Oct 30, 2018 Slush Crypto Team
2017 was the year blockchain technology and cryptos hit the mainstream. We saw a price run-up followed by a temporary surge in interest by retail investors, and a subsequent price deflation. However, under the hood, developers and entrepreneurs have been pushing the development of the core technology and market infrastructure forward at an accelerating pace.
The potential of blockchain technology has not gone unnoticed by institutional investors. The emergence of qualified custody solutions and clear regulatory frameworks is driving institutions to enter the space. With the inflow of institutional capital, we are one step closer to realizing the potential of a decentralized economy.
Existing blockchain infrastructure is sufficient for carrying out the simplest use cases of the technology, such as cross-border payments and store of value. For decentralized applications to be able to serve internet-scale user adoption, transaction throughput needs to be scaled by several orders of magnitude. Additional improvements in privacy, security, and user experience are needed for the technology to become ubiquitous in our everyday lives.
The decentralized nature of blockchains means that they, by design, sacrifice transaction throughput – as the same transactions must be verified by computers all over the world – to eliminate rent-seeking intermediaries. Until now, both Bitcoin and Ethereum have experienced congestion during periods of peaked network activity, which has resulted in higher transaction fees and slower validation of transactions.
Scaling can be solved either on-chain or off-chain. There are multiple projects developing solutions to solve the issue of scalability. The on-chain approach tries to increase transaction throughput within the blockchain itself, without moving any of the processing work outside the main blockchain. One way to achieve this is by making transactions more efficient, i.e. less computationally intensive. This approach is illustrated by ZCash’s recent “Sapling” upgrade, which drastically improves the efficiency of transactions on-chain. Ethereum is tackling on-chain scaling with sharding, effectively splitting up the chain and lowering the required verification work for each individual node. Projects like EOS are increasing transaction throughput at the cost of decentralization. By requiring more computational resources from each node the network simultaneously limits the number of nodes able to participate in the network. Off-chain solutions, such as the Lightning Network, relay transactions to another layer outside the main blockchain. These transactions are then aggregated and settled into the main blockchain in a single transaction. Multichain technologies, like Polkadot, increase transaction throughput by dividing the processing work between multiple interoperable blockchains.
The blockchain technology stack is being developed fast. Digital identity and reputation systems enable users to control their own data when interacting on decentralized applications. Open instruments around lending, exchanges and prediction markets bring the potential for full financial inclusion by enabling everyone with an Internet connection to finally enter the realm of global financial markets. Stablecoins like Dai and USDC offer the programmability and openness of cryptocurrencies, without the inherent volatility associated with an emerging asset class. Protocol Labs is building tools that allow users to monetize their idle storage space, creating a novel market for peer-to-peer storage. By tokenizing traditional assets, the liquidity premiums of previously illiquid traditional assets can be unlocked. In some cases, the ownership of an asset can be represented in the form of a Non-Fungible Token (NFT). NFTs are often used to represent a unique digital good, for example, an in-game item or a piece of real estate.
The developer tools for decentralized applications are yet to reach the level of traditional web applications. As blockchains are used for value transactions, the software running on these networks needs to fulfill strict security requirements. The growing availability of new development tools and the emergence of industry-wide standards help developers build secure applications and increase the speed of development. For example, the Ethereum developer framework Truffle has seen steady growth in monthly downloads throughout the year.
The technical challenges and emerging financial opportunities have driven masses of talent and new capital to crypto projects. According to Coinbase, 42% of the top 50 universities globally already offer courses in blockchain and crypto. The amount of university theses written about blockchain is on the rise as well. Last year, approximately 25% of the theses published by the University of Helsinki’s computer science department were written on distributed networks. The rise of crypto in higher education is a direct result of the growing interest in distributed networks among both students and businesses.
When there is a disproportionate amount of talent, venture capital will follow. VC funding in blockchain technology has more than doubled from 2017, on a pace to surpass $2 billion in 2018. In June, Andreessen Horowitz announced a $300M crypto fund, led by Chris Dixon and Katie Haun. Yale University endowment invested in both the a16z crypto fund and in Matt Huang’s and Fred Ehrsam’s $400M crypto fund, called Paradigm. Other notable crypto-only funds include Digital Currency Group, Pantera Capital, Blockchain Capital, and Fabric Ventures.
The entrance of more sophisticated investors to the crypto space has put pressure on regulators globally to establish clear regulatory frameworks. In the United States, the SEC is increasing its regulatory efforts through the appointment of a head of crypto. Financial supervisors in Asia have tried to provide frameworks for companies operating in the crypto space. The EU has taken its first regulatory initiatives through the AMLD5 directive (The Fifth Anti-Money Laundering Directive), providing the first step towards harmonized crypto regulation within the union. However, as usual with emerging technologies, legislation is bound to emerge with a delay to actual market events. In crypto, this has led to market-driven self-regulation initiatives, such as the SAFT Project and the Virtual Commodity Association.
In addition to regulatory clarity, qualified custody solutions and institutional-grade security practices are needed to onboard institutional investors to the crypto market. Recently, Coinbase Custody received a trust charter from the New York Department of Financial Services. BitGo has been operating a qualified custody offering in partnership with Kingdom Trust in the UK but is now in the process of obtaining its own license as well. One of the largest crypto asset custody service providers, Xapo, has been operating in Switzerland since 2015.
As a result of the developments in market infrastructure, we are already seeing institutions make their first moves into crypto. According to Grayscale Investments, 56% of their $250 million raised in the 1st half of 2018 has come from institutional investors. Intercontinental Exchange, the parent company of the New York Stock Exchange, launched Bakkt, an initiative which is intended to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets. Furthermore, Adena Friedman, CEO of Nasdaq, has publicly expressed Nasdaq’s willingness to become a crypto exchange by time. Many notable institutions, like Fidelity, have been following the crypto space for years, but have only as of recent reached the required level of conviction needed to enter the market more publicly.
Blockchains have yet to reach scale, but given the increasing mindshare allocated to improving these networks, we are confident that these issues will be solved in the future. As evidence of a more far-reaching conviction, both academia and capital are flowing into the crypto space at an increasing pace. For many institutions, the market still needs to mature in terms of custody services, market liquidity, and regulation.
Eventually, we should find ourselves in an economy where blockchain networks have reinvented traditional business models and created new markets native to the technology. Despite recent developments, the technology is still in its infancy, reminding us not to take any current market leaders at face value. In the end, as with any new technology, the winners will be those who are the first ones to build or to adapt quickly enough.
Slush has covered crypto in its program since 2016. As the industry evolves, we see it as important as ever to continue to be involved.
This year’s crypto speakers amongst others include:
Joey Krug, Co-Chief Investment Officer at Pantera Capital
Joey is currently co-managing Pantera ICO and Digital Asset funds. He is a co-founder of Augur, a decentralized prediction marketplace. He also started an AngelList syndicate which is now one of the top fifteen by backing. Joey received the Thiel Fellowship in 2016.
Preethi Kasireddy, Founder & CEO of TruStory
Preethi is the founder of TruStory, a platform for users to discover and validate claims that people make online. She was previously a partner at Andreessen Horowitz, a banker at Goldman Sachs, and most recently a software engineer at Coinbase. She’s an avid learner who taught herself how to code and is passionate about educating the world about blockchain and cryptocurrencies.
Elizabeth Stark, Co-founder & CEO of Lightning Labs
Elizabeth is working on scaling blockchains with a second-layer protocol for Bitcoin, called the Lightning Network. The project has been touted as one of the most important in the crypto industry, also referred to as “The HTTP of blockchain networks”. Moreover, Elizabeth has taught peer-to-peer technology, open-source software, and online privacy at both Stanford and Yale, and she has a law degree from Harvard.
Slush Crypto Evening
In addition to the crypto program during the main event, we are hosting an official Slush Crypto Evening on December 4th in downtown Helsinki. First published speakers include Joey Krug, Preethi Kasireddy, Earn.com co-founder Lily Liu, and MakerDAO founder Rune Christensen. The side-event will bring together speakers, startups, investors, corporations, and regulators to discuss the growth of the crypto economy. The event is organized in partnership with PwC and Zippie. You can find Slush side-events here, and apply to the event from the listing.
Slush Crypto Team,
Teemu Laurikainen, Crypto Program Lead
Katja Toropainen, Chief Program Curator
Emma Lehikoinen, Program Team
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