Meet Kakao: How Korea's Largest Mobile Giant Is Embracing Blockchain

This article originally appeared on CoinDesk Korea.

Both proponents and opponents of new technology tend to come up with extreme (or overly romantic) theories about it.

This was certainly the case for bitcoin and the debate about whether the world's first cryptocurrency would replace all global currencies. However, this tendency may also underly the seeming contradiction that large corporations, which typically exert centralized control over a product or service, are embracing new decentralized technologies such as blockchain and the token economy.

Kakao is a corporate giant that dominates the Korean mobile market. Its mobile messaging app Kakaotalk accounts for 94 percent of the domestic market. Based on this overwhelming market share, Kakao has successfully expanded its operations into markets such as advertising, gaming, mobile banking, taxi services and music.

As a result, Kakao employed 2,600 staff as of 2017 and recorded annual sales of 1.9723 trillion Korean won ($1.8 billion) with an operating profit of 165.3 billion KRW ($154 million).

The company recently announced a new blockchain business.

As one of the leading "middlemen" that has taken control of the mobile platform market in Korea, if Kakao chooses to embrace blockchain – which eliminates the middleman and allows users to directly exchange value – what would happen to the massive profits the company currently earns in its intermediary role?

The 'middleman' exists for a reason

Seeking the answer to that question and more, CoinDesk spoke to Jason Han, the CEO of Ground X – a Kakao subsidiary that has been charged with taking forward the firm's blockchain strategy.

"Will the middleman really disappear? Are the middlemen all bad? I don't think people are thinking seriously about these questions," he said.

Han is also skeptical about whether the numerous ICO projects currently underway will be able to produce services on the same level as companies like Kakao or Amazon.

"ICOs have an odd structure. You've already made all of your money by the time you start. Let's say you can't dispose of the money for two years. Two years go by very quickly. You spend those two years working on development to get your smart contracts working, then release your service. Maybe 1,000 users sign up. But you need something more to attract more users beyond that. You have to spend a lot on marketing and go through all kinds of trouble to get your name out there. But why bother doing all that? You've already made all your money," he said.

Before joining Kakao in March, Han worked as the CTO of an investment company called FuturePlay, where he was responsible for evaluating the technology of companies that were potential investment targets.

"From my investment experience, there is a huge gap between what startups promise in their white papers and what they actually deliver," he said.

That gap cannot be bridged simply by developing good smart contracts or designing a good token economy, argued Han.

"Those who have real experience in business will know. When you finish development, it's not the end of the project – it's the beginning. Figuring out how to close that gap is a business problem," he continued, adding:

"Until last year, nobody talked about business when they were making dapps (decentralized applications), but I think things will be different this year. Decentralization can't be the core of a service, it's just a method of providing the service. Tokens can't be the only kind of value that you offer to users. Tokens are only part of the value. What's important is the essence of the business itself."

Pinpointing the benefits

Kakao's proposed blockchain platform, Han said, could be summed up as "partial or gradual decentralization."

"Everyone is using blockchain these days because it's popular," he said. "I wish people would stop trying to put everything on blockchain."

Some of Kakao's services could be decentralized, while others cannot, Han explained. Rather than uploading a whole service to blockchain, certain functions of the components that make up the service could be separated out for decentralization and tokenization.

"For example, let's say that we convert the mileage points system into tokens. From the company's perspective, it's just changing the money into a token format. If we did that, it would be more about making mileage more useful rather than sharing our profits with users. When you tokenize non-core aspects of the service, it allows the company to retain its profitability model while also expanding user inflow. With a forward-looking approach, tokens could also be used to provide incentives to users, but in that case there need to be benefits for Kakao as well," Han said.

So, what are the benefits Kakao is seeking through blockchain?

"The token economy is a business model that no one could have imagined before," he said. "Until now, Kakao has only operated in Korea, but through blockchain we could expand into the global market. That means taking a portion of the profits we earn as an intermediary and using it to expand our market by sharing it with users."

For example, he said, if Kakao were currently earning 100 units in profits, then growing the market to 1,000 units would eventually allow the firm to give 300 back to users and keep 700 for itself.

"What kind of strategy could Kakao adopt if it wanted to export its successful service to the Asian market? Each country already has one or two established services. The only solution I can think of is offering incentives through blockchain. With blockchain, you can shake up the existing order."

Competitors on both sides

Kakao's longstanding rival Naver is also jumping into the blockchain industry with its subsidiary, LINE Plus.

North America-based messenger service Kik is also working on a blockchain business called KIN, while Telegram has raised $1.7 billion through an ICO, the largest amount ever recorded in a token sale.

"The biggest concern for dapps on ethereum or EOS is how to attract users," Han said. "Messenger services like Telegram have an advantage since they already have a platform with an established user base. This is why we need to pay attention to what these companies are doing. On the other hand, those messaging services have lots of users but no other services, while Kakao already provides a wide range of services."

Although Han was skeptical of ICO projects, he does not believe that all of these startups are destined to fail.

"Twenty years ago, nobody could have imagined a company like Google or Amazon," he said. "There are so many teams working hard on their own projects, and some of them will be able to create new types of commerce that are completely different from anything we currently know. Some of them may be able to create innovative business models by focusing on decentralization. With blockchain, I think this will only take five or 10 years, not 20."

Han provided the advertising market as an example to explain the competition he expects to see in the token economy of the future. In that industry, there are already many blockchain projects seeking to connect advertisers and consumers, thereby generating economic benefits for consumers.

At first, it will be difficult to completely remove the middleman and make the service 100 percent decentralized. Since it takes money and effort to attract advertisers and consumers, at first the middleman might take 70 percent of advertising revenue, while consumers would receive the remaining 30 percent. This model would already be competitive against current advertising agencies, where the middleman doesn't pay a cent to consumers.

Competition may lead some companies to offer 50 percent to consumers, then 70 percent, then 100 percent, eventually creating a completely decentralized system.

"Right now, nobody knows what kinds of services might come out of the blockchain world," Han says. "We haven't seen them yet. Steemit has shown us some of the potential, but nobody knows how far it will grow. But if you sit on your hands for a while and then something new comes out, it will already be too late. In this situation, having a go is the right thing to do."

Technical issues and ICOs

LINE Plus recently announced that it plans to create a blockchain platform using the ICON network. Kakao also plans to use an existing blockchain platform. Since most platforms released so far are open source, Kakao will use the source code of a suitable existing platform and add its own unique functions on top.

Han explained that Kakao was considering many existing platforms including ethereum, tendermint, cosmos, quorum, EOS and Hyperledger.

"Ethereum has the highest level of completion," he said. "But if we want to get started quickly then quorum is also a good option. EOS has not yet released its main network, so it is difficult to conduct a deep analysis of the platform."

He added that most existing projects have problems with performance or processing speed, and there are a host of issues outside of that which also need be resolved. The most important factor is providing a user experience that meets the expectations of the average users.

"If a platform has a very well-refined philosophy, will users be willing to pay for that value? You need to be issued a private key and install a wallet, but if you lose your private key, you lose all your money. Even the person who created the platform can't recover the money for you. It's ridiculous to the average users. Performance and speed are the basics, but even once you've got that sorted, it's just the beginning. The first step for us is figuring out what we need to do to make Kakao's services work and how to support millions of users accessing a service at the same time."

Kakao plans to launch its main network alongside meaningful services (dapps) by the end of the year. It appears that the first of those will be mainly created by Kakao itself, as well as external companies that already provide it with services.

"There are outside companies that are seeking a platform for a reverse ICO, and we are willing to give them a ride on our platform if they are a good fit," Han said. "We believe that the service should come first, and the platform later. A platform is useless by itself. You need to have a target service and then find a platform that will allow you to perform that service. We are not completely ruling out startups without existing services, but our main focus is on providing services that are already established.

With the Korean government effectively banning ICOs last year, issuing tokens is also a sensitive issue. When Kakao announced the establishment of its blockchain subsidiary in March, Financial Services Commission chairman Choi JongKu reaffirmed his negative view on token sales. Kakao has already made it clear that it has no plans to engage in an ICO to raise funds.

Han concluded:

"Issuing tokens and listing on an exchange are two separate issues. There are several creative ways to issue tokens, including through an ICO, an airdrop or offering tokens as rewards for active participation on the platform like Steemit does."

Kakao image via CoinDesk Korea