For intellectual property (IP) specialists, the discussion around new, emerging technology is always centred on the IP underpinning it, and, in many cases, how best to value such IP. Common issues surrounding the valuation of new technology include: (1) analysing its ownership; (2) identifying and classifying the IP associated with it; and (3) deciding on an appropriate methodology to value it. One such piece of emerging technology that poses considerable questions to each of the three aforementioned issues is blockchain, a neo-ledger introduced to the world in 2009. Initially developed in 2008 as the foundation for Bitcoin, a digital currency system created by a programmer, or group of programmers, operating under the pseudonym “Satoshi Nakamoto”, blockchain was originally envisioned as a secure, decentralised public ledger for digital transactions.
In its purest form, blockchain is essentially a complex database; a technology capable of storing a vast array of information in both a secure and sharable form. In the case of Bitcoin, its associated blockchain is used to store transactional information. Data is entered into the blockchain, which is publicly available, and then confirmed by the buyer involved in the transaction. Once confirmed, the data is then permanently etched into the public blockchain, creating a traceable and transparent transaction ledger for anyone interested, enabling a form of self-regulation by consensus which keeps the blockchain secure. The prime question this raises is, of course, how exactly any blockchain could remain secure whilst maintaining its public accessibility? The answer is, as is often the case for digital security issues, mathematics.
Each piece of information entered into a blockchain is stored in a chaotic mathematical sequence. In layman’s terms, this amounts to each data entry containing a “mathematical signature” that both links back to the previous and paves the way for the subsequent blockchain entry. When data is first entered, its mathematical signature is correctly calculated to ensure it fits in the sequence. Therefore, if anyone was to alter an entry after confirmation, the entire blockchain sequence would be thrown out of sync, thus flagging the fraudulent change and deeming it void in the eyes of the blockchain community. Each new list of transactions is stored in a “block”. The amount of computing power required to create new “blocks” is tremendous. In the case of Bitcoin, this process relies on “miners” to utilise their personal computing power to create new blocks, thus building and growing the blockchain and allowing new transactions to be entered. These miners gain bitcoins for each new block they add to the blockchain.
The new hoover
The cardinal sin for many blockchain enthusiasts is, perhaps, referring to the technology as a “blockchain” at all, for it was originally a term that was exclusively associated with Bitcoin. Blockchain is, in essence, a public, distributive ledger. Although the blockchain name is, nowadays, used synonymously with the technology in general, there are many blockchain-like databases operating under their own, unique names, such as Ripple, an open source distributive ledger released in 2012.
Public databases, made private
Recently, banks have begun the development and implementation of their own “blockchain” databases, such as R3, which is supported by 53 banks and used to store transactional information. The big difference with R3, and the majority of banks’ blockchain technologies, is that they are private and not accessible to the general public. This has, understandably, led many to question whether a “private blockchain” can ever be considered worthy of the Nakamoto-created moniker. The absence of transparency brings with it many issues, as does the lack of miners to confirm the transactions. With the confirmation of such transactions, and the power to manipulate and alter the blockchain at will, in the hands of a small group of individuals, the robust security-related benefits of a blockchain are relinquished in their entirety.
The reality is that, despite blockchain acting as a common name for a variety of technologies, the way in which a blockchain database is valued changes considerably depending on whether it is privately managed, as is the case with banks.
When it comes to valuation, it would appear that privately managed blockchains can be valued in a similar way to any private, corporate database. The software underpinning these private blockchains is likely bespoke, and therefore would boast considerable value in its own right. The data held within may also be of value, as would any bespoke security measures. If the blockchain can be directly linked to revenue generation, the income approach, or, more specifically the relief from royalty method, could be adopted if comparable licence agreements can be identified. If not, a cost-based approach could be utilised, or even the multi-period excess earnings method if the blockchain is central to business operations. A multitude of banks, such as Goldman Sachs, and few independent programmers, have even begun the process of filing patent applications designed to cover various aspects of the blockchain software, so a valuation of these patents could be used to value the blockchains themselves. However, no blockchain-related patent applications have yet to be granted, and there are serious doubts as to whether or not any ever would, given the technology’s mystique-coated background and multiple iterations and adaptions.
As for public blockchains, things get a bit trickier. Given that the data held within the blockchain is publicly available, this specific area is unlikely to have any value. Furthermore, the software driving pubic blockchain databases is often open source, which, once again, diminishes any value in this area, unless any additional, proprietary code has been integrated too. It appears that the true value of a public blockchain lies in its brand, as the greater the number of users, and the greater the number of miners, the more efficient the blockchain becomes. The relief from royalty method could prove suitable in this instance, although the relative youth of the technology means that comparable licence agreements are non-existent. To rectify this, the valuer must rely upon their experience and past valuations in order to reach an arguable stand-point on a potential royalty rate for a piece of blockchain technology. Similar comparables do exist, with licence agreements for large corporate databases as ascertainable as any other, and by drawing detailed comparison between blockchain databases to the databases in those agreements, a royalty rate is certainly reachable. Alternatively, when a blockchain forms the core of a business’s operation, the multi-period excess earnings method may prove more fruitful in delivering both a reliable and accurate valuation of the technology.
It is important to remember that, much like every piece of software, every database and every trade secret; every blockchain is different, and every blockchain must be valued in accordance with its current use and situation, rather than the universal narrative surrounding the technology. This is a task valuers must be comfortable meeting in the near-future if these exciting new databases are ever to be rightfully recognised on companies’ balance sheets and beyond, and one where experience and subject knowledge are truly the greatest allies a professional could call upon.