ICON 101: Public vs. Private Chains & the Network Effect

In the article below, we will take a look the relationship between the private chain and the public chain, ICONLOOP and ICON, and how their relationship will lead to a network effect that will create true value for the ICON network.

If you have not already done so, please take a moment to read the preceding chapters of this series:

By this point, you’re likely familiar with the origins of ICONLOOP and the role it plays in the overall ICON ecosystem. In case you need a reminder, here is what I wrote in Chapter 3 of this series:

As you know by now, ICONLOOP — formerly theloop — is the blockchain company established by Dayli Intelligence to provide private blockchain implementation for companies and clients who see value in having their own private blockchain. Ultimately, it’s the goal of the ICON project to provide the public blockchain that allows multiple private blockchains built by ICONLOOP to interact with each other. While it’s an organization separate from ICON, they are reliant upon each other. The more entities using ICONLOOP, the better for ICON, and vice versa.

Let’s also take a look at the summary of the relationship between ICONLOOP and ICON that was published by the ICON Foundation itself:

ICONLOOP is the company behind ICON, and has secured 100+ business partnerships with the largest companies in Korea since the beginning of 2018.

These include Samsung, LINE, SK Planet and Smilegate.

It also includes ICONLOOP being selected as the blockchain operator for the Seoul Standard Blockchain Platform, commissioned by the Seoul Metropolitan Government, which resulted in recent demonstrations of several ICON led government projects. These include ICON’s Decentralized Identity, Voting, and Payments.

However, many of ICON’s projects have been led by ICONLOOP and its private networks, thus, many have asked how ICON & ICX will connect the private ICONLOOP networks.

The short answer is : ICONLOOP private networks with strong use cases on the public chain have been carefully selected with the eventual goal of connecting with the ICON network via the ICON Nexus and every transaction will require ICX for transaction fees.

For a certain amount of time, it wasn’t entirely clear that ICONLOOP projects would necessarily connect with the ICON public chain; many assumed this was the case, but until ICON clarified this relationship (as they did above), this assumption was mostly speculation.

It’s clear that ICONLOOP has been successful as a standalone company. Simply looking at their lists of partnerships among major industries, including the government, shows that there is an appetite for the development of blockchain networks at a private level, and that ICONLOOP had the ability to get it done. Here is the first entry from theloop’s blog, back all the way in January 2017:

The Daily Financial Group, which is leading financial innovation through FinTech, has been conducting research and development on the block chain since its inception. As a result, it is necessary to have a block chain engine optimized for various customization and scale-up financial services for financial institutions. Since then, we have established Loopchain, a company specializing in the development of block chains, and have developed loopchain, a high-performance private blockchain solution that can be immediately applied to financial services.

This was the impetus for establishing theloop — based on their work investigating and researching potential use-cases for blockchain, they discovered there was a strong use-case for a customizable blockchain engine for financial institutions.

It’s no surprise then, that the initial wave of theloop partnerships was with financial institutions.

Of course, as time went on, more use cases were identified, leading to partnerships with educational institutions, the insurance industry, and business services.

Much like ICONLOOP’s initial foray into blockchain technology itself, the decision to develop the ICON public chain was also driven not by a hunch, but research, investigation, and a demand for it from their partners and clients. Here is a critical quote from Min Kim, speaking at the interoperability panel at *AIONEX *in May of 2018:

‘Chain ID (is a project) in which 25 securities firms decided to share and create a blockchain just for these firms. However, we also have blockchains in the healthcare side, university side, and we’re in the process of linking these blockchains together. There are other consortiums that are very interested in using the ID data that are stored in the 25 securities firms blockchain. This is not something that… we thought of, it is a natural progression to where things are going. As a company we are pretty much delivering on what the market is demanding at this point.’

That last sentence is the most critical — ICON was created as a response to the demands of the market. Rather than taking an “if we build it, they will come” approach, they instead were delivering something that these entities said they would use if it was available.

That all being said, it won’t all happen tomorrow. Many of ICONLOOP’s clients are still in the beginning stages of adopting their own blockchain technology, and are even further away from being poised to connect to the public chain. As much as we like to believe blockchain is quickly taking over the world, that isn’t the case. And that’s OK — the internet didn’t take over from Day 1, and blockchain shouldn’t be any different. Here is Ricky Dodd’s explaining this in a Reddit AMA:

First, I would say that the vision hasn’t necessarily changed. But I would say perhaps the scope has tweaked. Originally, the plan was like you said. Onboard all of ICONLOOPs enterprise customers, and connect them to the public Nexus and have freely flowing data across the network, powered by ICX. That’s still the vision, but I think we’re early (Bottom of the 1st, Top of 2nd… early… to use a baseball analogy) and enterprise adoption of public blockchain solutions will take some time and patience.

Regardless of the timeline of reaching true interoperability, we should still get excited when ICONLOOP announces a new partnership. That’s because the inherent value of ICON comes from the value of its network — and not network in a technical sense (although that’s important), but from a relationship and usage sense.

Ultimately, the role ICONLOOP plays is a critically important one; it helps generate the network effect — by helping build private blockchain networks — that the ICON public chain will require to ensure it’s long-term value (and growth).

Without any participants on the ICON network, it’s ultimately worthless — with nobody to connect with, why would there need to be a connection? ICONLOOP plays the role of ensuring those network participants will be there; first, by seeking them out and working with them; and second, by helping them onboard to the ICON public chain.

Network Effects

In the world of cryptocurrency, one of the most common phrases is “real world adoption.” Many people believe — and rightfully so — that cryptocurrencies won’t have true, intrinsic value until “real world adoption” occurs.

However, this means different things for different projects. For Bitcoin, Litecoin, and similar “monetary projects,” that means being able to spend that crypto at Chipotle, with your grandma also knowing how to do so. In this case, the fact it can be used to buy / sell goods establishes and grows its value.

In the case of ICON, that isn’t the case. Could you buy something with ICX? Technically, yes. But the value of ICX could increase significantly without a single token ever being spent in a traditional transaction.

The long-term value of ICX will grow not through retail interest (or FOMO), but through the gradual onboarding of ICONLOOP enterprises (and other private enterprise blockchains) onto the ICON public chain.

When that happens, the “network effect” begins to take shape.

Last year, Min Kim gave an interview and pointed out that:

“Everyone uses WhatsApp and WeChat… The matter of fact is that you mainly use those apps because your friends are on it. That’s the power of the network. The value of blockchain is in the network itself. The network increases with the number of participants. The more participants you have… the more friends are on WeChat, the bigger the value it is for you.”

Here is one of the better definitions of the “network effect”

A product displays positive network effects when more usage of the product by any user increases the product’s value for other users (and sometimes all users).

If Company A, B, and C decide to become a part of the ICON Network, the network becomes more valuable to Companies X, Y, and Z.

Why is this important to ICX? Over the long-term, the more value the network has, the more usage it will attract — and usage of the network requires ICX.

That’s where the long-term value in ICON lies; it has taken the necessary steps — by lining up willing partners — to build the long-term network effects necessary to significantly increase demand for the ICON Network.

Here is Markus Jun building upon this idea:

At the end, Kim refers to adoption occurring with ‘the more participants you have.’ And this is precisely the approach that ICON is taking: enticing corporations to join ICON’s network. Because every time you see an announcement of an MOU between [ICONLOOP] and Company X, you are seeing a new addition to the ICON network. And every addition makes the network more valuable. The sum total of the network value will always be more valuable than any single company within. Even if Company X is Samsung.

Accordingly, I don’t believe we should necessarily focus on the size or notoriety of individual partnerships as much as focusing on the big picture of ensuring continued progress in securing additional agreements from multiple companies.

That’s why the names “Samsung” and “Line” on their own are less important and impactful than the fact that ICONLOOP has secured 100+ business partnerships. Samsung and Line alone are nice, but they don’t by themselves create the long-term network effect the ecosystem will need to maintain value; the many other partnerships — even if only a portion become participants on the public chain — will create the true underlying value, which will only further attract additional partners.

However, not only are their direct network effects — like what was described above — but indirect network effects as well.

Here is a description of indirect network effects:

In most platforms, there are two users groups: producers and consumers. The more consumers on the network, the more valuable that network is to producers, and vice versa.

This type of network effect is called an indirect network effect, also known as cross-side effects. With indirect network effects, the value of the service increases for one user group when a new user of a different user group joins the network. You must have two or more user groups to achieve indirect network effects.

Taking Uber as an example, as more riders (i.e. consumers) join the platform, the more useful and valuable it is to drivers (i.e. producers), because they have more business opportunities. The reverse is also true. As more drivers join the network, riders have shorter wait times and more locations available for their rides, thus the network is more valuable.

I believe this is why this section from Ricky Dodds’ AMA answer was particularly important:

This means we’ll continue to be working on developing all the tools and features for connecting private and public blockchains (and public to public), closely collaborating with the ICONLOOP team and consulting corporates, governments, and other institutions where appropriate, but in parallel, we’ll be working to broaden the scope of the project to include other facets of the space that the foundation finds interesting, such as the concept of DAOs, identity tools and team-based applications that Min has mentioned in recent posts/interviews/meet-ups, etc.

But why?

We want to be building for the vision we see. ICON Republic as a digital representation of a country with governance and economic policy programmed into its core, facilitating the growth and expansion of crypto native and/or new breeds of companies (such as DAOs) while also dedicating resources to the design and implementation of interchain. We believe this path of parallel activity increases the likelihood of the success of the project and frankly speaking, limits the reliance on 3rd parties for short and medium-term success.

By expanding the vision for the ICON network, it will no longer rely solely upon direct network effects, but indirect network effects as well.

With components such as DAO (decentralized autonomous organizations), DApps, identity tools, and other elements, the network will draw in more individual users; with more individual users on the network, there will be greater incentive to develop DAOs, DApps, and other tools.

On the one hand, the ICON network will benefit by onboarding ICONLOOP enterprise clients with the value created by growing direct network effects; at the same time, it will maximize indirect network effects by luring individual users and builders to participate in the network.

Remember what I said just above: “Over the long-term, the more value the network has, the more usage it will attract — and usage of the network requires ICX.”

That’s why, when I see a new partnership, or DApp concept, I don’t ask myself: “How will ICX be used in this partnership/DApp?” but rather “Does this increase the value of the ICON network?”

Most of the time, the answer is “yes.” And when that’s the case, I know it will increase the long-term demand for ICX, and the value of ICX itself.

In the next section, we’ll take a deep dive into all the potential participants and partners of the ICON network and how they’ll help build these network effects.