Investing in the blockchain application & infrastructure layers

Thesis Overview

Decentralized digital currency is not where the true investment value of blockchain technology lies. Instead, decentralized applications (dApps) and their supporting infrastructure will carry the most potential for developing consumer-friendly, enterprise-benefiting, and thus broadly applicable use cases.

dApps won’t be the first sign that blockchain technology has the potential for ubiquity. Cryptocurrency’s recent surge in popularity and mainstream fascination with NFTs are just some examples of public willingness to redefine currently accepted norms, particularly in the face of today’s destabilized, hyper-politicized, and deeply inequitable societal concerns.

That sounds good and all, but you may be asking — so what, there’s barely any dApps out there, what’s there to adopt at all? As Union Square Ventures describes in The Myth of the Infrastructure Phase, “platforms evolve from an iterative cycle of apps → infrastructure → apps → infrastructure and are rarely built in an outside vacuum. First, apps inspire infrastructure. Then that infrastructure enables new apps…The common theme in the development of each major platform (electricity, cars, planes, the web, mobile, etc.) is that we build what we can given the tools available to us at the moment.” Their Web 3.0 infographic on the subject looks like this:

Source

Like USV, I consequently believe in cyclical value cycles distributed between investment frameworks and development frameworks; that is, I believe there’s a good time to invest in the infrastructure, and a good time to invest in the apps. I also believe history repeats itself, even tech history; and that current trends are giving off telling signs regarding which repetitions are imminent.

My thesis is therefore that certain tech breakthroughs (e.g. fire providing manipulable light) are pending “recurrence” in the form of innovation (e.g. light bulbs), and that these breakthroughs will be replicated via blockchain as part of a push towards more decentralized, peer-to-peer infrastructure which complements mainstream infrastructure. People will build a decentralized society by first rebuilding the foundational, necessary components of centralized ones.

Primers & Resources

Many others have taken great pains to describe these concepts in accessible terms, so I will point to them for information on the terminology and resources referred to throughout this piece.

Helpful links:

• HackerNoon — WTF is The Blockchain?
• Preethi Kasireddy — “How does Ethereum work, anyway?”
• Fidelity Bitcoin Primer
• A Beginner’s Guide to Decentralized Finance (DeFI) — Coinbase
• Cryptocurrency Compensation: A Primer on Token-Based Rewards — Harvard Law

Foundational, Innovation-Ready Use Cases

Social safety nets driven by decentralized altruistic principles: The furor and stress surrounding the economics of the pandemic — unemployment benefits, the stimulus, fraudulent business claims, student loans — has only made obvious the need for decentralized mechanisms for providing social support. Blockchain is a technology inherently driven by the collective’s belief in an individual’s right to ownership; of their assets, data, property, and their ability to interact with others. An interesting use case ripe for adoption, therefore, lies in spaces that allow communities to thrive without a central authority, which surfaces use cases typically dependent on some form of communal altruism: peer to peer lending, publically verifiable certification of work (and background checks), facilitating assets trading for commodities, etc. Startups like Power Ledger enable consumers/businesses to sell surplus solar power to neighbors, cryptocurrency exchange and remittance enabler Bitso, most NFTs, and the peer-to-peer insurance broker Otherwise are all examples of these kinds of activities in action.

Tokenized Assets: Once again, USV explains this use case better than I in the linked article; while their focus is on natural resources specifically, I’m interested in the tokenization of assets such as real estate, securities, or intangible assets (ranging from IP to promises — that is, private agreements). What’s the benefit of this process? For one, it allows consumers to make illiquid assets liquid, provides improved risk management, transfer securities privately and securely, or define and defend digital property. Masterworks is probably one of the best examples, but it and companies like PO8 (digitizing and tokenizing found underwater cultural heritage assets) are legitimately creating new wealth generation and investment opportunities more easily accessible to individuals from myriad backgrounds. The fact is, tokenization allows for ownership opportunities in previously inaccessible securities, thereby truly making pieces of the pie a bit more accessible to all.

Infrastructure creation for underserved communities: The Web3.0 discourse might have been fully elaborated by this point. But I’m interested particularly in the manner in which Web3.0 will contribute to the development of foundational ecosystems in emerging markets and developing economies. If trade and e-commerce aren’t reliant on a centralized bank account, government-issued fiat, or even physical ownership of tangible assets — that opens up quite a bit of room for increased global collaboration, wealth-building opportunities, healthcare management, a collectively owned internet infrastructure, or even introducing the possibility of individuals transacting with enterprises. In India, a ConsenSys blockchain project is focused on land ownership records; in Kenya, IBM is working with lending platforms to overcome the obstacle of ascertaining the creditworthiness of food vendors; and globally but particularly in Mexico and Latin America, cryptocurrency is being used to lower the share of remittances lost to fees.

Forward-looking opportunities

Blockchain’s value is most evident when considering use cases where rigorous tracking, recording, and reporting is critical. Decentralized finance (DeFi) is therefore usually the first use case people will think of. However, there are plenty of other industries or circumstances with similar requirements that are ripe for potential disruption across both applications and infrastructure.

Application Use Cases:

Supply chain optimization: COVID-19 forced supply chain optimization and risk management conversations to the top of every industry. According to Ernst & Young, 57% of companies they surveyed were affected by serious disruptions to their supply chains during the pandemic, with 72% reporting a negative effect. Perhaps consequently, the vast majority of respondents are preparing to retrain and reskill their workforces, increase automation, and explore new digital solutions. That leaves many areas to be covered: Invoicing, records of agreements, inventory management, procurement, carrier onboarding, and more. And many ways to address them using blockchain, ranging from digital twins for planning and optimization purposes, or tracking provenance for regulatory compliance purposes. Everledger, Openport, and Origintrail, are some of the most well-known companies operating in this space. TraDove, Chronicled, ShipChain, and Hijro are younger startups quickly gaining stake.

Enterprise Compliance: Blockchain has long seemed to be a match made in heaven for enterprise compliance efforts like Know-Your-Customer (KYC) and Anti-Money Laundering (AML). Grayframe, Fujitsu’s user identity and credential verification system, Elliptic, and Datafund are good examples of this use case in action.

Infrastructure Use Cases:

Healthcare records: Blockchain can radically change healthcare data’s access and sharing capabilities across individuals, organizations, and devices, while providing proof of everything ranging from services requested and delivered or payments, to proof of insurance and providing patients with direct access to and ownership of their healthcare data. All while maintaining HIPAA compliance! Hyperledger (IBM), BurstIQ, Medicalchain, Patientory, and Curisium are key startups in this space, focused primarily on ensuring secure and efficient patient data transfer and management.

Application/system/platform integrations: Much has been written about the possibilities of synergies among dApps, less has been written about how these possibilities may be used to ease the issue of technical debt. As Apple’s upgraded its hardware, consumers have complained about the number of “dongles” needed to replace missing audio jacks or USB plugs. This is an example of a software issue, too, often faced more by consumers than by enterprises, though the latter suffers as well; with tech across different industries changing at vastly different speeds, end-users struggle to reconcile old or trusted favorites with today’s critical upgrade. How do I connect Asana to Excel? Airtable to Microsoft Projects? In a trustless system, it feels much harder to get left behind because you couldn’t afford the latest upgrade or get your team to agree on one. Therefore any blockchain technology which optimizes or facilitates the ability of dApps to connect with each other or non-dApp APIs should be considered worth a second (or fourth!) look. For example: blockchain oracles.

Low/no-code developer tooling: Business of Blockchain postulated that there were 5,000 blockchain developers worldwide in 2016, compared ~25 million other software developers. However, interest in blockchain developers has increased in recent years, with Techcrunch stating only 1 out of 14 blockchain jobs will find a candidate. However, blockchain development frameworks will need to be simplified to facilitate widespread end-user and enterprise adoption. IBM, Atra, ServiceNow and Provide, Alchemy, and Appian are all companies to watch in this space. Projects like Plasma, Rootstock, Solidity, and Loom are blockchain development frameworks that are also key components of this iterative ecosystem. And Hardhat, Embark, and Brownie are development frameworks based on more common programming languages like Javascript and Python, which should make developing on blockchain more accessible. The Baseline Protocol is also a good initiative to keep watch of considering its emphasis on interoperability nad backing by sponsors like Accenture and Consensys. Notably, most of these work on the Ethereum protocol, which is inherently more flexible than Bitcoin’s.

Source

Evaluation Criteria

When considering whether one should invest in blockchain startups, particularly across these use cases, the following criteria should be used to evaluate the opportunity.

Fundamentals

• Are the company’s finances and projections in order?
• Why is the company raising capital, now? How will investment capital be used?
• Does the company’s purpose and potential align with our own analyses of the market and corresponding trends?
• What is the timeframe for investment?

Market Opportunity

• What is the compelling customer need or problem? Who is the ideal customer?
• What percentage of market share can this company feasibly hope for?
• What is the urgency behind a decentralized version of this use case? What does the centralized version (if it exists) look like?
• Get highly specific on the market size — which segment of the market, what demographics, can feasibly be expected to utilize this product given the “inaccessibility” of blockchain currently?
• What are the network effect factors and opportunities?

Product

• What kind of traction or major milestones has the company achieved
• What’s the complete competitive landscape look like?
• What is the product/company’s competitive advantage?
• What’s the business model?
• How dependent is this product on infrastructure provided by private companies or public entities?
• What additional dependencies within the blockchain ecosystem does this product/company have?
• How easily accessible is this product to a large end-customer TAM?
• What does the supporting developer ecosystem look like in terms of size, activity, and roadmap?
• Are there any regulatory concerns?

Founders & Team

• What are the founders and team motivated by?
• Why are they uniquely qualified to solve this problem?
• How well do they understand the industry, the economics, and the key metrics of their business?
• What do they consider their weaknesses to be?

Final Thoughts

I’m still relatively new to the somewhat nascent worlds of DeFi, blockchain, and crypto. However, as I’ve begun my descent into these topics, I’ve also started to see what I believe to be critical investment opportunities that I hope I’ve accurately captured in this article.