There are a multitude of different applications beyond just the transfer of value. These include:
- Settling of assets other than digital currencies: Consulting firm Oliver Wyman estimates that the added costs, delays, points of failure, and vulnerability for trading a digital security, such as stock, adds $65 billion-$80 billion in costs every year. The idea is that T+3 can be removed when assets can be traded instantly and the data shared among all counterparties immediately.
- Digital Asset Ownership: Proving ownership of assets on the blockchain and issuing new ones. The recent examples of this are Digital Asset Holdings helping Pivit issue a percentage of its latest funding on the blockchain; Nasdaq Private Markets is leveraging the technology for trading of private market securities; Chain will be issuing its own pre-IPO shares on the blockchain; and Overstock.com issued a $5 million bond on the blockchain.
- Smart contracts: Agreements can be reduced to code that self-executes and self-enforces. Three examples that are proposed are multi-signature transactions, which involve a third-party escrow agent; prediction markets where the outcome of the prediction automatically releases securities (Augur is an example of this); and oracle services, which are third parties that verify the outcome of events. All machine-to-machine communication (M2M) could utilize smart contracts to minimize the need for human intervention.
Growth and Hurdles
According to the authors of the report, there are multiple drivers required for blockchain technology to succeed and multiple hurdles to overcome.
The primary growth drivers are adoption by major enterprises, the Internet of Things, increased consumer interest in personal data security, clear regulatory guidance, and emerging markets. On the last point, the largely unbanked, mobile-friendly markets might find the technology particularly compelling.
On the other hand, there are numerous hurdles that can impede the growth of the technology, including prohibitive regulation, broken trust - such as with Mt. Gox - and technical debates, like the current debate regarding the block size increase for Bitcoin.
According to the authors, the amount of capital raised has increased significantly year-over-year. In 2014, approximately $350 million was raised by blockchain-related companies. In 2015, as of the writing of the report in October, $469 million was raised by blockchain-related companies. Further, the average deal size has increased from $3.8 million in 2014 to $8.4 million in 2015.
The most capitalized firms are 21 Inc. with $121 million, Coinbase with $107 million, and Circle with $76 million. Many of the most famous entrepreneurs and investors have invested in the space, including Reid Hoffman, Peter Thiel, Marc Andreessen, and Tim Draper, along with 7 of the top 10 venture capital firms of 2014. Further, many traditional financial institutions such as Goldman Sachs, UBS, NYSE, USAA, Barclays and Visa have invested in the blockchain space.
The authors end their report with company profiles on the most compelling companies, including Abra, Factom, itBit, Uphold, and Xapo.
Read the whole report from Needham Insights online.