- Abstract
Over the past few years, distributed ledger technologies have become one of the most important drivers of innovation that will profoundly changing society and the economy. Blockchain technology and DLT are often taken synonymously, although blockchain is an extended subcategory of DLT.(SANDNER, 2019). Blockchain technology has huge potentials for business-, economic- and social developments, but also a lot of challenges. This paper analyzes the success factors and competitive forces in the DLT landscape with a best practice example of a the blockchain startup DFINITY. It starts with the advantages of blockchain technology and the fields of applications, followed from the challenges and disadvantages.
The method of this paper is split in a theoretical and a practical part. The framework is based on a theoretically, secondary literature research and the content about the practical competitive advantages of DLT is based on an expert interview.
The results showed, that the application fields of blockchain technology are wide, but the success factors in DLT landscape are not tremendously different from other technology industries. The correlation between engineering excellence and commercial success is extremely low. Forming a sustainable business model with a straight strategy and a competitive advantage is still the key to success. The combination of this requirements with a strong team and the outstanding idea of DFINITY could change the entire infrastructure of the internet.
The study concludes that the most important competitive forces in DLT landscape are avoiding platform risks, having a logical business model and a solution that requires blockchain technology.
- Current Situation in DLT Landscape
By 2017, more than 1.6 billion US dollars had been invested in blockchain-based startups all over the world, which shows the relevance of the still young technology in the eyes of investors. (SANDNER, 2019). The areas of applications for blockchain technology are wide, but the most common use cases are cryptocurrencies like Bitcoin and Ethereum, which generate most headlines and speculations. Looking at the architecture behind cryptocurrencies, it could be used for more than just “mining”. (Mike Butcher, Ingrid Lunde, 2020) The decentralization of data can be used for a wide variety, especially to increase data security. A tremendous amount of the worldwide data traffics and storage is evaluated by humans and it cannot be ruled out, that information may be misused by the entity that manages the data.(SANDNER, 2019)
2.1. Advantages of Blockchain Technology
A key advantage of an open blockchain systems is hashing, which makes it almost impossible to change data. Once the data is verified by consensus, any attempt to change data can be traced. Furthermore, the blockchain has no central point of failure, which makes it easy to withstand fall outs and external attacks. The disaster-recovery is easy, because every system has a copy of the data. Another advantage of Blockchain Technology is, that the data is stored in near real time. This allows current and fast exchange of large amounts of information. The resistant and comprehensible system of the bockchain makes it possible to visualize transactions and their effects on the various contractual partners. This helps to increase transparency and precise analysis, because information cannot be changed. (Talin, 2019)
2.2. Application Fields and Use Cases of Blockchain Technology
Blockchain Technology and its smart contracts have often made it into the news in the last years. Especially the cryptocurrencies were widespread under many headlines about price increases and lots of speculation. The cryptocurrency transfers are made via a decentralized peer-to-peer application, where transactions-information are stored on a large number of computers. There are currently around 17.97 million bitcoins in circulation in 2020. The following diagram shows the continuous linear growth of the number of Bitcoins from October 2016 until December of 2019. (Statista, 2020)
2.3. Challenges and Disadvantages of Blockchain Technology
As table 1 shows, blockchain technology can be used for many financial and non- financial applications. (Dr. Siegel, 2016) Nevertheless, the implementation of the technology into daily life of an average citizen is not present. The contact points between blockchain technology and society are not visible. It seems too complicated for many people and is not easy to understand on the first glance. (Dr. Gunashekar & Deshpande, 2017) Furthermore, many companies and government do not even see the utility and potentials, because of the insufficient evidence on business profits and wider economic impact. There is a lack of clarity on how the technology would be governed and how smart contracts could be implemented in their own business processes. (Dr. Gunashekar & Deshpande, 2017) In addition, the uncertainty around regulations, the strong encryption and the energy-intensive nature of the technology are huge disadvantages for an amount of people and companies. (Dr. Gunashekar & Deshpande, 2017) Also ethical aspects are questionable, because paying with cryptocurrencies allow transactions without the involvement of banks or other financial organizations. Therefore the sender and recipient are largely anonymous which increases criminal activities. (Rosenberger, 2018)
- Identification of success factors in the DLT landscape
3.1. Analysis of Market- Conditions and Requirements
To understand the critical success factors for blockchain companies, it is important to analyze the market conditions in the DLT landscape. As long as the new blockchain based startups do not get too ambitious with programming complex smart contracts, it is relatively quick and straightforward to build a working blockchain solution. (Areiel, 2017) Therefore, over 12.000 blockchain based startups around the world were founded until 2017, but many of them failed. (Areiel, 2017)
There are over 2.000 cryptocurrency startups in the DLT landscape, but only a few of them became popular. The following diagram shows an overview about the numbers of death cryptocurrencies and the reasons why they failed.(Brandt, 2019)
There are currently 1,614 failed digital currencies listed, sorted by the reason for their end. 57,9% of the "deaths" have no trading volume or have been abandoned by their developers due to financial failure. Another 35,3% turned out to be fraud, 5,1% were parody and another 1,7% hackers. (Brandt, 2019) So, one of the success factors to become a sustainable profitable company, is to start looking for something new that is not on the list of current blockchain solutions. The classic business theories about strategy development and competitive advantages are in the DLT landscape as important as in usual technology industries. “The correlation between engineering excellence and commercial success is likely to be quite low.” (Areiel, 2017) Another critical success factor is the need of a solid business model, because the DLT market isextremely volatile. New technologies often get a hype with unjustified company reviews, but the need for appropriate due diligence hasn’t gone away. The business still needs a sustainable way of making money in order to succeed. A mandatory necessity in founding a blockchain company, is the question about the actual requirement of DLT. A large number of the current blockchain solutions on the market simply do not require DLT to earn more profits or achieve higher efficiency. But the most important success factor is the same as in the whole startup community, strong relationships between the founders and the team. (Areiel, 2017)
3.2. Outstanding Innovation in the DLT Landscape
Software and Programs are mostly built on platforms and thereby have many risks. The Founder of the blockchain based DLT-startup DFINITY Dominic Williams says: “We have no idea how Facebook creates its News Feed, and we have no idea how Facebook processes our data, and we have no way of knowing if it ships that data to Cambridge Analytica, and that is one key difference with an open internet.” (Nunez, 2020) He founded DFINITY with the idea of the “internet computer protocol”, which is a blockchain based cloud solution to decentralize the whole internet including all platforms.
What sounds like a surreal task, is already reality with a prototype version named LinkedUp, an alternative and direct competitor to LinkedIn. “LinkedUp was built as a demonstration, but the code is open source, meaning that any third-party developer that wishes can begin tinkering with the code and ultimately bring the idea to market if they so choose. Because the software is built on DFINITY’s Internet Computer platform, a public record of any changes will be available for anyone to review.” (Nunez, 2020) In essence, social networks and platforms would be no longer a black box. The users would have a much deeper transparency of how the algorithms work and why they only see certain pieces of content. That leads to one of the most important advantages of the internet computer from a user perspective, to have more transparency about the data transfers from the platform owners. The customers do not have access to the code that governs these networks. Current social media platforms do not give access about their activities with customer data, which will lead to the point, that people become more empowered to fight against monopolistic trends in the existing internet infrastructure. (Nunez, 2020)
dfinity4.png
- Competitive Forces on the practical Example of DFINITY
4.1. Avoiding platform risks as the key competitive force in DLT
A dramatic example of platform risk is the gaming company “zynga”, which was one of the most successful enterprises in the gaming industry, with a company value over 15 billion US dollar in 2012. Zynga is an American social game developer running social video game services and founded in April 2007 with headquarters in San Francisco, California, United States. (akahashi, 2011) The company primarily focuses on mobile and social networking platforms and cooperated with Facebook in 2011, to provide gaming applications in the Facebook-App. (Williams, 2019) They had millions of users, but when Facebook changed their Application programming interfaces, Zynga lost 85% of its market cap. (Williams, 2019) Zynga was completely dependent on Facebook's infrastructure and since this crash, the company could never come out of the tremendous losses. In this case, zynga had a sustainable business model, millions of customers, a high share price and good cashflow. Nevertheless, zynga had an enourmes platform risk with the extremely dependency to Facebooks regulations, which could have been prevented with and decentralized internet computer.
4.2. The potential future of DLT with DFINITY
DFINITY launched an open-source platform aimed at the social networking giants to build what it called the “Internet Computer Protocol”: a decentralized and non-proprietary network to run the next generation of mega-applications. (Mike Butcher, Ingrid Lunde, 2020) The Internet Computer Protocol works by combining computing machinery provided by independent data centers around the world to create the "Internet Computer", which extend the Internet with a new unique form of serverless cloud functionality. (Williams, 2020) The new prototype if the internet computer named LinkedUp, which runs on any browser, is unlike LinkedIn, not owned or controlled by a corporate entity. The software is hosted on the internet on a Switzerland-based independent data center, but in the concept of the Internet Computer, it could be hosted at any server that has the compute power to run the application. (Mike Butcher, Ingrid Lunde, 2020) The blockchain-based system of the Internet Computer is a real competitor to the platform giants like Amazon AWS, Google Cloud or Microsoft Azure. DFINITY is open-sourcing for developers to create new types of open internet services on the structure it has built. The vision of DFINITY is to bring back the internet to it’s origin
without platform risks and decentralized open source tools. The DFINITY tools include a
Canister Software Developer Kit and the programming language called Motoko that is
optimized for the Internet Computer, could change the entire infrastructure of the internet.
(Mike Butcher, Ingrid Lunde, 2020) The following figure shows the current status of the
world wide web based on platform like versus a decentralized world wide web with the
The ICP protocol will create a thick Internet, that’s also a serverless cloud possibility to implement any form of platform or software.
- Conclusion and Outlook
From an Internet of Things perspective, which will radically influence the technical world of the future, blockchain is a promising technology that can offer multidimensional reinforcements in many fields of applications and can even change the whole internet infrastructure. (Cui et al., 2019) Whole professions will become superfluous but new ones created for them. New Blockchain technology offers many advantages and can be used on different use cases, but the next important step is, to build more trust between this new technology and the society. This is an evolutionary development and takes time to emerge new ecosystems. In addition, startups like DFINITY are likely to have a big impact on the employment market, by building new jobs. (Rosenberger, 2018) The blockchain technology is assumed to be as revolutionary as the internet once was, especially with the new concept of the internet computer from DFINITY. The publication of the interview with the DFINITY Communication Director would have given more impact to analyze the future developments in the DLT landscape. Nevertheless, startups in the DLT landscape have to focus on a sustainable business models to generate real impact and get a competitive advantage and achieve success. The main success factors are a good team culture, logical business model and a real requirement of blockchain technology. The evolution of the blockchain technology is just at beginning. The technology has the potential to go in the next step of the Internet. (Rosenberger, 2018)