DECODING A REVOLUTIONARY BUSINESS MODEL

PART I – THE DIFFERENCES WITH THE TRADITIONAL MODEL

Despite all the noise around cryptocurrencies, the medias too often evade the real interest that these projects bring: a new business model. The organization of each of these projects is very different from what we have known up to now. All our corporate models and securities valuation are not applicable to these new entities and their tokens.

This articles series aims to understand what are the differences between these two models, “centralized” vs “decentralized”. The articles will be distributed as follows:

Part I – The differences with the traditional model.

Part II – How to assess ecosystems that issue Currency tokens?

Part III – How to assess the ecosystems that issue Platform & Utility tokens?

A CRYPTOCURRENCY IS NOT A COMPANY BUT AN ECOSYSTEM

First, it is important to describe what each of these projects really is.

Each of these projects based on a blockchain can be defined as a standalone ecosystem which is created around a new protocol, animated by a community of developers and users, who are paid with tokens created by the protocol for their participation in the development of the project. Let’s break down this sentence to analyze each of its components.

By protocol we mean a computer program which brings together all the operational rules of an application. All cryptocurrencies are protocols. The Bitcoin Protocol is the program which brings together all the operation rules of the bitcoin. The protocol determines the rules of mining, the conditions of validation of transactions, the remuneration of miners, the difficulty of the “Proof of work”. Each of these cryptocurrency is based on a protocol that defines its operation and also the creation of the tokens as well as their interaction with the rest of the application.

It is important to note that these protocols can be constructed on top of other protocols. There are indeed many protocols that are built on top of the Bitcoin Protocol to benefit from a decentralized and secured structure without having to manage the cryptoeconomy and network parts that we describe below.

Protocols can also be included in the Smart Contracts and benefit in the same manner from the features of the blockchain on which they are hosted. It is precisely the type of service that Ethereum offers by proving developers with the environment necessary to develop protocols or decentralized applications.

Ethereum goes further than the bitcoin in that it allows developers to take advantage of a decentralised environment based on a blockchain (including protocols for crypto-economy and network), but also of a virtual machine able to execute commands more or less complex from the contracts stored on the blockchain. This Ethereum Virtual Machine is composed of all the members of the network Ethereum.

TOKENS ARE NOT A SHARE OF A PROTOCOL

When you hold a cryptocurrency token, you do not have a share of the Protocol which created it, as you would when you own the shares of a traditional company. A protocol is inherently decentralized and belongs to each members of the network. For example, if you owned 51% of the bitcoins currently in circulation, you would not have more influence on the evolution of the network or the changes to the Protocol than if you had 0.1%. It would be different if you held 51% of the mining capacity (hashing power) since in theory you would have the power to choose the blocks that should be added or not to blockchain.

In other words, a cryptocurrency is a certificate used to exchange the perceived value of the protocol on cryptocurrencies exchanges. This business model cannot be compared to traditional companies where securities give you a right to dividends proportional to the profits made by the company. The incomes generated by these protocols are of very different nature and are created in the form of tokens to pay users who participated to the development of the network. It is important to remember that these tokens are generated by the Protocol from thin air.

These tokens gain value (or not) when they are traded on crypto-currencies exchanges, if purchasing demand is greater than number of tokens available. This demand is generated by the value created by the Protocol and the network by solving a particular problem. As will be describe in parts II and III of this article series, the value of tokens is influenced by many other factors that must be taken into account to determine their present and future value. In any case each protocol is created to solve problem more or less important:

Bitoin: instant transfer of value on the internet, regardless of distance or volumes.

Ripple: connect banking networks that are currently independent and do not communicate with each other’s easily.

Ethereum, Neo, Wave, Bitshares: provides a decentralized application development platform.

Siacoin, Storj, Filcoin, Madsafe: allows member of a network to access free memory space of the other members of the network in a secured and decentralized manner. All of these services have a perceived value that corresponds to the reality or not. Even if there is a significant part of speculation, this value is reflected in the resale price of the tokens on the cryptocurrencies Exchange.

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