The Stellar Podcast

Building a Profitable Business on Blockchain with Konstantin Richter from Blockdaemon

Episode Summary

Building a business on blockchain is hard. Aside from the normal challenges of scaling and finding product market fit there are the additional challenges of a highly volatile market and constantly evolving technical landscapes. Konstantin Richter of Blockdaemon is no stranger to these challenges and is forging ahead creating profitable business for other blockchain based businesses. Listen in to hear his insights, struggles and optimism around building for profit in blockchain.

Episode Notes

Building a business on blockchain is hard. Aside from the normal challenges of scaling and finding product market fit there are the additional challenges of a highly volatile market and constantly evolving technical landscapes. Konstantin Richter of Blockdaemon is no stranger to these challenges and is forging ahead creating profitable business for other blockchain based businesses. Listen in to hear his insights, struggles and optimism around building for profit in blockchain.

Episode Transcription

Konstantin Richter (00:00):
We're assuming that we're the largest node runners for blockchain nodes in the world. We have a few things that are unique when it comes to a middleware in order to deploy and manage nodes. You can go to our website, go to our marketplace and deploy 70 different node types across 30 different protocols with three clicks on a credit card.

Tyler (00:34):
Hello, Stellar community. Welcome to episode 20 of The Stellar Podcast. Pretty crazy that we've made it this far. Very excited today to welcome Konstantin Richter to our show. He's the founder and CEO of Blockdaemon. It's a blockchain infrastructure platform built for developers and enterprises. Running nodes is difficult. It can be a pain to set up and then particularly to monitor those nodes. So Konstantin and his team at Blockdaemon are alleviating a lot of that pain by creating a very simple to set up and run, maintain your blockchain nodes. Konstantin has a wide range of knowledge in lots of different blockchains and collects that knowledge here for us to open up some of the insights and information that he's found in blockchain and in running a business, making money from blockchain. So let's jump right in.

Konstantin Richter (01:38):
Yeah. So I'm Constantine Richter. I'm the CEO and founder of Blockdaemon. I'm I guess the awful term serial entrepreneur, I've been building software platforms for the last decade. Prior to that I worked in strategy and business development specifically for building mobile networks for companies like Nokia and Deutsche Telekom, T-Mobile, trying to find ways to monetize digital networks pretty early. I got and then fell into the entrepreneurial mousetrap and I build SaaS B2B platforms. And as an entrepreneur, when you build SaaS B2B platforms, you're looking for network effect, which is you want software to have the potential to either just exponentially grow very aggressively, but ideally you have a network effect which normally requires a marketplace. And so you're always thinking around how to turn a software utility into a marketplace where it can experience network effect.

Konstantin Richter (02:38):
And what excited me initially around blockchain besides bitcoin and being an early fan and holder of bitcoin, was that tokenization provides an inbuilt incentive mechanism in order to scale and run these networks. So you have this genesis or this big bang event and can birth a network that actually has liquidity and volume pumped into it from the get go. So you can fast track a lot of things. Blockdaemon was started in the summer of 2017. We became production grade and raised our first pre-seed seed round two years ago. When we started, at that point we were three people, but then we closed around with Comcast, with the Heroku founders that run a fund called Heavybit and a couple of other more enterprise grade SaaS platform VCs that were interested in the space.

Konstantin Richter (03:43):
And so we consciously made a choice to go more after software performance focused investors than crypto investors, and a choice I haven't, now I have to say I haven't regretted. There were moments in between where I was like, "Oh, I should have taken more crazy money," which I always refuse to take, but when the crisis hit and later 2018, 2019, I felt like it's been hard to keep traditional investors excited about our space, but I think that has now changed again. So we're assuming that we're the largest node runners for blockchain nodes in the world. We have a few things that are unique when it comes to middleware in order to deploy and manage nodes. You can go to our website, go to our marketplace and deploy 70 different node types across 30 different protocols with three clicks on a credit card. But that was the core and the genesis of the story Blockdaemon.

Tyler (04:45):
Wow. That's fantastic. I really, really appreciate the focus on the business of the thing and making sure that it's well-funded and the whole idea that you have to start with what makes money and then build out from there to whatever vision you might have in the future. I think that's in some ways it's a unique perspective, but it's extremely important otherwise you just don't last that long. So speak for a bit about, so you're a company, you're an entity, but you're running blockchains on decentralized networks. But how does that work if you end up running 50% of Ethereum's nodes, should that happen. How is that not a bad thing? That, "Oh, oops. We ran out of money, Blockdaemon has to shut down," does Ethereum go away because of that?

Konstantin Richter (05:49):
Yeah. It's a very followed example, but let's entertain it. So first off, it's important to understand controlling a node and providing tools for other people to do stuff. So like people use Docker images. Docker is a tool that's pretty widely used. And so I would compare it more to that. And so there's certain open source and certain components of our tools are also open source. And so providing tooling and monitoring plugins for example, for people to manage their nodes doesn't mean we have control of the nodes. We could go away and nothing would change. It's still would be your node, we might not update or sell you a software that allows you to automate monitoring of your node, but then you'll find another way to do it. And so first off, it's important to understand what that means.

Konstantin Richter (06:43):
But obviously, a good question specifically for the fully managed and hosted scenario, in that instance obviously it depends a lot on how you architecturally set it up, which is we only ever run full VMs and individual data centers that also our customer can access the physical VM and has the dominant rights over it. So even if Blockdaemon would cease to exist, you still would have your node in an Amazon data center, you could access and the node would operate until it's not updated anymore. And then you'd have to update it or find someone else to do that for you. And so it's important to understand the nuances there. In a lot of cases specifically on orchestration, it's really important for the performance and the safety of the network to make sure that a certain, as I said the weakest node in the network is the weak link. So problems that network having, Stellar is one of them, with the networks on these stalls, for example. And those are things that a good orchestration tool can help alleviate.

Konstantin Richter (07:53):
And so ultimately it's a choice, but decentralization is a complex subject and there's a lot of different layers to it. The first and most important layer is to ensure that not all your nodes sit in one data center. And so the first thing is, and we've done countless case studies and things we looked at early on. Where 90% of all nodes of relevance in the blockchain space sit on Amazon East. And so, people don't know that, but that's not great. That's a much larger issue for decentralization than people using Docker images for example, initially. Because this data center could go down and a network could go down. And so first off is making sure that sufficient data centers or nodes are operated that there's no dependency on any one data center or two data centers, even where whatever, electricity shortages, all sorts of different things could happen, that could impede the wellbeing of a network.

Konstantin Richter (08:54):
Then on top of that, you need to have the distribution of nodes also based on power and boating consensus mechanisms. So making sure that not just one entity controls all the nodes on the consensus side. And so that's important, and that's actually an architectural issue more than anything else. And then on top of that, then you have tooling considerations. I think Docker is a potential huge security issue if people would think and choose to look at it, but people don't. It's really complicated to find the true balance between what's a totally secure piece of a decentralized network that's completely... that you can't attack on any vector, is nearly impossible.

Tyler (09:46):
Can you speak a little bit to that third layer security concern where the tooling becomes the attack factor? How does that third layer, the Docker image instance, the example, where's the attack vector on the tooling?

Konstantin Richter (10:04):
Well, and it really... So there's actually great reports filed every year around security issues of large scale software, open source tools like Docker, for example, and there's whole reports on it that people can read up on. I think most folks know what that looks like when you're really deeply technical into it. But again, it depends on if you look at it. And so if you choose to make that an issue. And so I think the... But the first premise of decentralization is so you want to be network independent and you want to enable a good amount of independent stakeholders to operate nodes efficiently. And then the next degree is are the tools and the physicality of things protected? I would say most networks are still at the first layer stage, and maybe moving towards the second to some extent, but that's currently where Bitcoin is. Where you have hash power aligned with three forks and one territory or something.

Konstantin Richter (11:16):
And so it's still very early for all these decentralized networks. And so in order to... So there's different life cycles and different tooling across the lifespan of these networks and maturity. And so very early on, as you said actually, Stellar is a good example of a network that shows us not to be overly decentralized in order to ensure performance of the network. And so there's certain choices people make based on certain factors and certain risks that are acceptable to the community and others that aren't. And so that's the key factor really, but there is no one answer to any of these particular questions. It's a little similar like on the economical side, as we've touched on earlier, there's so many factors that each network is unique. What's true in one in network is not necessarily true in another, and the same is true for decentralization in a network.

Konstantin Richter (12:13):
And so for us obviously, one is we provide principle tools, open source tooling. People can use that. They can check quote, they can take a look at it. There's peer review, is all the substandard stuff that you do in order to ensure opensource integrity. And of course there's only ever a certain degree of absolute security with any open source tool. And then you have the close tool stuff where the protection is specifically on the contract layer. So if a bank comes and pays us, then I'm a Comcast's back commercial entity here in the US, we have [SLS 00:12:48] contracts, et cetera, et cetera. And so there's different ways you can find security and manage that network risk if you would want to. Right. But yeah, it's an interesting story. For us, personally the way I think of it is I think networks move from centralization to decentralization over time.

Konstantin Richter (13:11):
And I'd say we're maybe 30% in that journey. For most networks, Stellar has actually a little more evolved than most. If you think about it, I'm not someone who said, "Hey, there should be 10,000 set of nodes otherwise it's not decentralized," you and I know that's not true. A network can be decentralized with three nodes, as long as the interests aren't all... they're not controlled by the same entity. And so I think Stellar has a more maturity than most networks in that space, but it's still a journey. And so we'll see how the tooling landscape will evolve over time, according to it.

Konstantin Richter (13:52):
But yeah, and so for us the longterm vision of where we want to be is more probably a data dog piper example of a twinning platform, if that makes sense. Where it's a lot around plugin, laying and monitoring specifically, of your own node. Where it's like, this is my node, in my cloud account or in my data center. Only I can touch it, but I can use tooling that doesn't jeopardize the integrity of my node. It can't push data onto my node, it can only pull data out of it. That allows me to trigger certain behaviors to manage my node. And so that's the vision for Blockdaemon at its most evolved state.

Tyler (14:30):
Yeah. That makes a ton of sense to me. And definitely seems like a service that is useful. I a couple years ago got into serverless functions like Lambda functions, and there's a company called, and they have the CLI and the dashboards and stuff that allow you to manage and create all the very complex nature of running a service on serverless functions, just by creating a really good tooling around all of it. But they don't own any of your serverless functions, they just give you the tooling to manage it yourself, which increases the adoption level of something like a serverless function when it's easy to manage it.

Konstantin Richter (15:14):
Yeah. And all those things are fascinating, and I went deep into a rabbit hole around all that stuff initially, that nearly derailed us because I was so fascinated in this decentralized serverless type of stuff initially, that the problem was how do I make money off that now? And so I feel like the focus for us and the need to make money means that we're always at the current state of de-centralization, because I can only make money with what I can sell now. And so it's intriguing, it's an off spot because... But ultimately, I'm very happy to be in that position because I always say to my investors, "I always feel I'm in a knife fight, because I have to carve out business models." I have to understand the latest evolutions in order to be ahead of making sure that we can partake in them, and also to think about unit economics and running these things in a way that somewhat has a shot at profitability as well as break even over time and becoming a billion dollar entity on top of it.

Konstantin Richter (16:22):
And so I think it makes us commercially more viable, but again hyperbolic startup CEO warning, but it helps me because we're all in this space, because the opposite of this is... And there's countless examples and I want to name them, but projects that might raise hundreds of millions, whereas we don't know when ever we're going to launch, if at all. It's like, oh, you can build for seven years without any market interaction. And then launch something and hope it works. And that's not to say that that's not possible. I just feel like you're missing a lot of opportunity to sharpen your edges with real market interaction.

Tyler (17:12):
Yeah. Awesome. So what's still exciting about blockchain? Why are VCs, why are tech companies interested in investing in blockchain anymore?

Konstantin Richter (17:22):
Yeah, great question. And I don't know if they are, frankly. They're a lot less interested. Mostly because, not because they're not fascinated by the potential of the technology, but by the traction of physical market into action. And I think a lot of that has to do with a lot of the really smart people in this space were involved or involved in projects that secured so much capital that they don't have to interact with the market for another two or three years. And so I think that is a factor in it. I think what gets me excited personally is that I believe, I really truly believe that the only way we can retain any degree of data privacy, as well as financial freedom is via blockchain power trust networks. And so the more you're in it, the more clearly you see it.

Konstantin Richter (18:12):
And I feel like a crisis like the one we're currently experiencing really, really focuses one's viewpoint on that, which is, one of the funny things to me is when the US government is... Funny, it's tragic really, wants to send 300 million checks for 1200 bucks, and then the whole thing gets delayed by two weeks because they want to print the president's signature on it. You just wonder about the potential of what a digital currency could do here in order to distribute these funds efficiently, all the banks are going to take I think 7% of these funds when they get paid out by accounts. And so it just shows how inefficient these legacy systems are, and how really they don't serve the populace, the citizens of a nation built on a capitalistic value system any longer.

Konstantin Richter (19:09):
And so I see that really, really clearly and I really want to be part of building these payment rails that allow for much more imminent transfer volume, as well as ensuring identity and security. And so I think blockchains really are at the core of that. I think most investors, quite frankly, and we got very lucky with ours, but are very focused on general market perceptions. I think some of them have strong theses, but obviously they need to keep capitalization life cycles in mind. And so right now it's funny when you talk to most investors, there was a funny meme on Twitter. So it's like the general... I love when all the VCs come out like, "Oh, we really help our portfolio companies." And 95% of that help is giving the piece of advice of, "Don't die. Just cut everything you can and be around for as long as possible."

Konstantin Richter (20:03):
It's like, well that's not advice that's hard to come by. The advice that's actually hard is what is the right balance of risk here when I have a certain amount of one way, and certain things I think need to be built then I can take the first mover advantage, I can help scale networks and be an inflection point in early network creation, which we've proven that there's a lot of value if you participate in the networks that become dominant very early. And so finding that right balance of not just stopping everything we do, but to continue to build is complex. And that's one of the personal challenges I have, is because see opportunity and I want to continue to build.

Konstantin Richter (20:50):
And in my dialogue with my investors, those are the pertinent conversations where I'm like, "My interest isn't necessarily having the longest runway in the world. My interest is to actually bring on the revolution of a decentralized financial infrastructure." And I see opportunity for that. So I want to move off to that opportunity. And then the good news is I'm crazy that way and then my investors force me to become realistic about it. And within that, we hope we can build sustainable and aggressive longterm value for participants in the blockchain ecosystem.

Tyler (21:27):
That's a fantastic answer. Yeah, well, I'm extremely excited for your future, or just over this conversation. I can't wait to see what happens over the next few years as you iterate along with the market and become that node management tool, monitoring tool. Yeah, it's going to be super interesting to see where that goes.

Konstantin Richter (21:58):
It's running a business and an entity in an insanely dynamic market where macro factors, as well as our micro factors, our own cryptocurrency fluctuations, which are now even elevated within this micro environment. It's hard. I'm also like we're not immune to dying the good death here. But we're very good in finding ways to make ends meet and finding business models where other people struggle. And so, yeah, we'll intend to be around but it's the best and the worst part of my life.

Tyler (22:38):
Yeah, I can echo that for sure. Extremely fascinating. I think the frustration is like you can see what it could become, but the path to getting there is not obvious.

Konstantin Richter (22:51):
Yeah. But I think we're getting closer and I think situations like the current crisis will accelerate adoption over time. And so that's the way I look at it.

Tyler (23:04):
Yeah. Super excited. I can't wait to see where it goes. I agree 100% that this gives us a unique opportunity to really get into conversations where we might have struggled before with, "Well, what we have works." And for sure it works when everything's going well. And if you don't need to do cross border payments as urgently or micro-transactions, so you don't have to combine... Or I guess the combination of proof of identity with payments, isn't that much of a problem. And now all of a sudden those things are front and center very obviously problems, which I think were always issues underneath the surface, but there is a base layer of equality that we might have all had or wealth that's been stripped away. And it's just so obvious that this thing needs to be revitalized and rethought and rerun.

Tyler (23:54):
And then you have all of these companies that have been building these things on the side, really trying to make them work, but there wasn't the impetus or the energy behind let's make sure these things get adopted, that I feel like really does exist now. And it's just capitalizing on those opportunities, getting into those meetings and conversations with the products that we've always had. It's just now we have an audience that's eager and needs to listen to what we have to say, because I think general populace, the voting power of individuals in democracies is going to start pushing towards we need these kinds of services and tools. So make sure you put regulation in place that allows for the creation of these services and the adoption of these services in ways that it wasn't urgent, that those things happen before.

Konstantin Richter (24:42):
Yeah. Couldn't agree more.

Tyler (24:43):
All right. Well, thanks so much. I really appreciate you jumping on, taking the time. I learned a lot, hope to see you around in Stellar discussions as we start to think about monetization and as the Stellar ecosystem grows and these problems of the growing pains become more painful I guess, and more urgent to address.

Konstantin Richter (25:05):
Yeah. We'd love that. And so, as I said, we're psyched about Stellar. I think it's interestingly enough one of the projects that I think has the biggest distance to the praise it should get, and that it actually gets for the technical setup. And I think it's interesting because other projects generate a lot more hype and stuff and Stellar actually has really outstanding tech. And so I'm always curious how... Could Stella be more evolved and recognized in the space if there'd be more focus on pushing that message out, and some of that is via incentivizing more network participation. But I don't want to say as you said. It's not necessarily the best mechanism, but it definitely drives investor interest and adoption.

Konstantin Richter (26:03):
And so, inviting other participants to participate in the value creation, obviously, when you want to create a gold rush, then allowing people to take part in that is powerful. And I think there's so much talk and we're involved in all these discussions with all the big projects and all that objects changes and investors, and of course they always move to the next bigger thing, where they can allocate value. And so I think it'll be interesting how that looks. There's networks like CLO where the network economics for participation are really, really interesting for companies to insert liquidity as well as building core infrastructure on it. And so I think you do have to keep that in mind and consider it, because most of the participants in your ecosystem are blockchain ecosystem participants. They look at other chains as well, and everyone is struggling to stay alive. So people will always chase returns, until the business changes fundamentally.

Tyler (27:11):
All right, well, thanks so much again for chatting and I will catch you later.

Konstantin Richter (27:16):
Sounds good. Thank you. Bye

Tyler (27:25):
For more information about Stellar in the future of decentralized finance visit Get involved in the discussion in one of our active communities on Keybase at stellar.public or Stellar stock exchange. Until next time. I'm your host, Tyler van der Hoeven. Catch you all later.