Outlier Ventures December Brief
Updates on how start-ups and nation states embrace the token economy and what stands in the way of blockchains going mainstream
December has been an eventful month for the token economy. Starting with Bitcoin’s phenomenal rise to over $20,000 on top of futures listings to ripple’s surge to $2.5 and above, the industry saw a period of immense volatility. All top 30 coins set new all-time highs over the last 15 days as investor euphoria reached new highs. With altcoin prices surging to new highs, Bitcoin’s dominance in the total market-share of the token economy has reduced to 36.7% from a high of 86.7% at the beginning of 2017. It remains to be seen how this changes over the course of the year. 2017 was the year businesses rose to valuations that were otherwise unheard of, 2018 will hopefully be the year those valuations are justified.
This brief is a summary of our daily brief. Sign up for the newsletter to get short curated snapshots delivered to your inbox every day.
Start-ups
As decentralised communities became sources of capital and evangelists, ICOs continue to raise more than VC funding. The last month of the year was no different. A number of companies embraced the ecosystem as they announced initiatives aimed at using blockchains or integrating tokens. VCs are increasingly investing into blockchain oriented companies as adopters increase by the day. This month we covered Indiegogo’s exploration into token sales, Colu’s latest fund-raise and a Wikipedia for the token era.
Indiegogo
The crowdfunding platform, Indiegogo has taken the plunge into tokens announcing that they will be launching their own initial coin offering platform. The innovators who pioneered the crowdfunding in 2008, and equity crowdfunding last year now aim to make ICO funding simple and accessible to the everyday investor. The ICO craze has taken the world by storm with prices shooting up by phenomenal margins in the past year, but there are growing problems with compliance, particularly in the USA. In response, Indiegogo aims to be regulatory-compliant and has teamed up with FINRA-registered broker-dealer MicroVentures in hopes of offering the best tokens, while excluding the “not-so-good” ones. Combining the high failure rate in Indiegogo projects and the odds of ICOs going bust, one remains sceptical.
Colu
Israel based Colu, secured $14.5 million in new funding from Israel’s largest holding company, IDB Development Corporation for Colu Local Network. They offer an easy-access digital wallet which provides ‘local’ currencies, such as the ‘East London’ pound, with the aim of keeping money in local economies. While there are similar competitors in the space, Colu’s inclusive approach has gained them important investor attention, with $9.6 million also raised last year from investors such as Aleph, Spark Capital, Digital Currency Group and former Thomson Reuters CEO Tom Glocer. The pre-sale investors interestingly include the likes of E-Toro, the popular social trading and multi asset brokerage company. This is another sign of enterprises embracing the token sale model. Colu was an early adopter of coloured coins and Lightning Network, a proposed scalability solution for the Bitcoin network using off-chain protocols. With over $30 million in funding to date and an ICO on the way, it will be interesting to see how they use the capital.
Everipedia
Remember the time the Britannica Encyclopedia collection was a prized possession of the family? Today’s generation of millennials might not even know about their existence thanks to Wikipedia. The knowledge sharing platform was able to disrupt traditional sources of information by curating knowledge from multiple authors around the world and rewarding individuals for rating, reviewing and fact-checking. However, none of this “value” could be taken out of the platform itself. A new project named Everipedia is hoping to “disrupt” the process as it combines the traditional Wikipedia model with a blockchain. The new project leverages interplanetary file system (IPFS) for distributing the content itself. It will also link and source content from external projects if copyright agreements are made with them. Most importantly, the project will have a protocol layer for writers to track their contribution and be endorsed by others. By combining reputation and distributed content storage, the platform might just be able to combat fake news and provide more “neutrality” with regards to how facts are presented.
Governments
World governments spent 2017 waking up to the threats and opportunities offered by blockchains. A number of nations have openly embraced the technology for key functions such as identity, dispute resolution, logistics and trade settlements. As countries come forward with regulatory frameworks, we should see an increase of startups and financial investments flowing into the space. This month we looked at how Belarus, France and South Korea covers the three stages of evolving regulations: fear, scepticism and approval.
Belarus
President Alexander Lukashenko of Belarus signed a decree making it legal to transact in cryptocurrencies. The local government aspires to attract foreign investments and foster private sector growth through creating clearer regulations focused on the token economy. The change in law makes it legal to hold initial coin offerings within the region and tax-free trades of cryptocurrencies. The government also permits companies to be set up by English laws to attract foreign investments. Lukashenko said in a statement
“Belarus will become the first government in the world that opens wide opportunities for the use of blockchain technology. We have every chance of becoming a regional center in this area.“
Belarus is an example of the Internet and blockchains breathing fresh air into what may have seemed like a stagnant economy. Major companies from the region include phone messaging app Viber and NYSE-listed offshore programming company EPAM Systems Inc. As connectivity and trust are enforced by rising adoption of digitial technologies, we will see global economies intertwine ever closer in a new era of globalisation. Other nations that have been laying heavy emphasis on creating an environment that embraces blockchain include UAE, Singapore and Switzerland.
France
To the surprise of many, France has decided to pave the way for the trade and settlement of unlisted securities on blockchain-based ledgers in the near future. France’s unregulated security market is anticipated to be worth over $3.5 trillion. Beginning in July 2018, banks and fintech companies will be able to allow trading unlisted securities on distributed ledgers without the requirement of brokers or custodian banks. Finance Minister Bruno Le Maire said in a statement
“The use of this new technology will allow fintech firms and other financial actors to develop new ways of trading securities that are faster, cheaper, more transparent and safer,”
Nasdaq has been a pioneer in securities settlement on the blockchain in the recent past. And the Australian securities exchange (ASX) recently announced that they will also soon be fully implementing blockchains for trade settlements. The move by the French government is an example of governments embracing blockchains whilst remaining wary of the “threats” posed by cryptocurrencies.
South Korea
The rapid rise of Bitcoin’s prices has pushed regulators in Asia into overdrive. In a recent instance, South Korea has begun procedures to regulate the exchange of Bitcoins. Regulators see the token to be a means to speculate in the markets and worry about investors losing large sums of money during a crash. A recent report suggested an emergency meeting was called in Seoul to discuss how to regulate the currency. Stricter enforcement of taxation on capital gains and limitations on exchanges can be anticipated in the near future. India has been following a similar path (as newsletter readers will know, I have alot to say on the situation in India). The South Korean government conducted checks on a number of Bitcoin exchanges within the region for possible cases of tax evasion. Bitcoin’s libertarian design combined with the possibility of capital flight affecting foreign currency reserves often raise concerns amongst regulators in Asia. Although these nations have embraced blockchains publicly, Bitcoin adoption has relatively been slow owing to the threats they pose to monetary policy. These checks and balances however, will be crucial as the ecosystem matures.
Financial Institutions
The token economy represents one of the fastest growing markets in the world. Financial institutions are no longer sitting on the side-lines and wondering how to benefit from it. Here are the major moves by financial behemoths.
Goldman Sachs
Goldman Sachs has joined the league of mainstream Wall Street firms offering financial products focused on the token economy. Following the footsteps of Cboe and CME exchanges providing futures, the firm intends to set up a trading desk to market-make in the token economy by as early as June. It is claimed that the firm is setting together a team in New York to define their Bitcoin strategy. As the Bitcoin naysayers reduce in number it is interesting to see which direction the market takes next. With high volatility levels, and a market-wide dip even occurring earlier today, it will be interesting to see how institutional-sized trading desks might impact volatility in crypto markets. Although futures were anticipated to bring in institutional players and contributed to the recent price hikes, nothing much has come of it just yet. Bitcoin enthusiasts now look forward to offerings for the long-awaiting ETF. Regardless of the outcome, the entrance of institutional players is an important change in the environment, and with their trading desks will come further liquidity and legitimacy.
Vanguard
In case banks and stock exchanges embracing blockchains doesn’t excite you , here’s some more news. Vanguard, one of the world’s largest mutual funds would soon be using blockchain technology to track index related data. The fund has close to $5 trillion dollars in assets under management. Vanguard would be using blockchain technology to reduce errors related to names and share prices of stocks in index funds. These processes are traditionally done manually and susceptible to error. The system being designed at Vanguard will enable the creation of a real-time, automated index on a blockchain. All of this comes at a time when the founder of the fund Jack Bogle has been saying that investors should avoid Bitcoin like the plague. While it remains to be seen how Bitcoins perform in the future, it is clear that the underlying technology is finding more and more enterprise use cases.
Token Analysis
It is hard enough keeping up with market movements in the token economy. Thought leadership and in-depth analysis could often skip through the priority list given the lack of time. That is why we cover some of the best pieces in the industry in our newsletter on a daily basis. Here are the ones you should definitely read to understand the ecosystem better.
Trust asymmetry — Percy Venegas
It would be safe to say that the biggest contribution blockchains have given the modern economy is a means to enforce trust with code. (But Code is Not Law, remember) A recent piece by Percy Venegas explains how players in the economy benefit from asymmetries in information and trust. The piece provides relevant examples from trade finance between nations and the challenges involved in payments settlements in the traditional methods. It then looks at how e-commerce platforms have struggled with transactional issues due to a lack of trust in the system. The piece concludes by explaining how blockchains enforce “trust” and provide a better experience for both buyers and sellers in an economy. Read the piece here.
Fundamental challenges with public blockchains — Preethi Kasireddy
“Decentralize everything”. It seems as though this has been the agenda for the bulk of the ecosystem over the last year. Albeit centralized authorities could often hinder growth in an ecosystem, they often exist in certain industries for reasons that are often ignored. In a good number of cases, non-blockchain based solutions have often been a better solution than a decentralized ledger. Adding the ICO craze of 2017 to the same, leaves one asking the question “why a token” in the first place.
A recent piece by Preethi Kasireddy explores the crucial issues that limit the adoption of blockchains in the near future. Ranging from scalability to threats from quantum computing, her long-form article does justice to the concerns most sceptics have with regards to the token economy. The author explains the key issues blockchains currently hold and the proposed solutions for them in the near future Preeti goes deep into highly debatable topics such as sustainability of consensus mechanisms and deeply pressing issues such as lack of governance in the token economy. It is a highly recommended read for those looking for a bird’s eye view of pressing issues with public blockchains and possible solutions for them. We’ll part with the ending statement from her article
“Regardless of whether or not the current investment climate turns out to be a bubble or not, I’m a firm believer in that the blockchain is here to stay. We just need to put in some elbow grease as developers to knock out the barriers holding it back from mainstream use. And we need investors to seek and fund these efforts.”
