Bitcoin, Ethereum, in fact any cryptocurrency – they’re all just the tip of the iceberg. The really interesting part is the technology behind them – the blockchain.
Which is why over the past month or so we’ve been delving into the world of blockchain.
First, we explained what blockchain is and why it’s so significant.
Then had a look at how blockchain and “smart contracts” could disrupt the way the property market operates.
In this third special report, we’ve put a handful of companies under the microscope – including some startups racing to commercialise blockchain tech.
The companies building the blockchain ecosystem
In our last article on blockchain, we introduced the basic concept of a “smart contract”. This allows the facts of a transaction to be publicly recorded. Just like marriage vows, this means that the commitment can’t be denied later – because it forms part of a public, verifiable record.
We looked at how this technology is behind the transfer of units of cryptocurrencies (eg, Bitcoin), and how it can be repurposed to verify a much larger range of transactions – everything from diamonds to land.
We’re going to delve a little deeper. We’ll be looking not only at the different types of blockchain, but the uses they can be put to – for good and evil. Finally, we’ll end by unwrapping some more exciting startups. Most of these firms are little acorns today, but their position on the cusp of a revolution means that they may well be mighty oak trees tomorrow.
Firstly, let’s get started with some nitty-gritty.
The blockchain that powers bitcoin is fairly well understood. It’s designed to allow you to prove the currency transactions we discussed earlier – but not much else. By contrast, the Ethereum blockchain is much more powerful – albeit far less well-known. It was built from the ground up to be able to execute smart contracts very flexibly. Unlike the bitcoin blockchain, it actually allows you to run little bits of computer code.
I might have lost you on the technicalities here, so let me explain further: when you need to calculate something, you’d normally do so by running a programme on your own computer, or by renting some space on a computer run by Amazon, Rackspace or a similar firm. What that tiny little bit of Ethereum code does is to allow you to run the same program directly on the blockchain.
Theoretically, this distributed intelligence could unlock all kinds of dystopian future scenarios. Perhaps self-sustaining malware could exist on the blockchain. Think, for example, of a programme for sending scam emails. There’s a remote possibility that someone could run something like this on the blockchain, and then it would potentially be able to exist, grow and develop – all independent of its creator. All scary stuff, and not entirely unlike the malevolent, self-aware “Skynet” computer system made famous in the Terminator series of movies.
Of course, this is fascinating sci-fi. But there are many more down-to-earth alternative uses for the blockchain.
Just before I introduce these, I’d like to give you a little taste of how different this new world might be from our old one. Consider the recent spat between Apple and the FBI. The Feds want to crack the security on a terrorist’s iPhone – an obvious “slippery slope” to being able to crack everyone’s iPhone. Not just for terrorism, but surely soon for drug dealing, then taking drugs, then knowing someone who deals drugs, then for knowing someone who takes drugs, then for… well, just because.
Apple, using its mighty global power, basically told the Feds to stick it. For now, it’s got away with it – but for how long? It’s unclear that even Apple can resist indefinitely, even with its multi-billions and army of global citizens (and I use the word advisedly – it’s often more loyal to their iPhone than its state). However, in future there may be independent, autonomous firms – ones that are untraceable, unsueable and beholden to no authority. Where will the Feds be then? That’s the exciting – and slightly scary – world of the blockchain’s potential future.
Now, to the startups:
One of the most interesting blockchain prospects within the wider financial landscape is augur.net. It could perhaps be described as a kind of Betfair on the blockchain. Its purpose is to allow you to take an investment stance on a future event. Accordingly, it’s somewhat related to a kind of futures exchange but running on the blockchain. It’s not hard to see that a flexible, cheap, distributed market for financial trading could end up being a real challenger to the traditional markets. One only has to look at the eye-watering regulatory requirements of an exchange, such as the London Stock Exchange, to see how ripe for disruption the public markets in finance could be.
Another idea, similarly interesting, is provenance.org. This looks to provide a sourcing verification solution. While other startups exist that look to address a similar problem (Everledger, covered in my first piece, being a good example) there’s perhaps an opportunity for more than one player in the market. It’s likely that people will use this kind of technology in various different ways. Tracing meat from field to plate is one obvious application, but many others are foreseeable. It’s natural that the firms tackling the verification market will differentiate in due course, and there’s no reason to assume that there will be one dominant player across all sectors.
As we’ve discussed before, the tools to make blockchain-based businesses are themselves a lucrative market.
Chainspace.io is one such example. If I’m honest, I find it very difficult to appraise firms like this. One of the key maxims I use to evaluate the investment opportunity I’m offered, is to try and empathise with the customer. As I’m not a software developer, it’s hard for me to “feel the pain”. Accordingly, it’s a tough call for me to work out which of the developer tools available represents the best investment. Personally, I steer clear – but this absolutely does not mean that they’re bad investments – just outside my personal comfort zone.
Finally, if you’d like to select a firm that’s servicing the blockchain ecosystem, and is also (hopefully) a little less flaky than your average startup, then Coinsilium is worth a look. This is the brand behind the Block Chain Space program we discussed last time. It’s listed on ICAP’s ISDX Growth market under the ticker COIN, and makes its money from investing in blockchain startups. It’s not a “pure play”, but is certainly well placed to profit from a potentially revolutionary ecosystem –without the accompanying risk of a direct investment in a startup.
Andrew Lockley
Exponential Investor
P.S. If you’re interested in investing in startups – blockchain related or not – you should read our dedicated “how to” guide on how get started and what to look out for. Just click here to read more.
Category: Investing in Bitcoin