Real Ventures Crypto Brief - October 19, 2017

J.P. Morgan CEO Jamie Dimon recently expressed skepticism about the potential for Bitcoin and cryptocurrencies, and he’s not alone. Many people who haven’t studied cryptocurrencies and the technology behind them in depth see massive amounts of money funding immature projects (see the Tezos article below) and assume the industry is rife with pyramid schemes and bubbles. This open letter was widely shared this past week as a great primer on cryptocurrencies that acknowledges some of the valid criticism while providing information on the real areas of innovation, such as decentralized applications, that cryptocurrencies provide. A great read for those new and old in the world of crypto.

CBInsights has released a 31-page report on the growing blockchain ecosystem with well-researched data and analysis around Initial Coin Offerings, Venture & Equity Investment, and Corporate Investment in the space.  

On the equity side, the report tallies a total of $390 million in 2016 and $327 million from 42 equity investments deals so far in 2017. Over the past three years, 9 of the 10 largest American banks participated in fundraising rounds for six blockchain companies, which altogether amassed $267 million. It’s interesting to see how aggressively large enterprises are investing in blockchain technology, which many think will ultimatley disrupt incumbents’ business models.

The Ontario Securities Commission has released guidance indicating it is open to working with companies looking to build with and raise funds using tokens. The question of regulation in the space remains very uncertain; while governments genuinely want to help foster innovation, they also must satisfy their mandate to enforce existing laws and fight (rampant) fraud. Given the novelty of ICO’s, it is often impossible to tell the legitimate projects from the fake ones. 

Real Ventures Partner Janet Bannister recently spoke at the OSC Dialogue, where regulators and industry leaders were in unanimous agreement that the financial industry is undergoing a period of rapid change and evolution as a result of blockchains, artificial intelligence, and other new technologies.

Regulators worldwide are finding that it’s incredibly hard to control the explosive growth of money tied to no nation.

The “Byzantium” hard fork upgrade for the Ethereum has successfully rolled out and is running smoothly. This upgrade brings benefits for scalability, privacy, and new kinds of applications. It’s a testament to the cohesion of the Ethereum developer community that the network was able to upgrade so smoothly. A hard fork means that everyone who runs the network must agree to run a new version and abandon the old one - this process can be a very difficult one, as seen with Bitcoin’s struggles. 

It’s important to note that this hard fork wasn’t perfectly smooth. Just two days before the upgrade, vulnerabilities were discovered which had to be fixed at the last minute. These bugs, although very obscure, could cause a “consensus failure”, where people who maintain the blockchain couldn’t come to agreement about which chain is the main one, or made the network vulnerable to ddos attacks. In fact, bugs could still be discovered (and exploited) to this effect. Gavin Wood, a prominent Ethereum developer who founded Parity, has called for more conservative hard forks in the future. 

Casper is the “friendly finality gadget” designed by Ethereum inventor Vitalik Buterin as a core piece of Ethereum’s future. This specification goes into detail about how consensus can be achieved through Proof of Stake as opposed to Proof of Work, which will allow Ethereum to work much faster and more securely for a greater number of transactions. It’s important to recognize that these standards will change a good deal over time, but nonetheless the thorough research herein is impressive. 

One of the great things about Ethereum and blockchain technology broadly is how it has encouraged banks to commit real money and effort to developing common shared protocols. Until blockchains became popular, banks ran on software designed in the 1960’s. Now, they’re all racing to implement new technology. A remark from one of this bank’s executives sums it up best:

This article is such a great read for so many reasons. Many smart people have been criticizing token sales like Tezos, which market complexity and technical jargon to retail investors who don’t understand what they are investing into but don’t want to miss out on the Next Big Thing. 

When this ICO took place, I didn’t want to touch it with a ten foot pole. I couldn’t put my finger on it, but it just didn’t feel right - the website was too polished, there were too many interviews with large media outlets, there was too little real technical detail, and most importantly there were way too many people excited about making money and way too few dreaming about its potential for actual impact. 

Over time, I’ve found that the projects that are genuinely exciting - the ones that I love to read about because of the passion and potential in their founders and ecosystems - are the ones that perform best. Mostly, those projects are run by people who don’t have experience speaking on panels, don’t care about being on Forbes 30 under 30, and could never get a job at places like Goldman Sachs and Accenture (no offense intended). 

JPMorgan, while its CEO hasn’t been shy about calling bitcoin a “fraud” and those who buy it “stupid”, continues to invest in the blockchain technology that underpins it. JPMorgan was a founding member of the Enterprise Ethereum Alliance and has created their own fork of Ethereum, called Quorum, which is designed to work in closed “permissioned” configurations to allow banks to more efficiently communicate. 

This is a trend we’re likely to see grow over time: banks are gradually coming to understand how disruptive this technology is to their core business model. Recall the hubris of other incumbents in criticizing disruptive technologies in their industries (“Apple can’t do a phone”, “Netflix isn’t a threat”, “search engines aren’t news”) only to be totally rampaged by them. Banks have been trying to get ahead of “blockchain” by working overtime to engineer it to their benefit, but the core fundamentals working against them are that this technology is decentralizing and disintermediating, and banks are the epitome of centralized intermediaries. 

Trent McConaghy, the founder of BigChainDB, is an extremely well-respected engineer in the blockchain space. The Ocean protocol is his latest project that is working to bridge the world of artificial intelligence and blockchains. This is definitely a project to keep an eye on.