Remi Gai

@remi.gai

Internet vs Blockchain Revolution: New Concepts, Valuation Methods and Timing (Part 4)

This article is part of the Internet vs Blockchain Revolution Series. If you are interested in reading the other articles, check out this post.

Emergent technologies enable new concepts and business models that were not possible or practical before. These new concepts and business models often take time to be validated and require new methods of valuation. As the Internet Revolution has shown us, timing is very important for these new concepts and models to succeed in emerging markets.

The Emergence of New Concepts:

New concepts that appeared with the development of the Internet and Blockchain

New technologies have the potential to create new concepts and business models, allowing for new markets to emerge. For example, the Internet allowed for the emergence of new concepts such as “unlimited selection” (ex: a book store that sells all the books from around the world — Amazon), or the concept of “instant gratification” (ex: a movie rental store selling all the movies from around the world — Netflix). The internet made these new models possible, and the companies such as Amazon or Netflix understood that consumers’ expectations were changing and focused on shifting their model to satisfy these new demands. Some other concepts include “search engine”, “real-time information”, “instant messaging”, “social media”, “digital advertising” and “streaming”. Although we take many of them for granted nowadays, a lot of these concepts started as an idea and needed time to be tested and proven over time. For example, during the early Internet, Jeff Bezos had the idea of the “everything store” from the beginning but thought it was too grandiose at first and chose to focus on selling books as a proof of concept to validate the business model of “e-commerce”. Books were chosen because they are most similar to a commodity, in which the buyers knew what they would be receiving, and had a relatively high margin. Once Jeff Bezos had proven himself that “e-commerce” could be a viable business model with books, Amazon quickly expanded into other verticals.

Evolution of the entertainment industry with the emergence of new technologies

In the blockchain space, a new fascinating concept that emerged towards the end of 2017 with the introduction of CryptoKitties was “digital scarcity”, which allowed you to own digital cats on the blockchain. Having complete ownership of a digital asset wasn’t a feasible idea before the existence blockchain, and was a major pain point that forced the traditional entertainment industry to shift their business model over the past 30 years. During the pre-Internet era, the entertainment industry had a business model heavily dependent on the sales of physical products such as CDs, cassettes, vinyles and DVDs. With the emergence of the Internet, new type of files such as MP3 and MP4, and the peer to peer protocol (1999), piracy started to flourish, and files became free for grabs online. The lack of digital copyright protection and file ownership vehicle forced the traditional entertainment industry to shift into an experience-oriented model that we know today, with services such as Blockbuster, Netflix, and Spotify. If blockchain technology appeared 10 years earlier, perhaps the way we consume digital media today would have been different. Some other new concepts that came with blockchain include “immutability”, “finality”, “cryptocurrency”, “utility tokens”, “Token Curated Registry (TCR)”, “Decentralized Financial System (DeFi)”, and “Decentralized Autonomous Organization (DAO)”. These concepts are currently being explored by many exciting projects in the space and time will validate their value in the world.

New Valuation Methods:

Fat vs Thin Protocol (a concept from USV, by Joel Monégro)

The viability of new business models is not always clear at the beginning. During the early days of the Internet, many companies started with a “paywall” business model then gradually shifted into an advertisement model as it proved to be working. The digital advertising business model was discovered and popularized by Wired. In 1994, Wired replicated its traditional advertising model from their magazines to their new online magazine (Hotwired), which was something never attempted previously on the web. Interestingly during the early web period, there were so few websites that people even enjoyed clicking on advertisement banners, just to explore other pages. Once this new business model was proven to generate significant revenue, many companies followed this path, especially the emergent search engines, such as Yahoo, which previously struggled to find a way for monetization. In 25 years, the market size of digital advertising grew from nothing to $270B worldwide in 2018 (Statista).

Wired magazine’s HotWired.com was the first website to display banner ads (1994)

In the cryptocurrency space, we have seen interesting new models tied to token economics. For example, protocol and utility token developers can create value for themselves by retaining some of the initially minted tokens. The revenue is then dependent on the price inflection of the tokens based on its adoption, demand, and speculation by the market. While this model makes sense from the decentralization perspective, in which the opportunity for middlemen to capture value is supposedly removed or minimized from the system, the risks taken by these projects are fairly large as their success would be solely dependent on the success of their “one-time” minted tokens, without the chance of making major business model changes after deployment. Some other interesting new business models include the one pioneered by the exchange Fcoin (FCoinOfficial), which attempted to solve the problem of exchange liquidity by rewarding tokens for trading (the model of “trading is mining”) instead of charging fees like most exchanges, or the social media platform Steemit, rewarding users for the content they produce and allowing them to gain exposure on the platform if the users stake their tokens. Overall, we are excited to see new token and business models appear in the space.

UTXO Analysis and Market Cycles (Source: Delphi Digital)

For assessing the price of cryptocurrencies, we have seen new valuation methods such as The Network Value to Transactions (NVT) ratio, which measures the dollar value of crypto asset transaction activity relative to network value (popularized by Willy Woo and Chris Burniske), or the UTXO Analysis (concept from Unchained Capital), which correlates the unspent output from bitcoin transactions to price over time. Both are interesting ways to provide new frameworks to explain the value of Bitcoin during bear and bull market cycles. However, many questions still remain on what would be the right way to assess the value of protocol tokens. Should the value be based on the number of dapps built on the top of the blockchain, and their respective user base? Or should it be based on the total computational resources they provide (for example, gas fees in Ethereum can be seen as computational power offered by the miners, or storage power in the case of FileCoin)? Generally, as we are still in the early cycle of the blockchain revolution, there are no standardized frameworks for evaluating the value of blockchains, dapps, and cryptocurrencies.

Timing:

Internet Revolution: the evolution of the market, infrastructures, and companies

Looking back at how the major applications from the Internet era rolled out, pioneers of new technologies are rarely the ones who survive long enough to dominate their categories: often, it is the copycat that is still with us today: Google, not AltaVista or Yahoo, in search; Facebook, not Friendster or MySpace, in social network. In the technology world, the ultimate success of a new idea is very much dependent on timing. What led to the success of Mosaic, the first Internet browser was the timing for becoming an early mover in the space. In the 80s, only four universities that had gotten enough federal funding to effectively build (Super Computers used to cost $25M) and they were developing the NSFNET (The National Science Foundation Network), basically the Internet. NCSA’s fast computers and internet connections allowed Marc Andreessen and the other kids doing research to be perfectly positioned to catch the wave of the Web right before it took off.

Even great ideas that seem to be the next big thing can fail to deliver on their promise because the underlying technology or infrastructure isn’t mature enough yet to support its adoption and viability. For example, media streaming was a popular idea during the early Internet in which Broadcast.com (Internet radio company created by Mark Cuban in 1995) became successful, but other companies trying to provide video related services at the time failed. For Youtube (2004) to take off, it required the development of broadband Internet connections, combined with the adoption of consumer video and cell phone cameras, and the copyright infringement lessons from Napster’s failure (first peer-to-peer file sharing service that was shut down due to copyright infringements), which almost happened 10 years later. Facebook (2004) also got the timing right on the adoption of smartphones, which provided a more personal and intimate experience of the Internet at any moment. Where would Instagram, Snapchat, Twitter, and Uber be if the iPhone didn’t start the smartphone revolution? It was the perfect vehicle needed for social media consumption and production. Some would argue that social media finally became mainstream because smartphones went mainstream at the same time — both complemented each other at the right moment. In the blockchain space, the mainstream adoption of dapps will be very much dependent on the maturity of the technology and infrastructure that can allow for viability and scalability of some use cases. Some ideas could be viable and practical in the next few years, and others could take 5–10 years.

In conclusion, emergent technologies allow for new concepts, and business models to appear and it’s important to evaluate them from new valuation angles, as the previous methodologies might not be applicable. Many of these new concepts take time to be validated, and their adoption is closely tied to timing.

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The Internet Revolution facts are based on the book “How the Internet Happened”, written by Brian McCullough. Mark Twain once said “History doesn’t repeat itself, but it does rhyme”. We are attempting to draw some similarities between the Internet and Blockchain Revolutions, to help entrepreneurs and investors better understand technological life cycles. Please leave your thoughts and comments below, and hope this article series will have provided some valuable perspectives about the Blockchain industry.

Author: Remi Gai

Sources:
Book “How the Internet Happened”, written by Brian McCullough.
https://a16z.com/2019/03/12/hallucination-vision-scenius-networks-selling-using-making-art-brian-koppelman-marc-andreessen/
https://www.statista.com/statistics/237974/online-advertising-spending-worldwide/
https://coinmetrics.io/nvt/
https://www.delphidigital.io/utxo
http://www.usv.com/blog/fat-protocols

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