For Entrepreneurs: Do Startups Really Need Blockchain Technology? - Takeny

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Friday, October 30, 2020

For Entrepreneurs: Do Startups Really Need Blockchain Technology?

 

Among the questions on the minds of many entrepreneurs is the question: Should I adopt blockchain technology or not?


Especially since blockchain technology is being used in many different areas from supply chain monitoring to managing cross-border stocks and payments, meaning that blockchain is making its way into many areas.


Startups, to achieve their growth goals, jump into the blockchain bandwagon to create a buzz, persuade investors and raise new rounds of financing.


As the adoption of blockchain technology by emerging institutions is not just a technical decision but a commercial one as well, given that they are the leaders in decision-making, it is important that the founders not fall into this hype, but they must analyze whether the adoption of blockchain technology is appropriate from a business perspective. And it's not just to show off.


While the unique characteristics of blockchain technology forced startup founders to think of it as a fundamental and transformative technology, the utility of business remains firmly anchored as a vital consideration in this decision.


In this article, we will cover blockchain technology from a technology and business perspective that founders need to consider while evaluating blockchain technology.



Decision Tree: Assessing the suitability of blockchain technology for startups

Although many research papers present what are known as decision trees to assess the feasibility of using blockchain technology in the project, we wanted to simplify matters further and suggest a table of use cases, shown below:


Use case Do we need to store data? (User data and / or metadata) Do multiple users participate / update stored cases? Does any trusted third part share? Can a third party be eliminated? Resolution Notes

Social media app that includes user engagement and interaction Yes Yes Yes Yes This cannot be developed as a traditional centrally managed app.

However, one can consider blockchain in the event of a desire to migrate to a decentralized network


Food retailers receive supplies from producers, so ensuring food quality is a major challenge Yes Yes No No Yes

Organizations that keep employee attendance records Yes Yes Yes Yes No As long as there is mutual trust between the organization and employees, there is no need for blockchain. If any trusted third party was involved and the blockchain came to the picture, it would be just technical overkill.

Cost-benefit analysis: assessing business suitability

Every startup founder should plan to invest in blockchain technology, and assess the return on investment that will come from adopting it.


Blockchain technology may be adopted as a necessity or differentiating factor for your product, but evaluation should always be done from a revenue generation perspective.


You may have to come up with a cost-benefit analysis according to your business, but I will help you with an example to better understand the approach.


Let's look at the aforementioned case of the food vendors, where we compare the costs with the returns that are possible.


Development cost:

If the development effort to build a MVP pilot product with a traditional centralized system approach takes a certain amount of time, the efforts will be 30-40% higher if a blockchain-based approach is pursued.


A blockchain developer usually costs at least 1.5 times more than developers working on widely used technologies.


This would make the cost of blockchain development two times higher than the cost of developing traditional applications.


Infrastructure cost:

To assess the infrastructure cost, let's assume transaction volume of a few hundred transactions per second (TPS). If the infrastructure cost of a traditional solution were around X per year, then it would be the same for the blockchain-based approach. This is according to the assumption that approximately 8-10 nodes are part of the consortium.


It boils down to one conclusion, which is that instead of one party managing all of the infrastructure nodes, each consortium member must own the node.


As the volume of transactions increases, the traditional approach can expand horizontally; But blockchain-based solutions face the Scalability Trilemma.


This is a popular term coined by "Vitalin Buterin" which, from the perspective of the average person, is similar to the phrase "You cannot have everything."


Firms must clearly understand which of the three aspects will be focused and improved upon the most:


Decentralization, security or scalability.


Other costs

Some of the other business efforts required if blockchain-based solutions are adopted include creating a consortium, persuading accepted members about the benefits of joining the union, and expanding it to a level that can be claimed as secure.


Speaking of benefits, a blockchain-based approach can certainly enable business process automation using smart contracts.


This approach not only improves the overall process efficiency but also reduces the companies' operating costs.


Where blockchain technology can reduce the waste of resources, which could result in saving approximately 450,000 euros per year, depending on the source.


This value far exceeds the initial investment and operational cost that goes into a blockchain-based solution.


The bottom line is that blockchain technology may not have gained the importance it deserves. We strongly recommend evaluating the feasibility of the blockchain for founders of startups, and realistically looking at the technology and whether it can be truly drawn from it away from the media momentum and empty hype.

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