Introduction
Any new technology is only successful if it is used and deployed. And not by a few, but by many. So-called mass adoption. One example was the emerging Internet economy in the last 20 years.
This will also apply to crypto and blockchain technology. In order to be able to correctly classify possible investments in the blockchain/crypto area, it is therefore helpful to view the whole thing from a professional business IT perspective. After all, it is precisely in this area that the introduction and implementation take place. Without implementation, there can be no mass adaption.
The fact is, mass adaption is driven by companies offering services to other entrepreneurs and consumers that use the new technology. Government organizations also use new technologies, but it is usually companies that drive mass market development in the early stages. Therefore, this article will focus on the enterprise perspective.
So far, mass adoption does not exist in the blockchain space. Millions of people have invested in the crypto space, to be sure, many have lost money and a few have gained a lot of money. But the technology is not yet being used in everyday life by hundreds of millions of people, or even billions, without them realizing it. This development is just beginning. McKinsey, EY, BNY and others have published extensive studies and articles on this topic in recent months. More and more companies are taking a close look at the technology, defining use cases and starting to implement them in individual areas.
Step by step. First in smaller proof-of-concepts, then in the first roll-out countries or corporate divisions. Starting slowly, then becoming more comprehensive and far-reaching. This is a year-long process with numerous iterations, using different technology variants and vendor products. Create concept, practical implementation, gain experience, make changes, new project, etc. Most of the time, in a professional environment, this follows a similar pattern for many companies
The misunderstanding
Unfortunately, there is often a big gap in understanding, between the crypto investor and the company reality. The crypto investor has his favorite crypto projects and some more or less good reasons why he believes in this project. And then money is invested. Often a lot of money. Hope reigns. Sometimes numbers and analysis data are searched and found, which confirm the own hope: Project X currently has more monthly transactions than Project Y. And the TVL is 3 times higher, company XY wants to use this project, etc. At best, these are short-term snapshots that have nothing to do with the upcoming mass market adaptation.
In times of the emerging Internet economy at the end of the 90s/beginning of the 2000s, it was similar. There were many hotly traded projects with seemingly great business models and financially strong investors. Very few of them made it in the end. It was others. Why? That’s exactly what we’re talking about here! The answers are complex, but not really difficult.
First, we need to clear up a misunderstanding:
The misunderstanding lies in the wrong perspective! Most (retail) investors do not understand how the introduction and establishment of a new technology takes place at the corporate level. A change in perspective is imperative for this, otherwise it is difficult to understand how mass market adaptation actually takes place. You have to put yourself in the perspective of a company and the adaptation processes that take place there to understand how change and transformation happens.
The perspective of the company
Companies use new technologies when the technology opens up new opportunities. New business models, more revenue, lower costs, process improvements, efficiency gains and the like. A clearly identifiable, monetizable advantage must be identified that justifies the sometimes high financial outlay of an investment new technology. Otherwise, nothing happens and no adaptation takes place.
A company becomes active if it can achieve financial advantages over the status quo in the medium term. For this to happen, certain framework conditions must be met. One essential framework condition is legal clarity and existing regulation. It must be ensured that the new technology is used in compliance with the law. Otherwise, the risk is incalculable and a deterrent. However, we will not go into the legal aspects here, as this has already been done in detail elsewhere. The fact is, however, that a legally secure framework must be in place before large-scale investments are made. But let’s assume that this is essentially in place in almost all countries and will be refined over the next few years.
The focus in this review is on the classification of blockchain from a business IT perspective. In the first step, it must be clear what blockchain technology actually is.
A blockchain is a database
A blockchain is a database in which everything is entered immutably and only authorized persons can make entries, without the need for “trusted persons”. The trust authority is replaced by technology. Technology that enters data immutably into an immutable database in seconds, incorruptibly, 24/7, worldwide, with 100,000 entries per second. Technology that takes over the work of notaries, land registries, banks, intermediaries, clearing houses, etc.
This database must now be integrated into the company’s existing IT structure so that it can be used. Companies have complex IT architectures that consist of many different layers. The database layer is home to one such layer. In most cases, the database is a core part of the IT architecture. So the new blockchain database has to be integrated into the existing architecture. This is a big challenge! After all, new products and changes in IT must meet many requirements.
No company will put its existing structures and processes at risk with immature products. In addition to the technical challenges, there are numerous regulatory and legal requirements that must be ensured by companies with their existing IT architecture. A breach of these could have serious legal and financial consequences. Data protection regulations are a good example.
Let’s keep in mind that the blockchain must be inserted into the existing IT architecture of the company and must meet existing requirements.
Business requirements
The requirements for a company depend on the country and the applicable laws in which it operates. Furthermore, it depends on the industry in which a company is active. In the individual industries, such as banking, pharmaceuticals, automotive, utilities, media and technology, there are sometimes completely different requirements with regard to legal requirements. The IT systems must be structured and developed accordingly. A one-fits-all approach is unthinkable. The compliance regulations of a bank differ considerably in many places from those of an automotive company. Anyone who believes that the same product or the same database can simply be used everywhere is completely wrong. In some industries and application areas, it is not at all conceivable to use a public blockchain. The existing compliance requirements could not even be remotely fulfilled.
Every business use case has its own requirements, all of which must be taken into account. It is not for nothing that there are currently thousands of software products in the software industry for every conceivable application and industry.
Companies create comprehensive requirement catalogs for new products, in which all requirements are recorded. These must be met by a new software product. A competition is then usually held between several providers and, with the help of defined evaluation criteria, it is checked which product can best fulfill the requirements. Only then is a selection decision made and implementation begun in a subarea of the company.
And this is also the case in the enterprise blockchain sector. The naive belief that a company can simply use the Ethereum blockchain, for example, does not correspond to reality at all.
It must be clear that a selection is only made after a detailed definition of requirements, defined selection criteria and evaluations. The product is closely scrutinized.
Marketable products
Products that are used in a company must necessarily meet certain criteria. This is also referred to as a minimum marketable product (MMP). A software product can only be used in corporate IT once it has met certain criteria and been certified accordingly.
A few existing blockchains are now at a stage where deployment in an enterprise is becoming possible. Blockchain technology is still at the beginning of its development. Numerous companies first tried to develop their own blockchains to meet their own specifications. However, many failed due to the complexity of the matter and were not able to develop powerful solutions.
Therefore, in the last three years, there has been a clear tendency to use blockchain solutions from professional manufacturers. The situation was similar in the area of ERP software (Enterprise Resource Planning), where many companies 30 years ago first tried it with self-developed software solutions before settling on “standard solutions” such as those from SAP over the years. These standard solutions then took over large parts of the market and divided it up among themselves. Thus, in most enterprise functional areas, there are 3–5 major players that dominate the market, supported by numerous niche products that complement the standard products. A similar development is also foreseeable for blockchain solutions.
A standard solution must fulfill numerous core criteria in terms of functionality, security, stability and performance. Otherwise it is unsuitable for a company! Let’s take two core criteria as an example, representative of others, and take a closer look at them in order to better understand a selection decision.
Time-to-Finality
A good example is the time-to-finality criterion: here, the limit of one second must not be exceeded, otherwise the software user will feel that he has to wait too long. Time-to-finality in this context means that the transaction must be completed within one second and the user can move on to the next task. Exceeding this time leads to dissatisfaction and loss of time. Conversely, this means that all blockchain applications that cannot fulfill this criterion are unsuitable for numerous areas of application. In the software industry, it is considered unacceptable in terms of usability if the limit of one second is exceeded.
If a blockchain has a time-to-finality of 30 seconds, then it cannot fulfill this criterion and will not be considered for many applications. That is why there are currently more and more Layer 2 solutions for Ethereum that try to compensate for this deficit. However, this increases the complexity of the architecture, because theoretically not only the Ethereum blockchain has to be assessed and integrated, but also the L2 solution built on top of it.
It can certainly be predicted that these constructs are critical for mass market adaptations from a professional business IT point of view. It is not clear whether the L1 + L2 concept is a viable solution for many business requirements. As a result, the hype around certain L2 solutions should be judged with caution.
Companies prefer solutions that are manageable in their complexity and easy to integrate. Gladly also from a manufacturer who guarantees integration with other products.
Scalability
Another essential criterion is the scalability of blockchains. In a modern IT world, IT systems must be scalable as required. In the case of IT systems, scaling or scalability refers to the ability of a system to adapt as flexibly as possible to growing demands in terms of software and hardware level performance. This means that if the system is challenged by more users and an increasing number of transactions, the system must be able to “grow” with them.
A distinction is made between vertical scaling, in which resources are combined within a logical unit. This can be done, for example, in the form of memory expansion, higher storage capacity or more powerful CPU. The Ethereum Blockchain is one such logical unit. If performance is to be improved, measures must be implemented within this unit. However, growth here is always limited due to technical possibilities. To the point, this means that the scalability of the Ethereum Blockchain is limited and will increasingly reach its limits as the number of transactions increases.
With horizontal scalability, the increase in performance of the overall system is achieved by adding additional units, such as more servers. Here, how well horizontal scalability can increase performance depends heavily on the software. For example, the Avalanche Blockchain achieves horizontal scalability through “subnets.” A subnet is a sovereign network that can be integrated into the overall network and uses the same technology. It consists of a dynamic subset of Avalanche validators that work together to reach consensus on the state of one or more blockchains. The Cosmos and Polkadot blockchains also follow the horizontal scalability approach with other technical approaches.
At this point, it is important to understand how blockchains can grow in the future as the number of users and transactions increases. Indeed, they must be able to grow. From a business IT perspective, blockchains, which are limited in their capacity, are highly critical. Because no company will rely on systems that are limited in their growth for its medium- and long-term planning.
This means that growth will be primarily through horizontal scalability. There will certainly be special applications, such as very fast trading platforms, which have to run within a logical unit. For this, mega-fast blockchains, such as Solana or Fantom, are interesting. Most companies will want to use individual blockchains, which are based on a standardized product and can be easily integrated with other systems.
Blockchains of the future
In the future, companies will rely on blockchains, which will fulfill their business and IT requirements in the best possible way. The better the individual requirements can be met, the more relevant the respective blockchain technology will be.
The standard blockchain of the future, which has mass-market viability, must therefore meet the following requirements:
– Mapping of company-specific requirements in terms of functionality and compliance. Each company has its own content-related requirements that must be fulfilled.
– Performance and processing times that meet the needs of modern business processes (processing time within less than 1 second)
– The solution must be able to “grow” with increasing user and transaction numbers (horizontal scalability)
– It must be possible to integrate the blockchain database into existing IT systems
– The blockchain must originate from a professional vendor that can continuously develop the software and provide support..
Numerous companies are now implementing pilot projects with “standard blockchain solutions” and improving the products in cooperation with the manufacturers of the blockchains. The trend is clearly moving away from self-developed solutions to standard solutions.
Blockchain Investment Perspective
Only 1% of previous projects will survive
What does this perspective mean for the investment in Blockchain? The fact is that only about 1% of the more than 10,000 blockchain & crypto projects will still be relevant for the market in 10 years. It was not different 20 years ago with internet technology. A few leading players will divide the market among themselves and make the bulk of the sales. They will set technological standards and play a major role in shaping the market. Today’s market in the area of major global Internet platforms, such as Amazon, Facebook, Google, Twitter, and others, is a good orientation model for the future structure in the blockchain and crypto market.
As I said, this is not a new phenomenon; it happens all the time. It was the same with the automotive industry 80 years ago. In addition, there will be numerous niche players that may be interesting for special use cases, but they will only play a minor role.
If the goal of an investment blockchain sector is generating return in the medium and long term, then the goal must be to filter out the future big players. A short-term trading approach pursues a completely different goal. Here, other perspectives and parameters are of importance. The approach presented here follows a time horizon of 5 to 10 years.
So which projects are the Amazons, Facebooks, and Googles of tomorrow in the blockchain space? As already described above, the mass market is of decisive importance. Only here do the network effects around Metcalf’s law come into play. The projects that get the most users and applications will ultimately win the race. Are these always the best technical solutions in the end? Not necessarily. But they offer solutions at the right time that can fulfill the essential criteria and thus find distribution and use. Was Facebook the most innovative social media platform? Was Facebook the first social media platform? The answer to both questions is clearly no. It can therefore be the case that a technically better solution comes onto the market two years too late, but other solutions already have such a large market share that this solution can no longer assert itself. Usually, the big players then adopt the new technically superior solutions and integrate them into their service portfolio. They can do this because they have the market power and thus the financial resources.
Use cases with mass market potential
In order to anticipate the future mass market, it is useful to identify some of the main use cases of blockchain.
The following use cases are of great importance:
- Tokenization of assets: The tokenization of assets is the digitalization of all types of assets on a blockchain. A trillion dollar market will emerge here in the next 10 years, which will further digitize the existing financial world and open it up to new investors.
- Gaming: Hundreds of millions of gamers will take advantage of blockchain in the coming years to make their gaming assets, avatars, and experiences more transferable and usable.
- Payments: Blockchain technology will play a key role in the area of payment settlements. Be it payment coins, such as Paypal’s PYUSD, stablecoins like USDC or USDT, CBDCs (CentralBank Digital Currencies) or even Bitcoin (for certain transactions).
- Decentralized Finance (DeFi): DeFi has brought about numerous innovations in the financial market, which will in future also be taken up by established financial market service providers and made available to their customers.
- NFTs: NFTs are a big topic, enabling the digitization of all kinds of services and products. The applications for NFTs are almost limitless and create whole new markets, communities and applications. For example, one of the biggest emissions of NFTs is taking place through Ticketmaster in the area of ticketing.
- Metaverse: The metaverse is experiencing new opportunities through blockchain technology, but is still in its infancy in terms of mass market use. A suitable medium is still missing here, for example, in the area of end-user experience. Apple could make an important contribution with the launch of Apple Vision Pro.
According to the author’s current assessment, these are the use cases for which mass market use is imminent or in the near future. Blockchain technology will certainly produce further innovative use cases, especially the combination with AI promises additional new and interesting possibilities.
Identification criteria
Once the use cases have been outlined, it makes sense to look at which blockchain solutions can map them. This is primarily about the future, not so much about the current state of affairs. After all, the current state is only a snapshot. Of the projects that were still far ahead in the last cycle 4 years ago, most have disappeared into oblivion.
The following criteria are relevant for an enterprise IT perspective. They take up the explanations made above again in condensed form and could be adopted as evaluation criteria in a selection catalog:
- Product maturity: The blockchain must have reached a certain level of maturity that allows it to be used in a corporate context. The blockchain must be a few years old and have a technical robustness and reliability.
- Customizability: the blockchain must be customizable for the company’s particular use cases in order to meet the multitude of requirements and specifications.
- Scalability: Blockchain must be scalable for a mass market
- Further development & support: The blockchain must be continuously developed and supported by a high-performance team
- the blockchain must be technically capable of meeting end-user requirements — in terms of processing time and simplicity
- Integration options: It must be possible to integrate the blockchain into the company’s existing IT architecture and landscape. In addition, it must be integrable with other blockchains.
Summary
Closing Thoughts
For the successful investor, it is helpful to analyse the existing blockchain projects with the right perspective and using the appropriate criteria to filter out the big players of tomorrow.
This requires effort and expertise. In the traditional financial market, a similar procedure is followed in the context of stock analysis. The aim is to filter out the best companies.
The only difference is that in the field of equity analysis, established procedures and criteria have been in place for decades. In the blockchain sector, new ground is being broken and the criteria selected to date are often only suitable to a limited extent for filtering out the big players of tomorrow, because the selected perspective is not meaningful.
The aim of this article was to give the reader a new perspective for the analysis.
The criteria used so far to analyze projects can certainly be used as a supplement if they have proven their worth, but the investor should always be aware of the perspective from which he is viewing a project. Financial analysts sometimes arrive at completely different assessments than analysts with a business IT perspective. The business IT perspective is of elementary importance and must be taken into account. Ignoring this perspective would be a high risk for the medium and long-term success of a project and would not do justice to today’s way of doing business. Companies are key drivers of mass market adaption.
A future-proof indicator: Blockchains that are used on a larger scale by leading companies will certainly play a major role. They successfully passed the company selection process and were able to meet the requirements from a business IT perspective.
Finally, the author is willing to give the reader, who has followed his explanations so far, a few projects that could meet many of the above criteria. This is not financial advice, but merely reflects the personal opinion of the author.
Interesting projects with mass market potential (from a business IT perspective)
Smart Contract Platforms:
Ethereum in combination with L2 solutions: Ethereum has set numerous standards and has a significant market share. The weaknesses of Ethereum are compensated by L2 solutions. This combination will certainly also play an important role in the future, but it remains to be seen how high the market share will actually be in the future due to the two-layer solution and the associated disadvantages.
Avalanche: From a purely technical point of view, Avalanche offers a powerful solution that can fulfill a huge number of corporate requirements. The occasionally voiced criticism of the token economy of Avalanche is not assessed here in terms of its validity and is not of elementary importance for a mass market use of the blockchain. The fact is that Avalanche is very powerful, especially in terms of horizontal scalability and adaptability to entrepreneurial requirements with the help of its subnets.
Solana: Solana is a super-fast monolithic blockchain. The tremendous speed of Solana is outstanding and is very interesting for certain use cases. The stability and robustness of the blockchain can certainly be further improved, but from a technical perspective, Solana offers an innovative powerful blockchain. The potential scalability of the Blockchain is a decisive criterion for future use.
Further projects
Chainlink: Chainlink is the data provider for all types of data, which are processed e.g. in Smart Contracts on Blockchain. Data is of utmost importance for the future use of Blockchains. Chainlink is the undisputed market leader here and offers a powerful solution that has been on the market for many years.
Aave: Aave is an established and innovative DeFi project that has a high market share. Aave has set standards in many areas in the past and the solution has the potential to continue to play a leading role in the DeFi environment in the future.
Bitcoin: Bitcoin is unique. To what extent Bitcoin will play a role from a business IT perspective remains to be seen. But as “digital gold” it has a unique selling point for the mass market. In terms of robustness, decentralization, seniority, stability and market share, Bitcoin is unchallenged and has established its value and importance. Bitcoin will continue to play a fundamentally important role in the future and will be significant to the entire global economy.
The projects mentioned above are six examples, but there are of course other interesting projects as well. Projects like BNB, XRP, TRX, NEAR, Cosmos or Injective also have the potential to play an important role, but to what extent they have the potential to become a big player remains to be seen. They still have certain limiting factors from a business IT perspective, which could stand in the way of mass market adoption. As an admixture in an investor portfolio, they can be interesting, depending on the strategy of the investor.
About the Author:
The author Martin Bernecker has almost 20 years of professional experience in business informatics and has worked for companies such as SAP and Accenture for many years. Since 2017, he has been working intensively on blockchain technology and its implications. One focus of the work at BlockTecGroup AG is on the business perspective and the use cases of blockchain technology in the enterprise context.
