Investing in Blockchain
An interview with Antony Lewis, Director of Research at R3 Singapore
Hi Antony. Can you tell us, what caught your attention in the blockchain space this year?
This year we have seen a real divide in the companies operating in the blockchain space — they are either aligning to uses for existing industry participants, or attempting to create a market for disruptive uses. This year, I joined R3, an innovation firm building the next generation of financial services technology. Having previously worked in banking technology, I can see that there is a dire need to use technology properly to reduce risks, drive down costs, and potentially create new revenue streams.
What type of blockchain technologies would you bet on as an investor?
One of the key decisions you need to make from an investment standpoint is whether you want to invest in cryptocurrencies and public blockchain infrastructure, or companies that focus on distributed ledger technologies for industry use.
If you want to bet on cryptocurrencies and public blockchains, there are three ways you can do it:
- The most straightforward way is to buy the cryptocurrency itself (e.g. Bitcoin, Ethereum, Zcash), and hope that the price goes up and you can sell it for a profit. That is, before you get hacked, before the exchange gets hacked, or before you lose your keys. The price of these tokens are driven purely by supply and demand, much of which is based on news and rumours on chat forums which means they are quite volatile.
- Or you can participate in “initial coin offerings” which are digital tokens issued by a startup as part of a fundraise effort. This is an unregulated grey market and sometimes the prospectuses are no more than an internet landing page. The idea is that the price of the tokens goes up if the company does well, but these are not equities and token holders get none of the protection that equity holders get. Thus, buyer beware!
- Finally, you can buy equity in startups and companies that are creating solutions in this space.
If you want to invest in those companies building private ledgers for industry, it is important to understand the problems that these companies are trying to solve. Stick to an industry you understand and don’t be dazzled or confused by arcane technical concepts. Market entry, especially in finance, is difficult without strong credibility and takes time, so companies with cashflow or a good runway are probably a better bet.
Latest distributed ledgers such as R3’s Corda… don’t use a blockchain at all! Instead the focus is on interoperability between the new technologies being created.
What is (are) the solution(s) to the current limitations of the blockchain technology?
Public blockchains and private distributed ledgers solve different problems, and as such, are different technical solutions with different limitations.
Scalability is one relevant limitation. Currently Bitcoin’s network can only process about three transactions per second. There are several proposed upgrades and workarounds that seem to have varying levels of support from the community. An example of a solution is off-chain payment channels, also known as lightning networks, which seem to be gaining traction.
Another limitation is the privacy and traceability of coins — ‘once I know your account number I can see every transaction that has ever occurred in it’. There are some interesting solutions coming from the field of cryptography, loosely called “Zero Knowledge Proofs”, where you can demonstrate something about some data without revealing the data itself. The cryptocurrency Zcash uses one type of experimental zero knowledge proof called a “SNARK” to achieve transaction privacy.
For industry use, data privacy and confidentiality challenges are even more relevant, especially considering that commercial competitors may participate in the same network. As a result, the latest distributed ledgers such as R3’s Corda, which are built specifically for the needs of regulated industry, don’t use a blockchain at all! Instead, the focus is on interoperability between the new technologies being created.
This interview is part of Nest’s Unpacking Blockchain series.
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Antony Lewis (@antony_btc) is Director of Research at R3, based in Singapore. He was an FX spot trader and market maker at Barclays Capital, and a FX systems technologist at Credit Suisse. In 2013–15 he was the Business Development Director for Asia at itBit, the first bitcoin exchange to get a Trust licence in the US, and has consulted banks, law firms, education, and the public sector on blockchains and cryptocurrencies as an independent consultant.
Read more insights from Antony on his blog, https://bitsonblocks.net/.
