Fantastic business models and where to find them? The future outlook of Layer 2 2.0.

7 min read

Hi everyone,

Today is the last day of 2018. As 2019 approaches, Celer Network team wishes everyone a wonderful new year! Thank you all for your continued support. Since we first came out of stealth in Q1 2018 with some early supporters, we have seen significant growth in Celer Network’s vision, technology, team and community. We would like to share our 2018 highlights with all of you!

About Celer Network:

Celer Network aims to bring Blockchain technology to mass adoption. It is an Internet-scale, trust-free, and privacy-preserving off-chain scaling platform where everyone can quickly build, operate, and use highly scalable decentralized applications. It provides unprecedented performance and flexibility through innovations in off-chain scaling techniques and a crypto economics model designed based on game theory principles to bring essential value to the off-chain ecosystem.

Celer Network is founded by PhDs from MIT, Princeton, UC Berkeley and UIUC and has an all-star engineering team with years of industry experiences from top startups or tech giants like Google, Amazon, Cisco, Oracle, HP and more.

Reflection on the Blockchain Industry

Blockchain is a nascent technology with pace of development faster than anything else we have seen. We want to take this opportunity to share some of our reflection regarding this industry as a whole.

Fantastic business models and where to find them?

Crypto assets price crashed, as quickly as it soared to the moon just a few months ago. There are many triggers in this round of market crash and all these triggers are re-enforcing a “self-fulfilling prophecy” of panic sentiment. Panic sell happens on many asset classes but we rarely see the crash with this kind of violent speed as if there is nothing to “catch” the price. Unfortunately, we believe there is currently indeed very few, if not none at all, actual use cases that can “catch” or “dampen” the falling knife. There are many promising directions, including gaming, supply chain, financial derivative market, copyright protection and so many more. However, they are still very much in Proof of Concept stage and very few projects, if not none at all, have proven to the market that their solution has a solid market fit and generates sustainable value (either in the form of company profit or community value). Therefore, it is extremely hard to anchor a crypto asset’s underlying value when the high expectation of adoption meets vacancy of a viable business model. So what kind of business models are we talking about here? For any kind of transformational technology (think Internet), there can be business model that promises long term value (think social networks) or there can be business model that provide immediate revenue (think bring a snack chain store online). What blockchain space needs right now, is to use the latter to take viable niche market and later cross the chasm to the former. It may not necessarily be in the form of company revenue, but someone (maybe participant in a particular blockchain ecosystem) needs to be able to make money by cutting cost and bring benefits to someone else.

So where to find that viable business models? And a more important but often ignored question is who should be the one to find the business models in blockchain? The common understanding in this space is that platform builders should be building platforms and then, many applications with great user bases will come once the platform is ready. This is wrong. For already successful business owners, they all have limited understanding of the technology and more importantly, there is often no simple way to “drop-in” their existing and profitable business model to the “new blockchain world”. This inherent inertia will further prolong the adoption of the blockchain technology. Take one industry sector where people generally think that has low entry barrier for blockchain: gaming. We have been in touch with multiple successful gaming companies: some of them have more than 30 million monthly active users, annual revenue of $100 million and 400 employees. Though they all find the technology of blockchain fascinating, they feel hard to understand the very different business model. All of their existing gaming business models come down to the role of merchants and their revenue comes from in-app purchases. However, when we talk to them about switching their role from “selling stuff” to “running a decentralized economy, harvest tax and transaction fees with a much larger user base penetration across the globe”, they are immediately taken over by fear of uncertainty: does this model has the hope of making the same amount money as they do today?

Some of that fear comes from the lack of knowledge in the underlying blockchain infrastructure. But even for adventurous ones who took initial steps to do some pilots, blockchain is simply not ready with one apparent issue: the user experience of blockchain simply cannot match their standard for actual user adoption and much of the problem comes from the lack of scalability solutions in the blockchain space. Today, their applications are hosted via CDNs and all sorts of user experience acceleration services, as it is long known that even millisecond of latency reduction can turn into revenue. When trying out blockchain, the existing game developers are often in disbelief that one “move” in a blockchain game can take tens of seconds if not minutes of latency. Many of them have growth targets and already promising growth potentials and less than enough time to even take on those. Blockchain quickly settles for a lower-priority future-looking thing.

So, are we, as an industry, doomed in terms of user adoption? We think not. The very fact that people are starting to think about business models means that we have progressed significantly over the last few years. Fortunately, Celer Network is targeted to solve exactly that scalability challenge and, incidentally greatly suitable for gaming, we provide the low latency user experiences that no one else can provide. Also, when we ask these established companies that “if there is a proven business model that actually makes money, will you jump on the blockchain train?” The answers are unanimous yeses. We took the gaming industry as an example, but we are seeing this as a recurring theme across many different industry sectors: established players carry the weight of the entire industry and are interested in blockchain, but they do not take meaningful steps due to the lack of viable business models and limitation of underlying technology.

Platform builders, including Celer, are solving the limitation of underlying technology part. But what’s more important in our opinion, is for the platform builders to also pioneer on some viable business models, or set example for the established industry players. The reason is that platform builders are standing at the forefront of blockchain technology and knows perfectly about what blockchain can or cannot do. Blockchain platform builders should talk to established business owners about well-established and understood businesses like supply-chain, gaming, financial derivatives, identify friction points that can be removed by their platforms or new business models that could be enabled by their platforms. As long as some initial evidence of market-fit can be presented, the broader adoption will come like a spark setting out a wildfire. We hope, the market will hit the bottom, and importantly, a turning point, when Celer Network showcases viable business models with real user adoption and remove the scalability barrier exists today.

Layer 2 2.0: forge individual technology pieces into a powerful coherent solution

During the past few months, we have gladly seen the level of awareness for a layered blockchain architecture is gradually rising. Many leaders in the community have changed from trying to find the “silver bullet” public blockchain that solves the scalability, decentralization and security trilemma to architecting for a proper layered architecture to shift scalability challenge to the layer-2 infrastructures. This shift is evident by the amount of new projects popping up in the layer-2 space, many thought leaders’ position(e.g. Vitalik’s blog post) and level of community activities in the layer-2 space (for example, a lot more meetups were held talking about layer-2 and Devcon 4 dedicated two mornings to layer-2 scaling topics). This gradual but surely change is partly due to Celer‘s and many other projects’ market education efforts, but most importantly due to the actual delivery of product that gives the community confidence that layer-2 scaling is the last missing piece towards user adoption. We will continue to push for general market education and also continue to deliver to make the layered blockchain architecture a community consensus.

Along with the rising general awareness of a layered blockchain architecture, the layer 2 technology space is also flourishing. Generalized state channel, side chains, interactive computing and ZK-SN(T)ARK are all being developed. One trend we do find is that most of the teams are fixated on a specific technology piece. For example, some teams are working on generalized state channel, some teams are focusing on Plasma side chain, some team only focuses on Truebit-style interactive challenge compute. As our own technology development unfolds, it becomes clear to us that the future of layer 2 should not be that one team tries to use only a single technology piece to form a solution. Instead, multiple technology pieces should be merged organically to forge a single solution. This is Celer Network’s layer-2 2.0 vision.

In fact, Celer Network is executing this vision. At Celer Network, though we started in the area of generalized state channel, our whole architecture does not have a dedicated tie to a single piece of layer 2 technology. For example, our cChannel realizes the generalized state channel capability, but the State Guardian Network is a special-purpose Plasma-cash-like side chain to ensure. In addition, when we are doing settlement and dispute, we employ the principle of interactive computing that the initiator of the settlement starts an interactive challenge game with a direct claim of the final settlement result. This technique significantly reduced the gas cost of channel settlement. In the future, we plan to also add side-chains into our off-chain payment and smart contract transaction abstraction. We are also pioneering new technology trend in layer-2, such as Oracle as an Execution Engine. We are building Celer Network as the first ever layer-2 2.0 platform supporting a wide range of use cases.

Celer Short-term Future Outlook

On the technology side, we will adhere to our current roadmap plan to build out each component of cStack and cEconomy. We will start to release the cEconomy smart contract including the Proof of Liquidity Commitment and Liquidity Backting Auction smart contracts. With these smart contracts, we can bootstrap the “virtual mining” process and also solve the imminent liquidity shortage issue for mainnet launch. We will also work on the SGN construct and also contribute to the general plasma research. While working on each of these technical components, we will continuously execute Celer Network 2.0 vision of combining multiple technology pieces into a coherent solution.

On the user adoption front, we will focus on validating a small amount of viable business models. We have done significant market research and identified a few highly promising niches to enter with very concrete plans and potential industry partners. Once a reliable market fit is identified, we will roll out systematic user growth strategies to scale out the business. We may incubate the developers building on top of Celer or push on some particular market angle ourselves. However, the end goal is to provide “success templates” for blockchain developers and traditional industry partners and to catalyze the real adoption of Celer Network. In addition, we believe this will also increase the community’s confidence in the entire blockchain industry.

In the next phase of community building, we will focus on the following three things: 1. systematic developer educations; 2. Incubation of projects on Celer with viable business models; 3. Continued awareness building of the basic concept of off-chain technology. As for ecosystem, we will continue to work on collaboration towards community standardization and also expand our partnership with more application builders and traditional industry partners. Finally, we are committed to continued team growth to maintain our speed of technology delivery and to prepare for growth and adoption. We keep the above outlook concise because we believe action is much more important than words.

Thank you sincerely for your continued support!

-Celer Network Team

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