Over a series of three posts, I will dive into businesses that are dealing with Bitcoin as a currency and startups that are enabled by blockchain technology. In the first part, "Enabling the Disruption", I will take a look at projects that are setting the stage for the introduction of blockchain technology to enterprises but also might spark a whole set of new startups. Projects, that aim to introduce new technologies and business ideas based on distributed databases in a peer-to-peer network, similar to the idea of Bitcoin. Bitcoin and its Blockchain is majorly a platform to transact the cryptocurrency bitcoin and I say "majorly", because the Bitcoin Blockchain can also be used in alternative ways, such as storing data. The projects in scope of this post, use the idea and the technology of the blockchain not only to trade a currency. They intend to enable the transactions, validations and storage for all kind of information and assets in a network - whether it is a public network in which the participants do not trust each other, or a private network where trust may be given.
In the second part will analyze Bitcoin-specific startups. I will dive into Bitcoin business models and illustrate their position in the Bitcoin industry. I will also give you an overview of the Bitcoin ecosystem and my opinion on the future development of the landscape.
The third part will highlight some of the most interesting startups that are not only working with Bitcoin as a currency, but use the Blockchain or similar infrastructure to create new, disrupting products.
Back, when Bitcoin was Hype
Back in 2013 I sat in a financial management course at my alma mater. Christian Gattiker, Chief Strategist and Head of Research at Julius Baer was holding a guest lecture. After evaluating the global interest rate climate and discussing alternative investment strategies, he asked, who is confident that Bitcoin would be the next big thing in the financial world. Amongst the hundred or so students, mostly consisting of aspiring bankers and financial managers, only four raised their hand. Fast-forward three years, Bitcoin still has not gained the reach it was supposed to have. Its ease of use, the lack of a central intermediary and its security clearly make it the number one choice for the internet's currency. However, various setbacks, such as its mentioning in the affair of acclaimed shadow economy website Silkroad, its volatility in price against fiat currencies and the popping up of alternative cryptocurrencies, may be a reason for the large mass hesitating to adopt Bitcoins. So was the suspicious majority in this lecture right not to raise the hand? Well, little did Mr. Gattiker and the students in this room know, Bitcoin was hiding something in plain sight. The idea that a technology can ensure that
- all participants in a network have a historic record of shared facts (i.e. the ledger for Bitcoin)
- all participants agree on the correctness of these shared facts (Consensus)
- updates to shared facts are validated by all participants in a network (Validity)
- all shared facts are uniquely identified (Uniqueness)
- all shared facts, once committed, cannot be changed in the future (Immutability)
- there is no participant with a master key to change historic shared facts (Authentication)
- all of the above characteristics can be deployed to a scale that might be as large as the internet itself
The blockchain allows to ensure the above characteristics. Its term experienced quite some buzz throughout the last 6 months. Google Trends shows that during the early days of Bitcoin, the term was searched extensively, but requests skyrocketed since last summer.
The blockchain in the Financial Industry
The five characteristics Consensus, Validity, Uniqueness, Immutability and Authentication that are realized by the Blockchain were formulated by Richard Gendal Brown, Head of Technology at R3CEV, on his blog. R3 is one of the tech companies which use the idea of a blockchain to solve problems faced by the financial industry. R3’s goal is to leverage the blockchain idea with their own distributed ledger platform Corda. The company leads a consortium of 42 financial companies, including major banks like Deutsche Bank, Credit Suisse and J.P. Morgan.
Brown is considering the five characteristics of the Bitcoin Blockchain to be a menu to choose from. Each course in the menu can be chosen and adapted in order to develop a solution to a problem faced by a specific industry. Brown reformulates the five characteristics for the financial industry, substituting the “shared facts” with “financial agreements”, realized by smart contracts.
The history of smart contracts goes back to the early 90ies and their underlying idea is based on the assumption that most contracts are a sequence of logical processes that could be replicated by a computational device. Smart contracts were greatly embraced by many blockchain companies. It allows not only the transaction and validation of one specific “shared fact” such as the amount of Bitcoins transferred in the Bitcoin Blockchain, but a more complex set of information. Moreover, in contrast to Bitcoin, where all participants in the network have access to all information simultaneously, Corda allows the restriction of user access, making sure parties that are not required to see a specific set of information can be excluded from the network. Brown postulates that a technology solution, such as Corda for the financial industry is, cannot be a one-fits-all approach. Different problems faced by different industries must be solved by specific solutions.
Ethereum, Smart Contracts and Blockchain-as-a-Service
Another project that seriously pursues the idea of smart contracts is Ethereum. Ethereum is an open-source blockchain project similar to Bitcoin that focuses on the execution of smart contracts using a crypto asset called Ether (ETH). Ether was incepted in July 2015 and quickly increased in value on the market beginning of this year. The project is advanced by a company incorporated in Zug, Switzerland and a non-profit foundation in Canada. Joseph Lubin co-founded the Swiss-based Ethereum Company and acted as its COO. He continued to found ConsenSys, a company that is building smart contract applications based on the Ethereum blockchain.
The basic idea of Ethereum is to provide the decentralized network of a blockchain that allows implementation of contracts in multiple languages. A very understandable (even for me, as a non-programmer) tutorial for a smart contract (or decentralized app or Dapp) can be found here. The tutorial explains how to write and implement a contract that allows one user to send a certain amount of Ether to another user. However, more complex contracts, such as auctioning with escrow services are explained in the tutorial as well. The execution of the contract requires "Gas" to be performed, which is another virtual, scarce resource and costs ether. Depending on the complexity of the contract and data amount transferred, more Gas is required.
Etherum introduces its own economics to a decentralized network that allows users to transfer money (in form of Ether), create contracts, even build application and web services that are no longer regulated and hosted centrally, but shared by all participants. It is a highly interesting concept and will provide developers and entrepreneurs with an inspiring design to create new innovations.
Microsoft was the first major player to back the Ethereum blockchain and made it a certified Blockchain-as-a-Service (BaaS) on Microsoft’s Azure. ConsenSys teamed up with Microsoft to make this certification happen. Along Ethereums onboarding to Azure, Microsoft also announced collaborations with other technologies. Microsoft's approach clearly shows its confidence in the new technology and secures its front row seat, once the technology will mature.
Hyperledger - the Linux of Transactions?
Given the fact that Bitcoin sparked the blockchain industry, its application in the financial industry were obvious to some degree. Taking a step back and considering other fields of applications where the blockchain technology is already being leveraged or could be applied in the future gives need to the existence of a common technological framework. Unlike R3’s mission to develop a technical platform for one specific industry, Hyperledger is seeking to deliver an open-source framework that can be adopted by all types of enterprises to deploy and run public, private or hybrid blockchains. Hyperledger is an open-source project led by the Linux Foundation and backed by major players in IT, Finance, Technology and Media. The open-source framework will implement a system, where the adopter can choose, what “shared fact” is being processed in the chain, whether it is a cryptocurrency, a fiat currency, digital assets or smart contracts. The system will be largely scalable similar to R3’s Corda and should become a global standard for enterprises just like Linux had become in the world of operating systems. Jerry Cuomo, IBM’s VP of Blockchain technologies and participant in the Hyperledger project has testified on a panel at the US House of Commerce and shared his (or IBM’s) visions on the blockchain technology. Cuomo’s statements about revolutionizing the way businesses interact could be realized in the Hyperledger project. It will be interesting how this project will evolve. The project was initiated in December 2015 with the spin-off of Hyperledger from its previous owner Digital Asset Holdings and currently it can only be speculated what the final product "Hyperledger" will look like.
Where is SAP and Oracle?
In all of the media buzz surrounding the blockchain technologies, it appears to me, that two major IT companies have not been mentioned along with a blockchain related project; SAP and Oracle. Considering the vast field of applications of the blockchain technology, accounting software and database technology may be most disrupted by it. Even though it may take 5 to 7 years for the first-mover to adopt a blockchain-based accounting system - it may even take longer in highly regulated industries or for SOX compliant companies - the chances that a successful proof of concept initializes a wave of adopters are high. To be fully up to date with the blockchain technology and the products that will descend from it, it is a good idea to be involved as early as possible.
The race is on
Even though there is a long path to go to introduce blockchain on a global level, the current ecosystem shows that blockchain is not anymore an idea supported by geeks and highly visionary individuals, but that whole industries show interest and confidence in this disruptive technology. Maybe the most exciting answer the future holds to date, is how blockchain tech will be introduced to enterprises and private consumers on a large scale.
Ethereum, R3 and Hyperledger are three early-stage examples of how the blockchain tech is being approached to be made implementation-ready. The projects have some features that make them unique in their field - such as specialization for the finance industry - but there are a lot of overlaps as well - such as smart contract implementations. The major difference however, is the background of each of these projects. R3 is backed by a consortium of 42 banks and financial companies. Hyperledger is led by the Linux Foundation and backed by large IT players, such as IBM, Accenture, and additionally, some financial companies. Ethereum has the backing of a vast community and among the first to be on-boarded to Microsoft's Azure.
The near future will show who will win the race for the throne of blockchain technology. And whoever sat in the board or committee of this project, clearly has an advantage. The question remains whether there will be room for multiple players in blockchain technology.