer” to authenticate sensitive information about a user. In combination with cryptography technology, blockchain can be used to authenticate information such as certificates, qualifications and so on without exposing the underlying information on the public network. One example of this is OpenCerts, where users can notarise and verify their certifications in a seamless process. Not only does this allow for the digitalisation of certification, but it also allows for interoperability between systems. Even if you have different certifications from different organisations, they are all able to be quickly verified by the blockchain.
However, isn’t the blockchain permissionless? The issue is that anyone can publish to the blockchain, so what’s stopping others from publishing fraudulent information? How do we set the standard of which data is true on the blockchain? Well, you technically can’t. To me, this is more of a network effect issue rather than a blockchain issue. Anyone can come up with the same systems as OpenCerts, but it’s up to the authorities to trust and use their standard. The more institutions such as government bodies and educational institutions use this system, the more trustworthy it becomes. Ultimately, centralised bodies are still required to be open-minded and integrate the blockchain into their systems. The good news is that OpenCerts are in collaboration with a whole bunch of Singaporean Universities and Government companies, which can set the basis for verifiable digital certificates for many Singaporeans.
We can see from this example just how powerful immutability is. Beyond educational certifications, other ledgers like identification, health records and beyond also have the potential to be digitalised using the blockchain as a verifying layer
This is a concept that I first heard from Tascha Labs, so do check her take on this in the references below. Being a crypto native from the defi space, I’ve seen first-hand the power of tokenisation. The ability for anyone to deploy a token under the same standard means that we can easily create a market for any unit of value. This explicit representation gives anyone the power to create a token from thin air and give it a certain value, depending on its use case. We’ve seen it in our yield farming Ponzi, play-to-earn games and many more experiments in the crypto world, allowing for rampant financial speculation on a scale not possible before a public blockchain (with sufficient liquidity). Of course, these Ponzis eventually fail, but this doesn’t discount the fact that tokenisation has the potential to be a great economic tool to supercharge growth, especially in businesses that require huge network effects.
A lot of companies rely on network effects. A classic example would be a digital marketplace for second-hand goods. Building the infrastructure of the marketplace is the easy part. But how do you attract the initial sellers to list items on the marketplace? Which can then attract buyers to use the platform. This is a classic chicken and egg issue that comes with any product relying on network effects. The simplest answer to this is just to throw money at it, but this isn’t possible for companies that simply do not have the resources. With tokenisation, you give yourself access to the secondary liquidity on the public blockchain to artificially spur demand on one side of the problem.
A simple example of this is loyalty programs. These are rewards that exist in many products today, think about your kris flyer miles, or your credit card points. With loyalty programmes, price is split into tiers where users are charged less the more they use the product which increases the product’s profits. The more tiers of pricing that the product can sustain, the higher the expected profits of the product. This is assuming that the users on the more expensive tiers cannot take advantage of the lower prices. This is also why users are not allowed to sell their loyalty points, to ensure that only the users with the highest usage are targeted for these discounts.
So why would anyone want to tokenise their current systems? After all, tokenising a loyalty programme means that you give access to subsidies for all tiers, removing the price discrimination and removing profits. But the argument is that with tokenisation and access to secondary liquidity, this extra incentive will increase demand for all price levels which has the potential to increase user growth as a whole. This is exactly the behaviour seen in the cryptocurrency space, where everyone from the protocol to the layer 1 level distributes large amounts of token incentives to increase the demand for block space. Of course, most of the demand as we have seen isn’t sticky, but this doesn’t negate the fact that tokenisation can be a powerful tool when used by the correct companies
Tascha highlights these general conditions for tokenisation to work
- A functioning product with some levels of product-market fit: Tokenisation can help increase the demand in the short term, but beyond the short-term benefits users will need to enjoy the product and stay for the long term
- Your marginal cost decreases with scale: Since tokenisation is expected to supercharge your growth, your product must be able to benefit from network effects and decrease cost when scaling
- You’re in a large addressable market: There should be enough room in this market to meaningfully increase demand with tokenisation
- Your business model can clearly define the utility of your token
The above thoughts are just some ways that I believe the usage of blockchain can reach the masses. But keep in mind that I am completely abstracting the price impacts on cryptocurrencies. So what if blockchain is adopted as a verifying layer globally? I have no idea what that means for the price of BTC and ETH.
Furthermore, with any nascent technology, a lot of it just talks of its potential and still bears a ton of execution risk. I also expect a lot of this to change in the coming months given the pace of the industry, but that is what also makes it exciting.
Tokenisation can be a double-edged sword, the ability to supercharge your network effects also means that you can access liquidity on the public blockchain. This is also why we see so many malicious actors in the space pumping and dumping shit coins on the average user. With the bear market in full swing and many scams flushed out of the space, I expect to see more users understand the value of decentralised blockchain and how it can integrate into current business models. We can be cynical and call it all a scam, or we can think about how to use this powerful tool for good.