After nearly a decade of development, the emergence of cryptocurrencies and public ledger tokens has reached Main Street awareness status. The growth of the Bitcoin and Ethereum markets has provided a legitimizing course of development for the previously niched technology among enthusiasts.
Most recently, ICO offerings have been an experimental way to capitalize software development teams working on building out new applications. As an outgrowth of the traditional open source community paradigm, the commercialization of both public and private blockchain applications has upended known economic models around R&D, development, commercialization, and funding of enterprise applications.
The traditional model for software company market valuations has been closely attached to total addressable market (TAM) potential against the legacy model of licensing -or subscription in the case of cloud SaaS applications. A solution provider would determine potential opportunity as some combination of an estimation of user base against the pricing model sold to customers to access and use the application based on calendar time (a year, for example).
This began in the earliest days of the software industry, as companies worked to build and sell software as a product.
The Evolution of Software-based Intellectual Property
But as we’ve seen the results since the decision, the intellectual property discussion around how software is architected and protected has been the ongoing subject of continued legal controversy.
The issue in the 2014 US Supreme Court “Alice” case was whether certain claims about a computer-implemented, electronic escrow service for facilitating financial transactions covered abstract ideas ineligible for patent protection. The patents were held to be invalid because the claims were drawn to an abstract idea, and implementing those claims on a computer was not enough to transform that idea into patentable subject matter.
Despite the Court’s avoidance of mention of software in the opinion, the Alice decision has had a dramatic effect on the validity of so-called software patents and business-method patents. Since Alice, these patents have suffered a very high mortality rate. Hundreds of patents have been invalidated under §101 of the U.S. patent laws in Federal District Courts. Applying Alice, district court judges have found many of these claims to be patent-ineligible abstract ideas.
Patent issuance statistics from the PTO show a significant drop in the number of business method patents issued in the months following the Alice decision.
Software Development Requires A Sustainable Effort
At the same time, software development requires a sustained effort to engineer and maintain. While software has traditionally been built and sold as a product, it ultimately remains that of a quasi service effort. I’ve always called it a living organism because it requires continued support, advancement of the platforms and stacks, and assurance of future efficacy and compatibilities.
The R&D costs to develop, combined with the support costs to maintain represent an economic challenge. There’s a conundrum for early stage projects and investors when the intellectual property around any platform or project becomes subject to a diminished ability to protect the code base and innovation itself.
Economic models around open source have shown there’s still potential for financial profit and opportunity for open source-based platforms to be a “starting point” as a path towards traditional business commercialization.
RedHat has built a great company around their open source version of Linux. They primarily derive their revenue from support and education. Some features are paid as part of advanced enterprise applications.
Other projects have found their way to commercialization, but not without controversy. MySQL began as one of the most robust, open source database alternatives until it ended up in Oracle’s portfolio. While MySQL remains open source even within Oracle, the evolution of the product roadmap has exposed a dissatisfaction by even the original founder of MySQL, who has been working towards a fork alternative known as MariaDB.
Changes in Software Product Funding
Meanwhile, as the software market continues to push and pull around the intellectual property equation, the venture capital and software investing industry is experiencing a radical shift. With the advent of token sales as a funding vehicle, equity funding groups are experiencing a disruption as development projects have short cut their way to the direct market to obtain funding.
These ICO’s (initial coin offerings) have seen initial success as a crowdfunded, pseudo-equity product sale. This represents a big shift in overall software economics into the future, partly driven through the innovation of cryptocurrency as a means of value exchange, and because of the change in platform technology blockchain itself represents as path towards distributed computing and decentralized applications.
Distributed Computing vs. Centralized SaaS Servers
Most of the blockchain-based applications under development are server-less. Meaning they run at the local client level accessing the blockchain for data and value exchange. These applications are typically being built as browser plug-ins, or through highly modified application clients using locally executed code on top of node.js or the like. Private key information never leaves the client device, and only the hash transactions are transmitted to be confirmed as valid across a protocol network like Bitcoin or Ethereum. Private chains function the same way, but within the consortium network of participants and users.
We are witnessing a fundamental shift in how a user accesses the application at the core. If you don’t have a requisite token, the application simply doesn’t function. Take the most fundamental case of cryptocurrency wallets. Without a token, the software doesn’t do anything. Even though one can download and install the application itself, without valid tokens, there are no meaningful feature sets.
As token offerings proceed forward beyond wallet-to-wallet transfers of a currency nature, we will see a major evolution in how applications are designed and accessed by the user constituencies. Instead of a centralized database containing a user account and user metadata that represents an authentication to access the features of a platform, users will need to have a valid application token to authenticate access.
Stored Value vs. One-to-One Centralized Subscriptions/Licensing
This “stored value” feature is where tokens derive economic asset value unto themselves. Notwithstanding the fact the token can be bought or sold between holders, the market between users, buyers, and sellers provide the direct valuation of any application solution on a free market basis.
For example, if I want to access the features of a particular financial chain application, I must have a token. If I don’t buy and use that token, I may experience a disadvantage as a business because I cannot access the same data and value exchange the software application itself represents. The market will determine the financial value of that token based on the users who also may or may not be consuming the application features for their own purposes.
Depending upon the nature of the features of that application, the downstream economic impact could be dramatic, especially when considering the overall standardizations of vertical industries around data models and ontologies used by constituents in that industry.
As a user, if I am able to derive exponential downstream value through the access and transfer of data in a software platform, my ability to access the system, let alone actually manipulate any features within the system, becomes very valuable to me.
As the industry continues to evolve, I believe we will see shifts away from total addressable markets and calendar based subscriptions – as both valuation AND pricing models. Instead, I see a shift coming towards a market-driven approach based on the value chains of individual users.
This does provide a fundamental, rational basis for a token sale to first fund develop a system, then continue to maintain the incentives for a project group to afford to attract and retain developer talent.
Should the application network itself fall behind in features or lose user support, the value of accessing that network will drop against other, competitive offerings.
I will be working with the 10XTS team to further elaborate on these fundamental shifts in software economics as a series of blog posts and whitepapers. We believe this shift represents a significant opportunity for well-formed, capable development teams to capitalize upon the changes into the future.