Let’s cut the waffle and get straight into the meat:
- ‘BLOCKCHAIN’ BECOMES UNFASHIONABLE
Yes I said it. But I mean the term itself. It’s already regularly derided in the developer community as a term at best used out of context and at worst misappropriated by the people it’s supposed to replace. But it has been, and still is, a powerful catch-all term that has caught the minds and attention of investors, media and corporations around the world ultimately serving the community well. And whilst to many early adopters in the UK and US, especially those with exposure to the financial services industry, it may feel we are ‘past peak’ in the Gartner Hype Cycle, in other industries like Health it’s only just catching on. I think it would be crazy to throw away this successful moniker for a more technically correct but less catchy Distributed Ledger Technology or ‘DLT’ for short.
If anything ‘blockchain’ has become shorthand for the next Web paradigm; a new more decentralised & automated Web that promises an ‘Internet of Ownership’ of assets, resources and data and not just for people or companies but a flood of new autonomous economic agents like self driving cars, smart homes or drones. It’s much more than just the sum of its parts, today distributed ledgers, crypto tokens and smart contracts, but rather an entirely new economic and social paradigm. So I propose if anything we call it what it promises to be: Web 3.0.
Healthcase & Blockchain IBM Report – https://goo.gl/N8p5Lf
- BLOCKCHAIN +
If you follow our work on ‘Convergence’ you will already know we are big champions of ‘blockchain enabled convergence’, a subject we published a whitepaper on in October of this year. Which has now gone on to spawn a series of global events, kicking off in London in October, and currently being extended to Berlin then likely Boston, Dubai, S. Korea and India throughout 2017.
A recent article by Harvard Business Review summarised blockchain technologies as a foundational layer which will enable both the transformation and disruption of industries in a long-cycle. However we are already seeing signs this foundational layer is shifting from being solely a shared transactional / data layer to enabling the secure scaling and then convergence of other major macro-trends like IoT, 3D Printing, AR / VR, Autonomous Robotics and AI.
We believe 2017 will see this thinking go mainstream as more practical use-cases come to light with some great leadership already being shown by the likes of Innogy & EY (as below).
The digital bank of converging tech will drive change at US banks – https://lnkd.in/dDeH4rT
Carsten Stoecker in a post for the World Economic Forum https://lnkd.in/dF3FYfb
- BLOCKCHAINS + AI
Taking this one step further by far the biggest take out for us in 2016 is the most promising convergence combination without a doubt being blockchain + AI. Simplifying this down these ledgers are in effect databases. If you assume a winner takes all permission-less database they could be a single source of data to take on the proprietary data sets of Google. If you believe there will be a multi-verse of linked up blockchains, like we do, you get narrow but deep data-sets created by whole industries or sub-sets thereof. Given the data will generally be open and owned by the commons the big bucks are putting AI on it ahead of the market.
In November, DeepMind, the Google-owned deep learning company, announced it was recruiting a “blockchain, not Bitcoin” engineer to work on a healthcare infrastructure project with the NHS in the UK. The fact DeepMind are planning to use blockchain infrastructure for health data is instructive when thinking about how AI companies will position their services to government and consumers. AI companies may choose to use private blockchains to give the customer control of their own data. Consumers may not be demanding blockchains, but forward-thinking AI companies may realise that blockchains are the only way to avoid future regulation and antitrust. In 2017, we expect to see existing AI companies and startups choose blockchain infrastructure to manage customer data.
Trent McConaghy’s vision for DAO AIs https://goo.gl/lzgcgU
- INCREASED ADOPTION BEYOND FINANCIAL SERVICES
There is growing consensus the next sectors to go big on blockchain are Health, eGovernment, Insurance, Energy and possibly Security. In our blockchain startup tracker (1,200 and counting), and equally important corporate tracker, they have been the fastest growing categories outside of financial services with an increasing number of private and public experimentation and thought leadership.
What’s interesting here is like financial services these are all highly regulated industries with long sales-cycles and in some cases are hyper-localised. It is our opinion this is going to require lots of cross-industry collaboration, possibly lateral R3s, and an increasing amount of very patient capital. Now in the case of insurance that may not be so hard given many insurers themselves actively invest their capital in VC funds, and as an industry desperately need to improve their bottom-line so you can imagine this indirectly or directly puts money in its direction. Because these are such complex industries with high barriers to entry we believe, at least in the West, innovation in these emerging areas will be of a more transformational than disruptive nature.
Blockchain Angels Startup Tracker blockchainangels.eu/startups
- INFRASTRUCTURE OPENS TO STARTUPS
There are a few stand out private blockchain infrastructure leaders emerging including: Uphold, R3, Guard Time, Ripple, Blockstream, Chain, Hyper Ledger, Monax and newcomers Credits, Intel’s Sawtooth Lake and BigchainDB (the later broadly many argue aren’t technically a blockchain company).
Most, excluding the likes of Uphold whose strategy has always been to be the e-money app marketplace, have been focused squarely on paying the bills with large corporate clients like big banks. However there is a gradual opening of code and support being offered to startups which shows the industry is at an inflexion point. Monax, previously Eris Industries, has been open source from the very beginning. Recently Hyperledger was fully open-sourced whilst Chain and R3’s Corda have now opened up their platform and APIs to the wider startup ecosystem in the hope they can extend their reach and increase the level of innovation happening on their platform. This forces the competition to follow suit in the coming months and possibly look to specialise in particular verticals that play to their strengths.
We think the winners will go one step further in 2017 and combine tech with direct investment or capital from SPVs (special purpose vehicles) comprised of the VCs that back them that also wish to make bets at the application layer which reinforce their investments in infrastructure. In fact we know this approach is definitely happening in some instances because we are putting some of the SPVs together on their behalf…
- CORPORATE FRIEND OR FOE?
More and more corporates, including the consulting and audit firms that serve them, have been dipping their toes into the blockchain ecosystem in 2016, sponsoring various hackathons, whilst also simultaneously developing their own POCs. Until now corporates have been happy to let new entrants lead, typically at an infrastructure level, whilst they test the water.
However what has gone unnoticed is many have often been quietly patenting various solutions as they go. Many believe, often including the corporates themselves, patenting technology based on open source code is challenging if not impossible but ethically it now brings a tension around who is a friend or foe of the startup ecosystem. The costs alone of defending a claim by a squatter means the levels of the financial firepower required to even play the game have gone up dramatically. Now many corporates have become convinced of the strategic value of blockchain technology, they will seek to leverage all their available resources to pull startups into their orbit and away from competitors. This will be a mixture of investment, acquisition and patent trolling with precedent likely being set first by the financial services industry titans like Goldman Sachs et al.
- SOME REGULATORS BREAK FROM THE PACK
Bitcoin is still a very small part of the global financial system, and non-Bitcoin applications of blockchain technology even smaller still. Regulators have had no pressing need to implement legislation to protect consumers beyond the early adopter communities. However in 2016 governments and regulators around the world came to see the benefits of using blockchains to improve efficiencies in some parts of the financial system let alone the promise of accelerating a move towards ‘cashless economies’.
In 2017, because of adoption in wider regulated activities, as outlined in point (4), we expect Bitcoin and blockchain to become further separated and compartmentalised in the minds of regulators allowing for more appropriate guidance for each distinct innovation. We expect regulators to continue to push ‘regulatory sandboxes’ like the UK’s FCA to encourage further innovation in the space where players like UK, Singapore, Estonia and Dubai vie to become global hubs. This will become increasingly politicised based on the financial health of the given economy, and its tendency for capital flight, and its desire to pursue an agenda of austerity on driving efficiencies on its public sector.
Blockchain Corporate Tracker outlierventures.io/corporate-blockchain/locations/
- RECAPITALISED VCS GO LARGE ON BLOCKCHAIN
Until now VC activity in blockchain has been limited to just 50 of an estimated 1000 globally, just 5% of the market. Now that’s not entirely surprising given the industry is still fairly immature despite a general trend for VCs to be investing increasingly earlier in the cycle. However, at least in the US, general VC activity has been slowing down due to a drought of exits allowing them to recapitalise.
For 2017 many, including Tech Crunch, are predicting a flood of IPOs unparalleled since the hay days of the 90s, allowing VCs more free capital to bet on the next wave. It could also be argued VCs have been unable to acknowledge there could be a new and potentially disruptive phase of the Web on the horizon that could undermine this current batch of IPOs. A position that can move from once they exit their positions.
- VCS PLAYING THE ICO GAME MAKE OR BREAK THE MARKET
A VC backed fund has just been setup specifically to invest in, and presumably trade, ICO tokens. Now this in practice is nothing new with many US VCs personally going long on Bitcoin whilst their fund invested in startups that were committed to the protocol. Their ambition was to play both sides creating a self-enforcing loop as Bitcoin gained from the network effect. Those same people played a little with Ethereum until it struggled with the implosion of The DAO and a series of hard forks middle of this year.
The conflict in this strategy is do you hold and bring stability to the system, supporting its long term prospects, or do you make the market move for short-term profit? It’s this volatility that can have a crippling effect on the viability of a protocol for real world business use-cases whose fixed costs are in fiat.
Our primary problem with ICOs isn’t their legal ambiguity (which is still a serious securities risk) but rather, in their current form as open ended markets, they are misaligned with long termism and stability which we wrote a whitepaper on earlier in the year. They effectively put the pressures of being a publicly listed company, with potentially thousands of shareholders, on a company often with little more than a business plan and a bit of code. You only need to look at ‘conventional’ crowdfunding to see how challenging the model is and that’s without the ability of backers to be able to profit from shorting you.
So. The question is will market makers be more like day traders or long-termist shareholders there to steady the waters? Either way VCs are set to win but will the broader industry?
- PERMISSIONLESS LEDGER TENSIONS CONTINUE
Its very difficult to make specific predictions on Bitcoin and Ethereum because there are so many unknowns and you are likely to be heavily trolled whatever you say with so many vested interests at play. Bitcoin hubris since passing the $1,000 watermark, and especially when compared to Ethereum’s messy post-DAO decline, would have you believe a clear winner has emerged in 2016 but I believe the jury is not yet quite out on this one. I do however think it is fair to say BTC will very likely only go up further in 2017 (do not take that as investment advice).
I should declare I have no holding in BTC, ETH or ETC nor as an investor do I have a bias which one dominates as long as I have a stable and flexible protocol to build dynamic startups on.
It has always been my belief any permissionless blockchain protocol has an inherent inbuilt tension. On the one hand they have some of the most powerful network effects we have ever seen in tech. As discussed earlier there is a clear and immediate incentive for people who hold tokens in one to invest, especially from their profits, back into startups building on top of their prefered protocol to further increase gains. And yet as there is an increasing variation in requirements and complexity from the industries looking to tap into a given blockchain’s benefits can one blockchain really serve them all?
I think the ‘block size’ debate is only the tip of the iceberg as both these protocols, and presumably any other new player that may emerge, will continue the tendency to both aggregate and fracture simultaneously. I would expect more new entrants like Ethereum Classic, which you can think of as a post-dao activist investor, or privacy-focused cryptocurrencies Zcash and Monero to try and chip away at these tensions. Whether they succeed or not who knows.
However what we can say is in 2016 what Bitcoin has proven without doubt is that it has become the prefered crypto for storing wealth digitally and in doing so yet again it has outperformed every other currency and metal. But I believe many people are making the miscorrelation that the value of the token is indicative of broader sentiment about the value of the underlying blockchain and its promise for applications beyond purely transactional uses. Bitcoin’s primary use-cases, beyond pure financial speculation, are still dark markets, international remittance, gambling & gaming.
On the flip side we can all agree Ethereum must go through significant reform to be a viable competitor, please see a very detailed critique here, however neither blockchain has succeeded in realising the promise of apps that cut into markets beyond financial services. In my mind Ethereum still holds the most promise, albeit a massively under realised one, of being a dynamic toolkit for dapp developers. If we think of 2016 as Ethereum very much in beta, 2017 should bring the first real batches of product launches from a mix of high-profile projects like prediction markets Augur and Gnosis, alongside a range of other startups like JAAK, Golem, and Ujo Music. All having been developed on the increasingly stable Ethereum development stack. This could deliver on some of the high expectations that people have of Ethereum but this industry moves are such rates it is almost impossible to say exactly how it will all turn out.