Follow the money: Blockchain
What’s (really) happening among all the blockchain hype?
How do we cut through the hype, and get a glimpse across what’s really happening with blockchain? I looked at investor data across hundreds of blockchain startups published at Coinbase to try and see what trends we could spot.
What I found was that despite investment activity being spread across a range of different startups, there’s (still) a concentration toward blockchain startups working on underlying infrastructure such as enterprise blockchain-as-a-service and fintech plays such as crypto wallets and exchanges.
Blockchain infrastructure serves developers is necessary to be able to efficiently take advantage of this technology. Cryptoasset and financial services focused blockchain projects are positioning aiming to offer banking and payment options to the global under- and unbanked, improve the experience over the conventional system, and offer a service that sits outside of the purview of existing banks and governments.
Where are startups focusing?
Looking at the quantity of startups focusing on solving particular problems or operating in specific industries, we see that there really is an incredibly broad range of applications that startups are experimenting in applying blockchain too. However, there is a significant dominance of attention being placed toward in one of two categories — blockchain startups are generally either pursuing cryptocurrency and financial services related activities or they are working on web3 and blockchain infrastructure.
A good example of a startup pursuing cryptocurrency and financial services related activities is San Francisco based company Coinbase: A cryptocurrency wallet and exchange that allows individuals to buy, sell, and exchange cryptocurrencies. Coinbase was founded on 1 June 2012 and since then has raised $547.3m in investments, including a $300m series E round and is backed by prominent investors such as Andreesen Horowitz and Bank of Tokyo — Mitsubishi UFJ.
Similarly, an example of a startup pursuing web3 and blockchain infrastructure related activities is Tel-Aviv based Orbs: A blockchain-as-a-service startup focused on serving established consumer brands. Founded in 2017, they have reportedly raised $133.4m across two rounds of investment.
After infrastructure and finance, there is interesting activity appearing in artificial intelligence & machine learning (AI/ML), and security. It is difficult to discern between the genuinely interesting startups in this group from those who have added blockchain or AI/ML to their name for marketing reasons. Startup Figure claims to be using AI/ML and blockchain and reviewing their site it appears that their using blockchain for operational transparency purposes, and (probably) using AI/ML to assist in the customer experience — however to call this AI/ML may be more like calling Netflix an AI/ML company after learning of how they recommend the next TV show to binge watch to you.
Ocean Protocol features in the blockchain and AI/ML list, and is a very interesting project. They aim to use cryptoassets to create economic incentives around data marketplaces, hence expanding data access for AI/ML purposes. This is reminiscent of numer.ai, and an exciting project to follow. Ocean Protocol was founded in 2018 and raised $28.1m over two rounds using an initial coin offering (ICO) mechanism.
Where are investors putting their money?
Investors seem to agree that the most interesting and important investment for web3 and blockchain is in the underlying infrastructure. Despite the wide spread of investments, the majority of investment volume has been directed toward web3 and blockchain infrastructure (reflected in ~$9.4b of investment flows), with internet-of-things ($9.1b) and enterprise blockchain ($9b) applications getting plenty of attention too.
Smaller investment volumes are being directed toward financial services related applications (cryptocurrency, insurance, fintech) and real-estate. Each reflecting approximately $500m of investment flows indicating investors see promise in directing blockchain technology toward these sectors.
However, when we shift from looking at total investment volume and try and look at where investment is concentrated we see that the biggest average investments are being directed toward blockchain startups focusing on enterprise, and internet-of-things applications, as well as web3 and blockchain infrastructure.
What companies are doing well?
The web3 and blockchain sector has been fraught with scams and companies dubiously raising millions / billions, so ranking companies by total amount fundraised would be disingenuous. Listed below are the top 10 blockchain companies according the Crunchbases CB rank.
What can we take away from all of this?
Looking at the top 10 performing startups, web3 and blockchain is coming after financial services with force. The main problems startups are looking to solve are:
- Improving the retail experience so that it’s easier for individuals to purchase, use and invest crypto assets
- Infrastructure investments (e.g. stable coins, institutional treasury management)
- Consumer offerings directed towards financial control and privacy
The excitement surrounding this technology has not gone away, the evangelists are busy building new products and organisations. The technology behind these startups is heavily focused on improving the global financial infrastructure, ranging from consumer payment offerings through to institutional tooling to enable cryptoassets to become the new norm for the sector. What’s less clear are the business fundamentals that sit behind many of these startups. Time will tell if many of them can find the business models that support their valuable contributions.
The investments into blockchain infrastructure backup Gartners view that we are still some way from mass appeal. Fundamental infrastructure still needs to be developed before main stream applications can be widely introduced.
What’s driving the focus on finance and payments?
One answer is that we are likely living through an asset bubble and cryptoassets are caught up in this. Which means speculative investment (rather than real investment) is driving capital into the blockchain sector under somewhat false pretenses. While this is true, finance and payment infrastructure globally is insufficient for billions of the worlds population, which presents an opportunity for business.
Some countries, such as Australia, are blessed with a very modern financial infrastructure. Such infrastructure includes near real-time cash transfers and near ubiquitous touch and pay infrastructure supporting Apple Wallet, Google Pay etc. But this infrastructure is severely lacking in many parts of the world to the extent that 2.2b people globally considered unbanked, and 55m people in the US who are considered unbanked or underbanked in the US. So despite the Australian experience, there is much global excitement in making it easier for individuals to access banking and payments infrastructure, along with improving the experience of banking and payments.
Beyond these functional needs of individuals blockchain evangelists also express the unmet need of being completely in control of their money. They are no longer satisfied with banks and governments acting as custodian over their financial life, they speak of the weaponization of finance, and fear the abuse of power that comes from the global shift to digital currencies and transactions. I’m predicting the growth of the “responsible technology” consumer over the next 10 years, which will drive more innovations like this — not just in finance but other sectors too, in defence of personal data and reaction to persuasive technology and the “attention economy”.
When examining the state of blockchain, it’s important to do so through the lens of these unmet needs of the market. The market is asking for the 2.2b unbanked to have access to modern banking and financial services, it’s asking for the banking experience to keep pace with the on demand nature of our digital lives, and it’s asking for the option to be completely in control of their finances.
