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Blockchain Bad news for incumbents = 10x price collapse, good news is 10x increase in volume


By Bernard Lunn.






Bernard Lunn
Bernard Lunn
This is Part 2/chapter 4 in The Blockchain Economy serialised book.

Creative destruction from disruptive technology has historically been a bad news good news story:

- 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.

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

1. delay the 90% price collapse as long as you can 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 by being super aggressive on price.
3. create products/services for the new markets opening up where volume will increase by 10x.

Clearly it is hard to do A+B+C, 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 post/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.

Creative destruction is ugly because destruction precedes creation.

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: the democratisation of finance and the rise of the next billion into a global middle class (aka “first the Rest then the West”). 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 me and mine. A whole range of new assets will be Tokenized and traded.
This chapter/post 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 slowly at the wealthy end of the market, as this is not a price sensitive market.

Change may come first 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. Musicians have to make most of their money from live performances, because digital copies don’t make much money. 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 (disclosure, Daily Fintech’s Efi Pylarinou works at Rothbadi).

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
Founding Partner, Daily Fintech Advisers
www.dailyfintech.com

Bernard Lunn is a serial entrepreneur, senior executive, adviser and a strategic dealmaker. He worked in Fintech before it was called that with startups, growth stage and turnaround ventures (incl. Misys, Temenos, IMS, ITRS). He has lived and worked in America, India, UK & Switzerland and is adept at cross border deals.

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