Waltonchain: ushering an era of IoT mass market adoption -- Jeff Kuan

The purpose of this article is to provide an overview of the Waltonchain project from a commercial perspective. In future write-ups, I intend to conduct a technical deep-dive of the project, as well as highlight similar projects in the space.

1. What is Waltonchain?

Founded in November 2016, WaltonChain is a Chinese-Korean project that aims to solve the issue of centralization in the Internet of Things (“IoT”). IoT is a network which enables all things to exchange information and data with each other. This industry is growing rapidly: By 2020, IDC estimates that the installed base of IoT units will to grow to ~28B, and A.T. Kearney predicts there will be $1.9 trillion in productivity improvements and $177B in cost reductions realized by customers utilizing IoT over the same time period (source).

Why is centralization in IoT a problem?

Under a centralized structure, different stakeholders/machines/devices cannot seamlessly and autonomously communicate with each other, because data often belongs to different parties. As a result, stakeholders can only collaborate if they belong to the same network that all involved parties trust.

Let’s take the example of smart home appliances. There are currently many different smart home products on the market: Google Nest, Amazon Alexa, Apple TV, etc. Under the current centralized IoT structure, if I wanted all of my smart appliances to all function together and communicate with each other, I would either have to build a customized solution or as is the case for many people, buy all of the products from the same company.

If I wanted my Amazon Alexa to adjust the volume on my Apple TV or to tell my Google Nest to raise the temperature of my house on a cold day, I currently do not have an elegant solution. And remember, this is just a consumer use case for a single household. Now scale this idea to the enterprise-level use case. Under the current centralization schema, a company that engages various IoT platforms/devices to collect data about its machines, products and processes has highly isolated data, which is of little use externally.

Centralized solutions, such as the Open Platform Communications (“OPC”) standard, have been developed to address this problem. The issues with OPC are similarly true of any other centralized solution: OPC services are dominated by a single company called OSIsoft, which doesn’t allow for easy customization on top of what they already have. Additionally, there are many different variants of the OPC protocol, which makes data collection and processing difficult for 3rd party software solutions. Not only does this stifle innovation, but centralization also ultimately results in oligopoly/monopoly, where market share is concentrated with a few large players. These inefficiencies caused by centralization greatly limit the potential benefits of IoT to companies. A decentralized solution would unlock the benefits of IoT to the masses.

How does Waltonchain fit into all of this?

Walton’s solution is to create a business ecosystem that marries the capabilities of radio-frequency identification (“RFID”) and blockchain technology. Unlike the majority of blockchain projects that exist today, Walton is one of the few attempting to combine proprietary hardware and software solutions to address this problem to create an ecosystem that they are calling the Value Internet of Things (“VIoT”). The core technology has two key facets: (i) A blockchain solution that enables parties to collaborate within an ecosystem without first establishing a trust relationship (i.e. decentralized). (ii) Use of RFID technology to commoditize the incorporation of information about physical assets onto the blockchain in a cheap and scalable way.

Many projects are doing the first. To my knowledge, there are only a few other projects, such as Wabi and VeChain, that are doing both. We will conduct an in-depth competitor analysis in a future article.

The Waltonchain project has applications from both a B2B and B2C perspective. Its most obvious B2B use case is in supply chain/logistics, where one of the main issues is transfer risk of products between different key stakeholders. Using Walton’s technology, companies can track products at every point along their supply chain, and all inventory can be accounted for as data is written to the blockchain. Taking this one step further, by layering on top a smart contract mechanism, once a set of goods are accounted for, funds for payment can automatically be released from one party to another. The result is an efficient, trackable, instantaneous, and automated system that does not exist with current technology.

The B2C use case is most obvious in any industry where customer feedback is useful to stakeholders upstream in a supply chain. For example, having access to high-quality data collected about how, when, and in what quantities customers purchase products in stores is valuable to manufacturers in thinking about how to more effectively address changes in customer preferences. This allows companies to be more agile, innovative, and smarter about how they allocate their resources.

Although Walton is currently known primarily as a supply chain project, I hope it’s beginning to become clear that its scope is much, much larger. In addition to supply chain, the technology has potential applications in and has won awards for its project on waste management systems for smart cities (source). In reality, Walton should be thought of as a big data project. They are striving to create an all-inclusive, decentralized, enterprise-level IOT solution to make it easy for any company to implement and benefit from blockchain and RFID technology.

1. What kind of technology is Waltonchain developing?

We will dig deeper into this topic in our technical write up, but at a high level, Walton is investing resources to develop both proprietary hardware and software solutions. As mentioned above, this is not too common in the industry right now; most projects are focused only on software development.

Hardware
Walton’s hardware is what truly differentiates this project from other blockchain projects. There are few teams in the space with the same level of hardware expertise as the Walton team; the company consists of a diverse group of seasoned engineers, businessmen, and professors. Profiles of these individuals have already been covered extensively here, here, and here.

Walton is designing RFID chips and scanners. RFID technology is a communication technology that can identify targets through radio signals. The chips will be embedded on objects as a way to track and gather data about these objects. This is not new technology; RFID is currently widely used in industries as diverse as commerce, to infrastructure management and protection, to library access control systems. In 2014, the world RFID market was worth US$8.89 billion, up from US$6.96 billion in 2012. The market value is expected to rise to US$18.68 billion by 2026.

The RFID chips that Walton is designing provide several major improvements over existing RFID technology. Much of what I’ve included below has already been covered in /u/thelateMercutio’s post here. These benefits include:

(i) Higher sensitivity
(ii) higher transmission power
(iii) better anti-interference capabilities
(iv) lower reading error
(v) better compatibility: the chip can achieve high-frequency and ultra-high frequency functions at the same time, so the end customer can read the information through their smart phone and inquire about reliable product information
(vi) the ability to be recognized en masse, versus current solutions that must be scanned in smaller groups/individually
(vii)the ability to write directly onto Walton’s blockchain
(viii)Additionally the chips are designed with an eye towards security: the chips will be written into the world’s only electronic product code (“EPC”), a unique number that identifies a specific item in the supply chain, as well as integrate a real random number generator, which will generate a unique address through encryption logic (Source). The result is that each item tagged with a chip has a unique identifier on the Waltonchain, and can therefore neither be forged nor tampered with.

From a cost perspective, the chips will be sold at ~30% of the price of comparable products currently on the market; current estimates price a single chip at $0.05, and this price is expected to decrease further as production scales. For their manufacturing processes, Waltonchain is able to leverage Silicon Electronic Technology Co, one of the companies under the Waltonchain Umbrella Foundation (Source), to manufacture and design the chips at cost. In total, the team has spent over USD $8MM on hardware R&D.

Obviously, there are pros and cons of designing hardware in-house. The main benefit is that Waltonchain will have the ability to customize its chips based on the needs of the various partner businesses and address specific problems in the industries in which their technology is being applied. As an example, Walton has created customized RFID chips with washing marks to address counterfeiting specifically for the apparels industry. To address the same problem in the food and beverage industry, they’ve designed their RFID tags to be placed at the package’s seal and to break under stress. These are necessary customizations given the diverse nature of the industries and different contexts in which their chips will be ultimately be used. This ability to customize also provides an interesting value proposition to partner companies looking to leverage Waltonchain’s technology; tailored solutions are obviously more attractive than generic ones, and I think this will be a big point of differentiation in the longer term.

Secondly, as anyone who works in hardware knows, hardware is hard. Hardware R&D is capital intensive, resulting in high barriers to entry. To offset initial production costs, the project won several competitions, including the Straight Elite Talents Festival in October 2017, and was awarded 3,000,000 yuan (USD $500,000) (source). In addition, because Waltonchain is vertically integrated, meaning that they own their entire supply chain process from production to sale, the company will be able to control costs as they scale. In short, their business model should be more defensible in the long-term relative to that of any competitor relying on manufacturing partners for hardware development.

The technology for Waltonchain’s scanner is also unique, and the device plays a meaningful role in the overall ecosystem. One of its most important features is that the scanner serves as a light node on the chain, meaning that not only will it have the ability to mine, but it will also have the ability to authenticate and upload data to the network. These attributes create circular incentives for customers: by utilizing the scanner to authenticate and upload data about their products onto the Waltonchain network, they can also use the scanner to secure their own child chain, be rewarded in WTC for doing so, and use the awarded WTC for paying future transaction fees on the Waltonchain. This is a win-win for both customers and Waltonchain — this has the effect of adding security to the overall network by incentivizing more scanners to be used (thereby increasing the amount of nodes online), while also significantly decreasing costs to customers who buy into all the features of the ecosystem.

Functionally, Waltonchain’s scanners have the ability to read up to 1,500 products simultaneously and can write directly onto the blockchain as well (source). This mainly has applications from a logistics perspective. As a simple example, it’s easy to see how this would have the ability to greatly increase supply chain efficiencies by decreasing the time spent for inventory management in warehousing.

On the flip side, there are also significant costs associated with a dual hardware-software strategy, the main one being the company is allocating a percentage of total resources, specifically money and human capital, to also designing hardware versus focusing 100% of available resources on developing their blockchain software. This has tangible effects on the ability for the company to execute on the milestones set on the roadmap, ultimately leading to longer time to market. This has left the competitive field open to competitors like VeChain, which has a similar vision but is focused exclusively on software development while leveraging industry partnerships for their hardware. That being said, both Waltonchain’s and VeChain’s mainnets are set to be launched in Q1/Q2 of 2018.

Software
Walton’s software development efforts are equally ambitious. The team’s project will have several features that are unique relative to existing blockchain software solutions.

Leveraging the learnings from scaling issues faced by the earliest blockchain projects (e.g. cryptokitties), Walton has created their blockchain using a parent-child chain structure. At a basic level, the parent chain (“Waltonchain”) is responsible for the circulation and creation of child chains, while the child chains are responsible for the implementation of various applications. To explain via analogy, the Walton parent chain acts as a spinal cord: it serves as the highway for communication between the brain (database) and all of the different parts of the human body (child chains).

Companies utilizing the Waltonchain can create their own child chains to store proprietary information, while only utilizing the parent chain to broadcast necessary, public information; the majority of data would be kept on the individual child chains. This solution allows the child chains to bear the burden of the data load, resulting in limited congestion on the parent chain. This gives Waltonchain the capability to handle a larger aggregate number of transactions, making it significantly more scalable than existing blockchain projects, like Ethereum (in its current state).

The Walton parent chain itself will utilize a dual-chain consensus structure, a combination of Proof of Stake & Trust (“PoST”), which is an upgrade over Proof of Stake (“PoS”), and Proof Work (“PoW”). PoST creates a system for nodes to be evaluated based on reputation. Over time, the “higher quality” nodes and the more senior nodes will be rewarded more heavily (with WTC tokens), which has the effect of incentivizing good nodes to stay on the network, thereby improving the overall security of the ecosystem. Synergistically, PoW increases the security of the PoST chain, and the PoST will increase the speed of the PoW chain.

Most importantly, the child chains are capable of using independent infrastructure from the parent chain (e.g. consensus mechanisms). The main benefit of this is that companies creating child chains on Waltonchain’s technology will be able to select from a suite of pre-engineered, customized blockchain solutions and choose the one that is best tailored to their specific business use case.

Waltoncoins (“WTC”)
Waltoncoins are the token used for circulation and payment on the Waltonchain. There is a total supply of 100,000,000 (100M) tokens. The maximum supply is currently 70M tokens, with the remaining 30M left to be mined. Currently, the circulating supply is around 25M, while the rest is held by the Walton Foundation.

WTC are used for a variety of functions on the Waltonchain. Credit to this post and to /u/thelatemercutio and NetworkTraveler for simplifying things and contributing to my thoughts below. Examples of potential token use cases highlighted in the white paper are explained in more detail below:

The Issuance of child chains. Any company utilizing Waltonchain’s technology can create a child chain by paying a byte fee in exchange for network bandwidth. This must be paid in WTC. For those who are familiar with NEO, WTC functions like GAS in this respect.

The cost of the byte fee will be variable based on supply/demand principles; accounting nodes (stakers) will set the minimum cost accepted per transaction, and the node initiating the transaction will set the maximum cost to be paid. At the point where supply meets demand, the transaction will be written onto the blockchain.

This puts into place the proper incentives such that accounting nodes will be properly incentivized for their work. Companies will be rewarded for being early adopters (lower fees), and as network demand grows and accounting node resources become scarce, the price that companies pay to issue a child chain will increase.

As costs increase, Walton has built in mechanisms to adjust the economic price for transactions on the Waltonchain. These range from adjusting the various input variables in the reward structure payout to the nodes, to creating an upper bound for transaction fees. These provisions would assure that it remains economical for network partners to continue to utilize the Waltonchain network.

Dividend interest. Stakers will be rewarded for the efforts via the PoST consensus mechanism. As mentioned earlier, the PoST mechanism is an upgrade over the PoS mechanism: it creates a system for nodes to be evaluated based on reputation, whereby nodes with better reputations that have been online for longer would be rewarded more heavily for their efforts relative to new nodes. This alignment in incentives has the effect of improving the overall security of the ecosystem.

To ensure that there is the proper allocation of resources to ensure the quality of both the Waltonchain and child chains, fees will be split between accounting nodes for both the parent chains and child chains.

Credit and mortgage system. Because WTC will be the main coin in the Waltonchain ecosystem, WTC can serve as a credit reserve for transactions on child chains, and create a credit-scoring system for users.

Think of WTC like any major currency. Because everyone uses U.S. dollars, you can trust that when someone pays you in dollars, that it has value. This analogy can also applied to the Waltonchain ecosystem: because you know that WTC has transaction value, WTC inherently has value, and can be used to borrow and make payments.

To simplify the example used in the whitepaper, imagine a scenario where you go to buy something from the Titan Store, which is built on the Waltonchain ecosystem. To buy products in the Titan Store, you need Titan Coins, but you don’t actually have any. As a result, you can lock up some of your WTC to borrow some Titan Coins. At some agreed upon date later in time, you will pay back the Titan Coins that you owe, and your WTC will be released back to you via a smart contract.

The more you make payments on-time, the higher your creditworthiness. And as your creditworthiness increases, the fewer WTCs you need to mortgage for payment. The opposite effect will occur if you fail to make payments on time.

Distributed asset exchange. As the key link between the parent chain and different child chains, WTC will be used for parent chain token transactions, child chain transactions, as well as cross child-chain transactions. The Waltonchain ledger will be able to store balances held by user accounts and offers that user accounts make to buy or sell assets. The scope of this is not only limited to tokens, but will also include assets such as data. For example, if Company A and Company B both have child chains on the Waltonchain network, and Company A wanted to buy Company B’s data, this exchange could be made possible via WTC tokens.

Distributed voting and governance system. This system will allow safe and anonymous voting on both the parent chain as well as all child chains. Few details have been released about this specific use case, but this is a common feature for tokens of blockchain projects. Obviously the larger one’s WTC position, the more voting influence one would have.

1. Industry spotlight: the Chinese apparels market

The purpose of this next section is to analyze the marketplace dynamics of a single industry that Walton is currently focusing on.

At project inception, Walton saw the ability for its product to make an immediate impact in the apparels industry. Based on existing relationships of the executive team with Septwolves (USD$6.5B market cap), this made sense as a starting point. This is not meant to imply that apparels is the only industry that Walton is currently focusing on, nor the only industry where its technology can be applied.

Despite the seemingly narrow industry and geographical focus, the Chinese apparels market provides an interesting starting point for the Walton project. The complexity of the industry has created ample opportunity for its technology to add value, including, but not limited to manufacturing, warehousing, logistics, sorting, and inventory management.

Walton’s B2C use case will facilitate the collection of high volumes of customer data, and is a good way for the team to gather initial feedback about their technology, both from a durability (hardware) and scalability (software) perspective. In a fast-moving industry like blockchain, I believe that the incorporation of customer feedback to iterate on product development will be a key differentiator for competing companies.

Additionally, a number of secular trends, both globally and domestically within China, create a favorable environment for Walton’s pilot.

Demand-side market dynamics
China’s economy grew at a rate of 6.5% in 2016. For its size, this is truly remarkable. As a point of reference, over the same period, the other largest economies in the world grew at a significantly slower rate: the U.S. at rate of 1.6%, Japan at 1.0%, and Germany at 1.8%. Greater demand for consumer goods is being driven by an increase in the overall purchasing power of the average Chinese consumer, as well as by shifts in the demographic mix of the country.

Chinese consumers are making more money and therefore spending more. Some quick stats: Between 2010–2016, the average annual salary for a Chinese citizen increased at a CAGR of 10.4% (source). Over the same period, annual per capita consumption expenditure in China increased at a CAGR of 9.4% (source). Research by the Economist Intelligence Unit (EIU), a think tank, estimates that the proportion of the Chinese population earning upper-middle and high incomes in China will expand from 10% in 2016 to 35% by 2030.

This has resulted in consumers purchasing higher quality goods at increased rates. As can be seen in the survey data below, compared to consumers surveyed in 2011, Chinese consumers surveyed in 2015 increasingly desire premium products, with a more pronounced increase for apparels.

Despite the tremendous growth of online retail sales, Chinese consumers still prefer the traditional in-person retail experience. China’s online retail market has grown at a tremendous clip over the last few years; and this growth is only expected to accelerate. A report by Goldman Sachs estimates that China’s online retail market will grow at a CAGR of 23% from $750B in 2016 to $1.7T in 2020, nearly triple the pace of the country’s offline retail market. Despite this, the experience of buying in brick-and-mortar stores continues to be preferred among Chinese consumers. Surprisingly, online retail accounted for only 19% of total retail dollars spent in China in 2016. Although the share of online is growing, data indicates that the brick and mortar purchasing will remain a fundamental part of the Chinese consumer experience. A survey conducted by Deloitte (source) found that ⅔ of Chinese millennials preferred buying high-end fashion and luxury items in-person, the highest percentage of any other group from the countries surveyed.

What do these trends mean for Waltonchain?

The demand-side trends for the apparels market can be summarized into two main points:

Chinese consumers have more money to spend,
and Chinese consumers are not only becoming more selective about what they are buying, they are also still very deliberate about where they are buying.
One of Waltonchain’s largest value propositions and a benefit of targeting the B2C apparels market is that their technology will streamline the process and lower the barrier for collecting customer data. Key performance indicators (KPIs) such as ‘grab rates’ and ‘purchase rates’ are key industry metrics that help manufacturers and retailers make decisions about what to make, sell, and how they manage inventory. As volumes of purchases increase and as Chinese consumers become increasingly sophisticated, the value of customer data to all members of the ecosystem will increase. I believe Waltonchain’s solution is primed to benefit significantly from these trends.

Supply-side market dynamics

Chinese companies are embracing an omnichannel retail strategy to extend their reach to customers. In 2015, Alibaba announced their “New Retail” strategy:

“We anticipate the birth of a re-imagined retail industry driven by the integration of online, offline, logistics and data across a single value chain.”
— Jack Ma, Chairman, Alibaba
The online retail giant envisioned the integration of the online-offline shopping experience as a way to gather more data about consumers and capture additional revenues. Traditional brick and mortar retailers also saw this as an opportunity to partner with online companies and gain momentum to jump start slowing offline (brick-and-mortar) revenues.

The largest Chinese internet companies moved quickly, shortly after the announcement. In August 2015 JD.com, one of the two largest e-commerce companies in China, announced they were investing $700M in Younghui Superstores. In the same month, Alibaba announced they were making a $4.6B investment in Suning Commerce Group, a Chinese electronics retailer.

Alibaba Chief Executive Daniel Zhang said he would consider striking more deals with brick-and-mortar stores beyond electronics, as long as those retail chains “can bring us additional customers…We are trying to build an integrated online-offline platform for both customers and merchants,” Zhang said.
This trend of internet companies digitizing the offline shopping experience is accelerating. Earlier this year, Alibaba opened up another 3 stores in Shanghai and Beijing, bringing their total number of brick and mortar stores in the country to 13. This strategy has not only enabled Alibaba to reap the benefits of increased supply chain efficiencies, but has also helped the company successfully tailor their products to changing customer preferences. Since the opening of their first retail store (Hema) in 2015, the e-commerce giant said sales per unit area were three to five times higher than traditional supermarkets and conversation rates for Hema app users making a purchase reached up to 35 percent (source).

Chinese manufacturers need to adapt to increased global competition. A 2016 report by the World Trade Organization showed that China was the leader in and was estimated to account for 37.2% and 36.4% of global textile and apparel exports, respectively. Despite the large lead in market share, each industry has seen a 3% and 7% decline year over year, due to incumbent countries with low relative manufacturing and labor costs ramping up production, such as Pakistan, Cambodia and Vietnam.

Subsequently, Walton provides a seemingly attractive value proposition to Chinese apparel and textile companies facing increased global competition: a solution to streamline and ultimately decrease costs across the value chain to make them more competitive on pricing relative to products made in lower-cost countries.

The Amazon.com of the blockchain era?
Walton’s focused approach on Chinese apparels can be likened to amazon.com’s initial focus on the book market in the U.S. In my opinion, there are too many companies claiming to be a one-size-fit-all blockchain solution or be the “Ethereum of [insert country here].” Instead of trying to be a blockchain solution for everything, Walton’s focus on specific technology, the combination of RFID and blockchain, and focus on a specific industry to prove out the value proposition of that technology will give them a strong platform to rapidly expand into new industries in the future.
As evidenced by the projects currently being launched on the first child chains, such as the smart cities project, its clear that despite Walton’s initial focus on just the apparels market, there has been ample demand to warrant the implementation of additional projects with the launch of the mainnet. And due to the versatility of the company’s technology, although it was not something they planned for, this was something that the team was able to quickly capitalize on. It’s clear that the team is taking steps in the right direction to become the IoT platform of choice for enterprises, and they’re doing it in a logical and credible way.

Although the project is in its early innings, initial tests with partner companies have yielded very positive results:

“Up to now, many companies such as Tries, Joeone, SMEN in the apparel industry, Kehua, Lipson plastic in the manufacturing industry and Xiangyu group in the warehouse industry have applied for our WTC & RFID integration system. What is impressive is that all of them have benefited a lot by integrating our system. Compared to before integration, their yield rate has increased by 1.2%, the stock turnover increased by 5.8%, the distribution efficiency has improved by almost 100%, and the inventory efficiency almost tripled in their stores.”
Source: Waltonchain First AMA Questions & Answers

1. Concluding thoughts

The WaltonChain project initially caught my attention because of its real world applicability. If there is nothing else you take away from this, understand that:

Waltonchain is not just a supply chain focused blockchain company. They are striving to create an all-inclusive, decentralized, enterprise-level IoT solution. The company is starting with a few specific industries as their bread and butter to prove out its value proposition and refine its product offerings.

The project’s focus on both hardware and software development differentiate it in the blockchain space, and if successful, will ultimately create a more defensible business in the long-term relative to software-only focused projects.
Unlike many blockchain projects that are, for now, just a highly ambitious idea, Waltonchain has a working product being used by real companies. The team has piloted its tech with companies in the apparels, plastics manufacturing, and the warehousing industries. The Q1/Q2 2018 main-net launch will include immediate industry partner adoption.
Three child chains are currently in development, one for a Korean smart city, one for a smart agriculture project in China, and one that is under NDA. These projects may or may not have ICOs on the Waltonchain platform, but this functionality is supported by the project’s technology.

The company has developed strong corporate and government partnerships. These have been covered extensively here.
The project recently announced a partnership with Coinnest and Coinlink, the #1 and #3 exchanges by volume in Korea, respectively. This is important because it further adds to the full-suite capabilities offered to their customers. As a company trying to take advantage of Waltonchain’s RFID + blockchain technology, you can buy their chips, which are cheaper than existing solutions, and are compatible on their blockchain. And if you are planning an ICO, you don’t have to find a place to list your tokens because they already have the partnerships with exchanges.

On January 12th, the team announced that it was working with the China Mobile IoT Alliance on a global initiative to incorporate Waltonchain IoT in 2018 (source). Details of the official partnership are still pending, but the implications of this should not be taken lightly. Mobile network providers like China Mobile are exceptionally positioned to further drive the benefits of IoT to the masses, and specifically, to power smart cities of the future. They already have the technology deployed to connect billions of devices on their networks, and Walton has the chips to connect these billions of devices to the blockchain. It’s hard to extrapolate all of the potential implications, but this partnership will give Waltonchain a global platform to deploy its products.

Given that the team is able to continue successfully hitting all of its milestones, it’s not difficult to see a world where Waltonchain becomes the industry standard for enterprises looking to integrate RFID + blockchain into its own processes. This is a project that I am very excited about and will be following closely in 2018.