Consortiums have also sprung up as a major conduit for corporate exploration in the space. Arguably those with the most momentum today are Enterprise Ethereum Alliance, Hyperledger, and R3. Enterprise Ethereum Alliance (with 500 members) and Hyperledger (with 270 members) have joined forces to collaborate on bringing standards to the space, while R3, which has a heavy focus on financial services, has more than 200 members.
As the market evolves, we may see more corporations make moves to acquire access to resources and IP, or to leverage the second mover advantage discussed in Chapter 5. Regardless, successful moves will require not only deep acumen in the technology, but also a strong vision for how the technology will shape the future.
Debuting Cryptoassets in Portfolio Strategies
In October of 2018, David F. Swensen, Yale’s chief investment officer (known as the university’s Warren Buffett because of his investing success) surprised the financial community when news broke that he’d invested in multiple cryptoasset funds through the endowment. A report was published less than a week later attesting that Harvard, Stanford, and MIT were also investing in cryptocurrency and crypto-related projects through their own substantial endowments. These moves were seen as a signal of growing acceptance of cryptoassets as an alternative asset class among institutional investors.180
Organizations that seek to actively introduce blockchains and cryptoassets into their portfolio strategy have a few approaches to choose from. Direct investment in cryptoassets is certainly one approach, but this requires a great deal of sophistication in the space, and the industry still needs to mature to fully support the demands of institutional-grade custody. To ease diversification, firms have created indexes and baskets as the industry awaits the emergence of the first exchange-traded funds (ETFs).
But with the space so early in its evolution, many institutional investors seek more active navigation. In addition to established hedge funds moving into the space, a whole new breed of crypto-native fund has sprung up to serve investors looking to incorporate the sector in their portfolio strategy. Matthew Le Merle draws a parallel to the early days of the internet. “Smart people disagree about what is going to happen in the future of this space,” he says. “You need to cast a wide net through quality diversification.”181
Spencer Bogart, a partner at one of the oldest and most active venture investors in the blockchain technology sector, Blockchain Capital, explains, “The technology holds the promise to change the world in profound ways, to create new markets and entirely new business models,” he says. “But it’s complex. It can take 6 to 12 months of full-time deep diving in to really understand the impact of just bitcoin. And the number of people that are trying to form companies, the number of teams that are looking for ways to push this industry forward, it’s astounding. On any given day, we are seeing 20 to 30 inbound investment opportunities. It’s a massive undertaking to navigate through the change and complexity.”182
Using Tokenization to Remove Friction from Capital
Over the last few decades, investment markets have systematically applied technology to make capital raising and investing more efficient—that is, faster, cheaper, and more liquid. Today, most markets are driven by real-time technology platforms. However, there is a glaring omission: key aspects of the private equity market.
There have certainly been some advancements toward changing this, at least for small capitalization private companies and real estate deals. For example, the US introduced new crowdfunding regulations in the JOBS Act, and similar approaches have been introduced in Europe and Asia. As a result, investors have begun to experiment with direct investing in companies and projects via crowdfunding platforms.
Tokenization is a strategy that could take this process one step further. Pioneers working on this approach envision a world in which illiquid assets are encoded into tradeable tokens that are represented digitally on a blockchain. This would enable fractionalized and theoretically more liquid forms of ownership (friction is reduced if an asset is easier to trade, increasing liquidity). This could also open access to new kinds of investors. For example, enabling fractionalized ownership of a building could open up a new pool of investors that would not make a multimillion-dollar investment in that building, and make it easier to more broadly diversify a portfolio.
Digital tokens can also be programmable via smart contracts, opening new models for raising capital for projects under development by issuing “shares” in the form of tokens to finance an initiative. This approach could potentially be more efficient than today’s methods. It could reduce the (extremely high) cost of middlemen to perform such transactions today, and eliminate territorial and even temporal barriers.
This approach was used by blockchain teams seeking to raise capital for their projects by way of tokenized initial coin offerings (ICOs), also discussed in Chapter 5. Many of these teams got ahead of themselves: they didn’t have a clear purpose for their token or certainty of whether their tokens were securities (which requires adherence to securities regulation). Some teams even created fake projects to maliciously obtain funds. Nevertheless, billions of dollars were raised through this process—at minimum demonstrating how capital could be raised via tokens, and spurring a great deal of investment in further developing the process.
Expect to see creative applications of this approach from both established financial services leaders and new players. Many of today’s innovators are actively working with regulators to develop compliant models that will make tokenization accessible to a broad set of corporations. Mason Borda founded a company, TokenSoft, to support the complex compliance requirements of global companies looking to leverage token models. “For the last few years, we worked primarily with blockchain-first companies,” he says. “But at the beginning of 2018, this shifted. Now, banks and corporations are coming to us to understand how to leverage asset-backed token models, and there is a lot of experimentation going on. They’re seeking to leverage blockchain infrastructure as a more efficient model —and they’re making fast progress.”183
A New Frontier for the Corporation
While much of this book is focused on how blockchains will change the shape of business, they will also influence how the corporation invests. Leaders are already focusing attention on the space, whether in the hopes of more efficient capital formation or the potentially outsize returns that come from disruption. Investing in this type of high-risk and emerging space requires the same skills and strategies that apply to any other area of emerging technology, but with additional challenges: shifting regulation, a complex and fast-moving landscape of projects and companies, and the difficulty of institutional-grade custody. It’s especially crucial to align with expertise as you develop your strategy.
Chapter 14. THE BIG SMALL PRINT
Throughout this book, I have called out challenges that the space, and anyone looking to work with the technology, will face. These are big challenges, but as I have emphasized, there is a great influx of resource directed to address them. Like so many others that you have heard from in these pages, and that you will hear from as you continue your journey, I am optimistic that the future holds breakthrough after breakthrough that will ultimately resolve many obstacles. I don’t believe we know enough to accurately predict where these breakthroughs will come from. However, I do want to leave you with a focused list of warnings, all in one easy-to-scan place, to remember as you take your next step, whatever it may be.
Be Skeptical
Blockchains are sexy at the moment, and that’s creating a blockchain blind spot. They’re being built in to all sort of visions that really require nothing more than a database or that would be better off centralized. Question if a blockchain is really needed or if you are falling for the “blockchain trap.” Does a blockchain solve a real problem? For this use case, do you really need a database to which multiple parties can write? Is there a lack of trust among these parties? Is there truly no third party that these entities would trust? If t
he answer is no, you don’t need a blockchain, end of story. Instead of looking first to blockchains, challenge yourself to find a solution without one.
Don’t Write off the Toys
In this adolescent phase, a lot of use cases may look like toys (for the curious, look up Cryptokitties, an application that became crypto community lore when it “broke” Ethereum in December of 2017). We’ll see a lot of innovation happening in such strange places as digital collectibles. However, the learnings that can come out of these spaces—in everything from user experience to identity to how users leverage portability to overcoming scalability challenges—is very, very real. This is the time to try out these use cases yourself, and think big about how they can be extended to other applications.
Don’t Overestimate Who Cares about Privacy
Some blockchain entrepreneurs are hinging their businesses on converting users that care about privacy. While many care at some level, massive segments of our population have been inoculated to the idea of privacy, even as privacy-related scandals make headline after headline. This may change somewhat over time, but broad adoption will quite likely take something else—a massive groundswell in scandals, or the perception of top side benefits like compensation.
It’s Nothing without Network Effects
This next era is about ecosystems and community. If you can’t find a strategy to build network effects, you are on the wrong path.
The Best Technology May Not Win
In the hallways of Silicon Valley you may hear the refrain, “Design is the new engineering!” Indeed, design and marketing are the cornerstone of adoption—and without it, a great project can be DOA. This is the time to involve the marketers, designers, and UX specialists, and those who crack this challenge will be in a good position to break open the dam holding back broader adoption.
Nothing Matters without Scalability
Good user experience and network effects aren’t possible without scalability, and this is one of the biggest barriers in the technology today. Incredibly innovative and mind-blowing approaches are under development to address this challenge, and more will spring up. Keep a close watch.
Identity Hasn’t Been Solved
So much of the blockchain era vision starts with identity. Blockchain entrepreneurs get this and are in a race to figure out who will solve the challenge of establishing trusted, widely adopted identities complete with third-party attestations. A complete answer has not been discovered, and its pursuit is deeply complex. Watch this closely—a great deal of the vision can’t be realized until this is solved.
Token Instability Hasn’t Been Cracked
Cryptocurrency prices are all over the map. There has been a great deal of work (some of it controversial) on developing stablecoins, a cryptocurrency tethered to a more stable asset such as a commodity, and they continue to be an area of great interest and exploration. In fact, nearly 60 stablecoin projects have received more than $350 million in financing.184 Some companies are setting up foundations that issue multiple token currencies, one to be used for appreciation, and another to be used for transactions. But this whole remarkably complex area of cryptoeconomics—and how a small team of entrepreneurs can build a functioning mini-economy that acts as its own central bank (without all the tools available to a central bank)—is still in its infancy, and the fundamentals are not widely understood.
Consensus Mechanisms Are an Ongoing Battle
Because this book is not meant to be technical, we didn’t spend much time on consensus mechanisms. This is an important area to understand—and watch—as you take the next step in your blockchain journey. “Consensus” is how all the nodes on the network agree that the state of the blockchain is correct, and how the blockchain is updated. Consensus mechanisms should be designed so that no single entity could control or derail the blockchain—and this is the most difficult part to get right.
There are many forms of consensus being explored, but no clear winners: we need a lot more work and testing in this area. “Proof of work” is the consensus mechanism that the bitcoin blockchain uses. It is the most battle-tested approach, but it also uses an incredible amount of energy as computers around the world race to solve cryptographic puzzles (as described in Chapter 3), and is vulnerable if one entity could control more than half the network’s computing power (called a 51% attack). For blockchains to become more broadly adopted, we will need consensus mechanisms that are both proven and efficient.
We’re Still Figuring out Governance
These new networks are driven by baked-in governance. But we don’t have many examples of how these networks will function when millions of users get involved. Where will they break? How will they be gamed? We need better answers to these questions in order to develop efficient and effective decentralized governance mechanisms that function as intended. We may see some spectacular fails in the future, and will gain many new insights to behavioral economics along the way.
But Above All, Maintain Vigilance
We have so much yet to discover about how to work with this technology and how it will impact our personal and business lives. Scan the horizon continually to identify new threats, opportunities, and challenges as they emerge. Develop a robust network of trusted thought leaders and vetted specialists to help you stay informed of shifts as the area further develops.
Chapter 15. BRINGING IT ALL TOGETHER
Key Questions to Help You Compose Your Next Step
We’ve covered a lot of ground through these pages. We’ve explored how blockchains work. We took a deep-dive into the core fundamentals that will drive change in a blockchain future. And we tapped into the vision of entrepreneurs and pioneers in the space.
Now what? What do you do when you return to the office tomorrow, or next week? This chapter is a rundown of key questions to ask yourself and your management team as you take your exploration of the blockchain opportunity to the next level. Depending on how complex your organization is and where it is on the journey, some questions may be straightforward, but others may be unanswerable until you’ve done some digging. Regardless, exploring these questions will drive clarity around where you need to focus your attention. The questions are organized into three dimensions, shown in Figure 15-1:
Assessment
Aspiration
Action
Figure 15-1. The assessment, aspiration, action questions.
Assessment
How does our unique business landscape influence our opportunity, risk, and readiness?
BROADER ECOSYSTEM What industry-wide challenges could be solved by the attributes blockchains and related technologies offer? What blockchain-native companies are attacking these challenges?
Which organizations are exhibiting leadership in our industry and related industries, and what can we learn from their work?
How are we collaborating with the broader ecosystem (whether directly in our industry or beyond), and how should we formalize this collaboration?
What consortia and partnerships are gaining momentum? Which are aligned with our values and mission?
COMPETITORS What approaches are established competitors and new, disruptive companies that are targeting our market taking? What can we learn about their successes and failures to date?
What claims are they making? Are they credible?
In what circumstances could their work become a threat? In what circumstances do they become a potential partner?
Where is our business model most dependent on proprietary customer data? How do our customers measure the return on providing that data?
In what parts of our business do we serve as a middleman, and how do our customers measure the value of that service?
What parts of our business model would suffer disruption if competitors could fractionalize ownership of the product or services we provide?
INTERNAL ORGANIZATION Where and who are the people across the organization who
are exploring the opportunity in blockchains? Where are our gaps?
What projects or initiatives are already under way?
How are we connecting knowledge within our organization today, and how could we formalize this collaboration?
EXTENDED ENTERPRISE What projects and initiatives are our partners evaluating? Which align most closely with our values and mission? Which are positioned to address a key pain or challenge we also face?
How can we formalize collaboration with the clusters of knowledge within our partner ecosystem?
Aspiration
How could we drive business gains through new, more trusted collaboration across an ecosystem?
REDUCE FRICTION Where do high-toll middlemen serve as a proxy for trust in our ecosystem?
Where do cross-border or cross-organization business processes carry high friction and/or risk?
Where is fraud most costly to our business?
How could a decentralized business process increase efficiency for participants or customers?
FIND TOP-LINE OPPORTUNITY How could we deliver additional value to our customers by extending and more tightly integrating our business processes or elements of the customer experience beyond “inner circle” partners?
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