WHAT ARE BLOCKCHAINS GOOD FOR?
Blockchain Coinvestors Letter from London
Vol. 2, No. 2, February 2023
What are Blockchains Good For?
Use Cases Revisited
At Blockchain Coinvestors, we believe that the digitalization of assets, commodities, and monies is inevitable. That’s why we invest and partner with premier companies in the sector and offer our LP network the opportunity to coinvest alongside our funds.
Our latest investment is BCB Group – a regulated banking services and payments provider for the entire digital asset ecosystem. Banking services is potentially the most critical infrastructure to any ecosystem and in today’s environment many blockchain-related companies struggle to find banks that will support them. BCB Group has a unique market opportunity to partner with startups and projects in the blockchain space.
If you’re interested in learning more about BCB Group or a potential coinvestment and you are an accredited investor, please fill out the form through the button below.
Blockchain technology has been around for more than a decade now, and its potential use cases have only continued to grow. In the beginning, the first public blockchain – bitcoin – was primarily known as a cryptocurrency or the first internet native money. Subsequently, blockchain and its potential has since evolved into a disruptive and revolutionary technology. At Blockchain Coinvestors, we believe blockchain technology to be a true horizontal disruption that will ultimately affect all industries, in a similar way to how all companies were impacted by the rise of the internet. Today, blockchain is upending industries ranging from finance to art. Yet, as we move further into a digitalized society, the impact of blockchain technology and its importance will spread to identity, storage, and perhaps even how we organize ourselves.
In this month’s Letter from London, we outline the current and future use cases of blockchain technology. Our goal is to keep you informed on the latest developments and trends in this rapidly evolving field. Whether you're an industry expert or a newcomer to the world of blockchain, we believe you'll find value in the insights and analysis we provide.
We believe the adoption of blockchain technology will positively impact the world. Cost savings will improve human productivity while decentralized networks will make our financial and other systems more open, equitable, and durable.
What is a Blockchain?
So what is a blockchain anyway and what does it do exactly? Well, stated most simply, blockchains are a coordination mechanism between distrusting parties. Okay so that sounds like a bunch of jargon. What does that mean in practice?
How about an example? The first blockchain, bitcoin, allows distrusting individuals, that is people who do not know each other at all, to coordinate on how to exchange money directly across the internet. That may not sound like a big thing but it’s actually a HUGE idea – a true zero-to-one innovation as Peter Theil would put it.
Let’s say that I want to give $100 to Alison Davis, co-founder and chairman of Blockchain Coinvestors. The only way to do that directly is for me to hand her a $100 bill. We don't need to trust each other because we can look at the bill and reasonably assume that its legitimate (although there are of course vast numbers of fake $100 bills in circulation). So we make the exchange – e.g. I hand her the $100 bill – and we go our merry way and everyone’s happy.
But if Alison’s at her office in Silicon Valley and I’m sitting in London how do we do that? Well the answer before bitcoin was there was no way to do that directly (except for flying across the world with $100 in hand). We had to use a trusted third party or intermediary, typically a bank but also maybe Western Union or someone like that.
In that scenario I give my bank Alison’s account details and instruct the bank to send $100 to Alison. My bank calls her bank and her bank then adds $100 to Alison’s account and my bank deducts $100 from my account. But no money was actually exchanged at this point, rather, the banks made internal accounting ledger changes so that our accounts reflected the result of the transaction. What actually happens is that our two banks settle the transaction (e.g. actually exchange capital) on the back end over the course of several days (sometimes weeks).
Of course, I failed to mention that in this scenario because it’s an international transfer, I would have to pay $25 in fees to make the transaction and Alison would be charged $20 in fees to receive the money into her account. And of course, even though the banks are just making an accounting change, it still takes 2 days or more for the money to hit our accounts. So in reality no one is sending $100 from London to Silicon Valley via the banks.
In a post-bitcoin world, we can now actually make the $100 transaction directly and immediately across the internet. The details of how the bitcoin network works will be saved for a later day but suffice to say that a series of nodes are used to validate the transaction in real time. Here, I send a transaction to the bitcoin network that says – ‘hey please send $100 in BTC to Alison’ – and the bitcoin network of nodes immediately credit Alison with $100 in BTC and debit my account $100. Alison and I don’t need to trust each other, nor do we need to trust the nodes for the exchange to occur, and there is no trusted third party in the middle making sure everything is working properly. In fact, anyone can run a node on the blockchain network and right now there are more than 10,000 nodes on the bitcoin network validating transactions.
Certainly, bitcoin is more complicated than outlined above but only slightly so. The simple fact is the bitcoin blockchain is a coordination mechanism to allow individuals to exchange money across the internet. A ‘Peer-to-Peer Electronic Cash System’ as was titled the 2008 bitcoin white paper.
Implications
Even if blockchain technology had stopped there, the impact would have been tremendous on society. Yet, blockchain technology has kept and continues to develop as innovators push what these internet, native coordination mechanisms can accomplish.
A key development was the invention of the Ethereum network, which in 2013 brought forward the idea that ‘smart contracts’ could sit on top of blockchains. Think of Ethereum and other smart contract blockchains as blockchains that have computers built into them. In Ethereum, pretty much anything you can think of can be coded into its virtual machine, the results of which are then validated across the network. This is why Vitalik Buterin, the creator of Ethereum, call’s Ethereum the World Computer, as it’s a full Turing complete computer which anyone can use or help to validate.
After Ethereum, which launched in 2015, is when the potential use-cases and innovation really started to explode, and people started asking very interesting questions:
If cryptocurrencies could be exchanged directly across the internet, why not other forms of value, such as dollars, stocks, or bonds?
If exchange could be coordinated, why not loans in a financial system? Or decision making in an organization?
If money can be represented on a blockchain, why not art? Or collectibles in a game? Or even your identity?
The result of now more than a decade of blockchain development means that the there are many very real use cases and a thriving blockchain ecosystem today (more than $1tn in aggregate value). There are also several plausible use cases in development that seem more likely than not to be successfully developed. Below, we break out some of blockchain technology’s use cases.
Use Cases of Blockchain Technology
A. Already Working or Near-Term Use Cases
1) Payments
Blockchain technology enables fast, secure, and low-cost peer-to-peer transactions, making it an ideal solution for payments. Cryptocurrencies such as Bitcoin and Ethereum allow for digital payments without the need for intermediaries while dollar-backed stablecoins such as USDC and USDT allow for digital payments that are dollar linked. While costs on some blockchains remain high today, the simple fact is for large transfers of value or international transfers, blockchain based payments are one of the best ways to exchange value and the only way to do so directly across the internet.
In 2022, more than $7tn (yes trillion!) was settled with US-dollar stablecoins alone. That far surpasses the $2tn settled using Mastercard for instance and is close behind the $12tn settled on Visa, the global leader.
2) Decentralized Finance (DeFi)
Decentralized finance refers to financial applications that are built on blockchain technology that allow for financial products and markets to be facilitated without a central intermediary, like a bank. DeFi applications are non-custodial, meaning there is no institution that custodies users’ assets and range from decentralized exchanges to lending and borrowing platforms.
Today, there is about $50bn of value locked into DeFi contracts across the blockchain ecosystem. The DeFi ecosystem also did not see any crashes or failures within blue chip protocols despite the market turmoil of 2022.
3) Tokenization
Tokenization broadly is the process of representing something as a token on a blockchain. Specific current applications allow for assets, commodities, or other real-world resources to be represented as a token. This allows for fractional ownership, more efficient trading, and better liquidity in traditional assets such as LP fund stakes, securities, or other illiquid assets.
In 2022, Blockchain Coinvestors portfolio company Securitize, announced it would be tokenizing an interest in a KKR Fund as well as a partnership to tokenize interest in three Hamilton Lane funds. Similarly in February of this year, the Hong Kong central bank will issue a tokenized ‘green bond.’ The bond was offered in collaboration with Bank of China (Hong Kong), Crédit Agricole CIB, and HSBC while Goldman Sachs was the platform provider. Tokenization is a real use case today that is accelerating in adoption.
4) Art / Collectibles
Non-fungible tokens (NFTs), or tokens that have a unique representation on a blockchain, can represent digital art or collectible items. The use of blockchain technology for art and collectibles helps to authenticate the ownership and provenance of the item, making it easier to track and trade.
Since NFTs gained prominence in 2021, nearly all the world’s leading brands have launched NFT specific projects, including Nike, Adidas, Tiffany, Gucci, Time Magazine, Budweiser, McLaren, UFC, Australian Open, and many more. Just as all top companies once needed to develop a social media strategy, today, all the top brands are developing NFT strategies.
5) Gaming
The integration of blockchain technology in gaming can bring benefits such as the creation of unique digital assets with real-world value and the ability to own and trade virtual goods. Gaming is both a current use case but also anticipated to develop more fully in the future.
Simpler card-based games – such as Splinterlands – work exceptionally well today with hundreds of thousands of monthly active users and are generating millions of dollars in revenue. However, it’s still too early for more complicated games – such as first-person shooter – to work well on blockchains.
B. Anticipated Use Cases
1) Identity
Blockchain technology can be used to securely store and manage digital identities, leading to increased privacy and security in personal data. Sign-in with Ethereum, for instance, is a new form of digital identity where individuals can control their identity with their Ethereum account, rather than having to rely on a trusted third party.
2) Compute
The use of blockchain technology for decentralized compute resources can bring benefits such as increased security, improved data privacy, and reduced dependence on centralized servers. Dfinity is a Swiss-based project that is attempting to build a fully decentralized network of computing services.
3) Storage
Decentralized storage solutions based on blockchain technology can provide secure and more affordable storage options, as well as better data privacy. Similarly, that can make the safeguarding of data more censorship resistant. There are several well known projects building decentralized storage networks, including Filecoin and Arweave.
4) Decentralized Autonomous Organizations (DAOs)
We cannot imagine that in a fully digital world there will not be internet native organizations. Decentralized Autonomous Organizations (DAOs) are organizations that are run through rules encoded on a blockchain network. They are decentralized, meaning there is no central authority, and autonomous, meaning they are run by the code instead of a central group of individuals. DAOs can be used for various purposes such as community management, investment funds, or governance of protocols. DAOs are still in their early stages of development but there have been a few notable successful instances of DAO governance, including ConstitutionDAO and MakerDAO.
5) Web3
Web3 generically refers to the third wave of the internet. Unlike today’s internet (so deemed Web2), where technology giants control the flow of information and extract an enormous ‘take rate’ from content producers, in Web3, creators will have a direct relationship with consumers. In short, Web3 platforms flip the monetization model associated with today’s technology giants.
Concluding Thoughts
The 1990’s internet digitalized communication and content and initiated an enormous valuation creation event. Today, blockchain technology is allowing for the digitalization of commerce and has the potential to be as transformation as the early internet. Ultimately, all transactions and interactions in a digital economy could be coordinated or settled on a blockchain. Just as in 1990, the potential use cases – and business models – are not always obvious today. There are several working and notable use-cases today, but the full implications of blockchain are still developing.
If you are interested in learning more about blockchain use cases – please reply to this email and we are happy to walk you through a presentation with case studies of specific blockchain use cases and benefits today. You can also click here to sign up for our upcoming webinar on tokenization.
Thank you for reading,
Mitch Mechigian
Partner, London
ABOUT BLOCKCHAIN COINVESTORS
Launched in 2014, our vision is that digital monies, commodities and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and crypto projects. Our investment strategy is now in its 9th year and has to date invested in more than 40 pure play blockchain venture funds in the Americas, Asia and Europe; and in a combined portfolio of 400+ blockchain and crypto projects including approximately 55% of all blockchain unicorns. Our funds rank in the top decile amongst all funds in their respective categories on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in Grand Cayman, London, New York, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.
FUND PERFORMANCE
The Blockchain Coinvestors Fund of Funds strategy was created to provide diverse coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Blockchain Coinvestors Funds I and II have already experienced significant appreciation. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark. Fund I Net TVPI is 4.55x with an IRR of 59.8% and is one of the highest performing fund of funds in the world according to Pitchbook and Preqin. Fund II shows equally impressive early results with Net TVPI of 1.39x and an IRR of 30.9%. Fund III closed at the end of 2022 and will begin reporting this year. Our newest fund of funds - Fund VII - is now in formation. Email us at ir@blockchaincoinvestors.com to learn more.
BLOCKCHAIN COINVESTORS CURRENT OPPORTUNITIES
Blockchain Coinvestors Fund VII (Fund of Funds). Our fund of funds strategy provides diversified coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark. Fund I Net TVPI is 4.55x with an IRR of 59.8% and is one of the highest performing fund of funds in the world according to Pitchbook and Preqin. Fund II shows equally impressive early results with Net TVPI of 1.39x and an IRR of 30.9%. Our newest fund of funds - Fund VII - is now in formation and currently taking indications of interest.
Blockchain Coinvestors Fund IV (Early Stage Token) accesses early stage tokenized projects in their formation and seed stages through our relationships with other leading blockchain investors. We leverage asymmetrical information from our 40+ VC Funds to pick the most attractive opportunities.
Blockchain Coinvestors Fund VI (Mid Stage Growth) provides direct exposure to the emerging category leaders in the blockchain and crypto ecosystem. The Fund assesses the more than 400 blockchain and crypto projects in which we are already investors and employs a robust investment framework to select investment opportunities in their mid stage rounds - typically Series A, B, C.
Coinvestments. Our coinvestment program offers our investor community the opportunity to increase their exposure to emerging category leaders in the blockchain space. Please let us know if you want to learn which coinvestments are currently open for funding.
Contact ir@blockchaincoinvestors.com to learn more about any of these opportunities.
INTERESTED IN MORE? REGISTER NOW FOR UPCOMING WEBINARS AND CALLS
Our investment team hosts regular webinars and calls to help educate our community about the Fifth Era, fintech, blockchain and crypto. We discuss important trends, tailwinds, and investment themes including what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of our upcoming webinars for which you can register.
Investing in Early Stage Tokens
CBDCs. Protocol Tokens. Cryptoassets. NFT Platforms. Early stage token investing is more than getting in early into the next Bitcoin or Ethereum. Matthew Le Merle, an internationally recognized expert in blockchain investing, will review the options available to people interested in understanding what they're investing into when they start early stage token investing.
What is Tokenization?
Tokens are everywhere these days, attached to things we don’t expect like contracts or art. What does that mean, exactly, and why are they important in the evolution of the digital economy? Join Mitch Mechigian to hear about how tokens and blockchain work together plus the impact of tokens on the best innovations in the space.
Recordings of past webinars and calls can be found at www.blockchaincoinvestors.com/webinars.
RECENT PRESS
CNBC Crypto World: Matthew Le Merle discusses this year’s performance in the space and provides an outlook for 2023
Business Insider: A profile of the firm's investment strategy and why now is the right time to invest in blockchain technology
The Holy Grail of Finance: A podcast with Altvia regarding the inevitability of blockchain technology in conducting digital commerce
Boardroom Governance: Alison Davis gives her unique view on 20+ years of experience in management, investing, and board membership
CoinDesk TV: Interview on unicorns and predictions for 2022
Nasdaq Trade Talks: Discussion on the blockchain unicorn universe research and how to gain exposure
Ashurst: On the ESG Podcast, a discussion of the internet, fintech, blockchain, and individual revolution
Business Insider: Discussing how right now in blockchain is similar to the internet boom of the '90s in terms of growth and innovation
NBC San Francisco: An interview on what are NFTs
Crypto Unstacked: Podcast on the Fifth Era and the evolution of digital assets
BLOCKCHAIN COINVESTORS SWISS
We are excited to announce that Blockchain Coinvestors Funds are now available through Swiss certificates for those of our non-US investors who prefer this approach. The underlying fund is the same, however, our Zurich based team at Blockchain Coinvestors Swiss, who will introduce in future weeks, can provide detailed information regarding this investment option. Email us at mlemerle@blockchaincoinvestors.com to learn more.