How Blockchain Is Changing Venture Capital, Enterprise Investment, And Startups

By James MacAlistair

Bitcoin forever changed the face of currency, but it’s the computerized and networked infrastructure of Bitcoin, called a “blockchain,” that is changing the face of business and commerce around the world in ways that never were possible before. Venture capitalists and enterprise giants have seen the future, and it is blockchain.

According to an August 2016 report by the World Economic Forum (WEF), “The Future of Financial Infrastructure,” over $1.4 billion has been invested in blockchain technology in just three short years. More than 90 corporations have signed on to blockchain development consortia, with at least 24 countries now investing in blockchain research and development. The WEF predicts that by 2017, 80 percent of banks will be involved in projects implementing blockchain technology.

Matt Wong, senior research analyst at investment research specialists CB Insights, reported in a webinar just how dramatically blockchain investment had skyrocketed: During the five years between 2009 and 2013 there had been $93 million in global funding to blockchain/Bitcoin companies, but over the span of just two years, from 2014 and 2016, that amount went up more than 10 times, to $993 million.

Where it all started

In the beginning—way back in 2009, a bygone epoch in computer-years—there was only one blockchain, created specifically to make Bitcoin possible. It had to be practically bulletproof in its security and record-keeping capabilities. Every transaction involving bitcoins or any sliver thereof, from miniscule amounts to vast fortunes, had to be meticulously and permanently recorded, until the end of time, in the great immutable ledger-in-the-cloud known as the Bitcoin blockchain. Each new transaction record in the chain of records is a “block,” and each new block carries a digital seed of the previous block, creating the “chain.” That ingenuity makes it impossible to alter or tamper with any given block without altering every block before it. Not going to happen.

If that weren’t demanding enough, no one person or company or centralized authority could be trusted to hold the keys to that currency kingdom, so the Bitcoin blockchain was programmed to be a “distributed” digital ledger, one in which no new transaction record could be made without complete consensus by a number of participating but independent computer installations, affirming to and among each other that such a transaction actually had taken place, and had taken place precisely the way it was being reported on the blockchain system.

And if that weren’t enough, the vast and infinitely expanding universe of Bitcoin blockchain records had to be accessible to anyone in the world who wanted to log into the system at any time, night or day, 24/7/365 (366 in Leap Years), making the entire meticulous history of every transaction involving bitcoins transparent, right down to the very first record ever entered: the “genesis block.”

And then someone said, “If this mega-technical-database infrastructure called a blockchain can do all of that for keeping Bitcoin on the up-and-up, what could other blockchains do for life and industry and commerce and science and even art?”

Let there be blockchains. And thus venture capital met blockchain technology.

And there was blockchain proliferation

In July 2016, Moody’s Investment Services released a report that named 120 blockchain-based projects that have sprung up in recent years, accounting for the $1.4 billion that has been funneled so far into the space by individual and corporate investors. Moody’s use of the broad and somewhat nebulous word “projects” was prudent because so far it’s essentially impossible to nail down any precise classifications of those projects.

Some of the projects are new “public” blockchains that anyone in the world who has a computer and an internet connection can participate in. Some of them are new “private” blockchains that are limited to approved participants. Some of them are applications or “smart contracts” that are being created to run on blockchains, either public or private, carrying out certain predetermined computing operations. Some of them are consortia of companies and corporations that have come together to research and develop blockchain technology in ways not yet imagined. And some of them are projects developing ways to create custom turnkey blockchains for private use by certain companies or certain industries.

The technology is still so new, and in such a raw state of research and development, that even industry insiders grasp for terminology and definitions that adequately can define it, sometimes still disagreeing on which word means what—as a major player in the blockchain universe, Deloitte, lamented in its 2016 publication, “Bitcoin, Blockchain & distributed ledgers: Caught between promise and reality”:

Terminology is important. Without a consistent approach to terminology, it is difficult to explore the opportunities a new technology presents. It’s not surprising many of us are struggling to understand blockchain’s utility when its foundations are built on shifting sand. However, attempting to create a more precise definition is futile. Many definitions have already been offered, with the ensuing arguments about what is and what isn’t a blockchain, offering little progress.

That can create a dense jungle of nomenclature for investors, private or corporate, to machete a path through. Some of the broadest clearings in that jungle are more or less agreed on as general categories that have been taking shape—but only more-or-less.

Public versus private, permissionless versus permissioned—and the hybrids

In 2015, the BitFury Group issued a white paper in which it assayed to ring-fence some of these clearings in the jungle with definitions:

Blockchains can be classified based on access to the blockchain data.

Definition 1. A public blockchain is a blockchain in which there are no restrictions on reading blockchain data (which still may be encrypted) and submitting transactions for inclusion into the blockchain.

Definition 2. A private blockchain is a blockchain in which direct access to blockchain data and submitting transactions is limited to a predefined list of entities.

Definition 3. A permissionless blockchain is a blockchain in which there are no restrictions on identities of transaction processors (i.e., users that are eligible to create blocks of transactions).

Definition 4. A permissioned blockchain is a blockchain in which transaction processing is performed by a predefined list of subjects with known identities.

Note that a permissioned blockchain does not need to be private.

Yet other authorities in the field hold that “public” and “permissionless” are synonymous, as are “private” and “permissioned.”

Adding to the complexity, a new term has emerged: “hybrid blockchain.” For instance, the Walt Disney Company has announced the creation of Dragonchain, which it defines as a “Flexible Public/Private Hybrid Blockchain.” Some experts have applied another term to such conglomerates: “consortium blockchain.” Even there you won’t find solid agreement, though; a consortium blockchain might not be a hybrid blockchain, but instead be a private blockchain.

It’s inevitable that these categories and definitions will settle out over time, but for now, as with all other types of investments, the centuries-old advice still stands as true today as ever: caveat emptor.

Trends and prognostications

Recently there has been a significant shift in sourcing of investment going into Bitcoin and blockchain development. According to CB Insights, 2013 and 2014 saw investments overwhelmingly coming from from non-corporate venture capital, but in 2015 and 2016 that reversed, with corporate investors almost taking over the playing field in 2015, then outspending non-corporate investors almost 10-to-1 in the first half of 2016.

Although investment in Bitcoin-related technologies got the lion’s share of investments through 2015, the first quarter of 2016 showed a rush of investors, particularly corporate investors, into blockchain and hybrid startups.

Major banks and other fintech companies have been vitally interested and involved in blockchain technology development—for what may be obvious reasons—but new use-case applications for blockchain technology keep emerging at a blinding pace across an extensive range of vertical and not-so-vertical industries.

Moody’s report, for example, identified 25 major use cases already in sight and being developed, including such diversified applications as real estate, healthcare, public voting, taxes, energy, insurance, internet of things, regulatory oversight, supply chain management, record management, and shareholders’ voting.

One thing seems as certain as death and taxes: Blockchain technology is here to stay. Some have likened it to being every bit as revolutionary a technical development as the internet and cloud computing. If so, it will reshape the world we live in. Smart and nimble investors have seen the future, and the future is blockchain.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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