One man’s Tulip bulb is another Man’s Killer App. Is the Blockchain’s Killer App right in front of our eyes already?
For too long the conversations within the global cryptocurrency community and within the mainstream communities have revolved around
“Where is The Blockchain’s Killer App?”
Reference is usually made to history and how email was the Internet’s “Killer App”. With the introduction to email, gone were the days of delicately crafting your finest majestical masterpiece in beautifully tailored calligraphic orchestration, delicately styled with artistic flourish and precision on your finest hand-crafted, haute-couture Egyptian Papyrus. Gone were the days of easing your opus maximus into the finest hand-crafted linen envelope layered with the softness of silk with the vaguest textured roughness on the delicate dermis of your fingers. Gone were the days of tasting that hint of sweetness as you followed the shimmering light of the gum sealant of the envelope with your salivating tongue; sealing the envelope with the flourish of an artist; the perfection of the lines gratifying to the even most critical eye. Placing a stamp on these creative endeavours was almost clinical, but the crafting of a letter was a beautiful artform. The Internet changed all that — irrevocably and almost overnight.
Communications to loved ones could be composed in minutes, edited in real time, and sent and received in seconds. Thousands of years of history evaporated in the blink of a cursor and real-time global communication opened up for all. Perhaps more importantly, by osmosis, we became immune to the underlying Internet-based technology and attuned ourselves to what the internet could do for us that we needed it to do. We didn’t care about TCP/IP or HTTP — these were just nerdy acronyms from the future of a Brave New World.
So where is the email for the crytpocurrency and blockchain ecosystem?
Some reference Bitcoin itself as the “Killer App” transforming the internet of information to the internet of value. Whilst a noble cause, the problem comes in terms of the level of global adoption for Bitcoin.
In a 2017 study from Cambridge University* there were an estimated 5.8m unique bitcoin users globally. This represents less than 0.1% of the world’s population. Bitcoin was, and undoubtedly remains, revolutionary technology, but given its limited adoption, it doesn’t take the winner’s garland for the mainstream “Killer App” — yet.
Then there was CryptoKitties; Ah Crytpokitties — the game for the early adopting cryptogeeks who had way too much time on their hands, and had made way too much money, way too easily.
Cryptokitties promised so much. This was an application that enabled Ethereum owners to own a Digital Kitty that had unique and definable characteristics, each supported by its own unique DNA. With ownership confirmed, as defined by the underlying blockchain technology, the Kitties could be bred, exchanged and sold. With “Generation 0 Kitties” selling for in excess of $100k in less than 2 months of creation, CryptoKitties had the hallmark of being the Pokémon Go for Cryptocurrencies, with the potential to go viral and even mainstream. There was, however, one major flaw.
The Ethereum network cracked under the pressure of the success of CryptoKitties. Here was a single app, albeit a very popular app, within the Ethereum community that at its peak represented almost 20% of all Ethereum transaction in December 2017. The end result of the game’s success was the clogging up the network. This resulted in fees rising dramatically and the network remaining painfully slow. It was too much, too quick — and perhaps way ahead of its allotted time to be the “Killer App”. So where is the “Killer App” likely to come from? Perhaps it is already here, beavering away in the background: softly, silently and hidden away and we just haven’t collectively seen it.
Steve Jobs was once said:
“Technology should be either beautiful or invisible”
Whilst the Blockchain is amazing technology, it is incredibly difficult to describe it in 5 words and make it sound beautiful. I have been trying for almost four years. Try as I may, the problem is “Sexy” and “Blockchain” don’t really roll together in the same breath. It’s like asking an accountant what their favourite number is…? Notwithstanding, over the past four years around the community I have heard such descriptions as :
· Distributed Ledger Technology
· Crypto 2.0
· An immutable database
· Peer-to-peer currency
· Trusted timestamping
None of the above sells the technology to the masses. It doesn’t inspire people to say “wow this technology is beautiful — I have to try it ”. This is very different compared to the internet.
Al Gore first described the internet as “ The Information Superhighway”. In those three words a vision was painted. The media understood it and the masses got it. Its sub-text was that the world was about to be opened up; unbridled access to new ideas and new knowledge was on its way. The reason why the Blockchain is hard to describe is because its strengths lie in being hidden away — it is a technology layer. Its role is to excite us by what it can do; not what it is. It is an enabler. The best way to look at this is by example.
I am from Brighton in the UK but live in Sydney Australia. I have cash in my bank in Brighton.
Right now, it is quicker for me to :
· Fly from Sydney to Heathrow
· Hire a car and drive down to Brighton
· Go to my bank and draw out the cash
· Head on to Brighton Pier, buy a “kiss-me-quick hat” and get the UK’s greatest contribution to haute cuisine — fish and chips
· Drive back to Heathrow
· And fly back To Sydney, cash in my pockets
…than it is to get the money from the Banking system. In today’s world where yesterday is already too late, this kind of sucks.
Blockchain technology, as first seen via Bitcoin, enables this same transaction to happen in 30 minutes or less without going via the banking system. Instead funds are sent “person to person” or peer-to-peer, if you like. Blockchain technology is powerful but it’s not beautiful. Instead, it enables the internet of value to happen and for financial services to be disrupted. Indeed, it is in this enabling layer that perhaps we already have our “Killer app”; a “Killer app” that the cryptocurrency markets adopted in force, and the mainstream financial markets dismissed — the underlying infrastructure of ICO’s.
The infrastructures behind ICO’s.
As Mark Twain so often reminds us:
“History doesn’t repeat itself but if often rhymes.”
And so it is with financial bubbles.
Back in 1636–7 we had the Tulip Bulb mania, followed in 1711 by the South Sea Bubble. We have all collectively seen more housing bubbles than history can probably remember. Most of us with enough grey hairs remember the euphoria and subsequent pain of the dot com bubble and those of us in the cryptocurrency community have experienced the same repeating pattern of the ICO bubble and bust. Bubbles mean trouble.
Bubbles are a Darwinian game of musical chairs, driven by greed and fear. As the price of assets, markets or financial instruments rise to stratospheric proportions, the promise of ever-increasing returns fuel the greed to buy. As we reach excessive pricing peaks there are fewer and fewer buyers. Greed is quickly overshadowed by the fear of not selling high enough as the price begins to tumble and losses drive the emotions of fear and panic. The same lemming-like behaviour that drove up prices drove the irrational behaviour to sell at a horrendous losses before it is all too late. Initial Coin Offerings (ICO’s) were the Blockchain’s Tulip Bulb moment — and they were traumatic for many who entered the space late.
According to Coinbase, the volume of funds raised by ICO’s to mid July 2018 was in excess of $20bn — from a near standing start one year earlier. As the bubble began to expand in 2017 returns of 2x, 3x, 5x, 10x were not uncommon by those who supported ICO’s. Heavily promoted and unregulated ICO’s raised stratospherically stupid sums to fund their decentralised pipe-dreams. It seemed everyone was making money from the bubble until the crash in prices from early 2018 onwards.
While the falling cryptocurrency prices caused some significant trauma, there were some great outcomes from the ICO bubble. Most notably, the methodologies supported by the underlying technology infrastructure that proved new and powerful ways of raising global capital:
a) The power of cryptocurrencies. Ethereum was the de facto global standard to fund ICO’s — primarily because of the ERC20 token structure and standard. The ERC20 token standard was adopted by so many ICO’s, which meant:
a. Ethereum could be transferred from any person in any country globally with funds typically cleared to their nominated ICO’s Ethereum account in less than 3 minutes.
b. There were no international transfer charges form the banks (typically $20 — $50) — just a small “gas” charge for using the Ethereum network — usually a few cents.
c. Sums as low $20, $50, $100, $200 of Ethereum could easily be transferred and accepted
b) The power of smart contracts — the ability to programme money. ICO’s could be automatically programmed to take away the need for trust. The Ethereum address used to receive the global funds could be programmed via smart contracts to run their entire ICO. This is the equivalent of your own bank account number being able to be directly programmed — your direct debits on steroids. For example, you could automatically programme the smart contract to ensure:
a. no funds could be automatically accepted above a given threshold
b. Any funds in excess of this threshold could be subject to Anti-Money Laundering (AML) and Know Your Customer (KYC) confirmation to ensure appropriate legitimate subscribers were subscribing to the ICO.
c. These approved parties would be added to a “white list” that the smart contract programme would recognise.
d. The automatic return of funds should the minimium threshold not be reached for the ICO. This removes the need for financial supporters to trust the managers of the ICO to return funds should the ICO not reach its minimum threshold.
This demonstrates the ability to programme digital cash.
If we consider the same finance raising structure using traditional currencies via the banking system :
· Typically, it takes 2 days for international funds to clear — more from outside OECD countries. This is even more if there are weekends in between.
· The minimum banking fees would not make it viable for smaller amounts to be sent internationally.
· Banking exchange rates, which are usually 2.5% — 4% below market rates means a sizeable chunk is taken by the banks.
· Combined these would involve substantial reconciliations of funds being received in and would involve the manual release of tokens once funds were received. Manual process means things could, and do, so easily go wrong.
In sum, the underlying structures of ICO’s bypassed the banks but more importantly had the capacity to democratise capital globally. The flow of funds was automated, with no reconciliations making the process so much easier. For me this is and will be the “Killer App” — especially when we consider the advent of Security Tokens.
Security Tokens are the next wave of the cryptocurrency markets. This is where regulated structures will be put in place to tokenise traditional securities. Whilst in the very early stages of development, these security tokens will be highly regulated, which means traditional Financial Institutions can get behind them. Let’s look at a quick example to give you an idea of how these could work.
Consider a commercial property in the EU valued at say $100m. Using Security Tokens, that leverage the ability to define ownership, or part-ownership (like the CryptoKitties example we saw earlier) it is possible to fractionalise the ownership of that property. For example, it is possible to formally identify the ownership of 0.1% of the property in the form of a token. These tokens could then be listed on a regulated Security Token exchange and have an immediate global market for exchange. The end result, rather than the funding of a large commercial property being restricted to a handful of large global Financial Institutions, access to smaller, global investors could be seen. Subject to individual regulations evolving appropriately, it could be that someone in South Africa, Australia and Korea could buy into an EU-based project. Global property comes to life and so does its funding.
So, in principal, leveraging the ICO infrastructure above, and within a more regulated structure that clearly defines the core issues of compliance — i.e. KYC and AML:
· Smaller investors could get involved (subject to individual countries’ regulation)
· Global investors could get involved (although sanctioned countries would be excluded)
· Combined these would increase the number of parties able to invest in such a project — which would give the project holder more funding options — e.g. they could part fund the project via a smaller, and therefore cheaper, line of credit from traditional debt provider and the rest via security tokens — making it easier to fund this and many other projects in a portfolio.
· Cryptocurrency funds would typically be used to buy the tokens — with near instant transfer and no traditional reconciliation problems.
· The tokens could be traded 24/7 globally around the global exchanges (as happens in current Cyptocurrency markets) with liquidity opened up for traditionally illiquid markets.
· Imagine also being able to programme the nature of those tokens — and extend that analysis to being able to programme equities automatically….
In sum, bigger projects could have access to free-flowing global democratic capital from smaller investors. Institutions, on the other hand, which have Trillions of dollars under their management could get deeply involved in not only supporting projects directly but by creating new suites of financial products. After, all the underlying infrastructure would be regulated and therefore meet so many of the compliance criteria their funding mandates require. If it takes off as many believe, it has the potential to totally eclipse the current cryptocurrency markets. If just one percent of the global funds under management — c $300tr — the security token market would be 15 times bigger than the current cryptocurrency markets. Now, one percent is almost just like an institution “taking a punt” on riskier assets — but once the technology is proven, regulation laser-tight and Institutions are making money from it, 5%, would be just a drop in a very big pond of liquidity — and would potentially represent $15tr of funds at current levels.
None of the above could be achieved without the ICO infrastructure that was created and proven to work, through and during the Blockchain’s Tulip Bubble moment. This will be the foundation for the next stage in financial services for Institutions and the cryptocurrency markets where both will come together in synergistic unison.
Perhaps the Blockchain’s “Killer App” was there all along — but we have all been too traumatised to see it.
About the Author
Tim Lea is an Australian-based Blockchain Entrepreneur, Evangelist and Advisor. He is an International Keynote Speaker and Author of Blockchain Book Down The Rabbit Hole, all written in plain English and the upcoming podcast series “Down the RabbitHole: the Blockchain and Beyond”. He also runs executive briefings and 1/2 day, 1 day and two day masterclasses and workshops on the Strategic Application of Blockchain Technology.