Blockchain Creative Destruction is bad news + good news

Creative Destruction news.001

Creative destruction from disruptive technology is tough because the bad news from destruction precedes the good news from creation. Historically the bad news good news story plays out like this:

  • Bad News: prices collapse by 90%
  • Good News: volume increases by 10x.

If you are a startup that is good news + good news. The 90% price collapse is no threat because you have no market share to protect; you are playing offence not defence. It is much harder – but not impossible – for incumbents to navigate the innovator’s dilemma.

This is Part 2/chapter 12 in The Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated.  For the index please go here.

For incumbents, the game plan is usually some mix of:

  • 1. delay the 90% price collapse as long as you can. You do this by selling the benefits of a premium product/service = our artisanal product is better than that mass-produced competition.

 

  • 2. grab market share from other incumbents. You do thisby being aggressive on price within the existing paradigm (where a 10% cut is aggressive).

 

  • 3. create products/services for the new markets. This is where you go for the markets that will only exist after prices collapse by 90%.

Clearly it is hard to do 1+2+3, but it is possible by using different brands in different market segments.

We can see from other waves of change that a 90% price collapse is usually followed by a 10x increase in volume and this obeys the basic law of supply and demand. In this chapter we look at the good news part – where that 10x increase in volume will come from; although the precise shape of these new markets is hard to see, the direction is fairly clear.

Where the 10x volume increase will come from

Destruction –  prices dropping by 90% – is simple and quick compared to creating brand new products and services for markets that will only exist after a 90% price collapse.

These new products and services will come from two trends that are already visible:

  • Trend 1: t the rise of the next billion into a global middle class. This is a simple supply/demand issue. These new customers will need the same financial services but will also need a 90% price collapse to make them affordable.

 

  • Trend 2: Tokenize everything. A whole range of new assets will be Tokenized and traded. This chapter describes 4 new types of assets that will be Tokenized and traded in future:
    • Hard Assets where provenance is maintained on a Blockchain.
    • Creative Assets where double spend prevention is critical.
    • Reputation Assets where self-sovereign identity is critical.
    • Social Benefit Assets aka the impact part of impact investing.

Hard Assets where provenance is maintained on a Blockchain.

These include what the wealthy collect, such as land, jewellery, art, antiques/collectables – as well as the first assets that the next billion acquire as they make their entry into a global middle class (such as farm animals, crops, farm equipment and two-wheelers). Both need a simple provenance system where it is clear that the asset is what it says it is and the owner really is the owner. For a example a Chateau Petrus 1964 will cost you more than $3m, which is a big target for forgers to slap a label and an old-looking bottle with wine costing less than $1. Of course, a well-trained wine expert in a top class auction house will spot all except the very best forgeries. This is the artisanal approach and when so much money is at stake and when the customers can easily afford to pay, we expect change to come slowly to this high end of the market.

Change will probably come at the wealthy end just to make trading easier. Custody is more complex (digital assets don’t need temperature control) but the basics are the same; you trade an asset that is kept for you by a custody service.

Change may come fastest in the market of the “next billion” for 4 reasons:

  • Any service that is not based on an immutable blockchain is subject to the most basic form of corruption (changing the asset register so that somebody else gets ownership).

 

  • being able to securely record asset ownership is life-changing, so these bottom of the pyramid customers will quickly adopt any new service that offers this.

 

  • they cannot afford the expensive artisanal services.

 

  • the ability to collateralize an asset and borrow against it is life-changing at this end of the market. Mrs. Wealthy may want to borrow against her wine collection but it is not a priority; she does not need to do this. Now imagine a farmer, who has bought some farm equipment that can be used as collateral for an asset backed loan so that she can order something in bulk to save money; that is life-changing and will drive behavioural change.

Creative Assets where the double spend prevention issue is critical.

Something happened along the path to the creative economy. While it is axiomatic that creativity is the most fundamental skill that should be the most highly valued,  the Internet has been hard on people who make their living from creative work. The reason is simple – the Internet is the perfect copy machine. For example, musicians today have to make most of their money from live performances, because digital copies don’t make much money unless you get into the superstar category. Assets that have some scarcity value and appeal to hard core fans can create additional income, but that requires trust that the same asset cannot simply be copied and resold.

The same problem that Satoshi Nakamoto solved for money – the double spend problem – can be used for other assets where one is selling scarcity value.

Consider painting. We now think of only the original (worth $ millions for a successful artist) and copies (worth only the cost of production) but in the past we had something in between which is limited edition prints. If I buy a print where I believe only 10 will ever be made, I will pay more than if the supply is unlimited. So as a creator I own 10 slots on a ledger; if I sell 1 then I only have 9 left.

You can do the same with limited edition books or some artefact signed by the designer or by your favourite artist/musician.

In all these cases, the buyer must have confidence that the ledger is immutable and tamper resistant.

Reputation Assets where self-sovereign identity will be critical.

Today we give up our reputation assets in return for a free service. A credit score is one form of reputation asset. A high credit score says “this person has a reputation for paying his/her bills”. Reputation assets can also include:

  • being honest and trustworthy.

 

  • being skilled and diligent.

 

  • finding good investments.

 

  • being a fashion leader.

 

  • doing good for the world.

Today we work as if financial assets are worth accumulating and protecting while being casual about reputation assets. That will change because reputation assets are a leading indicator of financial assets. Reputation assets are not valuable today only because individuals don’t control them. That is where self-sovereign identity stored on an immutable Blockchain is the solution.

Social Benefit Assets aka the impact part of impact investing.

Many investors want to do good as well as make money in what is typically called impact investing. The problem is that, while it is easy to measure financial impact (how much profit did the venture generate), it is much harder to measure the social benefit impact. The old saw is you can only manage what you can measure. How do you measure the impact of a venture on something like reducing C02 emission, pollution, drug addiction or inequality or improving early childhood health and eduction.

This is a hard problem that is being tackled by companies such as Rothbadi & Co with their Seratio tokens and microshares.

Once it is possible to measure impact, one can expect impact investing to take off, which is good news for the financial industry and good news for the world.

Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).

 

2 comments

  1. It is not the first time that I see that you preach the “merits” of predatory practices for start ups and you mistaken preach that disruptive behavior brings innovation and also that destruction precedes creation. This an erroneous understanding of the creative destruction hypothesis while disruptive practices bring market instability and raises transaction costs while it encourages a lot of wasteful technical mutations that are pure waste of capital! The 90% failure rate of start ups is an indication of the inefficiencies practiced by venture capital and writers/analysts like yourself. You are a good example of a very intelligent and knowledgeable analyst that lets neoliberal idealism propose to young entrepreneurs to continue practicing market failure!

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  2. Hi Takiecon,
    Thank you for your input. 

    This is why I created this as a serialized open source book, so that I can get expert feedback before publishing. In a traditional book format your point of view would have been lost. 

    Let me address what you wrote at three levels:

    Systemic level

    Investor level

    Entrepreneur level

    Systemic level
    I started my career in a tech venture funded by the UK Government. This taught me that Governments are very bad at picking winners. The messy, wasteful private sector is better. All innovation funding has been massively wasteful in every cycle of innovation from industrial revolution to Internet, but it still works at a systemic level. Without these bursts of wasteful innovation we would still be hunter gatherers or subsistence farmers.

    Of course fundamental research needs to be financed and open sourced. We would not have the Internet without DARPA. There is a big question of who funds this fundamental research when the gains can be reaped by the entrepreneurs in another country.

    The reason private sector funding of innovation works is what Nassim Taleb calls skin in the game – which brings us to the Investor level.

    Investor level
    An investor who loses her money is unlikely to say “its ok ‘cos it works at the systemic level” but investors are also well protected against the failure of individual ventures. To be a successful early stage investor you need two things:

    1. Selection that is a bit better than average. A “bit” is enough because of 2.

    2. Diversification so that your many losers are compensated for by a couple of big winners.

    That is why we highlighted the 22x Fund which offers Selection and Diversification at zero fees.

    Entrepreneur Level.
    At this level I totally agree with you. At a systemic level, thousands of entrepreneurs can fail and society still benefits. At an investor level, fund diversification means that many entrepreneurs can fail and the investor is still OK. But what about the entrepreneur? I like to remind entrepreneurs that while investors have a portfolio, the entrepreneur only has one life. You may get 2 or 3 shots at grabbing the brass ring, but that is about it.

    Still, there are many entrepreneurs who have that risk appetite and some do get the brass ring.

    The subject of how individuals can benefit from the Blockchain Economy is the subject of Part 3 – stay tuned.

    Thanks again for your contribution.

    Bernard

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