We are passing through the last bits of 2018. For sun worshippers like myself, it means touching rock bottom at the solstice, the darkest day of the year. Every year, the sun moves away from the Northern hemisphere, until we reach the darkest hours. Every year, it rises back from the darkness, as we enter the new calendar year. This is the law of the pendulum.
Change is the only constant. — Heraclitus.
Certainly, 2018 was marked by a long way down for crypto markets, albeit bouncing back a little recently. Finally, we can hope in better days. Isn’t it what this period of the year is all about? I’m not a crypto maximalist, but I’m interested in learning. The crypto market degrowth carries strong signals. A transformation is happening. I wanted to understand the forces at play, so I dedicated the last two weeks investigating. Let me share what I found.
Doom and Gloom
It feels like 2018 is ending in a free fall down South. US markets are going down in flames with a government shutdown in the background, without mentioning an executive branch that makes the headlines every single day. Like a fish wriggling out of the water, it feels like hurting to desperately catch a breath of oxygen as the pressure increases from the justice department, the intellectuals, and the media. Even the White House seems to have lost faith in miracles, while openly sharing with innocent children its disbelief in Santa Claus. # SAD
Surreal times is not a metaphor. Western Europe is busy dealing (or not) with Brexit and the Gillets Jaunes popular protest against taxation. Eastern territories are taken over by Russia. Canada is squeezed between the US and China in the Huawei issue. The rule of law is challenged on a global scale and illiberal democracies are on the rise (a shout out to Fareed Zakaria, who analyzed the phenomenon two decades ago). The post-war world vision I’ve been taught at school is crumbling.
The crypto world didn’t turn out to be the safe haven many of us have been hoping for (happy 10-year anniversary Bitcoin!). The price of Bitcoin and Ether crashed respectively 80% and 95% this year. Foundational companies such as ConsenSys have been cruelly impacted. However bitter-sweet this might feel, I left ConsenSys with a bullish certitude that better days are just around the corner.
I’ve seen the rise of new markets and business perspectives starting to materialize. The crypto dream (banking the unbanked, a more fair world, etc) might not be for tomorrow, but real projects are happening, bigger and bigger ones. I wanted to know what other people thought and felt in the industry. The last two weeks, I’ve been busy speaking on panels, making interviews, meeting new and old friends, and working on some new and interesting projects. Here is what I learned.
Perspective for 2019
Three themes have been clearly validated.
1. ICOs are drying up
While the last couple years have been fertile in ICOs, signals indicate a major slow down. The first ones to notice are the small Devs shops since a good number of their clients are ICO makers. They started to notice more frugality in software development contracts, as the tokens lost significant value against the dollar.
This year was not bad overall. ICOs broke a new record with EOS raising $4 billion, just after Telegram raised $1,7 billion. These two do not entirely account for the average size of ICOs increasing by 60%, from $15.98M in 2017 to $25.72M in 2018. Remarkably, most of the action took place in the first quarter of 2018. The graph below (courtesy of Coindesk) shows a slowdown to Fall 2017 levels. It’s not that bad, but the trend is not looking good.
My main concern is for the smaller Dev shops which are bound to encounter difficulties if they can’t manage to tap into other markets (like the Enterprise market, see below). In the meantime, grants have been helping small businesses stay busy with exciting work. Thankfully, there is plenty of opportunities, from the Ethereum foundation and others.
2. STOs are on the rise
The discussion about Security Token Offering (STO) has taken center stage in the last couple of months. For the public, it is the promise of buying a token that is actually backed by an existing asset (e.g. equity, debt, bond, real estate, Picasso painting). Finally, we’re having a conversation about the value of the tokens presented to investors, with the added merit of involving the regulators upfront. That’s a solid advantage over ICOs*.
(*) For the newcomers to Blockchain, an Initial Coin Offering (ICO) is usually about buying a utility token, which is like a voucher enabling future consumption of some unit of service. Unfortunately, the regulator may see differently, associating ICOs with securities (sometimes with good reason). In the USA, the Howey Test is used to determine when a coin is actually a security. In any case, make sure you understand what you are buying.
Tracking assets on the Blockchain is nothing new. For example, two ConsenSys products were featured on CNN last Spring (food provenance and real estate). Closer to home (Toronto), OpenLaw and McCarthy-Tétrault issued loans on the Blockchain while The Bank of Montreal experimented with bonds. In prior years, there have been several popular projects tracking precious metals and other valuables. However, over the last months, I’ve observed a maturation in the sector, doubled with an acceleration of this type of ventures.
What’s new with STOs is the ability to easily sell securities to the public. More investors mean more trades, and more liquidity (solving a common challenge). The programmable nature of the Blockchain also helps, beyond purely trading, to automate compliance, making sure rules are “baked” into the token to avoid risky and illegal behaviours. One of the promises of crypto is to democratize investment by making it more affordable and accessible to the masses, opening it beyond the restricted circle of accredited investors (some call “the riches”).
Granted, working with regulators is more work than a typical ICO requires, but it may be a safer route. The Blockchain ecosystem is evolving, maturing standards and improving the user experience. More importantly, established companies such as Polymath and Blockstation, and securities exchanges such as the Canadian Securities Exchange (CSE) and powerhouse Coinbase, are in the business of helping issuers launch their STO, a billion dollars market per their estimation (some say a trillion dollars in the next few years).
3. Enterprise projects are ramping up
Last but not least, I’m very excited about the rise of Blockchain in the Enterprise sector. After a year of spending countless hours with executives from all industries, I feel bullish about 2019. I sense that we are close to mass adoption of Blockchain technologies. The last few panels I participated to were feeling the same optimism.
The adoption of Blockchain technologies has been slow for several reasons. Here are a few notable ones.
- Regulatory uncertainty. Why should CEOs invest in building a technology that may simply be blocked by a regulator, or by the market (competition or standardization)?
- Communication and Business Competition. It feels like several large companies have been using double-talk, trashing crypto and Blockchain for a while, until they suddenly launched their own project. Or it may simply be that some have suddenly seen the light. How naive do we want to be?
- Lack of maturity of the top Enterprise platforms. Any of those (Ethereum, Hyperledger, Corda) has to deal with its own limitations at the protocol level, and then there is the lack of middleware and other missing applications higher on the stack (e.g. AML). Interoperability is just starting to become reality, although it is foundational to large Enterprise applications.
- Lack of understanding of business executives. Unfortunately, there is still an unbridged gap in many organizations between their “innovation department” and their business operations. They invest in innovation, but they miss the execution part, hence they never fully realize the benefits.
Fortunately, the air seems to be clearing on most fronts. The regulator is more involved (understanding better the technology, opening regulatory sandboxes, clarifying token classes), even though many say there is more work to be done in Canada. Every day the main Blockchain platforms are getting better, and supporting applications are closing gaping holes in the tech stack. An example of this is the AZTEC protocol which brings more privacy (Enterprise cares about) to the Ethereum public network (to clarify: privacy is already available on private networks with technologies such as Quorum and Hyperledger).
We’re moving towards a world of multiple blockchains. Although there will most certainly be a standardization (around massively adopted chains) happening soon, the reality is that large organizations will have to deal with multiple technologies. Surely they will want to avoid vendor lock-in. They will also have to integrate with other chains for practical reasons, to integrate with third-parties, or to simply use the best tool for the job.
Finally, with the crypto market down, we got rid of the noise and disturbance in the boardroom. I was really getting fed up by having to address side-bar conversations about the price of crypto, its volatility (as if stocks were a guaranteed investment: see below), the waste of electricity, and other matters that seem trivial retrospectively. Finally, there is more time to talk about what matters: improve the customer business, gain a competitive advantage, shape the industry for the 21st century…
Business leaders realize that Blockchain is a team game. Many are actively looking for the partners they need to realize the benefits of team-play. They understand Blockchain is the best tool to digitize the value chain. We’re on the verge of seeing the spread of vertical industry consortia. Maybe the main game was not so much about creating horizontal consortia, as we believed a few years ago. As Blockchain technology becomes easier to use, it might actually make a lot of sense to rapidly deploy a business network with clients and suppliers for a market-specific application.
It’s not about Blockchain. The flirting season is behind us. As much fun (and time wasted) as there might be with experimenting with new blockchains, we have to ultimately return our attention to reality and the bigger picture. It’s time to think about what the technology can do for the business (ROI?), what a successful implementation would look like, and what is required to get there. Blockchain may be one of the tools in the toolkit. In any case, the Enterprise solution will encompass much more to include legacy systems and business processes.
Some industries are moving faster than others. The Financial Services Industry (FSI), the Supply Chain sector, and the public sector are leading the pack. According to IDC, the FSI market represented half a billion dollar in 2018 (a third of all industry spending on Blockchain), expected to grow at 75% annually. Worldwide spending on Blockchain is expected to reach about $12 billion in 2022. Where my observations contradict IDC’s insights is on regional distribution. I believe that Asia will grow faster. Canada can certainly do well — if we only stopped bleeding companies to regions with better and clearer regulations.
Executive leadership is critical. This is where I believe that organizations need the most help. While it's relatively easy to build capacity with a strong technical team, it’s another challenge to make bold bets on the business. Exponential technologies come with exponential risks, whether we like them or not. Industrial revolutions are tsunami-like events, where hoping for the best at ground level is not a good option. Technology is moving so fast that external counsel has become mandatory, for every single company, since every company is a tech company.
In the past couple of weeks, I had the chance to validate the market for Enterprise projects with experts from start-ups, big consulting firms, investment funds, incubators, and industry players. I’m more convinced than ever that it is a good time to launch a consulting firm to address the increasing demand and pressing business needs.
In synthesis, these 3 trends demonstrate a growing maturity, leading to industry adoption of Blockchain technology. The crypto winter is driving “the crazies” away. Regulators are involved from the get-go in STOs and Enterprise projects. Can we finally approach a large scale adoption of Blockchain with some degree of rationality and serenity in 2019?
Macroeconomic trends are not going to help us sleep tight, whether we look at the growing lack of confidence in the US, the slowdown of China’s economic engine, or the rise of tariffs. Meanwhile, the peoples have to support growing sovereign debt, and their own debt in a challenging time as interest rates are increasing.
Will crypto markets take a leading role as safe havens? Will financial markets bounce back? It’s possible. We should certainly wish everything gets better (or great again, should I say?), but I really hope the fascination for money and making a quick buck will diminish. We need some of us to wake up to focus on the real issues to create value. I believe in hard work and solving problems. I believe in facts, in reason, and invention. I don’t believe in mirages and pure speculation. Let’s look at the evidence. Let’s take on the challenges. And let’s move ahead.
Please join me in making the world a better place in 2019!
Things to Watch in 2019
I’ll leave you with a few things to watch in 2019.
There is hope the regulators in Canada and the US will catch up with those from more forward-thinking regions. We should be inspired by the IMF’s boss, Christine Lagarde, who is making the case for Digital Currency. What else can we modernize? Policy-makers: how do we compete globally?
- Blockchain technology roadmap
Ethereum, in particular, will be interesting to watch. Constantinople, its next upgrade, is scheduled for mid-January. The next phases of the roadmap to Ethereum 2.0 (Serenity) should follow soon. Public and private/controlled networks: can we have our cake and eat it too?
- Mass Adoption in Enterprise
I’m obviously biased here. I saw enough signals to believe the transition to new business models, digitized value chains, and industry vertical applications is happening.
With ex-ConsenSys staff and other experts, I’m launching a consulting practice to help business leaders build the infrastructure of the 21st century, to become the de facto leaders of the global economy.