Introduction to Blockchain and distributed ledger technologies investors

Signature Ventures is a research-driven VC fund for early-stage blockchain and distributed ledger technologies start-ups. Their focus is on European start-ups, but they also look at worldwide companies. Blockwall is a VC platform, with a fund active in the market since 2018, focused solely on decentralized technologies and their applications in the evolution of the Internet and equity investment. Simply put, companies that apply and use Blockchain or distributed ledger technologies. Blockwall focuses on early stage pre-seed to series A investments, also mostly in Europe. Maven 11 was created in 2016 and since then they invest in pre-seed to seed phase in early stage companies in blockchain and distributed ledger technology. Tom Trowbridge has a different background. He is the co-founder of Fluence Labs, an open source distributed computing protocol and software licensing system, and former president of Hedera Hashgraph, which had received funding from Blockwall.

Just a few years ago, blockchain and distributed ledger technology companies started to appear everywhere on the market. Today, this infatuation is not so strong.

What are the most relevant applications for blockchain and distributed ledger technologies today and tomorrow?

Juri explains that they usually look at blockchain in 3 layers. There is a requirement for a fundamental layer for base solutions, then there is a second layer of innovation which is at the interface, and interacts with the fundamental layer, and then there is a third layer where the user accesses the blockchain through the interface and they usually do not know if they are using a blockchain or not. Currently, they start to see positive renewal mostly in applications It is important to know where we stand at the moment. Then we need to create categories within these layers: base layers or pure protocols or privacy/scalability enhancing layers, on the infrastructure side or the development tools you find things like wallet exchange, custodian solutions on the interfaces. All sorts of new applications can be found in digital identities and even in gaming .

Dominic agrees with this 3-layer scheme. Blockchain is more of a back-end revolution as opposed to the internet which was a UI/UX revolution, and that influences B2B business models. The technology has so far been built bottom-up, and it’s reaching the point where it needs the feedback of market needs. But sometimes, start-ups don’t realise the long time frame there is before adoption by a large corporate, with long cycles going from 18 to 24 months until they go into use. Companies are still testing it; this is very long and therefore this adoption phase ends up being  quieter than expected despite the initial hype. And we have to stop talking about use cases and start talking about real business cases, to highlight the gain in terms of efficiency and cost improvements. We invest in both decentralized networks and equity. Some mechanisms work especially well and not on the other: for instance, designing token economics.

To Balder, “it’s good that the hype has died off. We have the time in our industry to focus on very important topics, like scalability, solvent privacy, UI/UX”.

The underlying trend is extremely strong and is in one of these use cases of Blockchain and distributed ledger technologies usage which will probably be there for the decades to come. It’s very early stage still. Slowly but surely, corporates are starting to build on this basis of blockchain.

According to Tom Trowbridge: “Scalability will drive use more than use will drive scalability”.

Once you have real scalability that’s functioning, use cases start to become apparent. In the current state you can’t look at where we are right now and make predictions. When we were holding a Nokia phone, we couldn’t have predicted Uber, Airbnb, etc. Back then, there was not enough processing power, bandwidth, the maps. This advancement needed to appear in order to enhance the creativity and to become really usable. What we take for granted right now started in competitive crowded spaces.

What would be a good business model for token?

The bitcoin network for example, is designed in a way that the token itself has all the value. But if there is a model where they are producing their own token, and having a parallel equity case next to it, from an investor’s point of view, you always want to know where the value comes from, and what is the sense of the token itself. According to Dominic it’s always about the market you are trying to address and the features you want to cover in that token.

What role do Blockchain & distributed ledger technologies companies have in ensuring greater data privacy and data sovereignty?

Looking at European Projects for example, Juri explains that to him, it is always coming from above, basically telling people “now we have to do these specifications”, they provide a great framework, with the GDPR I’m not sure that they are providing a good environment to build it. Dominic on his side explains that GDPR was an answer to a bigger problem, which wasn’t changeable in any other way because the technology was not ready. But Blockchain can definitely help implement that.

Data privacy and data identity is the backbone of society in the economy.

If you don’t have identity, you can’t have access to land rights, to financial systems, to being educated, to schools. A study from the Melinda Gates foundation was explaining that if you don’t have identity, then there is no bank account and there is no taking part in a financial system. Distributed ledger technologies as a ground layer can help change that role and help create identities for those who are living without. 1.1 billion people are currently without identity, but most of them have a phone. You can manage credentials and claims with that. And it’s important to distinguish a private identity, and identity for things. If you split those, you already get more privacy. It’s not about regulation, but also about efficiency. If you are the owner of your data, you can onboard quicker, get rid of all paper processes… I see a lot of impact that Blockchain and distributed ledger technology can enable for data privacy and data sovereignty.

Tom agrees with Dominic: “Self-sovereign identity is a critical factor that will make life easier for all of us.”

He adds that customers don’t necessarily know they want it, but once they’ll have it they will very much appreciate it. On the other hand, the risk is that in an effort to protect consumers, overzealous regulation leads to significant unintended consequences. For GDPR it was not intentional but it did slow down the ecosystem. Therefore there is a need for businesses who have an incentive to create these answers and solutions, and innovate in order to solve the problem that the regulation is intended to address.

Do you see space for blockchain and distributed ledger technologies based solutions in the area around portability of personal data?

According to Juri, there is so much fragmentation and so many different nationalities or cultures… different specifications. You can’t really build for all of them. It’s one of the problems, specifically in Europe. The data are not really standardized yet, so it’s difficult to address a market.

What about Open Source?

Balder explains that 30 days ago, a protocol that was being built for 2 and a half years and is entirely open source, which means you are able to copy the code and use it yourself, and even build a company around it. The company that created it started to lose some customer funds as the code was not a secured. The second thing is that when you build an open source software, the network is extremely strong. In the case of cryptocurrency for instance, if it is built the right way the effect that derives is very impactful, and it protects your open source business.

To Dominic, open source has its pros and cons, but a major pro is the decrease in development costs. This co-development atmosphere creating a community around a great project can really make the difference, in the sense that it will be continuously developed even if a team member leaves. That is a huge advantage. You can develop new systems in a broader and securer way. Open source doesn’t mean that it has to be used in every business aspect. It can be used for technology, but you can also choose to protect a certain environment. It is a lot about competitive dynamics. Open source is definitely a way to have market shares quicker. Juri adds that from his point of view, Open source is not a business model, but more of a development model.

Tom refers to a report from the Ford Foundation, written in 2016. The competitive edge of open source is not patents, it’s actually building a community and an ecosystem of users. And that’s where Open Source overlaps particularly well with blockchain and distributed ledger technologies. What Tom wants is to challenge the open source business model with relation to other less blockchain/non blockchain related projects. If you take Red Hat for example, there’s another 15, 20 of them. The business models break down into either a consulting type model, or the model of hosting the software and selling this service. There is often a combination of the two. Those are both fine, they’re very different from writing the core code. So, in order to monetize you have to build companies that are operationally intensive and people heavy. That’s not generally a skillset of talented developers who write great critical code. Tom explains that they are actually trying to create a model for these developers, who do not want to build these enterprises serving ancillary services, and instead just want to try to monetize what they built.

Q&A:

99% of the time, open source is scary for investors. What should the community do to change this opinion?

Tom: If you’re thinking about it from either investment, or capital raising perspective, you have to be sure that the person doing it is going to be able to write the code, and either they have a partner or they’re also going to be the same person to operate to go to market in business. Those are not always the same people. And if you are an investor, you have to make sure that it’s going to happen. And if you are the entrepreneur, you have to convince investors of both of those aspects.

Juri: You can build code that is very open, but you don’t have to open source everything about it. We have been talking to a company that is open development but not basically the fundamental core sort of algorithm. I am not from the entrepreneur side but if you are an investor you definitely want to see value somewhere.

Balder: It’s a very fair point. And I think that everybody here agrees that there’s a secret sauce in your company and you’re not going to giveaway the secret sauce. Definitely don’t do that.

Dominic: Also, it’s the backbone of the business model but it’s not the business model itself. So, you also have to think about governance, structures, how do you develop it further, who’s involved… Getting the right people involved in these business models to use it, to trust it, to be part of it, is a huge topic in designing these open networks.

Do you invest in specific business models?

Dominic: No matter what model you choose or how you come together to build something, it applies to general capital market rules. So, you will have to have a business model, the investor will have to see: does the team fit to develop it? Are you organized? How do you process yourself? How do you go to market? Do you know what the market need is, and can you address it and sell the product? What is your pricing strategy? We would never invest in something where we don’t see the upside – impact investing aside. You are promising multiples to your investor so it trickles down to pretty much “can I achieve these multiples when investing in that business model, and is the scale quick enough?”

Balder: I would agree, but I think society is moving away from a more shareholder focused interest, especially in the first two decades, and I think this technology is allowing us to do differently and be more stakeholder centric and aware in launching decentralized networks. It’s not only about the investor but I think to launch a decentralized network you need so much more, like realization. It’s very adamant with our industry.

Dominic: if you talk about decentralized networks yes, but if you talk about the applications, the businesses using it as a backbone end-tech, and having corporates as their customer, you have to find the same shareholder rules.

Juri: There’s a large debate around decentralized networks but they are very young at the moment. If the end is that you want to develop the network, you become a sort of company that builds around that network. It’s the ecosystem, but you still need a company that monetizes something and has some sort of IP. Because it is a token itself it’s not a business model. At some point they should reach an equilibrium where it’s not appreciating that much anymore, and won’t finance your company anymore. It might be 50 years down the road but it will be happening at some point.

Tom: I have to disagree there. If you have a protocol, that actually functions appropriately, with the appropriate token economics, you don’t need any equity value whatsoever. And if the founders have some share of those tokens, they have incentive for it to work, and if the ecosystem function is as intended, it should be self-funding over time. That’s a rare case but it really can happen. Now, most business model – and we can throw a bunch of people under the bus – simply fund themselves by selling tokens. And we’ve seen that over and over and over again. I think that the appropriately set up one is the exception not the rule. But there’s no enterprise that’s designed to be a self-sustaining token driven economy that’s fully decentralized. And I think that’s what people are trying to execute here.

Dominic: That’s a great point. Because the clue is token designed, and if you don’t design it in such a way but you just use it as funding tool, it doesn’t work. Many of the start-ups that approached us in 2017, approached us again this year saying “now we’re raising equity”.

Along this panel discussion, many aspects of blockchain and distributed ledger technologies could be talked about. Our speakers gave very interesting highlights on the development of these technologies, its implementation in today’s society, and the monetization of these technologies. We will be keeping an eye on the horizon to see what the right model for implementing the token economy will be.