Driving Innovation: How Startups Can Harness the Potential of Blockchain Technology
reading time
4
min
Jul 11, 2023
Increasingly so in recent years, blockchain has won the hearts of entrepreneurs and even made its way into organizations with traditional business models. While we're still a long way away from mainstream adoption, much has happened since the early days of bitcoin, when crypto was a niche technology run by a community with a somewhat shady reputation.
Nowadays, startups are using this transformative technology to perform more efficiently or give their products an edge, which then opens up the playing field and creates opportunities that are usually hard to come by for small businesses. As a side effect, innovation and out-of-the-box corporate solutions might arise more frequently, which ultimately spreads across the industry. I believe it's important to understand why, so let's go over the main advantages that blockchain is providing to startups.
Transparency and Trust
Most companies use read-and-write (CRUD) software to do their recordkeeping, often storing the data on private databases or clouds. Some even employ paper-based solutions, either as their main option or as an offline backup. From a transparency and data fidelity perspective, that presents the following safety issues:
There's a single central authority in control of the information.
There's one channel—or a few select channels—where data goes through, meaning the whole system is vulnerable if the channel(s) fail.
The system itself is designed to let (authorized) individuals make changes, which might result in mistakes or corruption.
Startups with a decentralized infrastructure are able to provide immutable records of all their data, particularly transactions. This means that employees, partners, investors and even clients or customers can have access to relevant information and verify every input if they participate as nodes in the network. Accountability and record integrity are natural byproducts of blockchain.
Security and Data Integrity
Startups that use blockchain can readily benefit from the technology's built-in data protection features. The cryptographic hash function turns information into a series of alphanumeric characters (making up a "block") before adding it to the chain. Consensus mechanisms provide an extra layer of security since data can only be added or modified if a task is completed (like paying a fee or spending computational resources), which then must be validated by every node in the network
Thus, blockchain provides a trustworthy environment against unauthorized access, tampering or data breaches. This increased security instills confidence in customers and helps startups comply with information fidelity regulations.
Disintermediation and Cost Reduction
Traditional business models often require intermediaries or procedures with unnecessary steps. We all know how a billing mistake, for example, can take hours on the phone with a call center and then days of bureaucracy before it's fixed. This is not only detrimental to customer satisfaction, but it's also more resource-consuming for the company itself.
Blockchain enables direct peer-to-peer transactions, giving startups the chance to streamline their activities, reduce operational costs and provide cheaper solutions to their clients. Unconvoluted interactions between service providers and their users can increase customer loyalty. When more resources and energy become available to achieve goals, new opportunities open up.
Smart Contracts and Automation
One of the ways in which blockchain helps organizations streamline their operations is through smart contracts, which are self-executing agreements with predefined rules. Traditional paperwork and logistics—for example, when dealing with an insurance claim—sometimes foster slow, ineffective processes and subjective human arbitration.
Access to Funding and Tokenization
Blockchain systems are able to interact with the real world, but they're also part of the crypto ecosystem—providing a gateway to alternative business opportunities.
The technology, for instance, has revolutionized fundraising through initial coin offerings (ICOs) and tokenization. Startups can issue digital tokens on the blockchain, offering a new form of investment and liquidity; decentralized fundraising allows startups to access a global pool of investors and democratizes investment itself. Tokenization also encourages the creation of unique business models, furthering ecosystem growth and community engagement.
Innovation and Collaboration
Blockchain comes from a culture where participants are invited to innovate and collaborate. Startups can enjoy immediate access to existing crypto platforms and protocols, quickly benefiting from shared infrastructures, interoperability (compatibility between applications and networks) and standardization. Moreover, blockchain communities are especially willing to provide valuable support, mentorship and partnerships, enabling startups to tap into a vast network of like-minded individuals and organizations.
There's Always a Footnote
While the mainstream adoption of blockchain has grown rapidly in the past few years, there are several caveats that require careful consideration.
There's still a fair amount of mistrust in the technology, so certain business opportunities and interactions could be restricted (interoperability between blockchain and non-blockchain systems is a regular problem). Crypto might not be ideal for all startups if it provides no advantages over a standard model or requires a major change of infrastructure with no convincing use cases in their particular market.
As has been discussed, decentralized environments offer native security advantages over traditional systems. However, that doesn't mean blockchain networks are immune to malicious behavior. For instance, "51% attacks" (where the assailant gains control of more than half of the network's nodes so they can validate any operation) are hard to pull off but not impossible.
Competent hackers are able to regularly bypass lax "know your customer" (KYC) validation processes, perform flash loan attacks (manipulate cryptocurrency prices) and find coding loopholes. Some blockchains depend on oracles to interact with external sources, such as real-world market indicators, and these are just as vulnerable to interference.
It's Part of the Process
All of the aforementioned shouldn't dissuade any startup from building its business around blockchain. There is no perfect system, and traditional options have their own flaws and challenges. Blockchain is still a young technology, so it's especially encouraging to realize how far it has come. Further improvements, creative solutions, governmental regulations, standardization and an expansion of the user base—which incurs in experimentation—should provide safer and more efficient decentralized ecosystems.
