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VBDE Framework: Dissecting Blockchain Business Models

A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

VBDE Blockchain Business Model Template

VBDE Blockchain Business Model Template

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Keep reading, if you want to understand how to use the framework.

Value model

In the value model we want to answer a few core questions:

Core Philosophy: What’s the long-term hard problem the protocol is solving?

Core Values: What key values drive the protocol?

Value Propositions: What set of values each key stakeholder get from the protocol?

When analyzing Blockchain business models is critical to understand that these look more like ecosystems with a very complex logic than just companies, with simpler dynamics. However, those complex systems are really born out of simple local rules built into the Blockchain protocol.

Blockchain Model

In the Blockchain Model we want to understand how the protocol connects the value model to everything else. So how the rules of the Blockchain makes it compelling for the entire ecosystem to form.

In this case we need to take into account three key layers.

Protocols Rules

What rules govern the Blockchain?

Here the sort of rules underlying the Blockchain will be critical to it. Perhaps, on Blockchain protocols like Bitcoin, rules like proof of work (PoW) are extremely important:

proof-of-work
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Network Shape

What network shape do the protocol rules determine?

Based on the protocol’s underlying core rules, a network will form, and this can take various shapes and forms (from entirely decentralized to distributed or perhaps centralized). Thus, understanding how the protocol rules are making the network evolve is critical to understanding how the balance of power moves along the Blockchain ecosystem.

Applications Ecosystem/Layer

Which applications can be built on top of the protocol?

For a Blockchain to become a business platform, it might be critical for it to be modular, or at least it gives developers the ability to build applications on top of the Blockchain, thus making it possible to expand the use cases available and developers to monetize their presence on the Blockchain.

Distribution Model

Here we want to understand how the various pieces come together to make the underlying Blockchain ecosystem sustainable and keep growing it.

Developer’s Community

Is the developer community engaged in developing apps on top of the Blockchain? What does it take to keep it engaged?

Developers play a critical role in the development of the Blockchain’s applications and therefore it’s important to understand how the developers’ community is evolving around the protocol and what sort of applications get sprouted.

Investor Relations

Is the underlying cryptocurrency a valuable asset for investors?

What makes Blockchain protocols work in the first place are the strong economic incentives underlying them. Thus, we might want to argue there might be no Blockchain without Crypto and vice versa. Therefore, as the Blockchain ecosystem evolves, monitoring how investors are responding to it is also important. Keep in mind that a Blockchain is much much more than a simple entity; that is a “super-entity.” As such, it needs the support of multiple stakeholders to thrive.

Mining Incentives

What incentives exist for miners to keep contributing to the development and growth of the Blockchain network?

Miners also play a crucial role in the development of the Blockchain. It’s important to notice that some Blockchains like Bitcoin are primarily based on Proof of Work, making miners the key players to mine new coins. Other players/users can also become miners when it comes to other protocols like Ethereum (where there is also a Proof of Stake mechanism).

Deal Making

What agreements are in place integrating the protocols through institutional & non-institutional channels?

For a protocol to scale, it needs to be adopted by a wide number of individuals and institutions. Therefore, here the progress in making the protocol integrated within other institutional and non-institutional systems becomes very important.

Economic model

How is the Blockchain crypto-asset gaining value and how the key players part of the ecosystem are monetizing the applications built on top of it?

While Blockchain protocols can be built far beyond incentives than economic ones, it’s important to notice that what keeps the ecosystem sustainable over time are the powerful economic incentives aligning various players part of the ecosystem. Thus, it’s important to understand what drives these players to come together.

Key takeaways

A Blockchain Business Model looks more like a dynamic ecosystem around which an entire set of players are

Value Model

  • Core Philosophy: What’s the long-term hard problem the protocol is solving?
  • Core Values: What key values drive the protocol?
  • Value Propositions: What set of values each key stakeholder get from the protocol?

Blockchain Model

  • Protocols Rules: What rules govern the Blockchain?
  • Network Shape: What network shape do the protocol rules determine?
  • Applications Rules: Which applications can be built on top of the protocol?

Distribution Model

  • Developer’s Community: Is the developer community engaged in developing apps on top of the Blockchain? What does it take to keep it engaged?
  • Investor Relations: Is the underlying cryptocurrency a valuable asset for investors?
  • Mining Incentives: What incentives exist for miners to keep contributing to the development and growth of the Blockchain network?

Economic Model

How is the Blockchain crypto-asset gaining value and how the key players part of the ecosystem are monetizing the applications built on top of it?

Blockchain Business Models To Understand How Most Blockchain Protocols Work!

blockchain-business-models

Read Next: Tech Business Models Framework

Related Blockchain Business Frameworks

Web3

web3
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.

Blockchain Protocol

blockchain-protocol
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.

Hard Fork

hard-fork
In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.

Merkle Tree

merkle-tree
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.

Nothing-at-stake

nothing-at-stake-problem
The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.

51% Attack

51%-attack
A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

Proof of Work

proof-of-work
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Application Binary Interface

application-binary-interface
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.

Proof of Stake

proof-of-stake
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.

Proof of Work vs. Proof of Stake

proof-of-work-vs-proof-of-stake

Proof of Activity

proof-of-activity
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Blockchain Economics

blockchain-economics
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).

Blockchain Business Model Framework

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Sharding

sharding
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).

DAO

decentralized-autonomous-organization
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Smart Contracts

smart-contracts
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.

Non-Fungible Tokens

non-fungible-tokens
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Decentralized Finance

decentralized-finance-defi
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

History of Bitcoin

history-of-bitcoin
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.

Altcoins

altcoin
An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.

Ethereum

ethereum-blockchain
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Ethereum Flywheel

blockchain-flywheel
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.

Solana

solana-blockchain
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

Polkadot

polkadot-token
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.

Filecoin

filecoin
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.

Brave

bat-token
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.

Decentralized Exchange

decentralized-exchange-platforms
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.

Read Next: Proof-of-stakeProof-of-workBitcoinEthereumBlockchain.

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