Blockchain Perspectives Part I
Happy New Year everyone! The community experienced quite a bit in 2018 and in several recent conversations I have been asked Dekrypt’s thoughts on the current state of the industry and what trends we pay attention to. In response to this I have decided to write a series of short articles.
Technical Solution to a Social Problem
The world we live in today is the product of millions of social experiments. Much of this has slowed due to rapid development that eventually led to the governance models and institutions we are familiar with today. As groups coalesced forming established countries and rules/regulations began to limit the scope of possibility, the darwinian evolution of culture in the physical world has shifted to a steady refinement of status quo.
Enter Bitcoin. In solving the double spend problem, it offered a technical solution to a significant social problem: trust. It created the potential for revolution in governance and monetary policy which would not have been possible otherwise. Looking at macro trends, there has been an oscillation between centralization and decentralization, culminating in more recent history as a rebalancing between power of companies and that of the individual. Significant power has been gained by companies and institutions in the last few decades and a technical innovation which allows for the replacement of intermediaries offers a potential catalyst to return much of that power to the individual.
A pattern that we find quite interesting is that of technical innovations and their eventual trade off in efficiency for some other purpose. To provide examples, the mainframe continually iterated to become more efficient. In the mid 1970’s the introduction of the personal computer makes little sense when focusing on efficiency as a metric. Before then, efficiency was prioritized above all else, but at a certain point, a personal computer was a viable next step. It was nowhere near as powerful as a mainframe computer but it enabled access for the common person and vastly increased potential for use. Another example can be found in the shift from intranet to internet. While having a small, siloed network allows for much faster transfer of data, creating infrastructure that allows participants to share information and interact all over the world was truly revolutionary. Both of these examples can be seen as a step back from the original focus of the technology. This leads us to blockchain. Big data has been the most recent focus, and large data storage facilities continue to grow in both size and number. Blockchain chooses to utilize this storage in an extremely inefficient way in order to get something unique: digital continuity. Continuity is something that we take for granted in the physical world since it is impossible to perfectly create a false replica. It is possible to get something close but nothing that matches the ease in which things can be replicated in the digital domain. This, the solving of the double spend problem, is what is so impressive about blockchain.
Metrics that Matter
The solving of this single problem started an entire movement and has led to the creation of numerous projects. The beauty of being able to incentivize the development of open source infrastructure is hard to understate. When looking at the challenges of creating something like the internet and the funding methods required, it is truly amazing to see something like bitcoin be created. Rewarding those who help secure the network and delegating trust to the periphery created a system in which trust in a centralized party is not required. In 2017 with the boom of the ICO this idea was extended to projects built on top of protocols. This has been problematic for several reasons. Most of these projects required their token to be used in order to get some form of utility of functionality. This creates a hurdle for adoption in an industry that already suffers from lack of users. In our opinion, many of these projects resemble conventional businesses and should utilize conventional business models that leverage the underlying platform’s unit of value. This decreases the barrier to entry for users as well as incentivizes usage of the base platform’s native currency.
In blockchain we focus on three core metrics: trustlessness, immutability, and decentralization. Making concessions on these three is problematic in my opinion because it is a very slippery slope. It is often said that in order to be successful, a solution must be 10x better than what already exists. This has been a challenge for many blockchain projects because they attempt to replicate what already exists rather than focus on utilizing this technology for what it is uniquely suited to do. If these systems attempt to create a digital republic that requires some semblance of trust, or puts a cap on the number of participants required to reach consensus, this can leave the project susceptible to a range of problems.
Those willing to give up a little decentralization for a little throughput will quickly find themselves resembling the institutions they seek to replace.
Often times the defense of projects that make concessions on these three core metrics is that they are much cheaper than the centralized solutions that currently exist. They claim that an open-source solution lowers cost and makes it easier for all participants to agree on a shared solution. While there is some validity to this, it is hard to believe that this situation will remain if their solution begins to gain widespread adoption. As competition increases, it will be a race to the bottom and a motivated, centralized solution has the potential to win because many of these applications focus on metrics blockchain is not optimized for. Many of these use cases utilize blockchain simply because the hype has created an environment where companies are willing to try something new and replace the horribly inefficient and disjoint systems currently in place. Digitization and standardization can be hugely beneficial to companies but it is a terrible disservice to blockchain to state that it is always the solution best suited for the job. We believe this has created confusion as individuals begin to deep-dive use cases and find better solutions that do not require blockchain.
Progress Without Concessions
Recent work by Dekrypt Managing Partner Howard Wu has driven much of our perspective on how the space could evolve. With the introduction of ZEXE and DIZK, one can start to see that batching transactions and completing computation off-chain is a much easier scalability problem than trying to propagate each transaction and perform all computation on-chain. Creating proofs off-chain and then verifying the validity of said proofs gives up none of the properties we believe are integral while achieving impressive scalability improvements. The internet did not constrain itself to ten users so that it could match the speed of intranets, it consistently maximized for connectivity and increased throughput until it got to what we see today.
So much amazing work is being done to push the boundaries of what is currently possible. At Dekrypt Capital we strive to align ourselves with the innovators - the missionaries as opposed to mercenaries. To become a 10x better solution, a story or narrative can work wonders in helping to both organize and incentivize participation. In our experience growing open-source communities, the ability to inspire has been a much more important metric than marketing or money. Many blockchain projects promise disruption and opportunity on a massive scale. It is not unfair to make the comparison to religion in this regard as the most ambitious projects must blur the lines between educating and proselytizing. In the same vein, we believe something of this magnitude will require a shared myth or belief in order to motivate and organize on a grand scale.
Pieces of the Puzzle
Blockchain is not exciting in a vacuum. It really begins to shine as it connects both disparate participants and industries. The benefit seen in connecting is even more significant when looking at other technological developments such as AI and IoT. Interfacing with the physical world remains one of the largest problems due to the continued necessity for a trusted oracle. Development in the domain of IoT and AI could allow for input, agnostic of human error or opinion. The ability for other industries to solve blockchain specific problems should not be overlooked. I see blockchain as a piece of the decentralized stack of the future. It may be a small piece of what ends up being built, but I believe it to be an integral one. At Dekrypt, we look for teams using blockchain for what it excels at while utilizing other technologies for the things it does not. Being critical of when blockchain is needed is something that is slowly gaining traction as overall education and experience increases.
This stack will take some time to come together as there is much work that needs to be done before any of the individual pieces are ready, let alone for them to connect. In the more immediate future, we believe that enterprise will drive significant innovation. According to a survey conducted by Deloitte, 95% of companies plan to expend capital researching or implementing blockchain in 2019.
This confirms what we have seen and heard from our enterprise connections and drives much of our investment strategy. Many investors look for “moats” to ensure the sustained value of their investment and to fend off competition. At Dekrypt we believe that an important aspect of the current blockchain landscape is the existence of a mental moat. In building multiple solutions for enterprise clients, combined with our deep connection to academia, we focus on sourcing and supporting teams building novel solutions that address the core problems of scalability, usability, and especially: privacy.
The vast majority of projects build something that looks interesting, but consistently lacks a solution to one or more of these core problems. Our portfolio companies address these problems head on, creating the potential for partnerships, licensing deals, or acquisitions. There are an ever growing number of companies that have the interest as well as budget to enter this space, but the vast majority lack the technical competency required.
Finding Value
Investing in teams who use off the shelf tech can be problematic. Many of these teams raise and spend millions obtaining licenses and conducting marketing while much larger players in the same domain already have both. At Dekrypt we have seen many large tech companies and exchanges begin to aggressively move into the space. Time and time again they lack individuals and teams able to address and innovate on these core problems. This is the current bottleneck and where we believe value will accrue as more companies increase development budgets.
To put it more bluntly, if a small exchange plans to beat Nasdaq, how realistic is that? If they hope to get acquired when their core contributions consist of a few pending licenses and a matching engine, why would they be chosen over the ten other decks describing a similar approach? Execution based projects that can quickly be replaced by large existing players is something we avoid. Investing in teams and individuals working to solve problems no one else can is much more interesting to us. This is agnostic to use case. If it is an entirely new business model or idea with no existing incumbents, or replaces existing intermediaries entirely, that is quite interesting. If it attempts to iteratively improve on something that already exists, in a vertical dominated by existing companies, it is imperative to have something proprietary or novel that existing solutions do not already have.
This mindset of sourcing and supporting current mental moats aligns quite well with our focus in the privacy domain. In our opinion, privacy is the single most interesting and important piece being worked on currently. Zero-knowledge proofs are unique in that they allow data to be attested to but not revealed. This drastically changes the dynamic requiring the storage of data to simply interacting with it as needed. As data becomes more and more valuable, and rules regarding the mishandling of it more strict, it necessitates a change in business model. This top down, legislatively motivated disruption is something that we are keeping a close eye on. It is not a small thing to replace deep seated institutions, but it can be much easier if an entirely new solution is required.
In the next article I will further explore different privacy technology and potential applications in the blockchain space.
Final Thoughts
1) Avoid projects that place trust in people or groups to do the right thing. That misses the point. There are too many external factors that can cause issues.
2) Ask yourself why does this need a token? Why does this need a blockchain? Being critical is key to legitimacy. That being said, try to find a happy medium between hyper-critical of where the space currently is, while attempting to see a future where all of these disparate pieces connect. Building a bridge between the two is where the focus should be.
3) Good enough solutions are fine for a plethora of metrics, these things take time to develop and certain aspects may never be as good as centralized solutions. Making concessions on the aspects that we believe are core to blockchain: trustlessness, decentralization, and immutability, is in our opinion, the wrong approach.
4) Education and community. These are the areas that are paramount to the success of this industry. Blockchain excels when people/companies/industries come together. The more individuals involved the better. The reason there is predominantly speculation and trading is because that is the only way most can participate. Education raises the bar of participation and benefits us all.
5) Focus on where this technology intersects and enables. Developing in tandem with IoT, AI etc. is extremely important.
6) This is very much a technical solution to a social problem. Approaching it from just a developer mindset or a philosophical mindset are both flawed, focus on the intersection.
7) Privacy is a requirement to unlock significant functionality and enable a plethora of use cases.
