An Investor's Guide to Blockchain: Does This 'Cool' Project Really Need Blockchain?

In a previous article, I described the reasons behind the blockchain hype, its consequences, and how to successfully use this technology. I receive many requests every day to help with some blockchain projects. However, in fact, I think that many projects do not need to use blockchain. There are other types of architectures that can be used, and blockchain (with native tokens and ICOs is what they want :)) is just one of them.

Then the problem comes

Blockchain, broadly defined, is a mechanism for reaching consensus among multiple parties in a shared database that does not trust each other. But in reality, blockchain is only needed when managing a稀缺资产(something that has a zero-sum property, if you have it, then no one else can have it). Paul Sztorc describes this concept very well. I took an attempt and expanded on his model in this post. So here are my "four major" scarce assets (there may be more!):

1. Value : money, shares, bitcoins, contracts, land ownership, etc.

2. Identity : naming, PKI;

3. status in a hierarchy;

4. objective history of facts : sources, votes;

This is irrelevant to the discussion of permissioned vs permissionless chains (or private vs public chains). Also, the type of consensus doesn’t matter, it all depends on the environment these systems are running in. For example, if a project is transacting with a fully regulated asset, miners (I’ll use the term “validators” below) need to be licensed. I have a model that describes these criteria and answers which type of consensus (rewards, penalties) is appropriate when a project needs a native token, but I’ll explain that in detail in the next post.

When a project doesn’t need blockchain at all

The open network model consists of many creators and consumers of information (possibly buyers and sellers), who are not related to each other. The blockchain restricts the way users interact, for example, they must follow some predefined rules and users must wait for confirmation from all validators. Therefore, in the full sense, the blockchain is not a p2p network. An example of an open network is the cloud computing market, where there are many providers providing such services, competing for customers, and they do not need a blockchain to record events or select providers (although it would be convenient to have the same API and be able to switch on the fly).

Below, I will directly give examples that do not require the use of blockchain:

1. Cloud storage market

2. Micro jobs market (similar to temporary jobs)

3. Healthcare records management

4. Media content management

5. Internet of Things

6. Web-of-trust (different from PKI!)

7. Cybersecurity

Many people will disagree with this statement, but the criteria is the same. If you believe that IoT needs blockchain, then answer the question “ For what reasons does IoT need blockchain? ” Your answer will probably be “identity and payments”, then the result will be an effective identity and established payment solution that IoT will use, and I will provide more examples below.

Fifty shades of grey

The community will also come to the conclusion that different blockchains need to be connected to each other and run as a heterogeneous network (composed of different networks). Many platforms are doing this, such as Sidechain, Infra, Hyperledger, Interledger, Ethereum (after sharding is implemented in the future). Multi-blockchain systems are more scalable and have a higher resistance to attacks (because each chain is independent). We call them市场网络.

While there are many issues with multi-blockchain architectures, it is clear that there is no one-size-fits-all solution. I will describe different plans and their respective applications in the next article.

Model

The only criteria I can come up with to distinguish between architecture types are:

What is the scarcity level of the core assets that need to be managed?

A clear definition of the business problem helps to identify the core assets and their degree of scarcity. I will try to provide examples of four types of assets that correspond to market networks and open networks.

To provide some comments: entities managed by an open network are not actually scarce, but reputation or IOU (such as debt) are in an awkward position. They are valuable in a limited environment. For example, reputation is usually not transferable and it cannot be expanded.

Let’s look at some questions that can help you understand the type of architecture that’s right for each business case.

Analysis of the idea of ​​“blockchain”

When you analyze a blockchain company, ask yourself: What is the core asset? What is the purpose of the network?

example:

1. Bitcoin: Managing Bitcoin Accounts

2. Namecoin: Managing the name of the namespace

3. Ethereum: Managing Contract State

4. Steem: Managing Steem DAO Shares

5. Ripple: managing the state of trustlines

6. Factom: A History of Managing Events

7. Everledger; managing the history of diamond events

8. DDoS Coin: History of Management Actions

9. Storj: Managing Reputation (?)

10. Bitmessage: Managing action history (bingo! It doesn’t require a blockchain)

The next series of questions will be: Who is reaching consensus? How many participants should be involved in the validation process? What are the reasons (incentives) to participate in validation?

example

There are some cryptocurrencies (I won’t mention their names) where the price of the token is related to the number of users. But how can the validators verify how many real users have joined the system?

I'm afraid only the controller of the network can verify it. Besides the mathematics (digital signatures, account and data input status), the validator cannot verify anything else in their copy of the blockchain.

Solving the problem

1. Ripple is supposed to act as a market network.

2. DDoS Coin should be an open network only.

3. Storj’s blockchain should only record a person’s reputation, not a coin.

4. Other projects should probably not create their own tokens (with reasons and exceptions that I’ll cover in the next article) and just manage core assets on the blockchain.

5. Steem is an interesting case because the system attempts to integrate monetary policy (it has three types of coins, representing loans, equity, and payment methods). The native token (such as fiat currency) is needed to implement monetary policy. Although, I have not yet accessed their initial token distribution model.

Why do these blockchains manage more than one currency (core assets + their own tokens):

1. There is no ideal payment mechanism;

2. Founders are eager to make money :)

in conclusion

In just three steps, you can understand whether a blockchain project is worthy of your attention:

1. Define the core assets that need to be managed;

2. Assess the asset’s level of scarcity;

3. Thinking about the consensus process from a business perspective

I hope this article can help you better understand blockchain projects.