Last week I wrote about the bull market in bitcoin and other digital currencies. But in fact it’s blockchain, the technology behind bitcoin, that has the highest upside for the global economy.
A blockchain is a distributed database that is used to securely record transactions and other types of data. For the past eight years, blockchain has provided a public ledger of bitcoin ownership and transactions. Now, blockchain is starting to upend other kinds of business activities – including the business of raising capital.
Something called an “ICO” is all the rage this year. ICO stands for Initial Coin Offering and as the acronym suggests, it’s a variation of an IPO (Initial Public Offering). Only instead of a company raising money by selling shares on the stock market, they do it using cryptocurrency and blockchain. Typically the company creates its own version of a cryptocoin, and offers it to people in exchange for either fiat or digital currency (most commonly, bitcoin). The company’s coins are known as “tokens” – think of these as similar to shares. So, for example, you might pay $1000 worth of bitcoin for 1000 tokens of Company X.
So far the biggest success story of a company raising money via an ICO is Ethereum, which offered its “Ether” coin tokens to the public in 2014. Ethereum went on to raise U$18 million in bitcoins, or $0.40 per Ether. The project went live the following year and by 2016 the Ether tokens were worth $14. But that was just the beginning. The growth this year has been staggering. As a New York Times article noted last week, the value of Ether “has risen an eye-popping 4500 percent since the beginning of the year.” As I write this, the Ether token is worth $337 dollars – equating to a market capitalisation of US$31 billion. Earlier this month the Ether went over $400, giving it a $37b capitalisation. So it’s a rich, but volatile, market for Ethereum right now.
New Zealand is getting a small slice of this ICO action. Mark Pascall, co-founder of a consultancy called BlockchainLabs.nz, told me that his company is doing “a lot of smart contract auditing work for companies that are doing ICOs.” By “smart contract”, he means a computerised transaction protocol that automatically executes the terms of a contract. “We’ve done four so far,” said Pascall, “and have just completed the audit for Status.im”.
Status is a fascinating new startup and an indication of where blockchain might take us next. Its introductory video on YouTube positions it as a kind of next-generation Facebook Messenger or WhatsApp. Not that you’d know that from the product description on its website: “an open source messaging platform and mobile browser to interact with decentralised applications that run on the Ethereum Network.” Say what? You can think of it as a messaging app, but with extra blockchain functionality – such as the ability to send payments and smart contracts.
To raise money, Status.im is offering an ICO in the form of a cryptocoin called the “Status Network Token.” To indicate just how heated the ICO market is right now, last week Status raised somewhere in the range of US$64m to $100m in a matter of days. Although not without controversy. The ICO caused congestion on the Ethereum network, meaning that many punters were unable to complete their transactions. There is also unease within the blockchain community as to whether ICOs are creating a bubble or not. Either way, new blockchain startups like Status are cashing in.
“There is a crazy gold rush to get money from ICOs,” Mark Pascall said. “My business partner at BlockchainLabs.NZ, Fran Strajnar, was involved in the Bancor ICO that raised the biggest amount of money so far (US$150m). Pretty cool that we in New Zealand are getting involved in these projects.”
High-risk ICOs aside, blockchain has undeniable promise long-term. The upside is that it may end up decentralising the commercial Internet. Think about all the large corporations that currently act as middlemen in online transactions. New Zealand’s own TradeMe, for example.
TradeMe is a hugely successful auction service here. It enables you to sell a product you no longer want – like a set of golf clubs – to someone you don’t know, via an auction. TradeMe is the intermediary that allows you to do that in New Zealand, while in the US it is eBay. But, at least in theory, online auctions could be carried out using peer-to-peer software that connects sellers directly to potential buyers using blockchain. No need for TradeMe or eBay, because it can all be done using smart contracts and cryptocurrency.
There are test cases for this already. A service called OpenBazaar is a blockchain-powered trading platform. It could be a pointer to the future of online commerce, although currently it has a very limited range of products on sale (mostly bitcoin tee-shirts and the like). So TradeMe is not under threat in the short or medium term.
The reality is that blockchain is a long-term proposition. The main problem blockchain has currently is its complexity – which, ironically perhaps, makes it difficult for most of us to trust. As Mark Pascall admitted at a blockchain conference held during Techweek, blockchain is very hard to explain in simple terms. Not only that, but its biggest star – Etheruem – has brought a whole other level of complexity to the table. Etheruem may well be a multi-billion dollar “world computer”, as it’s being touted. But if so, it’s a black box to most of us.
With that said, the early Internet of the 1970s wasn’t easy to understand or use either. It was the same for the early World Wide Web. It took a few years for Marc Andreessen’s Mosaic browser to arrive and make the Web easy to browse. So it’s not uncommon for network technologies to start out complex, but then evolve into easy-to-use mainstream platforms. That may well happen with blockchain too.
Certainly the potential is huge: blockchain could pave the way for a massively decentralised internet. But we’ll need to navigate the complexity first.