The HBS Entrepreneurship Club is starting the year with a series of articles written by Fellows from Pear VC. They’ll cover a wide range of topics from the US Seed stage venture landscape to predictions for the year and deepdives on building your startup on blockchain and cloud hosting!
This feature is authored by Pear VC Fellow Mei Tao.
Questions or ideas? Reach out to Jad — Pear Fellow and HBS Entrepreneurship club’s leadership team.
You are working through a business plan on a community-based electricity crowdsourcing platform, or brainstorming ideas on how to make election voting more secure and transparent. You read about blockchain’s promising security features, but you also heard more bashing on crypto projects going down the drain. You wonder, does it make sense for me to build a decentralized application (dApp), or should I stay away.
We tend to overestimate the effect of a technology in the short run, but underestimate it in the long run.
Looking back 10 years — early 2009, Apple had just rolled out its iPhone App Store, and there were less than 2,000 mobile apps on shelf. Today, iPhone apps grew to over 3.2 million, and mobile adoption exceeds 1/3 of the world. Interestingly, public blockchains today host a similar number of dApps as number of apps in 2008 App Store, but will dApps achieve the same growth as apps in the next 10 years?
Businesses don’t exist without solving customer pain points. To understand the usefulness of blockchain for your application, we need to understand whether blockchain is the most efficient way to address the needs of your particular customers, and evaluate whether the core benefits of applying blockchain are worth the performance tradeoff. Below we’ll run through each of the core benefits and their possible use cases.
Needs for Immutability
Blockchain is a database where you can add data, but not edit or delete. This also means that a dApp will live forever. The need for its immutability is the most apparent when involving the transfer or holding of ownership, i.e. money, assets, content. Today, half of the world’s population still live under authoritarian governments, where property ownership, freedom of speech, personal wealth, etc. are often on the line.
In countries like Nigeria, Uganda, Ghana, where land grabbing prevails and the property registration processes are inefficient, recording property titles on blockchain creates immutable and secure registry records, protecting land ownership of local residents. July 2018, the Ministry of Lands and Natural Resources of Ghana partnered with IBM to build a land administration system on the blockchain.
Immutability of the technology is also bringing blessings for citizens in Ukraine, North Korea, and China where governments exert significant censorship on media. Politically sensitive commentaries or graphics published on Wechat are immediately removed by censors (as shown below). However, with decentralized content platforms like Ono that are censorship resistant, consumers can regain freedom of speech.
Enabled by Tokenization
Tokens are often issued along with a dApp as rewards for the community of users, node runners, investors, etc, which creates a unique business model that monetizes from the appreciation of the tokens in the ecosystem. Tokens appreciate the increased engagement of the app and its perceived value in the market. This model unlocks the potential to shake up the value distribution systems in many existing businesses. One example is content creation on social media —
Steemit is a decentralized Reddit and the dApp with the most users (1mm+). Anyone can earn token rewards by posting good content, curating quality content, and commenting on the platform. Content creators make a living by creating good content and appreciation of the platform. This model completely removes the needs for ads from the ecosystem and strips away the ability of the Facebook of the worlds from monetizing off of user data.
The value capture by tokens also creates an investment and value storage alternative for consumers. Illiquid assets such as real estate, private funds, intellectual property, private businesses can securitize into liquid assets via tokenization. Harbor, Trust Token are platforms that tokenize assets and enable fractional ownership. In countries like Zimbabwe, Venezuela, where currency can lose value overnight, holding Bitcoin or a stable coin like Dai, creates opportunities for residents to preserve family wealth against hyperinflation.
Empowered by Transparency
On blockchain, the transactions and holdings of each public address are visible by the public (although these public addresses are not publicly linkable to individuals ensuring privacy). This transparency feature creates a single source of truth for all stakeholders which enables the easy tracking of key information, especially when this information is fragmented.
Health records today are disconnected and stovepiped due to lack of common infrastructure to securely transfer potentially high-stake information among stakeholders. MedRec, developed by MIT Media Lab, is a decentralized electronic medical records management system that aims to unify data access by disparate parties and replace centralized intermediaries. MedRec encodes anonymized metadata of patients and allows patients to easily authorize viewership rights to trusted parties.
Recording products’ manufacturing, packaging, shipping, and transaction info on immutable ledger can provide stakeholders along the chain one transparent view of the product history. Product provenance is a particularly high stake for valuable or health-related goods. Global diamond giant De Beers has been tracing high-value diamonds from mines to retailers using blockchain, and it launched Tracr, an open traceability blockchain platform for the entire diamond industry. VeChain has partnered with LVMH, Renault, DB Schenker, Kuehne + Nagel, etc. to provide provenance tracking solutions.
Trucking is another extremely fragmented industry with huge inefficiency in matching shippers with carriers, where public blockchain can potentially help track vehicle maintenance and capacity, monitor performance history, and generate accurate pricing. Other potential areas to benefit from the transparency feature include insurance /reinsurance records, property transaction history, etc. However, to put this information on the blockchain, companies face the challenges of i) providing complete IoT solutions to digitalize physical happenings; ii) incentivizing the accurate and truthful manual information upload.
Blockchain faces the inherent issue of scalability. Processing speed slows as users increase. Although many entrepreneurs are addressing it via PoS, sharding and off-chain solutions, the performance tradeoff of a decentralized application is structural. This can impact certain use cases more than others — applications that require a lower frequency of transactions have much higher defensibility on a chain. Property title recording with a few transactions per sec, for instance, has lower performance requirements, whereas a decentralized currency exchange that needs to support millions of transactions per sec requires much more efficient protocols.
Currently, the dApp UI/UX also suffers from the still early-day infrastructure (browsers, wallets, data feeds, etc) and limited interoperability. Ethereum dApps charge a fee for each transaction to compensate the nodes operating the distributed network. However, these frictions can be addressed with the continuous development of the ecosystem and improvements in protocol design over time.
Deciding whether to build a decentralized business depends on how essential the benefits of immutability, tokenization, and transparency are to the value creation of your company. Today, the majority of applications are still better off being centralized. Below is a list of example use cases assessed against the needs for blockchain’s core benefits and the potential performance tradeoff, to serve as a reference as you think about whether to go app or dApp.
Additionally, decentralized applications can typically fundraise through token sales, which for some founders can be an attractive alternative to raising traditional VC funding. It allows entrepreneurs to potentially raise bigger round earlier, easily access a global base of investors, and gain liquidity immediately on their shares (in a good market environment).
The overuse of the word “blockchain” today still signals the lack of adoption of the technology itself. The day when consumers can enjoy the benefits of your application without even being aware that it runs on a blockchain is when your decentralized application has succeeded.