Should blockchain projects care about business models?

Opinion by Vinicius ‘Vini’ Farias Riberiro, EEA Regional Representative for Portugal

A brief discussion about blockchain business models.

IMHO, definitely yes. But why does it seem that many do not care?

First, let’s define what a business model is. Simply put, it is an organization’s plan for making money. But wait, many blockchain projects are not-for-profit. Should they also worry about a business model? Considering that they have expenses and they will need money to cover them – sure, they should.

Now let’s take a look at some of the most common business models on the blockchain. Please note that the list is not exhaustive.

Blockchain Business Models

• • Utility Token: possibly the most frequent model, but its concept has been stretched and distorted more often than not. The critical part here is the ‘utility’. Arguably many tokens do not have a real utility, which poses a significant threat to their sustainability.
  • Transaction fees: fixed or variable cut on each transaction. It applies to different contexts, such as:
    • Assets: minting, selling, follow-up fees for transactions, royalties, etc.
    • Finance: withdrawal, deposit, trading, swapping, derivatives, lending, liquidity pools, etc,
    • Blockchain: mining, sequencers, validators, etc.
  • Blockchain as a Service (BaaS): permissioned chain for business, for instance. It can be marketed to businesses, such as banks and other private companies, that do not wish to use a permissionless chain.
  • Services: companies charge fees for performing services.
    • Consulting
    • Research
    • Development
    • Auditing
    • Bug Bounty
    • Digital Identity
    • KYC and AML
    • Infrastructure
    • Oracle
    • Data Management
  • Gaming: in-game transactions and NFT-related activities. Moreover, there is the gamification of financial applications, or GameFi.
  • Licensing, Royalties & Trademark: similar to traditional business, but in the blockchain.
  • Venture Capital: a VC branch inside blockchain companies. It operates similarly to a traditional VC.
  • Staking: projects can stake their tokens and get more tokens as a reward.

Traps and biases on tokenomics

From the above list, tokens, and staking are the ones that may have a higher associated risk. If the blockchain project does not have solid tokenomics, there is a significant chance that the token will hold value mainly due to the Greater Fool Theory.

Greater Fool Theory

People may buy overvalued assets with the expectation of selling them for a higher price to someone else. This is known as the Greater Fool Theory. The issue arises from the token not having an intrinsic value comparable to its price. It may resemble a house of cards. To avoid this, people must carefully understand the assets’ intrinsic value. Many assets on the blockchain, do not have clear utility and value, and their price may be explained by the Greater Fool Theory.

Halo Effect

Another bias that may impact the asset value is the Halo Effect. It is the tendency for generalized impressions of a project to influence one’s opinion or feelings in its token. An example: if a project has a good brand, many users, or a good reputation, therefore, their token should be a good asset for investment. Not necessarily. This can be a cognitive bias leading to questionable decision-making.

Concluding Remarks

A project’s long-term economic sustainability must have a solid business model, as discussed above, otherwise, it will most likely fail. People should always be able to understand how projects create value and generate cash flow. Although blockchain has many differences from mainstream business, some concepts and principles should still apply, like having a sound business model.

Additional resources

Some skepticism by the outsider Bill Gates on NFT’s value: Bill Gates: Crypto and NFTs ‘100% Based on Greater Fool Theory’ – Decrypt

Critical PoV from polynya on crypto-economic model sustainability: “That said, I do have much more knowledge and experience with business models in challenging fields than crypto people who think tokens are a sustainable economic model (which is, like, 99.999% crypto projects)” / Twitter