Technologies that change the world often have humble and obscure beginnings. When the Defense Advanced Research Projects Agency of the U.S. Department of Defense created Darpanet, the goal of the project was to create a decentralized and redundant communication network that would allow for continuous communication between cities within the United States in the event of nuclear war. Darpanet, the predecessor to the internet, was built for a narrow and specific purpose—but it also had sufficient funds and resources to get up and running.
Entrepreneurs and pioneers soon reimagined the technology. Startups managed to drum up sufficient funding to add new layers of applications on top of the basic infrastructure, scaling the network with product innovation and capital, creating the internet as we know it today. Companies that are now household names, such as Google, Amazon, eBay and Facebook, created the resulting hundreds of billions of dollars of enterprise value.
Sometimes a startup technology company begins with an idea that fails to gain traction, undergoes a metamorphosis and achieves notable success in a totally new direction. Over the past few years, the denizens of Silicon Valley have coined a new use for a word that embodies this dynamic: “pivot.” In the short time since Satoshi Nakamoto published his Bitcoin whitepaper in 2008, there have been multiple pivots throughout the industry. New and unexpected innovations on top of the blockchain infrastructure have surprised many industry observers. Investment by Blockchain Capital in blockchain technology has mirrored and proudly helped the industry by providing capital, leadership and guidance to this nascent ecosystem.
The Face of Consumer-Facing Technology
Many of our early investments were consumer-Bitcoin focused, including numerous Bitcoin wallets, exchanges and payment-related companies. These early entrepreneurs built the “bridges, roads and tunnels” of the Bitcoin infrastructure. Companies at the forefront of the industry, such as Coinbase, have emerged as the leading consumer-facing companies within the Bitcoin industry, but consumer adoption of Bitcoin as the kind of payment technology its creators envisioned has seen slowing growth in developed markets such as North America.
Most consumers in such markets have excellent access to financial services. Although credit cards have high fees for merchants, they work well for consumers. The proliferation of mobile banking services and of bank branches, and access to global capital markets via services such as E*TRADE and Schwab create a high hurdle for new payment technologies to get over before they can gain market share and consumer adoption. Although existing and heavily entrenched financial services technology is broadly serving technologically advanced cultures, that is only one segment of the market.
Consumer-facing financial services using Bitcoin may have disappointed early industry enthusiasts, but we remain bullish on their adoption in the developing world. There are 3 billion people in the world, mostly in developing economies, who have no access to the financial services that most people in the U.S. take for granted. They have no credit cards, bank accounts or securities trading accounts.
Many of these consumers, though, now have a smartphone in their pocket, giving them unprecedented access to cutting-edge financial services. There are nearly a million new smartphones turned on every day. In the same way that these consumers leapfrogged landlines to get 4G smartphones, they are likely to leapfrog bank branches and plastic cards to get mobile, ultra-low-cost, blockchain-based financial services.
Financial Firms Pivot to Take a Second Look
The first major pivot for the Bitcoin and blockchain industry was the realization by financial incumbents that blockchain technology is a robust, ultra-secure infrastructure layer for the trading and settlement of traditional assets. Initially, banks, brokerage firms and stock exchanges generally weren’t interested in Bitcoin, per se. Some of these firms were turned off by the fact that criminal activity—namely by the Silk Road—was associated with the early days of Bitcoin. Other firms feared that their traditional roles of being a financial intermediary could be threatened if Bitcoin were to gain broad-based adoption as a peer-to-peer payment technology.
Increasingly, banks learned that the
blockchain can enable a better, faster,
cheaper way to trade and settle traditional
assets like stocks, bonds and commodities.
Blockchain and distributed ledger
technologies hold the promise to unify the
current fragmented approach to trade
reconciliation, where all market participants
keep their own records in differing formats.
Many of our portfolio companies (Chain,
Blockstream, AlphaPoint, PeerNova, itBit
and Ripple) have pilots or technology
trials underway with large financial firms
to address the massive opportunity of
re-architecting the way assets are traded and
settled. These trials will be completed over
the next year. If the return on investment
makes sense for these banks and brokerage
firms, we expect the trials to turn into large
commercial-scale collaborations and
integrations that produce significant
revenue for our portfolio companies.
The next pivot we are witnessing is the reimagination of the Blockchain as a free-to-use distributed database that can function as an immutable record and can track chain of custody or provenance. Documents and business processes can be “hashed” into the blockchain, allowing consumers and enterprises alike the ability to prove to regulators or customers that their data or documents have not been changed or tampered with. This brings up extensive opportunities for non-financial use cases for blockchain technology. We have seen a flurry of entrepreneurial activity around this expanded view of blockchain applications in non-financial services sectors, including these portfolio companies:
We also led the first ever venture capital investment into a start-up in the Ethereum ecosystem called Ethcore. Ethereum is in some ways a competitor to Bitcoin, though our view is that it is complementary. Ethereum is also blockchain-based, but is optimized for smart contracts, compared to Bitcoin’s payment orientation. In addition to some important technical differences, Ethereum has a robust and growing base of world-class developers.
The blockchain technology industry
remains an exciting and fertile investment
environment. Leveraging our industryleading
position, we continue to see
fantastic deal flow. Our mission continues
to help small companies of today grow into
the blockchain behemoths of tomorrow.
Bart Stephens is a
Other partners who
thoughts to the
creation of this op-ed
are Brad Stephens
and Brock Pierce.
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