Sankaranarayanan
Jul 31 · 10 min read

At the height of the great recession in 2008, Satoshi Nakamoto believed that commerce on the internet relies heavily on financial institutions serving as trusted third parties to process payments, but these trusted financial institutions were also responsible for the market crash. To enable commerce without a trusted third party, Satoshi proposed a peer to peer transfer of virtual cash that would allow online payments i.e., Bitcoin and the underlying technology called Blockchain.

One year after the proposed cash system, the first bitcoin was mined. Today, Facebook, Goldman Sachs, and JP Morgan are working on their own cryptocurrencies.

This is a rapidly evolving tech and to clearly understand this nascent tech space, we need answers to these questions.

  • What are Bitcoin and Blockchain?
  • What is happening now? And
  • What’s next?

What are Bitcoin and Blockchain?

A few people understand what it is, but Wall Street banks, consultants and IT companies can’t stop talking about it. It’s difficult to talk about Blockchain without Bitcoin, but there are plenty of excellent articles about it online, So, I’ll try my best to summarize it.

So, there are six things here. Bitcoin, Cryptocurrencies, Blockchain Technology, Distributed Ledger Technology, Smart Contracts, and Initial Coin Offerings. So what do these terms really mean?

Bitcoin is a decentralized currency/asset with a public ledger which is also known as Blockchain. There is no trusted third party controlling the Bitcoin’s blockchain. Instead, anyone can read it, write into it, and hold a copy.

This Bitcoin’s blockchain tracks bitcoin, and it has rules and one of which states that there can only be 21M bitcoin and everyone must agree to these rules to use it. Since anyone can read and write in it, Bitcoin uses mining to establish consensus in this trustless environment. Mining is basically a method of incentivizing good guys who devote immense computing power to secure the blockchain, and these good guys can append a block of a transaction to the chain of previous blocks. For doing this, they get rewarded with a bitcoin. This also stops bad actors from taking over as it needs an enormous amount of computing power to do bad things.

Bitcoin’s code is open-source. This led to people creating alternate Cryptocurrencies or altcoin that seeks to improve or expand Bitcoin’s capabilities.

There are a lot more to Bitcoin like Hashes, Suggested Witnesses, Sidechains, Public-Private Key Encryption, among others that are beyond the scope of this report.

Now, let’s talk about Blockchain. It is a tech that gives way for untrusted parties to reach a consensus on a common digital history. This common digital history is essential because this history can easily be duplicated, and this problem can be solved with Blockchain tech without a trusted intermediary.

This tech makes sense in unique instances like Banking, Identity, Voting, Digital ads, Security of Critical Infrastructure, Industrial IoT, Cloud Storage, and Computing, Real Estate, and Insurance to name a few.

And then there is DLT or Distributed Ledger Technology which is basically Blockchain without miners. If you remove the miners/verification step, you are left with a distributed spreadsheet. This is something that renewed the interest in the Blockchain over the last few years. The idea of distributing a database among the participants to ensure a common truth is a novel idea.

DLT with a layer of consensus is Blockchain, but Blockchain is slow and overly complicated in most situations. So, instead, companies are focusing on a lightly administered DLT. Bitcoin and Etherium are public/permissionless blockchain, which means anyone can access it. On the other hand, if the trust is already established i.e., all parties are known, DLTs provide a great solution.

Smart Contracts are another layer on top of the blockchain that allows users to put their own code that executes automatically. Participants agree on a set of basic rules like a contract, and every one holds a copy of this contract. When preset conditions are met, the deal gets self-executed and enforced automatically.

Smart Contracts came into existence with the Ethereum, and it is one of the things that makes Ethereum so compelling.

Finally, ICOs. So all blockchains use tokens that provide utility. For Bitcoin Blockchain its BTCs and for Ethereum Blockchain it is ether or ETH. So tokens/coins are offer ways to raise money without taking the traditional VC route.

A team announces an ICOs where are they sell of tokens of their blockchain to raise funds and these tokens are subsequently traded on exchanges.

Right now, Blockchain world is still nascent, but the tech promises various applications.

What is happening now?

The blockchain space has gone through several hype cycles in recent years. In December 2017, Bitcoin price soared to a peak of nearly $20,000 while ICOs or Initial Coin Offerings grew to incredible highs giving tremendous access to capital, even traditional VCs swooped into the token sales.

In 2018, the price of BTC and ETH crashed in a matter of months, and this led to many ICO projects going sideways. In 2019, Blockchain space is rebounding, but the Wall Street Journal declared that the ICO market is dead due to SEC’s aggressive stance against tokenized offering.

VC investment in the blockchain world has declined rapidly in 2019. Last year, US$4.1B was invested in the space, and this year, it saw only US$1.6B. As this space is still nascent, more VC deals are going to early-stage startups.

Funding towards Blockchain Companies in the last 5 years | tractics.co

ICOs and token sales need CPR as it is getting out-funded by VCs, but the market is slowly rebounding with renewed interest post-crash.

Average and Median deal size in the last 5 years | tractics.co

To really understand what is happening now, I’ve analyzed 1800+ Blockchain Companies and organized them to help you better understand the market.

Blockchain Market Map | tractics.co

Wallets and Payment Services

This category includes startups that provide services like wallets and remittance or money transfer. Wallet companies mainly have software that can store, send, and receive cryptocurrencies, but these wallet companies may double as exchanges.

Notable companies Coinplug, ABRA, Uphold, Wirex, Token, Xapo, Bitt, Toast, Sreami, Wyre, and Ripple.

Exchanges and Trading

Exchanges allow people to convert their traditional fiat to cryptocurrencies and vice versa while trading platforms allow professional investors and investment funds to transact in larger volume.

Notable companies Luno, Coinsecure, OkCoin, Kraken, ShapeShift, Bitso, Bitflyer, Coinbase, Paymium, Quoine and Polychain Capital

Lending and Marketplace

Peer to peer marketplace platforms helps users exchange goods directly without middlemen, and P2P Lending allows users to lend to their peers without the traditional limitations imposed by the government and financial institutions.

Interesting companies in this segment BitBond, Wayniloans, DharmaLabs, OB1, DomRaider, EximChain, BTCJam, and The Sun Exchange.

Enterprise Blockchain Services and Solutions

Companies in this category provide enterprise-level blockchain solutions to other companies in industries like financial services, healthcare, insurance, and supply chain. On the service side, there are companies which provide APIs, protocols for various use cases, and some companies act as blockchain consultants too.

Some high-performing companies in this segment Hijro, Arc-net, Paystand, Spratum, Tremor, Pokitdok, Netki, Quanataverse, Peernova, and QTum.

Merchant Services

This category is for companies that provide services and solutions to merchants and sellers like consulting services, kiosks, reward program, to name a few.

Notable companies Bitpay, Coinify, BitGo, Simplex, POSaBit, DotDashPay, BitPesa, and Colu.

Content, Media and Social

The companies in this category offer services that range Blockchain-based content platforms, media houses that cover the blockchain and cryptocurrency world, and social networks that run on Blockchain.

Interesting Companies Chronicled, VideoCoin, Decent, Brave New Coin, Mycelia, Blokur, Loyyal, Synereo, Matchpool, Imbrex, and Earn.com.

Games and Gambling

Blockchain games include applications and tournament gaming platforms where users compete for a prize pool. Gambling startups allow users to place bets from anywhere around the world with cryptocurrencies.

Notable companies Payment21, Peerplays, Vicoinz, Drapper Labs, and FunFair.

Financial Services

These are companies that provide solutions for financial institutions to help with issues like clearance, data management, settlements, and many more.

Some high-performing companies in this segment APIO, Alphapoint, SETL, Clearmatics, HumanIQ, Gem, Hyperledger, and Neuroware

Now that we know how the landscape is let’s look at what will happen next in this evolving space.

What’s Next?

To answer this question, we need to look at the data from a different perspective.

So, I used the data (like funding, momentum, customer adoption, media attention, and competition intensity) to evaluate tech, products, and business models against market maturity and adoption to come up with these 8 trends that you need to keep an eye out for.

Custody — The ability to hold crypto assets on behalf of your clients has been a challenge for large financial institutions. Anyone who can access the private key has total control over the asset. Financial Institutions needs to find a way to handle access to the private key at scale so that it doesn’t end up in the wrong hands. Some companies use offline cold storage as a way to circumvent this problem, but companies like Xapo use decommissioned swiss military bunkers to protect user’s crypto assets. To get the trust of Blue-chip firms and get mainstream adoption, the crypto world needs to figure out a solution for the custodial tools.

Mining — raising competition, declining demand, and environmental demands are some of the most critical challenges in this segment. OEMs are entering the space with AMD announcing mining rigs, but the declining price of bitcoin led to a decline in demand and environmental criticisms hurt miners’ bottom lines.

Stable and Privacy Coins — Cryptocurrencies that are optimized for stability are stable coins, and there are close to 60 stablecoins in the market that have received around $350M in funding. There are fiat and gold-backed currencies (like Tether), crypto asset-backed currencies (like Dai) and non-collateralized currencies (like Basis). These are long shots and but if they manage to get some adoption this year, it could move the needle on cryptos being the means of exchange.

And then there are privacy coins. These are assets that are trying to get adoption beyond the black market. The thing is, Bitcoin and other currencies are quite traceable and to create full anonymity, privacy coins came into existence. Cryptos like Monero, Zcash, Horizen, Dash, and Bytecoin are a few prominent ones in the market. With major exchanges like Coinbase and Gemini listing these coins, looks like it will be more comfortable to purchase and hold these assets in the future.

Tokens — We are looking at two primary tokens here. One, security tokens and the other one is non-fungible tokens. Security tokens help bring real-world assets (like stocks, bonds, and other securities) into the Blockchain so that it will be easier to access and trade over the internet (better liquidity). Security tokens, along with smart contracts, can make these tokens more programmable and thereby eliminating the need for a middleman. But migrating real-world assets to a blockchain has its own set of difficulties (like regulatory compliance, legal and much more).

Non-fungible tokens are digital tokens that are scarce and unique. It found its first use case in gaming like Cryptokitties and Decentraland. I see there are more tokens and real-world use cases to come.

Data Marketplaces — Data is the new oil. Everyone wants AI in their product, and AI needs millions of datasets. If you are not Apple, Google, Microsoft, or Tencent, you can’t create/mine data. So we need to buy it. Blockchain can offer a secure way to share data without a middleman or data leakage.

DLTs — Banks and financial institutions were one of the first to experiment with Distributed Ledger Technology for clearance and settlements. A simple bank transfer has to go through a lot of intermediaries, but with an open and transparent DLTs, the transactions could be settled directly. This could mean some serious cost savings for the financial institutions and banks.

DLT also found its way to the industries. IoT and Supply Chain are the starters, and more real-world tests will be performed to evaluate how the industry-specific DLTs stack up against traditional technologies.

Bitcoin — Bitcoin/altcoins — Bitcoin/Altcoin hasn’t moved the needle in peer to peer payments like most consumer platforms like Venmo or WeChat did in the past. People still see it as a store of value to hedge their bets and not as a medium of exchange. Another essential problem that plagues these currencies is scalability. If the volume goes up, transaction speed goes down while the fees go up.

Right now, developers are working on building another layer like the Lighting Network for example, on top of the bitcoin blockchain for cheap, instant bitcoin payments.

ICOs — ICOs may need CPR after the regulatory stance by most of the governments. But they are bouncing back with more decentralized networks that make these ICO tokens a digital commodity than securities. So this is a trend to watch out for.

Finally,

Bitcoin was truly a novel use case for blockchain technology. What started off as a way to get around these middlemen, these financial institutions have managed to adopt this tech as well. Now, FB Libra is on the horizon, although it hated by everyone, it potentially has the same level network effect to match the growth rate of Bitcoin.

Meanwhile, Blockchain and DLT will continue to disrupt industries like Online advertisements, Education, IoT, Music Industry, Insurance, Human Resource, Healthcare, Supply Chain, Retail, and many more.

Data Driven Investor

from confusion to clarity, not insanity

Sankaranarayanan

Written by

Marketer who works with VCs. Writes detailed reports (on Medium and my website tractics.co) that paints the landscape of an industry

Data Driven Investor

from confusion to clarity, not insanity

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