Recently, Nick O’Connor shared two pieces with you about blockchain – what it is, why it’s going to be so big and how you can start thinking about investing in it.
The blockchain is a marvellous thing. It’s the technology behind bitcoin (which is probably less marvellous).
We’ve already looked at some of the details of how the blockchain works, so today we’ll be looking at what you can do with it. And there will be no more bitcoin getting in the way.
So what’s all the fuss about?
Well, let’s imagine that you’re going to sell a house. You have to exchange contracts. Now, despite the fact I’ve bought well over 100 investment properties in my life, I have to say that I have no real idea what lawyers actually do when they exchange contracts. Do they phone each other? Email? Perform a special dance? Maybe cast a spell? I don’t know. But what I do know, is that it seems to cost me quite a lot of money.
Now imagine that you had a little electronic lawyer, sitting on a computer server. He wouldn’t need paying or feeding or an expensive office to work in. He wouldn’t make mistakes and get sued (incidentally I’ve just got a compensation cheque from my lawyer’s insurance company – I lost several thousand buying a pair of flats, due to a drafting error on a contract). Furthermore, this little electronic lawyer would be able to work in a frenzy all day, every day. He’d never stop to eat or sleep.
What could you do if you had a little electronic lawyer?
Let’s imagine for a moment that we didn’t have to worry about stamp duty or mortgages, just to keep things simple. Then, your little electronic lawyer would make buying a house as simple as checking into a hotel room. Actually, far faster than that. It would take fractions of a second. In short, it would change the whole way that we bought and sold houses – why we did it, when we did it, how we did it and, crucially, how often we did it. You could buy houses on Airbnb, instead of renting them. You could trade chart patterns and market news in housing, just like high-frequency FX traders do. This is why the “smart contract” concept is so appealing – regardless of whether it’s based on the bitcoin blockchain, Ethereum or some other kind.
Do you think that’s mad, sci-fi fantasy?
The government of Honduras doesn’t. Sick of fraud from sticky-fingered bureaucrats, it’s already implementing a blockchain-based land registry trial, supported by technology from Factom and Epigraph. The roll-out hasn’t gone smoothly, but that’s down to tinpot government problems, not due to any fundamental limitation on the technology.
This potential for massive, revolutionary, global-scale disruption is the magic of blockchain. And I’m going to show you some firms that are doing some crazy-disruptive stuff with the blockchain. Many of them I’ve met personally. In some cases, I’ve spent hours and hours looking over their business plans with the senior management. But I can’t tell you which ones are which. (Well I could, but then I’d have to kill you…)
Today, I’m going to show you around the blockchain space, so to speak. We’ll have a look at the different types of things various companies are doing, just to help orientate you. And if you’re interested, maybe we’ll look at some more specific opportunities in a future issue. But before we start with all that, it’s worth taking a look at the investment landscape as a whole. You might still think this is investment voodoo. But Nasdaq has just announced that it’ll be using blockchain for investor voting functions, and Samsung is building on Ethereum. So while many of the most exciting firms in the space are startups, this is by no means tin foil hat technology. But of course, the main action is often in the risky little startups, not the large, slow-moving corporates.
The blockchain companies investors should watch
It’s important to recognise how much serious attention blockchain startup investment is getting at the moment. For example, there are accelerators completely devoted to blockchain firms – such as Nexuslab and Block Chain Space.
(In case you’re unfamiliar with the model, an accelerator usually offers a small investment, a few weeks office space and some mentoring support to young firms, in return for an equity slice. The programmes usually only last for around a quarter – which can make the equity cost seem pretty pricey.)
There are also specialist investment groups and firms, such as blockchain.capital (yup, that’s an actual web address), who is exclusively focussed on the sector. These guys have a three-year history, so it’s clear that it’s a technology moving into the adoption phase, not one that’s still stuck in the ideas lab. If you’re keen for exposure, but don’t fancy getting your fingers burned with a direct investment, it may be worth looking at those accelerators and funds.
The level of love the blockchain is getting makes it clear that, in summary, this is either going to be very big or a lot of smart people are going to end up looking pretty dumb (including me).
Now, on to the smaller, riskier, exciting-er firms…
The first is StockFrog – very much a personal favourite of mine, and one that I think all readers should have on their radar. This firm does something remarkable, in a market that many people think is too complex, dull and risky for them to get involved. That market is share trading. The problem is that share trading is really rather expensive. Of course, if you want to buy a few shares, and leave them untouched for a decade, it’s quite manageable. But most people don’t want to tie themselves to firms like that. They want the freedom to buy and sell, to make the best of market opportunities.
The problem is that (just like with stamp duty on houses) fast trading usually erodes all possible profits because of dealing fees. StockFrog does two things – both of which are game-changing for small investors. Firstly, it allows investors to own tiny fractions of a share, so you can get started in share trading for a child’s pocket money. Secondly, you can buy and sell even a tiny share portfolio quickly and cheaply. I’m a passionate believer in the right of everyone to have simple and transparent access to fair markets. Market failure is what turns free market economics into crony capitalism. And I really do believe in what StockFrog is doing to fix the stock market – which is, if you’re a small investor, utterly broken.
Another disruptive market entrant is diamond-verification firm Everledger. Run by an unforgettable founder (Leanne Kemp), the firm has been through both the Barclays and Allianz accelerators – so it may be young, but it’s getting taken pretty seriously. The premise of the firm’s offer is to check the data on each diamond transacted through the platform. So the clean looking stones that are all too often associated with some seriously dirty transactions, can finally be held to up to scrutiny. When your firm’s product is so tarnished in the public consciousness that it inspires feature films and hit singles about the bloodbath behind the trade, it’s clear that there’s a great opportunity to profit from a clean-up operation.
Furthermore, a proper transaction ledger has real potential to reduce fraud and theft – crimes that are all but inevitable without proper verification and traceability. It’s not impossible that Everledger will end up losing the fight to some other firm trying to get this market tidied up – and Blockverify is an obvious comparator. But in my opinion, it’s a promising idea – and well worth a look. Don’t bet the farm without proper scrutiny of the latest news on traction and competition, however. On the upside, the firm has ambitions to clean up other markets prone to criminality, such as counterfeit designer goods (that’s Blockverify’s current focus).
Watch this space, this could be big…
If you’re interested in selling picks and shovels for the gold miners, rather than panning for gold, you might want to take a look at Eris Industries. This is a firm that might be described as “blockchain as a service”, in that it looks to make it easy to build new firms using the blockchain. It’s not interested in providing services to end users and instead focuses on a B2B play. If blockchain technology becomes ubiquitous, it’s certainly well placed to benefit. Its website highlights the opportunity for automation of banking processes.
Another startup focussing on this particular application more tightly is Crowdaura (incubated by Accenture’s FinTech Innovation Lab). Crowdaura is specifically aiming to provide banking infrastructure capability using the blockchain, and nothing else.
If you’d like to take a look at something refreshingly different from smart contract, consider Filecoin. You might be familiar with the way bitcoin works – in that people get awarded bitcoins for solving difficult, but essentially pointless, mathematical problems. Filecoin turns this model on its head – rewarding those who store data. This gives a very handy way to back up data and a reward mechanism built around it. In my view, it’s not so much a cryptocurrency, rather than a simple reward program for storage space. Think about it as Airbnb for your hard drive.
So, there you go
It isn’t neat, it isn’t pretty. Many of the firms doing exciting stuff with the blockchain are at the spare bedroom stage, with barely-working websites. But look back to where Harley-Davidson, Dell, Google and M&S started. It wasn’t glorious. They started in sheds, garages and low-rent business premises. And I bet you wish you’d had your money in them from the start…
I’ve picked just a few firms out of a large, complex landscape of blockchain technologies. There’s a lot more to this space than just smart contracts – and there are divisions even within this subfield. I couldn’t possibly hope to cover all of that in one article.