7 Takeaways from Boston Blockchain Week
With the dust finally settled, it is time to think back on an amazing Boston Blockchain Week.
What does it all mean?
Where do we go from here?
Boston Blockchain Week was a LOT to absorb. It spanned 32 different events, 65 firms, hundreds of speakers, and over one thousand attendees (including people who traveled from India, Denmark, France, Toronto, NYC, SF and beyond).
There were panels upon panels, free developer training classes, VC office hours, student meetups, barbecues, Monday’s MIT Business of Blockchain, and Thursday’s (Off) The Chain Summit presented by Pillar, convening a select group of 250 founders, developers, academics, and students for a day-long conversation about blockchain challenges and opportunities.
Speakers included many of the CEOs and executives leading the world’s most important blockchain companies — check out the list to get a feel.
Here are seven themes that emerged from Boston Blockchain Week:
1. Blockchains have serious limitations that restrict their value to narrow use cases.
Blockchains will always run slower and be more expensive than private databases. Storing any serious amount of information on a Bitcoin blockchain would be hugely expensive and slow. At best, people today are recording hashes, pointers, and brief transaction records. Even then, scalability and throughput can be major headaches.
Any “island of trust”, such as a corporation, or a small group of friends, can run a centralized database, and it will beat a blockchain, hands-down.
That means that blockchains are at their best at interfaces, whenever information must cross islands of trust. Blockchains do well when they confirm information (and money is just one type of information) between wallets, across national boundaries, along a supply chain, and among people or independent businesses who do not know each other.
That is a narrow use case, but it’s a really important use case!
Despite their limitations, blockchains will change our financial and organizational systems vastly, offering new business models, new networks of capital flows, and new economic communities.
2. Scalability challenges will be solved faster than expected.
When it comes to scalability, there are many “Layer 2” middleware solutions coming that will take the load off.
In parallel, there are multiple next-generation blockchain models that will bypass Proof of Work entirely.
The new models may also reduce the influence of today’s mining pools.
High transactions per second at low cost will open up new worlds of possibility.
3. Governments are moving aggressively to regulate blockchains.
This is a reality that complicates the picture, and is only partially about stopping scams.
Governments will fight fiercely to guard their lifeblood — tax compliance! — and to block money laundering and terrorist financing. (Gary Gensler) Some blockchain concepts are direct threats to their vital interests.
Any time a business relies on people to trust their good behavior, that business can expect to be regulated. (Patrick Murck) This is true from banks to utilities to restaurants and indeed any business raising capital. So it’s going to be true for your blockchain start-up. Design for it.
The lack of a clear voice in the regulatory environment leads to inefficiency and chills innovation. Once the rules are known, companies can move faster and design for constraints.
We are hopeful that regulators in the U.S. will acknowledge and make room for blockchain innovators, so that founders do not flee to other countries.
Exchanges seem to be earning the lion’s share of profits right now, perhaps because they are willing to take the risk of living in a regulatory gray zone. Regulation will even the playing field by making it feel safer to compete. Once Wall Street gets into the game, you can expect exchange fees to drop considerably. (Gensler)
Takeaway? Every blockchain company team needs to watch regulators carefully and be poised to adjust their location, business models, and protocols in response.
4. The U.S. window to raise seed capital via SAFT or ICO is closing.
Last year it was thought that a utility token could be sold in advance to investors as it would not be a security (per the Howey Test), any more than a gift card sold by a McDonald’s for a right to purchase future hamburgers would be treated as a security.
But what exactly qualifies as a utility token? While there are some plausible explanations (a laundry or subway token, an API key, a membership token, an ID confirmation), the whole magic and appeal of a token economy are its network effects. It is desirable for early tokenholders to benefit as usage grows specifically so that early tokenholders will help promote adoption.
If you tell any investors that the token may rise in value though, that “manner of sale” is going to feel like an investment pitch, and the U.S. SEC (or your local state government) may object no matter how carefully you define utility.
I previously wrote a post here about how utility tokens are often less valuable than expected. Suffice to say, I came away from Boston Blockchain Week even less enthusiastic about utility tokens.
So for now, avoid SAFTs and ICOs inside the United States, if you want to sleep well at night. (This whole blog post is layman’s opinion not legal advice. Consult your own attorney.)
5. People are financing their blockchain start-ups anyway. How?
- They raise equity from a VC firm. (Call Pillar first, obviously) They use that funding to code their project and to promote adoption. Tokens are never used for fund-raising. Participants earn their tokens (e.g. by mining), or redeem tokens (e.g. for a product or service) and can then start trading tokens among themselves in a secondary market. Later, the company might be able to sell its tokens on the open market to raise further capital.
- They go ahead and use a SAFT or ICO, and just exclude investors from US and other foreign countries where regulations remain uncertain. Utility tokens may still reach USA by secondary markets, through no action of theirs, and so they can might still have a global product.
- The hybrid token model — first raise equity from VCs, then later sell tokens to accredited investors in a mini-IPO (likely costing >$300K to set up plus 6-month SEC review delay, but available to raise amounts up to $50M), and one year after issuance, they will become openly traded by registered broker-dealers. Those tokens could have extra rights, just as holders of stock have a right to vote in board elections.
- In the near future, companies will be able to issue a legally compliant security token, initially just to accredited investors, but after a one-year holding period these tokens could be resold to general public in the USA via either a low-cost crowdfunding provision for raising $1M or less, or via the Reg A+ or similar provision. See Republic and Templum, respectively.
- A two-coin solution. One coin is a security token that can be traded on secondary markets as described above. The other coin is a utility token that is mined or redeemed, but never used for financing.
We don’t know yet that these approaches will work. I still suspect though that a path will be found, and it will change finance.
Most of the audience seems to believe there will be a role for seed-stage VCs for many years to come (a great relief to hear).
However many also believe that other asset classes like later-stage private stocks, bonds, real estate and other property will become widely traded through security tokens in just the next few years.
6. We are hearing terrific start-up ideas at every level of the stack.
A sampling, just from companies who spoke at the (Off) the Chain Summit:
New blockchain protocols: Chia, Tezos v2, Algorand
New tools: Mesari, multi-party computation
New internet: Blockstack, Linnia
New finance: Ripple, MakerDAO, Templum, Circle
New applications: Aragon, (Poly)Swarm, LBRY
There is a dizzying wave of innovation coming from these projects.
7. The best blockchain ideas challenge centralization of power.
What makes a good blockchain start-up in our eyes?
Start by asking what businesses today command high profits through centralized power, and then you have found a potential fit for a blockchain.
You can see incumbents everywhere. They are the two-sided marketplaces, the businesses guarding silos of proprietary data, the companies who have locked up supply chains and distribution channels, and the regulation-protected corporate giants. Blockchains have a chance to upend them all.
At the same time the classic start-up rules still apply. To succeed against the incumbents, you need a value proposition that enables a 10x improvement or that creates entirely new industries and applications.
Simply splicing the word “blockchain” onto your pitchdeck isn’t going to get you very far. As mentioned in the first point above, blockchain isn’t for everyone.
NEXT TIME: we describe Pillar’s investment thesis for blockchain.
