Sunday, 17th November, 2016
| Take a closer look
TL;DR Our new State of Blockchain report is out, with almost 100 pages of charts, comment and analysis. Tucked amongst them is a graphic that reveals a trend that at first seems exciting, but when you dig deeper and look ahead, is actually worrying. (Read more in THE TAKEAWAY below.)
TOP 5 STORIES ON COINDESK Zcash’s security. In spite of steps taken to ensure that no-one could replicate the initial Zcash public key, some in the cryptocurrency community still harbour doubts about its effectiveness. While the likelihood of a security compromise is slight, given that six people would have to be compromised, it could still be an appealing objective for state players. And however small the risk, some argue that it’s too high. Read more.
Crypto banks. Switzerland is working to draft legislative amendments that support the development of a new category of financial institution. The objective is to make it easier for digital currency businesses to obtain the necessary licenses to operate effectively. Switzerland has been at the forefront of digital currency inclusion for a while now, but even so, this move signals a mind-shift at government level. Read more.
A new type of blockchain. PwC Australia has been working with blockchain startups on Vulcan Digital Asset Services, designed to allow enterprise clients to create digital assets that can interoperate with and trade alongside digital currencies. This could encourage banks to start working with bitcoin, and central banks to contemplate the creation of blockchain-based fiat currencies. Read more.
About change. In response to the steep decline in the use of cash, Sweden’s central bank is considering issuing a digital currency as a complement to the current system. While it has not specified the technology it would use, blockchain is obviously an option. Read more.
Data verification. Peernova has raised $4m in Series B funding from Chinese construction group Zhejiang Zhongnan. The US-based startup has been working on a new type of blockchain-based data verification system. The source of the funding indicates an increasing interest in the Asian market, and a potential joint venture with the construction group. Read more. More Blockchain News →
QUOTE OF THE WEEK "We believe public blockchains will have the greatest impact on developing economies (reduced need for trust) and the connected device, IoT economy (immutability, auditability)." – from State of Blockchain: Q3 2016 |
THE TAKEAWAY
Our latest State of Blockchain report is a good read, full of original graphics, details and quotes that highlight shifts and market trends in the cryptocurrency and blockchain sectors.
This page especially held my attention and got me thinking:
The lack of funding announcements for ethereum-based businesses compared to those relying on bitcoin is striking, even when you narrow the focus to just this year. It’s also surprising, taking into account the overall positive market sentiment toward the digital currency (see our survey). And it’s worrying. Given ethereum’s business-friendly smart contracts functionality, why aren’t more VCs nosing around?
The business case is there. Ethereum appeals to large enterprise, and startups are using it to develop decentralized applications (dapps) with interesting use cases. Most have a relatively clear path to monetization.
So where’s the investment?
Part of the answer lies in the graphic above: check out the box at the right. ICOs are initial coin offerings, or tokens issued by a dapp and offered to the public. The participants in these crowdsales tend to be either potential users of the service, or investors who hope to re-sell the token on an exchange at a higher price. The trickle turning into a stream that you see in the list has not slowed down: in November alone, there will have been at least five.
Obviously, ICOs are a much more predominant source of financing for ethereum businesses than VC capital.
But why? And what does it mean?
ICOs carry significant strategic advantages:
1) The business retains its independence, usually does not have to give away equity, and has no outside interference in its board.
2) The application in question gets access to an engaged community of users and investors. In a way, it efficiently takes care of the financing and marketing at the same time.
3) ICOs are easier to pull off than VC investment, since the business does not have to run the gamut of vetting by analysts and seasoned investors. The “market” will decide if the idea is good or not.
4) For many, ICOs may be the only option. VC investors are probably staying away from ethereum businesses for now because of the digital currency’s relative youth. And The DAO hack as well as recent DDoS attacks on its blockchain will almost certainly have impacted their eagerness to jump into untested waters.
These compelling reasons highlight why ICOs are a good fit for young startups looking to harness a public blockchain. However, they reveal an underlying weakness in the ethereum startup sector, which could affect its development and sustainability going forward. Let’s take a look at the dangers hidden in those advantages:
1) Less interference means less support, which means less “mature” management and experienced leadership. Startups that go straight to ICO will miss out on the benefits VCs can bring, including contacts, vision and expertise.
2) The engaged community of users and investors is probably not in it for the long haul, and is not really interested in the health of the business. Users may end up dumping the assets if the utility doesn't meet expectations or if something better comes along. Token investors want trading gains more than they want profits (since they generally don’t get to share in those), and can usually exit at any time.
3) Relying on the judgement of the “market” for the ICO tokens as a barometer of sustainability is misleading, since it does not generally focus on the fundamentals. The product-market fit, long-term strategy and strength of management team are secondary to short-term traction and cool functions.
4) VC investment in ethereum is likely to pick up as the technology evolves. Unless, of course, ICOs become so entrenched in the market’s mentality that venture capital is edged out.
There you have one of the biggest risks to the sector: that it becomes addicted to the quick thrill of crowdfunding, at the expense of future development. The current focus on crowdsourced finance may be ideal for raising visibility and getting test models out into the market. It could, however, end up undermining the resources and the resilience of the industry of tomorrow.
– Noelle
More background:
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OTHERS ARE TALKING ABOUT...
In the press this week, Asia seemed to be the center of attention, with CNBC reporting on how the retirement of rupee notes was boosting demand for bitcoin; Quartz commented on China’s central bank’s search for blockchain experts; and Bloomberg caught up with Digital Asset’s Blythe Masters at Singapore Fintech for a brief interview about innovation in the area.
Elsewhere, Rolling Stone magazine carried a profile of Steemit; Fortune used our Ethereum Sentiment Survey as the basis for an article on the digital currency’s resilience; and MarketWatch released a slick video starring the Winkelvoss twins on the advantages of bitcoin.
UPCOMING EVENTS
SECTOR REPORTS
WHAT WE’VE BEEN UP TO We've been having a blast planning our new series of events that launches next Tuesday, November 22nd. Called CoinDesk On Tap (how could it not be fun with a name like that?), the focus is on fireside chats with cryptocurrency and blockchain entrepreneurs, thinkers and doers.
We kick off with a conversation between our editor Pete Rizzo, bitcoin pioneer Charlie Shrem and cryptocurrency lawyer Marco Santori. Come along and join us – you can get tickets at EventBrite.
The marketing department has also asked me to remind you (or to point out, if you haven’t seen) that we have a temporary discount on ALL our research. You can now become better informed about ethereum, trade finance, smart contracts and more for just $100 per report.
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