Obtaining Competitive Advantages With Decentralized Technology
Founders of struggling businesses using decentralized technology have learned that they cannot simply replicate everything traditional applications do using decentralized technology and win customers.
Obtaining competitive advantage using decentralized technology requires founders to completely transform their business models. More on this below after a brief introduction.
Decentralized applications are products and services built on public blockchains (aka decentralized technology). Currently, there are many decentralized applications in areas such as gaming, gambling, exchanges, collectibles, finance and more built using different public blockchain protocols. The chart below displays this.
Decentralized applications can have security, privacy, cost and time savings advantages compared to similar offerings provided by centralized competitors. They may also have unique financial rewards/incentives built in. Given these benefits, it would seem simple for decentralized applications to obtain competitive advantages over incumbents, but few actually have.
In this post I offer some suggestions for founders using decentralized technology to obtain competitive advantages.
Blockchain-Use Case Fit
A first source of competitive advantage for new decentralized applications is selecting the right blockchain protocol from the beginning. The reason is two fold, (1) the development of a decentralized application places more value on precision rather than moldability, so switching costs can be high, and (2) your use case will be best suited to a particular level of decentralization.
Some blockchains are less decentralized and secure in order to process transactions faster. Others blockchains are completely decentralized and more secure but have slow transaction throughput. This is known as the blockchain “scalability trilemma.” Existing blockchains are only able to compete in two out of the following three areas — speed, security, and decentralization. Note the difference in transaction throughput of Bitcoin and Ethereum versus EOS and Tron in the table below.
While there is a promising infrastructure that aims to solve the scalability trilemma, in the meantime it is important for innovators considering decentralized applications to leverage the best of what currently exists.
Before selecting a blockchain protocol, it is important to discover early in the planning of your project how much decentralization matters to your use case—this will impact a user’s perceived value of your solution.
For example, open finance applications have found a sweet spot on Ethereum. This is because open finance applications built using Ethereum can work with scalability limitations unlike other decentralized applications that require an immediate transaction settlement — like gambling and gaming. For instance, I can wait five minutes and pay a few dollars in gas to receive a $5,000.00 loan on Dharma but I wouldn’t want to wait five minutes and pay a few dollars in gas to receive $20.00 while playing an online poker game.
Another aspect to look for when evaluating blockchain — use case fit is market size. For instance, the reason why open finance applications are thriving on Ethereum, is that ETH has a robust trading market. For open finance applications to function efficiently, the aggregate market value needs to be sufficiently large. Without a robust market there will be no liquidity (Source of content from Kyle Samani: “The Unbundling of Ethereum”).
Like open finance on Ethereum, other blockchain — use case fit narratives are taking shape. Online gambling and gaming applications are working well on Tron and EOS. One could say its because of both the use cases and users willingness to trade off some decentralization and/or security for increased transaction throughput.
If you’re interested in learning more about open finance check out this article:
Open Innovation
One of the main characteristics of decentralized technology is open innovation. This is why many participants choose to open-source their code, allowing others to view what’s been done and contribute. While this is more transparent, it also introduces risk. For instance, there is little preventing others from making a copy of the code and starting their own project with a fraction of the effort, with perhaps only a tiny incremental improvement. While it is easy to copy the code, it is not easy to scale, which hinges on leveraging open innovation to develop competitive advantages from a strong community, using existing technology and transforming user experience.
Strong Community
Businesses that launch early decentralized application prototypes can capture a passionate community. The most valuable resource in a decentralized business will not be data, but rather the strength of community — collectives of individual users and software developers with shared values. It is important for decentralized businesses to engage with the community and remain highly transparent about risks and operations.
Over time the business will develop a learning relationship with it’s community that grows, deepens and becomes smarter with each product iteration / milestone. So even if a competitor were to copy open-sourced code, a customer considering the switch will have to teach the new company what the former already knows.
To establish even more community stickiness, decentralized applications can take engagement a step further to bolster a competitive advantage by having financial incentive mechanisms and governance rights as part of their business models. Business is in part, in the hands of the user community. This idea is important because most often, users are the ultimate beneficiaries in decentralized applications.
Take Aragon for example, a decentralized application that empowers users to create global, bureaucracy-free organizations, companies, and communities without any intermediaries. It allows creators of new social structures to optionally distribute economic and governance rights to peers.
Furthermore, strategic relationships between communities that form ecosystems will also lead to a competitive advantage. These ecosystems will be magnitudes stronger than centralized organizations.
Founders of decentralized applications can develop competitive advantages by creating communities and ecosystems with shared values, being transparent in communications and offering incentives for participation.
Using Existing Technology in Ecosystems
There are thousands of decentralized applications with teams working in isolation, doing something similar to other companies all while building new technology from scratch. It is entirely possible to capture value by creating a decentralized application using other decentralized applications—also termed an open API strategy.
Unlike industry dominating platforms like Amazon, Facebook and Uber (who also use open API strategies), founders of decentralized applications cannot have a winner takes all mentality — at least for now. As the industry is no where near large or mature enough, the benefit of an ecosystem strategy involving decentralized applications is having open connections and creating shared value, which ultimately creates collective competitive strength.
An area where this is occurring is in Open Banking. For example, Starling Bank, a digital-first bank from the United Kingdom uses an Open API strategy to compete with full-service banks. Starling gives customers access to its “marketplace” where they can choose from complementary third party products and services that can be integrated with their Starling bank account. For example, through Starling, users access third party services to view investments, apply for mortgages, travel insurance and more.
Founders can leverage existing technology both as part of an open API product development strategy and as part of an open ecosystem consisting of complementary decentralized applications.
Transforming User Experience
Online companies staging (and selling) experiences have been around for years. Think about the first time you booked an Uber or watched Netflix. These companies changed the way services are delivered; like flagging down a cab or going to the cinema to watch a movie.
Like Uber and Netflix changed the way services are delivered, founders of decentralized applications have the opportunity to create business models that reimagine the way products and service are consumed to capture new value.
Creating a decentralized Uber, Netflix or other popular app and trying to compete by offering lower fees is a losing proposition. Founders need to be creative when designing new experiences, leveraging the unique characteristics of decentralized technology described below:
- Trust layer: there is no central party to ensure transactions are valid.
- Permissionless: accessible to anyone, anywhere.
- Censorship resistant: no central party can block or control transactions.
- Programmable: applications are controlled by software and code.
- Transparency: code is open sourced.
One company that has designed a clever user experience using decentralized technology is Brave. Brave has a free and open-source web browser that protects users’ data and blocks advertisements and website trackers. Brave also has an opt-in program that allows users to view advertisements and receive a share of the revenue from the advertising promotion.
The benefit of Brave for users is a privacy-centric and customized website browsing experience. The benefit for advertisers is less fraud, lower fees and better conversion economics of their paid campaigns. This is a large divergence from the walled garden approaches (defined below) of competitors like Google and Facebook.
A walled garden is a type of software system. In it, the service provider controls all the offerings and information and has the power to authorize and approve access to non-approved applications or content. This is exactly opposite to a decentralized platform, where consumers can access the applications, media and content without any restriction (source: MBAskool).
Just like Brave, founders can create surprising and transformative experiences using decentralized technology which can lead to competitive advantages over incumbents.
Learning Advantages
While new technologies generally emerge quickly, decentralized applications are moving at light speed. These applications are not at the cusp of falling off a hype cycle, but opportunities emerging at the ground floor. There has been some early movement towards decentralized applications, but we predict that many more startup founders and existing institutions will enter the market over the next decade.
Now is the right time to explore decentralized applications. Regulators are well-aware of decentralized technologies. The broader market is becoming increasingly aware of decentralized technologies owing to the efforts of a few well-known early movers. At this point, a “wait and see approach” is not a good option and will only serve to put would-be innovators in the back seat for years to come.
Getting started is difficult. Decentralized innovation is a moving target that will paralyze some. Building it is not easy, not widely documented and not well-known by an abundance of software developers. But, early movers into decentralized applications will develop an important learning advantage.
When it comes time to planning, developing and deploying a decentralized application, those that leverage early prototypes and learnings will be far ahead of those that have to mimic open-source code to compete.
To help startup founders get started, I have another blog post all about finding product-market fit. It is aimed towards digital currencies, but any decentralized application also applies.
Final Thoughts
It is best practice for those considering deploying decentralized technology to focus on the long-term. These technologies could take between 5 and 10 years to generate a return on investment. That said, aligning with partners and investors who also have the same vision is critical.
If you have a business problem, use-case, or desire to meet new customer needs, engage your innovation team, an analyst, or outside experts to explore how decentralized technologies could impact any of these areas. Once a proper use-case is defined, you should test, learn and launch early prototypes.
Founders that use decentralized technology to reimagine business models, learn and build a community will develop advantages that propel them forward as the technology we use changes before our eyes.
If you have any further questions about the post don’t hesitate to get in touch. I specialize in helping businesses create new value using decentralized applications and digital currencies. Here is my website, email and LinkedIn.
Thanks for reading,
Drew
Tags: cryptocurrency, digital currency, blockchain, competitive advantage.
