It has been an interesting past few weeks, where I have expended a lot of time and energy on digital assets, their lifecycles, valuation models, and general concepts around fungibility, fiat conversation, and audit requirements in a blockchain-powered business network. This post is inspired by many frustrations I have around business modeling, monetization strategy, and understanding and devising an economic model around a blockchain business network. While I expend time and energy in deciphering the various complex structures, technologies, and motivations around various components, I wanted to go back in time and source a thesis from the evolution of Internet protocols and its related economic structure, which began with curious innovations and ended in not only disrupting and revolutionizing many industries but also creating new business models that never existed before. I suspect we will witness such a disruption once again, perhaps on a different scale and driven by motivation surrounding the inefficiencies of today’s economic infrastructure and ever-changing valuation structure of things we possess or aspire to acquire, whether real or digital. As digital goods begin to take center stage in our evolving economic system, the infrastructure that enables the creation, distribution, and exchange of these digital assets seeds the curious innovations that are constantly changing our perceptions (and subsequent realizations) of value. It is like any other system that is making itself up as it goes along, just like weather, evolution, and vibrant economies that aren’t inert and stangnant;1 since these systems are in a constant state of change, they aren’t predestined. Not being predestined, the digital economic system isn’t predictable, making this a very interesting and perfect breeding ground for amazing innovation.
As we dare to envision a world with decentralized control and governance based on distributed technology challenging every business model and governance structure built upon centralized business structures, we do have to ponder on not just the shift but the motivation, incentive, and monetization elements that will fuel and power the economic infrastructure to move things of value, thereby keeping up with changing our perception (and subsequent realization) of value. Thus, taking a few pages from the success of Internet phenomena and the early days of the Internet evolution and monetization of various layers that exemplify the Internet, where each layer is more abstract than the lower layers, enabling a robust and modular system design where . While there is a tight dependency between each layers, any one layer can be upgraded, patched, or completely replaced, with an impact on adjacent layers.
In this post, I will attempt to decompose blockchain into essentially four distinct layers to better understand and categorize technology, security, scalability, service orientation, and collective economic contribution to the blockchain application design. While there are many layers and approaches proposed to simplify our understanding of complex blockchain technology spaces, the intent of my discussion here is to focus on the commercialization of blockchain protocols and its collective impact on overall costs of not only solution designs but also on the operational elements of the blockchain network. And while many of the innovations in the foundational transaction protocol (layer 1), their enhancements around security and scale (layer 2), and core services that utilize these (layer 3) manifest their economic model and strength with some kind of token, be it a crypto asset or crypto currency governed by a crypto economic system in the blockchain network (mining, transaction processing, etc.), all of the collective constructs of underlying layers and their respective token models feed into layer 4, which is the business application that creates a tapestry from services provisioned in layer 3 and extend the benefits of decentralized (or quasi-decentralized) blockchain networks in the form of speed, cost, transparency, and trust to network participants. Drawing an analogy with Internet protocol layers, ideally these layers from a system design perspective should be abstracts and modular and easily swappable, enabling business applications and underlying services to take advantage of innovations and their resulting (hopefully improved) costs structures at lower layers.
In my post discussing the governance structure of blockchain networks, I describe how the governance structure was fundamentally being based on devised economic incentives driven by consensus in hopes of governing the network. This leads to defining governance—a body (centralized or decentralized) whose sole responsibility is to make binding decisions in a given system by establishing a set of laws or rules.
Read more here, Blockchain for Business Series: Blockchain Protocol Commercialization: A “BizTech” Agenda