The blockchain investment landscape (aka what to invest in)
When you take a step back and think about why things are set up the way that they are in our investment landscape, you may ask: Why an incubation lab?
We know that many of the underlying technologies are still imperfect and immature, and many of these use cases have yet to be expanded upon. The range of blockchain technologies that we see today are mostly based on the concept of chains, but what that fundamentally means is that it is a non-closed-loop, unidirectional technology. It is a chain of time — so it’s a timestamp. Do all real-life scenarios require timestamps? Are there other structures out there that can fulfil what blockchain aims to deliver? These are all topics that are worthy of being studied in an incubation lab. Other than these deep technical explorations, there are also some new projects in the lab that focus more on closing the “last centimetre” gap. This involves partnering with the “traditional” equity-funded companies, and even very mature internet companies who can put their products on the blockchain and invest resources in its development.
Another swathe of the landscape includes chips and mining rigs. There are a whole lot of nodes and even storage devices that need to be supported by corresponding hardware. The hardware does not necessarily have to be in the form of a computer as we might typically understand it, where we refer to its computing power as its defining feature; a chip does not necessary require high computing power. For IoT projects, any sensor that can provide small amounts of computing power can serve as a contributing node in the network. As long as that sensor continues to pipe data through, it has value, and any such node should continue to exist in this network.
What kind of value does such a node have then, and what kind of profit can be realized with such a chip design? Take smart meters as an example. The smart meters of today can compute, store and broadcast data, but it cannot be used to receive payment. It can provide this data, but it is unable to leverage on the vast network effects in terms of economic value. So, even in just an area like smart metering, there is already lots of opportunity to be had. Hence, hardware is clearly a strategic part of the investment landscape.
The competition for private chain dominance is intense, but we can draw a parallel to the operating system wars 10 years ago. There were more than 100 operating systems in contention, but now only three remain. Could this also be true for public chains? It’s hard to imagine that a public chain can satisfy all the scenarios required of it, where only one public chain rules them all. For example, you might need a public chain to support the entire sharing economy, but it would be difficult to have such a general and scalable chain that can support all apps. This underpins the reality of why there are a hundred chains competing. There will definitely be a few teams that jostle and get ahead. Finding these depends entirely on the founding team, and your investment acumen — whether you can find the future Google or BAT in there.
Comment: BAT stands for Baidu, Alibaba, Tencent, the three kingpins of the Chinese internet.
Exchanges are also an investment priority. Whether decentralized or centralized (of course, today, most are still centralized), wallets and exchanges are important entry points for users. When you make equity investments, you tend to ignore the secondary market. But TGE’s primary and secondary markets have vague boundaries and tend to be oriented to be short-term, so secondary market analysis become vital. We must establish and support community operations in these dynamic secondary markets.
There is another pertinent point pertaining to secondary markets. In equity investment, there is an important aspect: corporate governance. In early stage equity investments, we usually are only board observers, so it is difficult to give them the help they need. With TGE projects, the role we can all play is diminished even more, since there is no legal support for it. Many of these projects have foundations, and foundations have directors, but there is basically no place for investors on these boards. Therefore, when designing a blockchain, accounting for the design of its community and protection of its holders are vital, a key takeaway from the study of secondary markets.
In the application dimension on our landscape, games are definitely the easiest class to take off in a big way. In applications involving trading, we should avoid narrowly understanding trade as being limited to only financial transactions. In fact, aspects such as information and data transactions are included; in the future, every byte of data I transmit should garner me its corresponding value, even if it is only a penny. All medical applications, such as medical care, insurance, and more are ultimately linked to these data — data generated by real users in the real economy. Projects in information security, social networking, IoT, and artificial intelligence, stem from the use of application-based public blockchains.
In China, we focus on projects with viral application. In the US, we evaluate projects for their technical merits. The process of evaluation hearkens back to early stage venture investment where talent is the critical factor. We start by understanding more about founders and the team, such as what extraordinary things they have done in the past, why they banded together and formed a team, what goals they have in the future, and how far they can go… these are just a few of the factors to consider.
Another aspect is the potential of the application and use cases. How does one grapple with the notion of potential? One way is to use the maturity of the use case as a gauge — if it already sees a lot of use, and has millions of users in the community, but it can be decentralized, can cogently introduce tokens as an incentive, and can start the network effects of a blockchain using its community. Keep in mind, however, that many technologies are not perfect yet, so there is room for improvement. Every public chain these days says that it can support millions of nodes, and other big claims, but we still have yet to test the limits of the technology beyond the lab.
Comment: Maturity of use case is sometimes also a justification for what we call “reverse ICOs”, ICOs by companies who are already established but can find a good use case for introducing blockchain to some part of their business.
Wallet protocols are another interesting section. Beyond development of the underlying technology, security is a key focus, along with computing power and other related technologies. There definitely are going to be more effective and elegant mechanisms waiting for new, innovative teams to discover. Today, people only focus on the chain and the “timestamping” effects, soon the conversation will shift to block size and space allocation and use on the blockchain as well.
Moving on to the service sector, hedging and custody of digital assets in the secondary market are of particular interest. We know that there are currently no strong custody services for digital assets due to legality issues, which has led to exchanges being the default candidate for custody. With changes in regulatory landscapes, custody is another investment opportunity.
Covered above are the entire set of good investment opportunities in blockchain, spanning the underlying technology, public chains and decentralization, and exchanges. Let’s summarize the thoughts above further.
Turning to the development of protocols, our belief is that many of them will not be used publicly for now. In the long run, the public chains of many different application scenarios will survive, but now they are still in the initial stages of competition. In the short term, due to computing power, there will be no truly better, differentiated service.
Third generation blockchains and technology should achieve several characteristics: first, scalability; second, operationality; third, sustainability; fourth, privacy; fifth, security; sixth, governance. Is it possible to and define these using smart contracts? It is absolutely possible, even though it does not yet exist today. Based on the trend of development however, these requirements will certainly be met in the future.
Observing exchanges today also sends a strong message. The transaction volume of all decentralized exchanges now only accounts for 1% of the trading volume of the top (centralized) exchange, so the development potential of decentralized exchanges is particularly huge. By scanning the entire choice set of investment opportunities today, we are essentially searching for market gaps and white spaces. Just from this data point alone, the opportunity in exchanges is huge — for both centralized and decentralized exchanges.
Wallets are an entry point, and wallet projects should be equity investments. In the future, B2B markets will depend on some of these underlying products and services to support them, in order to really tap on and expand the B2B offerings available.
In conclusion, under the development of the real economy, the “last centimetre” use cases will provide the perfect breeding grounds to perfect blockchain technology, supporting the development of blockchain as a whole.