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Value, Price, and Cost: How Blockchain Changes Business Value

2019.11.07 limin.zhang

Original author:Haebin Lee

Image by Nina Paley / Price vs. Value

When the market crashes before your eyes, it is tough to imagine what will come next. While blockchain technology itself is flourishing with governments, public services, and some private companies, public blockchain businesses are desperately looking for a sign of hope remaining in the market. However, this may also be the perfect time to talk about the real value that blockchain technology and this market can offer. Can blockchain technology bring change in value for business and consumers? If so, how much value to whom? Can it suggest a competitive business model compared the incumbent business? Let’s talk about the new type of value that blockchain business — more specifically, the emergence of public blockchain businesses — may bring from three perspectives of value, price, and cost.

Cost: Who is Picking Up the Bill?

Let us remind ourselves of the most basic framework of value, price, and cost. Price and cost determine a firm’s profit while price and value yield a consumer’s surplus.

[Figure 1] The Value, Price, and Cost Framework

From the service provider’s perspective, reducing cost or (and) raising price would increase its profit. Many say that blockchain technology reduce the cost of running a business, but this argument may be controversial. When it comes to the cost of operating centralized data server or network, blockchain technology does save such cost. The unexpected cost, however, may arise in providing stable service quality with several nodes participating in the blockchain network — as we all know, blockchain is not a technology that features superior efficiency as centralized network. As seen in multiple projects, the ‘inefficiency cost’ may be even higher than the cost saved by using blockchain technology as the business grows. Vitalik Buterin, the founder of Ethereum, said, “the medium scale computing cost of Amazon’s EC2 (that features elastic compute cloud service) is $0.04 per an hour, while the cost of doing the same task in Ethereum is about $13.40 per 200 milliseconds, which is 1.4 million times more expensive than that of Amazon.” [1] This shows the current gap in efficiency that the blockchain industry may have to catch up with. As the business grows, limited scalability and inefficiency cost of blockchain even get worse, whereas the centralized network server enjoy the economy of scale and incur less cost per consumer. We thus cannot simply argue the total cost of running blockchain business will be much lower than before. However, what is truly striking about blockchain business is that consumers, not firms, are usually the ones who pick up the bill for such cost.

In traditional business model, this is how it works — a company builds and maintains centralized network server capable of handling many requests from users. The cost for operating such network is covered by a firm, and the profit of serving users comes next. In a blockchain network, however, firms are not responsible for processing user requests, but the ‘voluntarily participating nodes’ are. And users are charged for the cost of rewarding them. For example, when people use a DApp based on Ethereum network, they need pay the reward for nodes to process their requests either in token issued by the DApp or ETH — meaning that the firm is no longer the only one who pays the bill to get the network running.

Price: From Unseen to Seen

Price includes the cost plus a firm’s profit. Let’s think about how much we have paid to use IT services that we use every day. It is surprising that the very idea of ‘paying to use a service’ is quite unfamiliar in current IT business. Once connected to the internet, you do not have to pay a single penny everytime you send an email with Google, or check your friends’ photos on Facebook. Except for premium membership plans to skip the advertisement or to expand the cloud storage, most IT firms do not charge users for using their services. It does not mean these services are entirely free of charge — in return, users need to hand control over their data to service providers and advertisers, who are the primary revenue source of business. It is no surprise that some IT giants are criticized for misusing user data when it is simply an ‘invisible price tag’ put on their services. Welcome to the world of ‘sign up for free and use our service’ that we live in.

In blockchain-based services, however, a price tag becomes more visible. And providing user data to use a service is now strictly separated from paying to use it. It is the user, not service provider, who can solely manage and claim the ownership of user data within a blockchain network. Some blockchain businesses even enable their users to ‘sell’ their data to earn tokens or to pay for using services. A question still remains whether blockchain-based services that put a visible price tag on may come shocking or reasonable to mass consumers who are used to what seems free. Several use cases will be able to answer this question soon.

Value: Philosophy Over Practicality?

Among the framework, ‘value’ is the most tricky part to discuss in blockchain business. The value for firms is often defined as their profit, bufor consumers it is more complicated. In simple words, a value is about ‘what makes consumers want to buy a product/service.’ We often encounter with advertisement phrases of blockchain services such as ‘take more control of your privacy’ or ‘more transparent and decentralized transaction’ whereas traditional advertisements used to stress how fast, cheap or convenient it is to use specific services. So, here are some questions that may follow. Would consumers be willing to use blockchain services while compromising efficiency and prompt customer services? Would values proposed by blockchain business such as privacy and resistance to centralized authority be powerful enough to attract mass consumer pool?

They say good cannot exist without evil. In blockchain industry, such concepts have been crystal clear since the beginning — decentralization is good whereas centralization is not. Many blockchain business models often get feedback such as ‘It is not decentralized enough’ or ‘Don’t you think your service is way too centralized to be called as blockchain service?’ while a few comments said, ‘It is not practical enough.’ As we have seen in numerous failures of social business, stressing the good cause easily ignores whether it can actually win consumer’s choice over other options. We have learned many lessons that tell us philosophy alone cannot get this industry far. Everybody loves good company, but only when it can provide people with a good reason to be its consumers. Some say the token economy and philosophy that lies underneath can magically allure the consumers in pursuit of the financial reward. However, it lacks real-life evidence or use cases. We have to face that most token economy has served investors, not consumers. We also have witnessed the philosophy of decentralization being tampered with a very few visible hands. It is easy to lose one’s faith in philosophy, but in practicality, it is not. Only when blockchain business does not compromise the practicality of its service, the philosophy can be catered to consumers as a final touch.

Moving Beyond Competitors

Many wonder if up-and-coming blockchain business can beat its giant competitors. Figure 2 sums up the ideal scenario for the value, price, and cost framework of blockchain business versus its competitor — the cost and price become lower with more consumer’s surplus, which eventually yields more value created in total than its competitors. Although no one can tell if this ideal scenario will turn into reality, it may be controversial that the firm’s profitability of blockchain business was depicted lower than its competitors. But for now, let’s stick to its motto — ‘less rents for middlemen,’ because firms themselves are the middlemen between the nodes of the network and end users. And of course, this figure is just for brief comparison and the specific portions of cost, price and value in the framework may vary upon company to company.

[Figure 2] The ideal value, price, and cost framework for blockchain business versus its competitors

As of now, it seems like a tough game to win — all three perspectives of value, price, and cost tell a gloomy forecast about the competition with existing firms. Inefficiency cost is way too high, consumers are used to ‘free’ services, and whether the philosophy of blockchain can appeal to mass consumers is in question. Let’s look at the bright side of this uncertainty — with ‘Innovator’s Dilemma,’ a theory suggested by Clayton Christensen in his book titled ‘The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.’ This theory illustrated how new technology can disrupt the incumbent market and even cause some of the giants to go out of business. The book described the traits of ‘disruptive technologies’, which change the fundamental value proposition in the market and cause a drastic and sudden paradigm shift which strongest and biggest players often fail to adapt to. If we define blockchain technology as disruptive, it may be growing into an entirely different paradigm, even without competing with current IT giants. No wonder this theory argues that disruptive technology initially offers poorer performance with less capacities than existing solutions. Although the value, price, and cost framework may not tell a bright future of blockchain business, there may be a potential of blockchain business that we cannot see just yet in the paradigm that we live in. We also need to focus on how it already cracked the small part of the way people think. A lot more people have started to notice the ‘inappropriate’ amount of middlemen rents or problems associated with centralized business and economy. Even when the blockchain technology fails to solve these problems and vanishes in the air, what is left behind will last and accelerate the emergence of the next disruption that actually works. Well, let’s keep our hopes high.

Blockchain technology itself does not come along with the ‘proper’ business model or the value framework. This technology merely provides an environment which new business models should adapt to. No one can ever predict how long it will take to for blockchain hype to turn into actual business success. And blockchain technology may not promise us the most lucrative business in human history. One certain fact is that, however, it has showed us the possibility of new normal by disrupting the world of centralized business where maximizing firm’s profits used to be considered a virtue. That is the hope this industry should always stick to through the rough time.

Reprinted from: https://medium.com/block-crafters/value-price-and-cost-how-blockchain-changes-business-value-b17c2aecb06f

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