Blockchain technology is one of the most trending technologies of our time, which possesses a prominent position in Gartner’s hype curve for emerging technologies. Originally focused on cryptocurrencies, blockchain is nowadays considered as an innovation vehicle for Fintech applications, as several financial services take advantage of the open, transparent, trustworthy and scalable nature of distributed ledger infrastructures and of the “smart contracts” built over them. Beyond financial services, blockchains are also applied in other application domains including Industrial Internet of Things applications in energy, manufacturing and supply chain management.
The ubiquity of blockchain and its technical advantages over existing solutions are the primary source of the hype that surrounds it. Nevertheless, when dealing with emerging technologies it’s always important to consider the business aspects i.e. the business models that can lead to improved bottom lines and new revenue streams. Companies need to know how to make money using blockchain in any of the above-listed sectors, either as a user or as an operator of blockchain services. The answer is not very obvious as blockchain is usually a network that nobody controls. In following paragraphs we explore some of the business models of the blockchain era, including practical examples of blockchain-based companies.
Blockchain Business Models
In general, blockchain companies leverage one of the following business models depending on their role and position in the value-chain of blockchain services:
- Cloud-based services – Software as a Service (SaaS): Several companies offer access to cloud-based infrastructures for hosting & developing blockchain applications. Their business model is a utility-based SaaS model. A practical example of a blockchain based SaaS service is BlockCypher, which provides the infrastructure fabric for blockchain applications. BlockCypher provides access to their API and infrastructure at a fee.
- Consulting and Professional Services: IT and business consulting firms provide professional services to clients that aim at building custom blockchain infrastructures for their enterprise needs. This is for example the case with IBM, which has established a rich portfolio of professional services around the open source Hyperledger fabric blockchain infrastructure.
- Enterprise Blockchain Infrastructure Providers: Several enterprises develop, provide and operate blockchain platforms for their enterprise customers. They make money based on appropriate Service Level Agreements (SLAs) with their customers, which provide specific service guarantees in terms of uptime, availability and service updates. This business model is pursued by several IT enterprises and resembles the consulting and SaaS business models outlined above. A prominent example in this category is Microsoft’s Blockchain-as-a-Service (BaaS) service, which is offered over the popular Azure platform.
- Membership (Subscription) Fees & Per Transaction Fees: Some companies operate blockchain infrastructures on behalf of groups or consortia of other companies, while providing value added services to them. These “facilitator” companies for blockchain services charge the members of the network a subscription fee for their participation in the network, along with transaction fees for each transaction. R3Cev LLC is employing a subscriptions’ based and per-transaction fee business models. The company provides blockchain-based distributed database services to more than 70 financial institutions, including some of the planet’s biggest financial firms.
- Trading of cryptocurrencies: Recently we are witnessing an increase in the market value of cryptocurrencies like BitCoin and Ethereum. Some companies have been making money through successfully trading in these markets and such activities ensure that the market value of these tokens increases. Several providers of BaaS services are offered with opportunities for holding and trading large amounts of cryptocurrencies. In most cases this is done by companies that are exclusively in the blockchain space (e.g., BaaS providers Factom and ConsenSys), rather than by IT enterprises with a wider solutions portfolio.
Beyond Conventional Blockchain Services
While the BaaS model is the foundation for the operation of blockchains and smart contracts, additional business models are emerging as startup enterprises exploit distributed ledger databases and smart contracts to roll out novel services. Fintech is the area where most startups are active. For example, tØ a subsidiary of on-line retailer Overstock.com is currently issuing and trading stocks over the internet based on a blockchain network. This is a rather unique way of trading financial securities, including blockchain-based private and public equities. Likewise, Openbazaar provides an on-line marketplace that is empowered by blockchain technology (i.e. like a blockchain-based eBay). Openbazaar’s value proposition is that it does not rely on any centralized authority, which lowers the possible cost for e-commerce infrastructure and tools for people and companies wishing to start an e-commerce business. Also, there are several mobile apps, which exploit blockchain networks in order to enable micro-payments, bank transfers and card transactions. Examples include Sentbe and Abra.
A great number of blockchain-based startups are emerging in other sectors as well, offering services such as:
- Insurance services (Insurtech), with particular emphasis in establishing smart contracts for settlements and agreements between insurance companies.
- Healthcare services, including services for sharing patients’ records and other personal data in a secure and privacy friendly way.
- Compliance services, which exploit the transparency and openness of blockchain in order to ensure compliance to laws, directives and regulations.
- Traceability and supply chain services, which are based on the logging of the state of objects in the distributed ledger, which includes the full history.
- A wide array of internet of things services, which involve logging and management of transactions between sensors and internet connected objects at scale and in a reliable way.
Outlook
While business models for fintech startups are already there, the business models for innovative enterprises in other sectors are still in their infancy. During the last couple of years, enterprises have been enthusiastic about the innovative functionalities and the unique operational model of the blockchain infrastructure. This enthusiasm would lead to novel blockchain ideas, along with models that will lead to monetization. Such models will not be confined to the use of basic blockchain services, but would rather entail the use of more advanced blockchain features such as consensus protocols and smart contracts tied to monetization mechanisms. It’s certainly time enterprises dispel the blockchain hype and focus on business model innovation.
