As I look around for a new company to found or join, I’ve been spending some time investigating opportunities around blockchains (Bitcoin, Ethereum, etc). I’ve gathered some of my initial thoughts in this post and would love your feedback!
I’m not going to provide definitions for blockchains or Ethereum but, if you want a primer, try the Coinbase article: A Beginner's Guide to Ethereum.
The Blockchain’s Advantage
As with any new technology, it’s useful to ask: in what scenarios will it have an advantage over traditional technology? I’ve a lot of blockchain ideas that don’t have a clear answer to that question. Scenarios that might make sense today seem to group into two broad clusters: Low Trust Environments and Complex Multiparty Systems.
Low Trust Environments
Blockchain activity is transparent and irreversible, making it a good fit for environments with low trust. Low trust can emerge through a variety of vectors: strong incentives to renege on agreements; poor legal infrastructure or high legal cost of legal action; anonymous individuals engaging in one-off transactions; lack of independent reputation signals.
Areas where there’s already blockchain innovation in low trust environments are:
- Governments that have high levels of corruption or kleptocracy where property rights are poorly enforced and residents cannot trust the legal system. There are several nations that are looking into moving all property deeds to a blockchain.
- Illegal markets where participants cannot rely on a legal system if a contract is broken. There have been dark web marketplaces for illegal goods for years; this doesn’t appeal to me as a sector to do my own startup but there’s clearly an opportunity here.
- Peer to peer marketplaces where the cost of legal action outweighs the upside. Some peer to peer platforms have decent reputation signals (e.g. eBay, AirBnB), I suspect that more markets could join the sharing economy if transactions were transparent and arbitration were easy and trustworthy. Likewise if participants could bring their reputation systems with them across platforms.
Complex Multiparty Systems
Platforms like Ethereum enable complex contracts (code) that are transparent and execute automatically. This makes it a good fit for contexts with many stakeholders and transactions, especially when none of the stakeholders are a good candidate to centralize responsibility and act as a clearing house; this dovetails with the trust examples as a trusted third party might be able to overcome some of the complexity.
The music industry is already looking into the blockchain to manage rights and royalties. There are opportunities in healthcare to give patients more control over their health data by storing it in a decentralized, secure manner. Individual identity, whether government supported (Social Security Numbers) or private is also a candidate for the blockchain.
A subset of this category is slashing transaction costs in existing low-margin markets. Markets on the blockchain should be able to enable lower transaction costs by replacing intermediaries and overhead with code. In sectors that already compete on margins, there might be a significant advantage to shaving off a fraction of a percent. This can range from stock markets to money transfers to betting markets.
A Note on Decentralized Governance / Organizations
I really like the idea of distributed autonomous organizations that run and are governed on the blockchain. However, I think that they are only effective in certain contexts that are stable and don’t require quick adaptation. I wrote a bit about that a few years ago.
The Challenge of Timing
Many startups perish because they had the right idea but the wrong timing. It’s especially hard to figure out what blockchain companies make sense to start building today. Some of the things making it more difficult:
- The technology stack is changing rapidly and a lack of developer tools make it difficult to build on the platforms
- Security is still very difficult and there are plenty of hackers targeting the ecosystem
- The speculative bubble has added a lot of noise to the sector and it’s hard to tell which initiatives are credible or just marketing hype
- The speculative bubble is messing with transaction costs: Bitcoin transfers and Ethereum code executions once cost fractions of a penny but now cost dollars
- There aren’t great decentralized consumer interfaces to the blockchain, meaning that most initiatives need to create centralized, off blockchain ways to use the platform – obviating some of the benefits
These factors make it a tough time to start something on the blockchain. That said, once the problems are resolved, it’ll might be too late; some startups will have early leads on building network effects and others will have a huge advantage just from tinkering with the technology for years. Ultimately it’s incredibly tough to say which ideas are right to start building now versus waiting a year or two.
I’m very interested in the potential of blockchains in the long run but am skeptical of a lot of approaches in the short term. The most successful initiatives today will involve consortiums of business or governments. Consumer blockchain tech is probably further out or obfuscated behind a traditional, non-blockchain interface.
I have a few blockchain related ideas I’m currently noodling on and I’ll share them here if they pass my initial vetting. Until then, I’m keen to hear your feedback on my thoughts; does the above make sense? Am I missing or wrong about something?