Business metrics for blockchain projects

March 2, 2017

Originally posted @Murins

 

Despite of huge hype about blockchain technology among start-ups and venture capitalists I was asked many times: what could be valid business goals for blockchain projects? The answer is simple – any blockchain project should profit its users by improving their opportunities and capabilities to make transactions.

If we look at profitability as return on capital then blockchain technology could increase profits for its users in five ways, by

  1. reducing transaction costs;

  2. increasing revenues due to increased amount of transactions;

  3. creating new revenue streams due to lowered transaction costs;

  4. reducing level of required capital;

  5. increasing capital usage or employability.

 

Business metrics 1: Reduced transactional costs

 

Blockchain technology already shows us that it is capable to replace humans with algorithms to store, audit, trigger and process transactions. Blockchain potentially could make savings on due diligence, escrow accounts, storing and transferring assets, processing claim, avoiding fraud and human mistakes. Software could partly or fully replace work of auditor, lawyer, custodian (or trustee), insurer and banker before transaction is made, during processing transaction and after transaction is made. These costs are measurable. For example if custodian takes up to 0.1% from loan sales that asset manager buys from loan originators and if asset manager buys one billion EUR worth consumer loans portfolio then it spends up to one million EUR for custodian services. So what blockchain start-up should do? It should look on their users business cases and evaluate what transactions costs and by how much it could reduce them for their clients by implementing blockchain solution. I believe that blockchain can reduce transaction costs in payments, finance, insurance, trade, manufacturing, servicing, leasing (or renting).

 

Business metrics 2: Increased transactions volume

 

Not only blockchain technology can reduce costs but also time to settle transaction. It may create impact on trade volume of particular asset as it could create opportunity to make more trades of particular asset in a given time period. For example, in Wall Street to settle security or bond trade on average takes 3 days. If there are 251 working days then at maximum brokers can trade one asset 84 times per year. But if you can reduce settlement time to 15 minutes then brokers can trade the same asset 8032 times per year. This improvement blockchain start-up can express into numbers by showing how much additional revenues their users can generate by increased trade volume. This metric could be applied more to the use case where relatively high frequency of trade is observed, e.g in bond, security, and FOREX trade.

 

Business metrics 3: New revenue streams

 

As I mentioned before blockchain technology could significantly reduce transaction costs. This could create opportunities for offer new services that previously were not available due to high share of transaction costs in total transaction value. For example, it is very hard to find factoring service to factor an invoice of 30 EUR just one time because manual invoice validation and manual new payment order reconciliation with payer could take more than 5 EUR or at least 17% out of invoice value. For a long time, such service would not make economic sense. Now blockchain technology could significantly reduce the transactional costs thus allowing new service lines emerge, e.g. micro-factoring or micro-insurance. This could be expressed in numbers by how much revenues users could generate by offering new services to its clients. This metric could be applied more to the use case where relatively high due diligence costs and relatively small transaction values are observed, e.g. in factoring, lending and insurance.

 

Business metrics 4: Lower cost of capital

 

By reducing transaction costs and time, blockchain technology could offer more instant ways how companies could connect to financial markets. This could imply that part of own capital or equity (relatively expensive capital) could be replaced by borrowed capital or debt (relatively cheap capital). For example, if small and medium enterprise is connected to factoring, lending, debt collection services and the cash flow is automatically managed, than share of company's own capital in company's working capital could be lowered maybe even by several times. This gain could be expressed in numbers by how much percentages blockchain user reduce the need for its own capital in their working capital. This metric could be applied in use cases where users could significantly benefit from instant access to financial markets, e.g. trade and manufacturing.

 

Business metrics 5: Increased capital employability.

 

If blockchain technology could reduce time of transaction, then it could reduce time when capital is frozen or stack into bank account before it is invested or actively employed. For example, if asset manager buys from loan originator 6 month loans twice a year and if each trade settlement takes 21 working days then asset manager freezes its funds 42 days out of 251 working days. It means that asset manager actively employed its capital 83% of time. If settlement times were reduced to 10 minutes after implementing blockchain project, then asset manager would employ its capital 99% of time. It means that asset manager would increase its overall profit margin of loan investments by 16%. This metric could be applied in use cases where users could significantly benefit for increased usage of capital, e.g. asset management.

 

 

 

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