Blockchain — Perception or Reality?
Blockchain has been around since 2008. It is only recently that the interest around the technology has tremendously increased and in 2017 it has sky rocketed. The crypto industry started booming due to cryptocurrencies like Bitcoin and especially due to a rising number of Initial Coin Offerings (ICO’s), a new method for fundraising Blockchain projects. This trend is continuing in 2018 although the Blockchain crypto market has lost two thirds market cap compared to its maximum cap last year. According to PwC report, in 2017, ~$7 billion were raised in 552 ICO’s whereas in 2018, till May only ~$13.7 billion raised in 537 ICO’s.
Blockchain Investment — More Data
Based on Coindesk data, in 2017 the money that was invested in Blockchain projects via ICO’s outreached traditional VC investments for the first time. On the other hand, the number of investments made by VC’s was and is still greater in 2018 than the number of ICO’s with 552 vs. 876 in 2017 and 537 vs. 1943. These numbers can be explained by the capital raised in ICO. Typically, the amount of dollars invested through an ICO’s is much higher than traditional VC investment in seed/A rounds (10s millions vs. several). For example, this year the popular messaging app Telegram raised more than $1.7 billion dollars, one of the largest ICO’s recorded. Further, the growing number of VC’s investment (more than doubled to date) despite the market losing significant valuation, is showing the high belief of VC firms in crypto.
The fluctuating price of Bitcoin has resulted a lot of media exposure for Blockchain. One way that reflects this interest is the data shared in Google Trends. Bitcoin price changes and the number of times that the word ‘Blockchain’ was searched in Google search engine are highly correlated.
What is Making Blockchain so Attractive?
The nascent technology is foundational for creating a new realm of products and services in various sectors. At its CORE, it enables decentralizing and eliminating intermediary businesses by increasing the level of trust programmatically in a network (commercial or non-profit) and exchange of value (aka token) between two (peer-to-peer) or more participants. For example, the traditional banking system in the financial industry is such an intermediary that can be removed from the process in the case of payments. If an individual wants to transfer money between accounts, he must be go through the bank or some other third party and specify how much he’d like to transfer, from which account and where. This type service has a fee and can also take between few hours to few days depending on the amount, the source and target, the date, etc. With Blockchain the intermediary service level and fee can be shrunk via a secure (immutable) peer-to-peer transaction that is happening almost instantaneously on the Blockchain.
There are more Blockchain potential use cases, some that can potentially change our everyday lives. According to the World Bank Group, billion people are having an issue proving their identity while trying to access basic services such as the financial system. To deal with this problem, earlier this year, Microsoft has launched the decentralized digital identities management platform that is empowering every person to own his digital identity, control its privacy, participate in communities, and enjoy apps with tailored experience and more.
What is the Future of Blockchain?
People tend to compare Blockchain with the introduction of the Internet technology. Apple co-founder Steve Wozniak said earlier this year that the Blockchain hype reminds him the dotcom bubble before it crashed. Wozniak told the audience “A good portion of the companies promising to do life-changing things on the internet quickly went bust”. He explained that it doesn’t mean the technology will not take-off, it’ll just take more time.
In their HBR paper “The Truth About Blockchain”, Marco Iansiti and Karim R. Lakhani provided a framework to evaluate early stage technology and its maturity. The framework is dependent upon two dimensions novelty and ecosystem coordination. Novelty refers to “the degree to which an application is new to the world” and coordination refers to “the number and diversity of parties that need to work together to produce value with the technology”. Combining these two dimensions results in four quadrants to evaluate where a technology is at in terms of its life cycle.
The four quadrants are:
1. Single use — In this quadrant, we can find low novelty and complexity. These type of applications are highly focused solutions that are replacing existing business models with cheaper alternatives. The value is immediate but is not ground breaking. Bitcoin is falling within this quadrant. Since its inception it’s started offering a value amongst the community of people who were using it. So long there were more than one participant, it has resulted value for its users.
2. Localization — in this quadrant, we can find high novelty and low coordination. What we should expect to see here are private Blockchain networks that can benefit from cross-enterprise collaboration through a distributed ledger (DLT). The financial sector is creating some traction in this space which can be expanded to other areas like supply chain. One such example is NASDAQ which is working with Chain.com to validate and process financial transactions.
3. Substitution — in this quadrant there are applications which are low on novelty as they built on top of local applications but require high level of coordination. Adoption in this category is slower as these type of applications are trying to dramatically change business models. Cryptocurrencies belong here. Cryptocurrencies are built in top of the bitcoin innovation and would require a lot of coordination from governments and cooperates to adopt them so as consumers. Adoption in this category will likely to take years. The complexity is coming to a common ground that all the parties are agreeing to and ultimately add value (regulation, security, privacy, etc.).
4. Transformation — in this quadrant, there high degree of innovation and coordination. These type of applications can impact economics, society, politics and more. That make them very hard to adopt and it can take a lot of years till we see them in action. Smart contracts is an essential Blockchain feature in this context. The smart contract is a way to programmatically enforce legal agreements amongst parties within a network. That can make the way of doing business simpler by automating and replacing manual work. For instance, when good are being delivered between businesses, the supplier can automatically get paid via an event which is logged onto the Blockchain.
In Summary
The hype around Blockchain is keeping up with the interest and investment both from ICOs and VCs. The technology has a lot to offer but in order to take off both novelty and coordination needs to take place. Each innovation type would have its own pace. The transformation phase that is likely creating a lot of excitement is still few years away. What will happen in the future is hard to tell but one thing is sure. It’s going to be interesting…
What do you think will happen?
