A VC on Nailing Down a Blockchain Strategy in the Next 2 Years
- Mercedes Bent is a partner at Lightspeed Venture Partners and focuses on consumer, fintech, edtech investments.
- Blockchain and crypto are where the Internet was in the mid 1990s, and will explode in the coming years.
- She advises all leaders to think about their organization’s blockchain strategy over the next two years.
- See more stories on Insider’s business page.
As an investor in Fintech, cryptocurrencies have become another class of assets — like equities, bonds, and fixed income funds — that I need to keep track of.
But not enough people are talking about the underlying technology that makes crypto possible.
Sure, distributed ledgers and tokenomics feels niche and nerdy to the average person. But in a few years, it will change the fundamental structure of business as we know it.
The implications of blockchains are enormous.
They keep track of who owns what, who owned it beforehand, and all of it is out in the open and public. It allows for transactions to occur without having to trust the counterparty, because the ownership of both sides of the transaction are publicly recorded.
For example, no one can try to sell you a digital version of the Brooklyn Bridge because you can see that they don’t own it. Provenance, or the chain of prior ownership, becomes a matter of public record. And without needing trusted intermediaries to broker transactions, the potential for commerce becomes limitless.
A Thai farmer can buy shares in Tesla without having to first clear currency controls or set up a brokerage account in America. No rogue governments can seize their citizens property or assets because there is no central organization (like a bank) that they can pressure to get control of their accounts. While cryptocurrencies like Bitcoin and Dogecoin get all the attention, they are truly the tip of the iceberg for what is possible.
Blockchain and crypto today are where the Internet was in the mid 1990s.
Thirty years from now, blockchain will be built into the guts of every digital service.
We won’t even have to think about it. It will become the operating system for virtually every industry.
NFTs are a great example of how blockchain technology is entering mainstream pop culture. The original “Charlie Bit My Finger” video, which was all over YouTube when I was in college, sold as an NFT at auction for just over $760,000. Somewhere on the Ethereum blockchain, there is a record that registers the NFT’s buyer as the owner of a single, canonical digital asset like the original YouTube video, making it a scarce, one-of-a-kind item, and therefore giving it value.
Ensuring the authenticity of a work of art is just one of the use cases for blockchain. As the industry started to realize a few years ago, there are hundreds of others. To pick just a handful of examples:
- MIT began issuing digital diplomas to graduates in 2017. The ability to store transcripts, grades, certifications, and credentials in a permanent and secure way will make life easier for both job applicants and potential employers.
- The De Beers Group has created a digital record for every diamond it sells. This enables buyers to verify the authenticity of each jewel as well as its source — especially important given concerns around the ethics of diamond mining.
- Decentralized music sharing platforms will enable artists to distribute music directly to their fans and receive the royalties they deserve.
- Supply chain management is already being revolutionized by blockchain. WalMart, for example, has been using digital ledgers to track the flow of Chinese pork and Mexican mangoes.
Essentia has a great breakdown of 50 ways blockchain can be used in the real world
Essentia
The other big breakthrough that crypto allows is a solution to that age-old question, which came first, the chicken or the egg?
We all know how valuable network effects are in business. But many startups struggle to get network effects started. No one wants to be at a club that’s empty. No one wants to be a seller in a market with no buyers. How do you get the flywheel to start spinning?
Crypto offers a solution, through something sometimes called tokenomics.
For example, frequent flier programs reward loyal customers with points that can be redeemed in the future at a fixed and predictable value per point. Tokenomics rewards early customers with tokens that may in the future go up dramatically in value, based on how quickly value grows in the business.
In a network effect business, this gives customers (sellers/buyers/network participants) an incentive to become early adopters.
Imagine a startup marketplace with few buyers and sellers initially. The company might create a token that earns X% of marketplace fees. When the marketplace starts out, there aren’t many transactions, so there aren’t many fees, so this token doesn’t get much of a revenue stream and therefore isn’t worth much. But if the company is successful in the future, and it has a lot of transactions happening there, the tokens could become very valuable. If the company gives tokens to early sellers on the marketplace (whether outright, or for every successful sale), it gives those sellers an additional incentive to sell more on the marketplace and therefore make it more successful in the future. The first chicken arrives, and it leads to the first egg, and the cycle begins.
Why is crypto needed to make this work? Because people need to believe that the company will make good on its promise to pay out marketplace fees to token holders. If it’s just a promise, maybe they trust the company, maybe they don’t. But if this promise is written into code in the blockchain, then no trust is required; the payment of fees becomes immutable (ie the company can’t change its mind in the future). This makes it safer for those early adopters.
There are plenty of legitimate criticisms of blockchain technology.
One (as Elon Musk will tell you) is its carbon footprint. In Bitcoin and some other cryptos today, coin miners must perform massive processor-intensive calculations in order to update the digital ledgers while protecting against spoofing and spam. This requires huge amounts of electricity. Bitcoin and Ethereum, the two most prominent crypto currencies, consume about as much energy each year as the country of Thailand.
But the industry is moving away from energy-hungry ‘proof of work,’ towards “proof of stake” to update ledgers, a much more energy efficient approach. Even Ethereum itself, one of the big Proof of Stake chains, is moving to Proof of Work, and there are other tokens that have been designed from the ground up, like Chia or Iota, in a similar manner. Others incentivize environmentally friendly activities such as solar power adoption, or use carbon offsets to mitigate their energy requirements.
Another problem is the amount of time it takes to approve blockchain transactions. If you want to sell or trade your Bitcoin, for example, you’ll have to wait for changes to the blockchain to be validated. That means Bitcoin maxes out at about 7 transactions per second.
But there are now multiple consensus protocols that operate at much faster rates than Bitcoin’s or Ethereum’s (called new L1 chains), as well as a number of solutions that provide a kind of express lane for transactions, validating changes off the Ethereum blockchain before merging them back in (called L2 solutions). So both costs and scalability bottlenecks will soon be addressed.
Over the next two years all leaders will need to think about their organization’s blockchain strategy.
We’ve already started having those conversations with early-stage companies in the Lightspeed portfolio, as well as startups we’re considering investing in.
Blockchain will be as consequential a force as the Internet because it solves a fundamental problem we’ve been grappling with for millennia. The Internet solved the age-old problems of connection and information. Blockchains solve the age-old problem of trust and network effects.
Ultimately, I believe blockchains will have just as great an impact on how business is conducted as the Internet has. Check back with me in 30 years to see if I was right.
Mercedes Bent is a Partner at Lightspeed Venture Partners and focuses on consumer, fintech, edtech investments.
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