Outlier Ventures monthly brief — February
Forget price — the blockchain ecosystem is maturing and finally delivering with real-world products and timely regulation!
January may have been the wildest months in the token economy after what seemed like a bull run that would go on forever. Markets that may have been blinded over the incremental returns tokens produced in December found itself in panic as regulatory hurdles and operational hiccups (*hacks*) came one after the other. It may have been a scary time for first time investos to enter the market but enthusiasts that have been in the ecosystem for a while would understand that this is only normal in the growth cycle of the token ecosystem. Price action aside, the industry has been hard at work. Regulators continue to provide clarity, start-ups have been raising and pivoting products to meet consumer demands, and enterprise interest is slowly evolving from proof of concepts to real deployments. Price is at the moment a weak signal of the growth and utility of the blockchain ecosystem. It’s better to look at enterprise applications and development roadmaps. One would think this is the end of the world waking up and seeing charts full of red, but there has been no slowdown in innovation or enthusiasm over the course of the month.
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Startups
In 2017 ICOs raised 4 times more than traditional VC funding for blockchain startups. The ability of a crowd to back a project is a challenge recognised by venture capitalists around the world. We have been seeing an increasing case of larger series B round checks being signed off to mature companies that started off during the first wave of Bitcoin’s price rally in 2014. As is the case with all ecosystems, companies that have raised substantial amounts have also been pivoting and exploring alternative models to accelerate growth.
Ledger
French hardware wallet startup Ledger, has raised $75 million in one of the largest series B rounds in the ecosystem to date. The second round of funding was led by European VC fund Draper Esprit. The funds raised would primarily be used for research, development and expansion of the firm’s operations around the globe according to Ledger’s Chief Executive Eric Larcheveque. Although the token economy has grown substantially over the last year, the infrastructure for storage of tokens and secure transfers has been slow to arrive. News of exchanges being hacked and individuals losing private keys have become a norm over the past year. With over a million Nano S’s sold over the course of the past few years, and funding will be used to scale Ledger so it is in a position to acquire a new generation of enthusiasts that have been flooding the gates of the token economy. Psst… If you are still storing your tokens on an exchange, now might be a good time to secure them.
Blockchain
Bitcoin wallet service, Blockchain.info launched a service to buy and sell cryptocurrency in the United States as a direct competition to Coinbase. The UK-based company had earlier raised a series B round of $40 million in what was one of the largest fundraises of the time. The startup claims to have over 22 million users, of which 1 million use the platform on a daily basis. Blockchain.info has been an important tool for individuals that are new to the token economy. The platform primarily allows individuals to set up a wallet without having the ‘challenge’ of downloading the entire blockchain or storing private keys. Although the method is not censorship-resistant as Bitcoin was originally designed to be, the simple experience has contributed to a lot of “first-time” experiences to individuals transacting through Bitcoins. The startup’s latest pivot to offering purchase and sale of Bitcoins could be an indicator of the low-profit margins involved in being a wallet only business. Whatever the reason, it is always good to have an alternative platform as a gateway to the token economy.
Sovrin
After two decades of the Web, identity remains broken. Be it the latest hack on Equifax or Russia’s alleged trolls meddling with the state elections in America, broken systems of identity verification have affected the normal functioning of society. Most recently, India witnessed its centralised identity system named “Adhaar” giving hackers access to the biometric data of millions of individuals. While blockchains have the potential to automate and scale trust, their ability to decentralise identity and create censorship-resistant, self-sovereign ownership has not taken substantial scale just yet. This is why we had invested in Evernym and Sovrin in 2017. The product allows individuals to make “verifiable claims” that may be linked to their identity or a transaction. The days of trusting a central authority with AML/KYC related documents would long be gone as a chain capable of verifying and attesting them through decentralised identifiers take centre stage. Our portfolio company Sovrin, recently released their whitepaper explaining more on the matter. Grab it here.
Enterprises
The constant jump in stock prices associating themselves with “blockchain” have enticed multiple enterprises to position themselves as “blockchain” ‘adopters’ over the course of the last two quarters. Kodak even went ahead and announced an ICO. Pointless speculation and price bumps aside, the last month has been phenomenal for blockchains in the context of enterprises. Larger names with real products have begun being open about how they position themselves within the ecosystem. Be it banks such as Sberbank or a search engine like Baidu, it is becoming evident that the ecosystem will see an number of older, well capitalised companies entering the industry with superior product offerings.
Sberbank
Russia’s Sberbank, opened a blockchain laboratory to develop and test new blockchain-based solutions. in January. While blockchain technology was initially approached with a degree of scepticism by some banks, Sberbank has been actively involved in the ecosystem since they joined the Enterprise Ethereum Alliance in October. Sberbankhas now piloted projects with major partners such as Severstal, and Russia’s largest consumer electronics retail chain M.Video. They now have over 20 blockchain-based pilot projects. Sberbank represents another financial giant now from a long worldwide list of firms looking to implement blockchain-based projects.It will be interesting to see if Sberbank will be working with the Russian government in the future, who have made several attempts in recent years to create cryptocurrencies — one notable innovation being the Bitcoin analogue RuCoin.
Baidu
Chinese search engine behemoth Baidu (the Chinese Google) has joined the list of companies offering “blockchains as a service”. Baidu Chain has been in use by businesses for asset securitization and exchange. The project’s site explains the basic use cases of a blockchain such as tracking, auditing, financial management and credit. This puts the organization in the direct competition with Tencent, it’s mortal competitor. Other international companies looking at “BaaS” as a business model include IBM, Microsoft and Mastercard. Interestingly, Amazon Web Services has shown little interest in launching a BaaS business. However, they have been partnering with companies in the space and are open to proposals.
Given the sheer size of China’s market, Tencent and Baidu stand to gain heavily from blockchain adoption in South East Asia. The other BAT — Alibaba — has a unit researching blockchains. Integration of the technology into Alipay could be crucial for mainstream adoption. If trends point to anything, 2018 will be the year where enterprise blockchains lead the rally for consumer adoption. If so, what will happen to the idea of a censorship-resistant information network?
Maersk
IBM continues to take the lead in onboarding enterprises towards blockchains. In its latest move, the conglomerate has partnered with Danish shipping giant Maersk to create a new company to introduce blockchains into logistics. 51% of the new entity will be owned by Maersk while IBM will control the rest. The goal of the company is to help ports, customs offices, banks and other stakeholders in the global supply chain reduce the amount of paperwork involved. According to a 2013 study by the World Economic Forum, reducing the barriers involved in information sharing and border administration in global trade could increase GDPs from 5% to 15%. A worthy reward for all the effort that would go into revamping legacy systems to be blockchain compatible. Another example of the growing split between permissionless blockchains for censorship-resistance and distributed ledger technology for back-office automation.
Governments
The constant price rise we witnessed in 2017 spooked many regulators. The SEC has been consistent in delivering notices to possible perpetrators. China, South Korea and Japan have also stayed vigilant about the token economy over the course of the month. States have also begun engaging with startups to see where a blockchain can be implemented effectively.
Estonia
Estonia has continued to set the standards for nations trying to go digital through a recent green energy project launched on a blockchain. The nation had earlier launched a Keyless Signature Infrastructure and launched an E-Residency programme that used a blockchain technology to varying degrees. A recent partnership between Elering, an electricity and gas operator and WePower, a blockchain based energy trading platform has been announced with the intention of increasing green energy consumption and sustainable living. Elering is primarily creating a smart grid platform on an existing data exchange layer named estfeed for the trade of electricity and gas.
By using smart contracts, data analytics and machine learning such smart grids are able to reduce carbon emissions through encouraging greener forms of energy production, decentralize it by sourcing it from multiple individuals and democratize it through giving a free marketplace that allows a Laissez-Faire model to trade energy. For a more in-depth analysis of where energy is headed as a sector, read this report written in collaboration with UNEP.
United States of America
Over the month, news broke that the CFTC (The U.S. Commodity Futures Trading Commission) subpoenaed the “stable” currency solution Tether. The notice was issued on Dec 06, 2017, almost two months ago. Tether provides a cryptocurrency commonly known as ‘USDT’. The premise of the currency is to provide stability and liquidity in a market which lacks in both. To do this, they claim that every tether is attached to one real US dollar held by the company. The issue being investigated is whether this claim is true. It has long been suspected by some that tethers are issued out of thin air. This viewpoint arose following the theft of 120,000 bitcoins from Bitfinex exchange on August 2, 2016, and the consequent issuance of redemption tokens to victims. For anyone interested in full details of this story, we urge you to check out this post by Bitfinex’ed.
The companies in question are known to have undergone an audit in September by Friedman LLP. However, the audit was never fully completed and the companies have since cut ties with one another. Much of the fear surrounding this story comes from the belief that if it is found that tethers are not tied to real dollars, both Tether and Bitfinex could go under, which could negatively affect the entire market. However, this is not a one-sided story. Although the subpoena occurred almost two months ago, Tether has since issued almost $2billion USD which is believed to have fuelled the meteoric rise of the token economy. Despite the rising concerns over the last day, Tether has not lost parity to the dollar on exchanges…
South Korea
The markets in Asia have been struggling to find momentum over January with concerns about a total ban on cryptocurrency. The uncertainty ended half way through January with a clarification from the government. The Finance ministry of South Korea clarified that the nation will have no short-term ban on cryptocurrencies. The announcement came after over 60,000 signatures were collected for a petition demanding the minister that had suggested the move was replaced. Finance Minister Kim Dong-Yeon stated:
“All government ministries agree on the need for a government response to an overheating in cryptocurrency speculation and for a degree of regulation. The issue of banning exchanges that the justice minister talked about yesterday is a proposal by the Justice Ministry and it needs more coordination among ministries.”
South Korea has been a hub for cryptocurrency-related activities. Unable to handle the inbound demand for tokens, a local exchange had recently stopped accepting new users. When it did open registrations, the exchange saw over 240,000 users registering within an hour. Meanwhile, China’s largest cryptocurrency NEO has been continuing to surge in spite of China’s clampdown on tokens, exchanges and mining. Indonesian officials stated that Bitcoin-based payments are not legitimate. As nations continue to attempt to ban tokens, it is important to realize that a completely peer-to-peer based currency cannot be eradicated within national borders. An outright ban would only push individuals towards trading in fiat notes. By ensuring exchanges work in a regulated fashion, individual nations could practically avoid creating a parallel economy outside their reach.
Token Analysis
No dearth of thought-leaders in the fastest moving industry in this day and age. The beauty of working within the token economy is the fact that it brings together economics, politics, technology and basic common sense in a way most other industries cannot. Sometimes, we tend to look at markets and wonder if this is the greatest financial experiment that has ever occurred in the history of mankind. It may be hard to see through all the noise that keeps stemming from the space. That is why we have compiled some absolutely compulsory reads for you. We look at pieces from our CEO — Jamie Burke and a long form from NY Times in the month’s brief.
Cleaning up crypto, let’s get back to the future! — Jamie Burke
The token economy changed a lot in 2017. A fair amount of discussion and focus shifted from ideology and business models towards price action. The media embraced a new “generation” of experts with no prior experience in the space (eg: Wolf of Wall Street) instead of providing context and guidance to what was actually going on. Although the year left many considerably richer, the lack of guidance and signal through the noise may have left many confused and focusing on the wrong things. Our CEO, Jamie Burke recently penned a post with a manifesto on how those of us who care about our industry can take back control of the narrative to put the focus on value creation over speculation. The post ends with a call to arms for 2018 that should guide investors, start-ups and enterprises that embrace the token economy. Read it here.
Beyond The Bitcoin Bubble — Steven Johnson
Any time there is a dip in the price of tokens, it is normal for experts to come out and call things a bubble. Pointing fingers at irrational exuberance are easy. Providing guidance and leadership towards directing something as groundbreaking as blockchains to a point where it truly disrupts human society takes grit and effort. A recent piece on NY Times explores why the rise of the token economy is more than just a means to attain quick wealth. It looks at how things that were unimaginable a decade back such as transacting money globally without a trusted intermediary is now possible thanks to blockchains. The piece explores how the token economy has more to do with democratic governance than brute capitalism and then proceeds to make a case for the need for open protocols to rise. We leave with a parting note from the article itself.
“Yes, the blockchain may seem like the very worst of speculative capitalism right now, and yes, it is demonically challenging to understand. But the beautiful thing about open protocols is that they can be steered in surprising new directions by the people who discover and champion them in their infancy. Right now, the only real hope for a revival of the open-protocol ethos lies in the blockchain. Whether it eventually lives up to its egalitarian promise will in large part depend on the people who embrace the platform, who take up the baton, as Juan Benet puts it, from those early online pioneers. If you think the internet is not working in its current incarnation, you can’t change the system through think-pieces and F.C.C. regulations alone. You need new code.”
Read the article here.
