Blockchain – a Ripple in the Ether or a revolution?
November 02, 2015
Following on from "Cryptocurrency - the next hotbed for deal activity?" we now turn our attention to the intriguing technology that underpins (most) cryptocurrencies – the blockchain. Over the past 18 months there has been ever increasing enthusiasm for the technology that was spawned in the 2009 Bitcoin whitepaper. Advocates of the technology say its impact will reach far and wide, from the clearing house operations between banks, to government contracts, and insurance certificates for diamonds. But what is it and is anyone actually using it? What follows is a quick dive into the world of blockchain and a look at some interesting companies / projects that are looking to unleash the power of the blockchain.
So what is blockchain technology?
For technical people the whitepaper (linked above) provides a good place to start. For everyone else, it is broadly: a decentralised, distributed cloud-based ledger secured by cryptography – simple. Bitcoin is the best known application of a blockchain, the result being a public ledger of all transactions that have ever taken place over the Bitcoin network, a network maintained by a decentralised, distributed group of computers. In essence, you don’t need middlemen to maintain ledgers of accounts anymore to ensure that the books are balanced and people aren’t double spending.
The thinking goes that you can use a blockchain for other things, not just a payment network, and that you can separate it from Bitcoin. Anything that involves multiple layers of middlemen, could in theory use a blockchain to cut them out, speed things up and reduce costs. Anywhere we find documents and records held by a corruptible entity, we could use a blockchain to remove the risk of corruption. The ideas for use cases go on and on.
Okay, but is anyone actually using blockchains for anything meaningful?
Well, it is still early days, it was only invented in 2009 and, outside of hard-core technologists and cryptographers, people only started paying attention to it in 2012. As such, there hasn’t been much time to think up uses cases, develop them and deploy them at scale.
Having said that, many of the large financial institutions have been exploring the potential of blockchains. Barclays, for example, has stated that there are 45 blockchain experiments that they want to carry out. The recent announcement that a consortium of 22 banks, being led by R3, is working together to develop a unified blockchain framework further reiterates the belief that this is going to be something big.
At the other end of the spectrum there are a number of early stage companies and projects developing some pretty cool stuff; some with a narrow focus, others with much loftier ambitions. Everledger, for example, is attempting to track diamond ownership in order to reduce fraud, whilst Ethereum's stated purpose is to ‘decentralise the web’.
Figure 1, below, profiles four interesting blockchain related entities. I’ve kept the focus on currencies, payments and blockchain development platforms in this blog and will explore some of the wider potential use cases in my forthcoming November article.
Fundraising and deal activity
Deal activity has mainly been focussed on fund raising by companies from venture capitalists and, more recently, corporate venture capital arms. One fact I find interesting is that Ethereum (see Figure 1) conducted one of largest ever crowdfund raises. In August 2014 they raised c.$18m in less than four weeks, selling ‘ether’ (the ‘currency’ used over the Ethereum network) for bitcoins. A year later and there has been a steady trickle of established financial institutions investing in the potential of blockchain technology.
At the start of 2015 BBVA Ventures and NYSE took part in the $75m Series C investment round in Coinbase and more recently Visa, Nasdaq, Citi and Capital One (amongst others) took part in a $30m investment round in Chain.com, a blockchain developer platform.
Mergers and acquisitions (M&A) activity is almost non-existent at this stage. Having said that, early this summer Digital Asset Holdings announced the acquisitions of Bits of Proof and Hyperledger. We expect to see more acquisitions as the technology is tested, use cases are proved and the best blockchain-related companies identified.
One other thing to keep an eye on is the potential AIM listing of Coinsilium, a London-based blockchain investment firm. The listing, which was planned for August, was expected to raise £3 million to be used for further blockchain investments. At present it is unclear why the listing has been delayed.
Financial institutions are continuing to explore blockchain use cases and are likely to remain standoffish toward Bitcoin. They will likely favour private blockchains that they can control, monitor and regulate. However there is still a great deal of value to be had from harnessing and innovating on top of public blockchains such as Bitcoin. My next blog will focus on some of the wider ranging use cases of blockchains outside of financial services such as land registry, improving transparency in government spending and aid donations, fraud reduction, know your customer (KYC) solutions…the list goes on.
Where have you seen blockchain being discussed and/or piloted? How do you see the technology being used more widely outside of financial services institutions? Is blockchain the ‘revolutionary’ technology it professes to be or simply another hyped investment ‘fad’? Share your thoughts below or schedule a meeting to discuss your situation in confidence.