For all the bluster and bold assertions from the crypto sector’s staunchest evangelists, the technology has failed to make the impact many expected. The most promising aspect of the technology—its distributed network architecture—is revolutionary, but also may place a high initial cost on many of the companies who want to create lasting solutions.
At its heart, the problem is that blockchains work best when more people are actively participating in verifying and processing transactions. Despite its surging popularity, most networks struggle to scale because they paradoxically require significant nodes to operate, and many can’t achieve those long enough to reach critical mass.
To get around this limitation, some companies in the blockchain sphere have started to look beyond the startup ecosystem to find strategic partners. These smaller projects don’t make the same merger and acquisition agreements traditionally made, but rather leverage existing solutions’ resources to help create a foundation that is resistant to user base fluctuations. As opposed to solutions that run on their own steam, these projects show the true promise of blockchain, and have the potential to be the ones leading the revolution.
Blockchain’s Scalability Problem
One of blockchain’s most lauded advantages over traditional networks is how it removes the need for intermediaries and central control, two factors that create inefficiencies and transparency problems. Indeed, blockchain has largely succeeded in providing an almost completely decentralized environment, but it’s one that comes with its own set of problems. For one, the distributed nature of these networks raises maintenance and infrastructure costs significantly, as data must not only travel two ways once, but do so thousands of time for every member in the network.
As a result, building larger networks that can provide the services companies intend to offer means an exponential increase in costs rather than a linear one. Adding more capacity requires larger user numbers, which raises the overheads of maintaining the network. As a result, projects that offer massive networked utilities such as computing power, large-scale logistics, and even storage, find themselves in the hole long before they make a push for public adoption.
In another contradictory twist, this is problematic because blockchain projects require significant user bases pooling their resources to be successful. A platform that promises web acceleration by using surplus bandwidth from its nodes, will fail at accelerating any traffic with a small network, and will be tapped out nearly instantly.
Finding Smart Partnerships
Many blockchain companies have looked for a way to ensure that most of their raised capital doesn’t go towards keeping the ship afloat exclusively. One of the most common methods that they resort to is the strategic partnership—long a staple of the traditional business world. For smaller startups, the prohibitive startup costs involved in building their platforms can be a sizable hurdle, and one most can’t get over.
To circumvent the issue, several blockchain companies have sought partnerships with their non-blockchain counterparts to enhance their product. Instead of making promises and having to fulfill them once users begin to join, these startups are providing their new customers a platform that is not just built, but already functional when they arrive.
The difference in these two situations is important for a startup as the former presents users with a system that doesn’t work as advertised and is not likely to do so unless hundreds more users join in short order. This is connected to the fact that until they’re proven useful, most companies’ tokens remain speculative assets.
Some companies can greatly enhance the services they promise when aided by off-chain partners. Leonardo Render, for instance, a company that offers digital image and animation rendering services, has partnered with non-blockchain rendering service Giga Watt. The deal means Leonardo Render can immediately offer customers 23,000 GPUs for their needs and can slowly onboard new users until it can fully sustain its own platform.
One way to get around this problem is by affiliating with companies that offer similar services already. Storj, a blockchain cloud storage solution that promises to leverage its users’ empty storage space to create a shared database, has partnered with storage giant FileZilla. This is not useful only to Storj, however, as FileZilla also benefits from the tokenized ecosystem and enjoys a bigger incentive for users to stay, instead of flocking to larger cloud services like Google or Amazon.
On the other hand, many larger companies are starting to come around to the benefits of blockchain and are seeking out solutions that could enhance their operations. Online retailer Amazon announced in May 2018 a partnership with blockchain firm Kaleido, a platform that allows for easy and simplified blockchain development. The company plans to integrate it with its Amazon Web Services platform to expand its offerings.
Accounting giant Deloitte has announced partnerships with as many as five different blockchain firms to create an array of services that could improve several branches of the accountancy field. More than simply expanding Deloitte’s portfolio of service offerings, these companies also receive financial backing and resources. Most importantly, however, these blockchain projects receive the user bases they so desperately need, without incurring the significant costs usually involved.
Decentralization Backed by Centralized Actors
The reality is that blockchain is still too young to support large user base platforms without assistance. Despite the grand promises and hype that surrounds the sector today, the fact remains that most companies to launch an ICO in the past two years have floundered, and those that haven’t, did so by adapting. By finding partnerships that add value and provide an important reprieve from the costs—both financial and otherwise—startups can focus on ideas, and not on survival.