The Platform-Product-Market-Fit Dilemma and the New Blockchains that can Challenge Ethereum in the Security Tokens Market
The current generation of security tokens has been mostly tied to the Ethereum blockchain. When comes to digital securities, the limitations of Ethereum are well known but the initial market conditions made Ethereum the obvious choice to power the first experiments in the space. Under normal market dynamics, Ethereum should have been able to capitalize in the “first mover advantage” and become the default runtime for digital securities. However, security tokens remain a largely underdeveloped and slow growing market which has opened a window of opportunity for other blockchain runtimes to become a relevant challenger to Ethereum to power the backbone of digital securities. There have been a lot of noise about different blockchains venturing into digital securities but no pragmatic analysis about their chances of gaining significant traction. Today, I would like to outline a framework to analyze what blockchains have a real opportunity to become a relevant runtime for digital securities and which ones might have a tougher road ahead.
The first step towards understanding what blockchains are viable options to power the next wave of digital securities starts by understanding the challenges of Ethereum in the space. A lot has been written about the technical limitations of Ethereum when comes to security token but, in my opinion, that’s just a small part of the equation. From some perspectives, Ethereum might be a victim of what I like to call the platform-product-market fit thesis.
Security Tokens, Ethereum and the Platform-Product-Market Fit Dilemma
Product-market fit is one of the best established ideas in terms of software market dynamics. Mediocre products in the right markets are likely to perform better than amazing products in the wrong markets. However, what happens when we are talking a platform that has achieved product-market fit in a specific market and starts products in another market. The history of software is full of examples of platform vendors that achieve relevant traction in a specific market and use third party products to expand its dominance into new markets. A classic example is AWS using its market leadership in cloud infrastructure to venture into industries such as machine learning, internet of things(IOT), mobile or even blockchain. A more mainstream example can be found in Uber leveraging its transportation platform to venture into other industries such as food delivery. However, how are platforms affected when new products build on their infrastructure fail to achieve product-market fit? This is what I like to call the platform-product-market fit dilemma.
The idea of the platform-product-market-fit thesis essentially states that platforms that achieve dominance in a specific market, risk that leadership position by powering products that fail to achieve product-market fit in new markets. Assume that a platform [Platform-A] has achieved product-market-fit in one market [Market-A] and uses that traction to power products to a different market [Market-B]. If the new products fail to achieve relevant traction or Market B develops slowly a few things might happen:
i. The competitors of Platform-A might have enough time to catch up and develop relevant capabilities to power products for Market-B.
ii. Slow Market-B conditions might influence new customers to gravitate towards Platform A competitors.
iii. The Platform-A competitors might be able to launch new products for Market B that gain more traction than the ones powered by Platform-A.
iv. If Market-B finally develops into a market larger than Market-A, then Platform-A’s competitors might leverage their new achieved market dominance to regain relevant traction in Market-A.
Extrapolating the platform-product-market-fit dilemma into the universe of security tokens we have a platform like Ethereum who has been the clear leader in tokenization and is now powering a new generation of security token products. The slow-moving conditions and regulatory challenges of the digital securities market are creating a window of opportunity for Ethereum’s competitors to not only become a relevant runtime for security tokens but also( with the assumption that digital securities become a large-enough market) use that dominance to disrupt Ethereum’s leadership position in the blockchain space.
An important thing to notice about the platform-product-market fit applies to digital securities is that Ethereum might become vulnerable to the financial and regulatory uncertainty surrounding this new market. In some weird behavioral market psychology jiujitsu, the lack of traction of existing security tokens, the uncertain regulatory climate and the limited liquidity in the market is pushing startups to look at Ethereum alternatives such as permissioned blockchains. You can argue that, if the first wave of security tokens would have achieved product-market fit, then it would be incredibly difficult for other blockchains to enter the digital securities space.
The platform-product-market-fit dilemma clearly applies to the security token ecosystem but doesn’t necessarily applies to every Ethereum competitor. Disrupting Ethereum in the security tokens market requires a specific emphasis in some of the key capabilities that are relevant to the next generation of digital securities and those are not present on any blockchain.
Essential Capabilities of a Blockchain Runtime for Security Tokens
We can write an extensive list of desired, nice-to-have features that we would like to see in the next generation of digital securities but that wouldn’t be neccesarly helpful. Stating features like scalability is sort of obvious because if a blockchain can’t scale, it shouldn’t be a blockchain runtime in the first place. Narrowing the analysis to the specific characteristics that are needed for any blockchains entering the digital securities space, there are four key dimensions that I think are relevant:
· Ownership Representation: To power digital securities, a blockchain runtime should have some representation of a token or other transferable ownership form.
· Security & Privacy: Security-related Capabilities such as access control, encryption and privacy policies are a must for security tokens to achieve mainstream adoption.
· Developer Community: Developer adoption is essential to build the next generation of tools, protocols and frameworks for security tokens.
· Protocol Extensibility: Digital securities need new forms of decentralized finance protocols to power dynamics such as dividend payments, derivatives, debt, etc. A blockchain runtime for digital securities must support the creation of new protocols that can be used with different representations of ownerships or tokens.
There are many other aspirational capabilities that can power the next generation of digital securities but most of them have some form of dependency on the aforementioned four. Taking a pragmatic look at the current blockchain platform ecosystem, we can see that the list of blockchains that natively address the previously listed requirements is relatively small. There are plenty of runtimes in which those capabilities can be enabled in some hacky way but very few currently natively address those four dimensions.
Five Blockchains that can Achieve Relevance in Digital Securities
At the risk of being controversial, I believe there are five blockchains that are currently well-positioned to become legitimate challengers to Ethereum in the next generation of digital securities. The main criteria is current relevant traction across the four characteristics listed in the previous section: ownership representation, developer community, security-privacy and protocol extensibility. While there are several blockchains that excel in some of those aspects, only a handful have shown consistent traction across the board.
· Quorum: Quorum is becoming the main option for implementing permissioned Ethereum solutions. The compatibly with the Ethereum runtime plus robust privacy and access control capabilities make Quorum a robust candidate to power digital securities in permissioned networks.
· Hyperledger Fabric: Hyperledger Fabric has some limitations among the technical capabilities listed in the previous section but those are overcome with a flexible extensibility model and a fast growing developer community. Also, Hyperledger has recently incorporate privacy-centric efforts such as Ursa and Aries. IBM’s sales and marketing efforts is an important asset of Hyperledger Fabric that should not be underestimated.
· Tezos: A flexible governance model, a simple programming model and a vibrant developer community make Tezos a viable candidate to power a new generation of digital securities.
· Algorand: Fresh out of a highly anticipated launch, Algorand provides best-in-class security and privacy capabilities combined with a great programming model and an emerging developer community.
· EOS: It would be hard to underestimate the impact that EOS can have in the universe of digital securities. A robust programming model, a strong developer community together, a solid tokenization architecture combined with a strong financial arm, make EOS a valid candidate to venture into the digital securities space.
The previous list is based on a short term outlook. There are several other blockchain runtimes with enough merits and talent to achieve market relevant in the digital securities space but I think they would have to overcome their limitations across some of the dimensions listed in this article. The elephant in the room remains the possibility of a new blockchain runtime specialized in security tokens but even those will have to address the four key capabilities: : ownership representation, developer community, security-privacy and protocol extensibility in order to become a viable runtime for digital securities.