Last week, I attended the 2nd Annual Blockchain Conference in Toronto. Given recent cryptocurrency turmoils, I was hoping for an even-keeled event, but the name of the game was hype. Statements like “…everything will be tokenized…”, “…blockchain will help solve child labour” or “…will eliminate inequality” were thrown around. To borrow terminology from Gartner’s Hype Cycle I can say that blockchain technologies are still sitting comfortably atop the Peak of Inflated Expectations (is there a higher peak?).
I sat back and took it all in, but also looked hard to find some balanced takeaways and lessons. Below are some points that I gleaned from the conference with some of my own commentary.
The tension between centralization and decentralization
Centralization of internet technologies has created some serious negative consequences. Chris Dixon details this view in this article: an unfriendly climate towards entrepreneurs and developers, consumer data privacy concerns, and the proliferation of spam and fake news. All this leads to less innovation and wider societal issues. The theory is that this can be counteracted by blockchain technologies which provide the infrastructure to create decentralized environments that are community-driven and that may surpass their centralized predecessors in quality and output.
In the conference, one of my favorite speakers made sure to point out that it’ll be 5 to 10 years before the disruption occurs. We are still in the midst of the process of discovering blockchain applications and he cautioned that centralization is valid and valuable in many situations.
The lens of centralization vs. decentralization should be one that is used by blockchain strategists and practitioners as they consider new applications and investments.
Finding a useful application for decentralization isn’t straightforward. Often, centralization is there for a reason. There is value for certain entities (companies or governments) to coordinate complex operations and establish/enforce rules, laws, and standards.
Perhaps the most suitable candidates for decentralization are where there is a need for coordination between many participants (a community or members of a complex value-chain), and where that coordination would be expensive or otherwise undesirable to manage centrally. Or maybe situations where direct peer-to-peer transactions are the source of value and are threatened by centralization. A prime example that comes to mind is blockchain for music rights.
The discourse will continue as entrepreneurs, developers, and companies race to find blockchain applications with a viable product-market fit. Top of mind should be the careful consideration of the tension between centralization and decentralization.
Investing in blockchain companies
Representatives from three VC firms were invited to the “Blockchain VC Panel” to discuss, well, their perspectives on investing in blockchain companies. It was remarkable that 2 out of the 3 VCs didn’t make a single investment in a blockchain company. This, to me, clearly speaks to the scarcity of investable blockchain startups. I can corroborate this as an angel investor. Out of over 250 startups that pitched to me or passed through my inbox, there was only one genuine blockchain company (a few others mentioned leveraging the technology in their future roadmaps). [Note: I didn’t count the many unsolicited ICO offers that I receive].
This scarcity is due to the lack of clear blockchain use cases that are also accessible to entrepreneurs. It seems that today’s most sensible blockchain applications are being tested by the likes of Walmart, IBM, and the United Nations, where marshaling complex value chains to try out new technologies is possible. A task that is unattainable for most young startups.
So what did the outlier VC bet on?
It seems that this VC has taken a bet on the Ethereum blockchain (the one that is powering smart contracts and is seeing most of the new distributed-app creations and ICOs). They are investing in companies that are in the coin and token trading businesses, ones that are providing wallet platforms, and ones that are working on the infrastructure and protocol layers to enable commerce using crypto-currencies. This is a sound bet given current knowledge, invest in the foundation in the hopes that useful applications will layer on top. But what’s clearly absent, as mentioned before, are investments in applications with a specific business use.
Next-generation distributed ledgers
A fascinating presentation at the conference was from the IOTA Foundation. They have the bold goal of entirely rethinking distributed ledgers. “Mainstream” blockchains, IOTA says, are inefficient with limited transaction throughput, and bottlenecks created by mining operations. So, IOTA is building a distributed ledger with no blocks, chains, or miners. This idea might sound outlandish, but it has been given credibility in the marketplace.
So how does such a distributed ledger function? Are you ready? Using a new data construct called the Tangle that is built on a mathematical model called the DAG (Directed acyclic graph). Within the Tangle, transaction issuers will participate in the confirmation of previous transactions. This eliminates the need for miners (and their fees) and supposedly future-proofs the network since it’s highly scalable.
It’s encouraging to see that work is being done to address blockchain technologies’ obvious limitations.
It’s an exciting time with a lot happening in experimenting with blockchain technologies, mostly within the domains of large enterprises. I didn’t touch on ICOs although the topic was front and center in the conference (two panels were dedicated to ICOs), mostly because I don’t want to dive into speculative trading and I find the experimental work more interesting.
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