Elusive horizons of blockchain adoption: From crypto-currencies to global commerce
It has almost been a decade since the advent of blockchain, which emerged both as a decentralized paradigm for doing business (in the form of fair exchange of value), as well as a digital platform with peculiar properties of information management, data assurance and privacy. Blockchain platforms promise to transform the efficiency of doing business by building higher barriers against malicious behavior and making transactions lot easier to verify. This is accomplished by a digital network of actors, who constantly transact, commit and verify the flow of business, aligned closely by an intricate economic model implemented as a software protocol that collectively delivers orderly business processes — also called the Consensus Protocol. Despite the overwhelming excitement around the new tech innovation, the jury is still out with very little “consensus” across opinions ranging from declaring 2018 as the year of its arrival to outright pessimism on its purpose in the world!
We, at The Hive, have been tracking the evolution of blockchain as a platform since its inception with Bitcoin and other cryptocurrencies. At the technology plane, it has been an unprecedented confluence of distributed systems, cryptography and information theory into a single platform. Traditionally these three foundational technology areas had evolved independently as databases, information security and telecommunications respectfully. Cryptography takes a front-seat in blockchain platforms going beyond securing users and communication, driving both service assurance (through the aforementioned Consensus Protocol and programmability of services through Smart-contracts) and information assurance (by constructing high-resistance against attacks and low-cost verifications). Hence, blockchain features prominently in several frontiers of innovation like zero-knowledge proofs and secret (information) sharing.
Consistent with our investment thesis, we have focused on applications of blockchain platforms in our core B2B areas of interest including enterprise automation, industrial Internet, cybersecurity, financial services and retail/commerce. In particular, we have been evaluating the disruptive value and business premium of blockchain’s approach towards service and information assurance in our areas of interest by delivering transformative disintermediation, service agility and/or orchestration of decision making (and automation). Our venture decisions have been influenced by both maturation of technology and timing of new business ecosystems firming up around the decentralized fashion of operations. The business ecosystem timing is a more sensitive aspect of blockchain adoption as it demands alignment with industry-level economic trends; and cannot be led by a single (sometimes benevolent!) market leader unlike previous platforms like cloud (Amazon), mobile (Apple & Google) and big data (Google, Facebook et al). We see three horizons of disruptive business transformations driving the adoption of blockchain, which form the basis to our growing portfolio of decentralized businesses.
Horizon 1: Securities & Trading
Bitcoin was originally designed as a payment instrument with autonomous issuance, provenance of exchange of value to back ownership and a double-spend resistant continuous clearance cycle to bring liquidity. The design of these features leveraging blockchain’s innate service and information assurance properties can be extended to many kinds of financial instruments like bonds, stock, derivatives and credit.
Our portfolio company Blockstream delivers bespoke and private asset management networks layered over consolidated trade flow capacity across multiple blockchain-based markets. The asset management networks are created on Blockstream’s Liquid platform, which get access to the consolidated scale, liquidity and operational efficiencies of the underlying markets, along with confidentiality, privacy and structured finance. The confidential trade positions in the asset management network and the bespoke trade services for synthetic structures are built using cryptographic structures called Sidechains invented by Blockstream. We see an opportunity for Blockstream to significantly disrupt the $225 trillion financial assets market over the next 5–10yrs by digitizing and virtualizing asset management networks with blockchain-driven consolidation of underlying trade flows driving unprecedented scales of liquidity and operational efficiencies. Liquid recently reached a key product milestone and becomes GA in May with several exchanges trading cryptocurrencies already deploying it.
We remain actively interested in more blockchain applications in this horizon, especially in the liability-centric securities like credit, insurance and swaps.
Horizon 2: Service Operations
Blockchain’s elemental primitives of service and information assurances have the potential to be relevant across a wide spectrum of digital services far beyond financial services. The abstract process of delivering a service (say, e-commerce) can be broken down to assurances around an atomic change across a set of state variables (e.g. assets owned by the merchant and shopper). Hence, Blockchain can deliver robust operational support system (OSS)-style service assurance for operations that are inherently decentralized.
An example of decentralized service operations is the class of emerging digitized Edge services consumed by industrial operators. Our portfolio company Xage Security is the first and only blockchain-protected security platform for the Industrial Internet of Things (IIOT). Xage creates the essential trusted foundation for secure interactions between machines, people, and data. Xage leverages blockchain to distribute authentication and private data across the network of devices, creating a tamper-proof “fabric” for communication, authentication and trust that ensures security at scale. Xage supports any-to-any communication, secures access to existing industrial systems, underpins continuous edge-computing operations even in the face of irregular connectivity, and gets stronger and stronger with every device added to the network. Xage customers include leaders in the largest industries, spanning energy, utilities, transportation and manufacturing. The appeal of Xage for customers often involves solving today’s decentralized industrial security challenges while also opening up a foundational platform for future multi-party peer-to-peer IoT applications such as smart cities, transactive energy, and autonomous transport.
The Hive is looking into service operations in other vertical and functional areas for new ventures in this horizon of applications of blockchain.
Horizon 3: Asset Tokenization
A more radical horizon for applications of blockchain is the active management, value-based pricing and malleability of non-financial assets (like fixed assets, AR, inventory et al) held by enterprises. This has deep implications for financing and performance management of industrial and digital assets.
Non-financial assets are managed passively in a coarse-grained manner today. They are financed by financial assets (like debt, credit or equity with counterparties) with a rigid, pre-determined block depreciation cycle. The average operational efficiency across multiple classes of assets is expected to serve the consolidated liabilities emanating from the financial assets. The liabilities are held by either or both of the leasing company and the asset operator.
Asset tokenization consolidates financing, liability management and operations of the asset into a blockchain-driven network of malleable tokens that permit dynamic value-based pricing and reallocation of liability exposure. The asset is commissioned with a pre-determined distribution of tokens between the financing, owning and operating entities. Greater consumption of the asset leads to a rally in the value of the token boosting yields for all stakeholders. Poor performance of the asset (incl. outages, incidents etc.) puts a downward pressure on the token price forcing a reallocation of liabilities. This turns enterprises’ balance sheets transparent to the operational efficiencies they can drive over their assets; also making balance sheet restructuring a continuous process.
We foresee a new layer of blockchain-based decentralized applications focused on market efficient and transparent operations of assets. The Lightning Network is the first step towards developing platform standards for these “Layer-2” applications focused on designing and delivering structured transactions for asset operations. Our portfolio companies, Lightning Labs and Blockstream, are both nurturing a fast-growing community of entrepreneurs and enterprises developing Layer-2 blockchain applications. I had discussed the applications of Lightning in asset tokenization (especially for asset operations in the emerging shared economy) in my earlier blog.
We are exploring applications of blockchain in this horizon in industrial use-cases involving long periods of asset depreciation (15–30yrs) with rigid financing contracts. While operators are moving to usage-based pricing models, the leasing arms of industrial manufacturers still have to deal with passive asset blocks.
As we forge ahead with co-creations in this space, we are cognizant of new business challenges imposed on the partner ecosystems. The growing microcosm of decentralized businesses still need to co-exist and interoperate with a predominantly trust-based centralized economic macrocosm. We need to be very careful in wiring the trade flows seamlessly between the two worlds, else the decentralized will get instantly starved off business. Benevolent (cough!) market leaders cannot steamroll like in the case of previous platforms, as it defeats the foundational tenets of this platform. Blockchain platforms need collaborative community building accompanied by service marketplaces to create sustainable businesses. Equity value is no longer created by consolidation of flows (like an Uber or AirBnB) but only by excellence in service execution. Enterprises, entrepreneurs and investors need to adapt to these new realities to realize the elusive horizons of blockchain adoption.