Trends and Limitations of Blockchain Development
All content is based on Click Ventures’ observations through attending blockchain industry events. This article is an aggregation of our speaking notes across events.
Notwithstanding the ICO ban in China, blockchain activity never stopped. The blockchain communities in China are still busy exploring the future applications of blockchain technology. We recently delivered a keynote to 5,000+ Chinese and Overseas investors and entrepreneurs at the BARIC in Xiamen, China on ‘Trends and Limitations of Blockchain Development’.
Similarly, Hong Kong’s fintech and blockchain scene has successfully attracted unprecedented talent, eager to explore new opportunities and exchange ideas. We recently sat on a panel at Block O2O in Hong Kong discussing the ‘Coming of Age’ of cryptos, and interviewed a range of stakeholders in the blockchain space at the very high profile Token 2049 in Hong Kong.
Here are some highlights from our observations:
The Trends
1) Rise of SAFT/RATE
The blockchain space is still in its nascent stage, with regulators hurrying to play catch up. We observed that investors/startups have evolved quickly to match the regulatory uncertainty through investing in tokens.
Enters SAFT (Simple agreement of future tokens) and RATE (Real agreement of token and equity).
SAFTs (which in essence are securities) give investors monetary support to projects in exchange for the right to gain access to the tokens when they are ready. Token maturity may require months or even years. SAFTs ensure compliance with regulations during the fundraising process and give projects early and quick access to capital without going through expensive and lengthy legal consultations. From an investor’s perspective, SAFTs minimize overall legal risks while simultaneously offering early access to tokens even when projects are not mature enough for equity rounds.
RATEs, on the other hand, are also securities. For the more adventurous investors that want to gain equity in blockchain companies, they can get shares which come with free future tokens through RATE. The benefits of using RATEs are that investors will automatically comply with the law, as they are designed as securities on day one. Further, companies selling RATEs to raise capital will not have to pay taxes, as they are selling equity to investors complemented by tokens.
We believe that financial instruments will continue to develop, such innovations aiding with investments in the blockchain space.
2) The transition away from Blockchain 1.0 seems to be underway
We have encountered numerous ambitious projects, observing interesting use cases of blockchain technology. One example is maintaining the track record of a global network of jurors to rule on disputes that cannot be satisfactorily dealt with by centralized organizations using the immutability and decentralized feature of the blockchain. Another example is leveraging the immutability of blockchain to bring transparency to charities.
Such examples illustrate attempts to harness the characteristics of blockchain technology to tackle challenges that span across industries. Broadly speaking, the greater diversity of blockchain usage reflects a gradual transition away from the disruption of currency/payment systems (Blockchain 1.0) led by Bitcoin, as an increasing number of people have started to realise the potential of applying blockchain technology to disrupt other industries.
As such, Click Ventures views this development as being beneficial to the long-term growth and continued relevance of blockchain technology.
3) (Blockchain) 3.0 is still taking shape
We found that communities are still figuring out what will lead the charge of the Blockchain 3.0 that promises to deliver big promises regarding the future of blockchain technology.
Some advocate a replacement of blockchain technology, while others suggest working to finetune the existing blockchain protocols. In general, this reflects the need for the protocol to be updated before it can suit mass adoption.
Attempts such as the DAG have been introduced as an alternative to blockchain technology. Within a DAG, the validation of transaction becomes part of the transaction process, so there is no need for expensive mining. As miners are eliminated and transactions ‘validate’ themselves, transaction fees are reduced to zero, and the protocol does not need the pre-hashes between blocks to maintain transaction sequences, making it blockless. Because of this, the recurring problem of centralization of power in the hands of big miners can be overcome. However, it is acknowledged that projects using DAG currently remain in the private chain space, so this development is still ongoing.
Other blockchain protocol level innovations, such as the EOS, attempts to speed up transaction speeds to cope with mass adoption. They do this by taking out transaction fees and handing the responsibility of mining to a smaller number of miners who stake large sums of tokens to ensure good behavior. Moreover, as projects are built on different blockchain protocols that are not interoperable at the moment, the latest wave of innovation is working to let blockchain ‘talk’ to each other.
As we observed, these types of innovations revolve around the big concepts of interoperability, scalability and sustainability which are the main themes of blockchain 3.0 discussions.
The Question Marks
- Blockchain/Crypto is still not an asset class to most of the big Institutional investors
Taking a holistic view of institutional asset managers, the biggest players are pension funds, sovereign wealth funds, endowments etc. which like to see established track records and consistent returns to consider them an asset class. As one institutional investor simply puts:
This is evidenced by the fact that despite seeing big names like Soros, Venrock and Passport Capital dipping their toes into the blockchain/crypto space, it is perhaps a bit early to say institutional investors are head over heels into the digital revolution. Even from our conversations with hedge funds and cryptocurrency brokerages, we observed that the more adventurous hedge funds (except crypto funds, of course) are still taking tentative steps towards exploringthe space.
2) Questions on the technology: Scalability, Volatility, Interoperability, Sustainability of Blockchain protocols
As we observe the industry exploring different applications of the technology in the Blockchain 3.0 era, we spotted a few extra technical problems that are still hindering mass adoption of blockchain.
For one, a digital asset that experienced 20% fluctuation is hard to be used as a store of value and medium of exchange, which are the fundamental use cases of currencies.
At the current state, some protocols from the 1.0 era also face major sustainability issues- it is no secret that bitcoin consumers more electricity than Ireland and Singapore. Although 2.0 protocols such as Ethereum have consciously tackled electricity consumption as a sustainability issue, efforts have not been sufficient to handle the volume via traditional, centralized means.
Another major observation is that the protocols are not ready to handle transaction volumes at mass adoption, reflecting scalability concerns. CryptoKitties, one of the most prominent use cases of the Ethereum protocol, faces as long as 30-minute delays in processing transactions generated from the game.
We also came across this interesting experiment called Blockparty, which takes Ether as deposits for a 3 person meet up. It experienced high costs (14 GBP for this small meetup) from gas prices and significant delays on transaction processing when a major ICO was online.
These are signs that the protocol layer of blockchain technology is still in its very nascent stage.
3) Merging with the real world- tackling business models, resolving accounting issues
When we try to integrate token business models of blockchain enabled companies into the real world, we found questions around taxes, KYC and investor profiles.
At BARIC, we used a hypothetical example of Starbucks issuing tokens to raise a few real life questions around token based business models. The key is that a household name currently needs to face these question marks when they embrace blockchain powered, token based new products.
We believe that integration requires mainstream corporate acceptance of blockchain empowered digital assets. Under current accounting standards, cryptocurrencies are intangible assets, which means that the fall in the market price of cryptocurrencies decreases earnings, while increases in the value beyond the original cost or recoveries of previous declines in value would not be captured.
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