Blockchain: How To Conduct Your Due Diligence And Evaluate Business Models
Over the last few years, I have evaluated many blockchain technologies from an M&A and valuation standpoint. I’ve also been in the blockchain and crypto ecosystem for many years, have acquired a few credentials in this space, and have developed my own framework on how to evaluate some of the intrinsic value within blockchain technologies.
So I’ve seen firsthand how blockchain technology can change how consumers share and store data through secured chains of cryptographic blocks. Not only can blockchain revolutionize currency, but it can also codify areas such as events, medical records, transaction processing, voting and much more.
An Overview Of Blockchain Technology
The formation of blockchain technology is composed of linked blocks, each of which holds numerical information often found in databases. These blocks link together and build off the previous ones to form a chain of data blocks (a.k.a., the blockchain).
Blockchain technology is an open-source ledger, meaning that all participants are privy to the same information. The ledger method of validation eliminates the double-spending problem, which arises when an individual sends the same money to multiple sources.
The technology is thus run on a peer-to-peer (P2P) network where there is a set protocol for creating and validating transactions in new blocks.
Popular applications of blockchain such as bitcoin operate on an open ledger, while some uses of blockchain, such as government initiatives and voting, may benefit from a closed-source chain or a partially closed ledger.
The advantages of blockchain include the decentralization of user data, which is achieved through the public network of participants who form a consensus that the information presented is accurate. Instead of one entity or corporation having control of the data, blockchain data is shared throughout its participants, where these users have the power to add code to a blockchain. Blockchain also creates the potential for crypto assets, which could move commodities into a tokenized set of crypto data to be used on a commercial level.
Lastly, the popularity of blockchain technology gives way for new business models and propositions for companies that want to promote decentralized technology-oriented business models.
How To Evaluate Blockchain Technology
I’ll now explain a framework for the evaluation of blockchain technologies and business models through three tests: a decentralization test, a crypto-asset test and a business model test.
Decentralization is the biggest driving force behind the shift to blockchain technology and business models. By decentralizing data on a public record, block-level data is transparent to all users. Since blockchain is fully decentralized, the coding is open source, so that one entity does not own or control the information and decentralization grows stronger with the entrance of new users. The more people who engage in the network, the harder it is for an individual to censor information to the public.
Blockchain technology is typically decentralized along one of four vectors: political, architectural, commercial or contractual. Let us take a deeper look:
• Political decentralization: Political decentralization refers to how many individuals or organizations control the system. Political decentralization strengthens as more people engage in blockchain activities — the more individuals involved, the less power they each have over the influence.
• Architectural decentralization: Architectural decentralization refers to the amount of computational hardware and software required by a system to operate. Blockchain follows architectural decentralization because there is no central infrastructural point (i.e., no one computer that is at the center of the network).
• Commercial decentralization: Commercial decentralization refers to the business models and opportunities that a decentralized network creates. For example, a decentralized method of currency transaction disrupts the typical banking model with set fees and interest rates, enabling direct people-to-people transfer.
• Contractual decentralization: Contractual decentralization, known as “smart contracts” in blockchain technology, relies on the blockchain code to initiate a transaction between individuals. The contract is devoid of human mediation and initiates a transaction once both parties have abided by the rules of the contract.
Crypto Asset Test
Crypto assets are another lens under which to evaluate the technology. They determine the behavior of the technology and its monetization potential. A crypto asset can take three forms: a crypto commodity, a token or a cryptocurrency.
• Crypto commodities: In the physical world, popular commodities include metals and oil. However, in the digital world, they correspond to network, storage, compute and protocol, helping create tokenized digital products. Within crypto commodities, more than one will likely scale based on the use case.
• Tokens: Tokens are analogous to finished digital products built through crypto commodities. Although there are many solid use cases of tokens, lots of them really do not need to exist or have weak use cases. One needs to carefully consider how the crypto commodities build these tokens and whether the use cases really create value.
• Cryptocurrency: In my mind, there is only one true cryptocurrency, and that is bitcoin. There are several commodities and tokens that have been implemented in a manner that they can function as cryptocurrencies. The ability to monetize these implementations into either commodities or currencies can drive some value.
This article originally appeared on forbes.com To read the full article and see the images, click here.
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