Business models: what are they?
The term ‘business model’ describes an organisation's strategy for generating profits. It details the goods or services to be offered, the market segment that will be targeted and the strategy to be deployed. Having a well-defined business model helps businesses that are growing to obtain funding, find and retain good employees, and for senior management to stay focussed. Even though the internet still plays a large role in the digital revolution its use has changed significantly and, notwithstanding that the World Wide Web was built with the best intentions for all, business infrastructure seems to have a way to benefit big businesses, governments and the media the most. Many feel this is a central flaw of the existing Web 2.0 infrastructure which still supports the internet as we know it today.
A history of business models across Web 1.0, Web 2.0 and Web 3.0
Looking back at Web 3.0 over the past few years, we see that its first wave of business models either failed to scale or could have been better imitations of Web 2.0 businesses. Despite widespread scepticism, it is likely that in the future we will see the creation of significant models as a result of the persistent experimentation by some of the brightest business minds. After all, who would have thought that Amazon (a book seller) would now dominate on-line retail or that, in the mid 1990s, Google would crush AOL and all other web search engines? By investigating both tried-and-true and novel Web 3.0 business models, we can hopefully better predict which ones will be profitable in years to come.
Taking a cut of each transaction is a tried and effective method of making money since it is logical to charge users based on the amount of money they spend on your decentralised application (dApp). As found in Uniswap docs “A small liquidity provider fee (0.3%) is taken out of each trade and added to the reserves. While the ETH-ERC20 reserve ratio is constantly shifting, fees makes sure that the total combined reserve size increases with every trade.” Beyond only an exchange, markets may benefit from transaction fee structures as well; OpenSea is an NFT marketplace that does not charge any fees to either buyers or sellers but does deduct 2.5% off the final transaction price. This business model is suitable for exchanges, DeFi and marketplaces, and is currently used by Uniswap, Kyber Network, and OpenSea.
Integration transaction fees for third parties
More and more external services are being integrated into decentralised applications. Integration of these services into your dApp is quick and straightforward, saving you the time and effort of starting from scratch. Wyre is commonly used as a gateway to dApps that accept fiat currency. In addition to the transaction costs that Wyre already charges, you can apply your own fee too. If your users change US dollars to Ethereum, your dApp will earn a small fee.
Similarly, 0x Instant provides an "onramp" for cryptocurrencies whereby if you incorporate the 0x Instant widget into your dApp, you may earn a fee of % on crypto-to-crypto exchanges that go via it. This business model is suitable for dApps which utilise a fiat on-ramp, dApps which may not be able to monetise through other methods, and wallets, and is currently used by Balance.io.
Expenses incurred during token creation or distribution
There is a growing number of dApps that enable users to generate their tokens - be they NFTs, synthetic position tokens, or something else. A decentralised derivatives exchange such as Market Protocol lets its users generate ‘position tokens’ that may be used to gain access to artificial price movements. Market Protocol charges a small minting fee for this service though conversely some dApps only charge a fee when the resulting token is sold. In the field of NFTs, this method is rapidly gaining popularity. For instance, the NFT creation platform, Mintbase, charges a 1% transaction fee on all transactions.
The EIP 1337 standardises recurrent transactions on the blockchain (subscriptions). This will make it possible for dApps to adopt the subscription-based revenue model prevalent in the Web 2.0 software as a service (SaaS) industry. Groundhog’s suite of technologies powers the cryptocurrency subscription economy and unsurprisingly they provide services that allow dApps to incorporate subscription payments, just like Recurly and Chargebee do for the Web 2.0 ‘SaaS’ industry.
Issuing a native asset
Native assets are essential to the operation of the network and derive their value from the security they provide. When the price of a native asset is high enough to incentivise honest miners to supply hashing power, the cost for malicious actors to perform an attack also rises and this increases the value of the currency because of the increased demand for it. There has been much analysis and quantification of the value built up in these local assets.
Holding the native asset, building the network
In the early days of the cryptocurrency industry, many start-ups grew up around a defined network with the goal of making that network more valuable and popular. The business strategy is to "grow their native asset treasury; construct the ecosystem." As a major Bitcoin core developer, Blockstream uses its cryptocurrency holdings as a source of capital, and ConsenSys, which aims to increase the value of the ETH it owns, has expanded to a staff of 1,000 by providing the essential infrastructure for the Ethereum ecosystem.
Taxing the speculative value of native assets
The next generation of business models puts most of its attention on the exchanges, custodians and derivatives providers that deliver the financial infrastructure for these native assets. These platforms were designed to facilitate users' speculation in these highly volatile assets. Companies such as Coinbase, Bitstamp and Bitmex have made billions of dollars but they are not monopolies because they add value to the networks built on and are easy to use. Even though a company cannot get a monopoly by giving ‘exclusive access’ (because the underlying networks are open and do not need permission), they could get a competitive advantage in other ways, such as their liquidity or brand recognition.
Other models worth mentioning:
- a dual token model - such as MKR/DAI & SPANK/BOOTY, where one asset absorbs fluctuating consumption and the other is steady for optimal transacting.
- governance tokens - give users a say in how fees are determined and development is prioritised. They can also be thought of as ‘fork insurance’ in that if you control enough of the governance tokens, you can either avoid or enable a blockchain to fork
- tokenised securities - are digital representations of current assets (shares, commodities, invoices, or real estate) priced according to the actual asset with a premium for divisibility and borderless liquidity. BloXroute and Aztec Protocol are researching transaction fees with a treasury that takes a small fee for their innovations e.g., scalability and privacy, respectively. Starkware wants to give its technology as an investment in return for tokens, so developing a treasury of all the projects it collaborate on. Veil, Guesser and Balance provide UX/UI for Augur and MakerDAO, for nominal fees, referrals, and commissions.
- network-specific services - include staking providers (e.g., Staked.us), CDP managers (e.g., topping off MakerDAO Collateralised Debt Position (CDP) CDPs before they become undercollateralised), or marketplace administration services
such as OB1 on OpenBazaar, which might charge traditional fees
(membership or a percentage of profits).
- liquidity providers - in non-revenue generating applications, Uniswap, an automated market maker, generates income by supplying liquidity pairings.
Given the number of new business models and the enthusiasm with which they are studied it is clear that, whilst the tried-and-true method of raising venture capital will always have a place, both the role of investors and the nature of capital are changing. Web 3.0 will no doubt create new business models.
Capital, itself, transforms into a network-native asset with a defined function. Investors will have to
change their mindsets to deal with this new organisational mode driven by trust-minimised decentralised networks. These networks range from passive network participation to bootstrapping networks after financial investment (such as computational work or liquidity provision) to direct injections of subjective work into the networks (such as governance or risk evaluation).