Game-changing blockchain investment. Part 1: Identifying use cases
See how one investment fund breaks down blockchain, identifies use cases and builds a game-changer.
This is Part 1 of a 2 part series. Read Part 2 here.
So, you want to invest in blockchain? And you want to do it in a more meaningful and targeted way than just buying Bitcoin?
That's when you run into a shopping list of obstacles.
- It's still an immature technology, making it difficult to pick winners.
- Decentralisation and public blockchains systems are a novel area, and no one's entirely sure which way it's going to go in the long run and what the best use cases will look like.
- The rampant speculation in the space has distorted a lot of things well beyond their real value, making it hard to gauge worth.
- Individual solutions will often require entirely separate infrastructure projects to achieve their own goals.
- The most immediate blockchain applications – hybrid blockchain models targeted at specific business problems – are being snapped up by large existing companies.
Trying to invest in the next wave of blockchain, in the form of novel solutions based on public blockchain-level trust, means finding a strategy that lets you overcome some tough challenges.
For a better understanding of the space, Finder spoke with Bicameral Ventures, an investment fund that has grappled with these issues and emerged with its own take on investing in blockchain, condensed here.
The first step is naturally to get an understanding of what problems blockchain can solve, and try to define them in a meaningful way. And Bicameral Ventures started, as many blockchain adherents do, with the concept of trust.
Step 1. Define what blockchain can actually do
Step back and look at what exactly blockchain can theoretically do, and to assemble a shopping list of the actual solid functions that blockchain enables.
On this step, Bicameral Ventures assembled the following:
- The ability to audit.
- Instant settling of transactions.
- Reliable smart contracts – or the ability to program clear chains of cause and effect.
- The ability to validate independently-reported data.
It's a somewhat esoteric collection of functions, but the concept of "trust" is a nice, solid framework around which to collate them. Essentially, the above functions can be pithily boiled down to "blockchain is a trust factory – you put in energy and trust comes out".
By this thesis, when you want to find commercially valuable applications for blockchain, you need to explore the nature of trust in the world.
Step 2. Define the problem these applications can solve
When you look at the role of trust in businesses, for the most part it represents an enormous ongoing cost. This cost is what Bicameral Ventures has started referring to as "the overhead of trust," Bicameral Ventures CIO Alex McDougall explained.
For an example of this overhead in action, consider the cost of making an international payment.
"Think of the amount of money you pay for remittance fees, or wire transfers. We can trust each other individually, but we pay banks to be in the middle of our transactions. We already have that agreement, but we need someone else to execute on that."
The actual processes needed to ensure the money gets from A to B are a system of trust involving multiple intermediaries and existing relationships which each involve their own layers of trust. There's trust in other parties to do their jobs appropriately, trust in the legal system to ensure that failures to do so are properly remedied, trust in one's records and record-keepers, trust that the data telling you to send the money is correct, and so on and on.
You want to send money to the recipient, but for you to be confident it will arrive, it has to pass through a complex system of "trust aids". These systems incur a mountain of indirect costs.
"The indirect costs when you send money are behind-the-scenes costs of people doing spreadsheets, the capital set aside against your payments... in order to do that you need to set aside billions in capital, and that capital is expensive. That's a large amount of money that's just trapped against that trust."
How do we know blockchain can solve these problems? Because it's self-evident.
When you send cryptocurrency to someone it goes directly to them without incurring any of those trust costs. When you send a bank transfer to someone it passes through a system that requires all of those complex trust costs.
Payments are often described as one of blockchain's "killer apps". And when you boil down the question of what exactly blockchain does for payments, you can start looking for some of the less obvious killer apps.
As a sophisticated and far-sighted blockchain investor, that's kind of your jam.
Step 3. Find other places these solutions can be successfully applied
So blockchain can remove "the overhead of trust". A good place to start looking for ways of applying this thinking is by identifying the overhead of trust in existing systems, and then picturing what it would look like if you remove it.
Let's go with a big example: customer data for market research.
A business can get information from polling prospective customers, analyzing the data its customers provide, or just politely asking them for their opinions. But for the good stuff at scale, a business will often go to a data-hungry giant like Google or Alteryx (a partner of the Experian credit rating agency and the sole software content provider for the US Census).
Through them, they'll either just outright buy data as in the case of Alteryx or jump through hoops such as targeting the same Google Ad campaign at different demographics and comparing how likely each is to click on it, via Google.
This is not to imply that gathering customer data is bad. On the contrary, it's essential. But it's extraordinarily expensive, inefficient and not especially safe or profitable for the customer whose data is being given up.
"Every company has a data acquisition strategy, and spends money on acquiring and processing data, storing that data, learning stuff about their customers," McDougall explains. "That's the direct cost right now. If we're on the internet, I have no idea that it's you, I have no idea what you're like, how to predict your behaviour, how to build an experience for you. On the internet, we pay Google. 'Hey, say, you know this person.' That's our centralised trust proxy in the digital world. The amount of profit these earn, that are withheld from the system, are all building blocks of the overhead of trust."
Let's turn back to those five previously mentioned blockchain functions and see how they can help remove the overhead of trust in this example.
|Immutability||Data cannot be tampered with.|
|Auditability||Companies and customers can track the path of data.|
|Instant settlement||Data can be transacted and paid for in real-time.|
|Smart contracts||Customers can be certain that they will automatically be paid when their data is provided or used.|
|Able to validate independently-reported data||Companies can verify the accuracy of customer information.|
One outcome of these is that customers can directly opt in to providing specific data to a business in exchange for rewards, while both customers and businesses can be sure the data is safe and accurate.
It goes without saying, but might as well be said anyway, that elements such as the ability to validate independently-reported data can be done without compromising the security of the data itself.
For example, if a commuter wants to sell their vehicle usage information to a company, that company can verify that the information they are receiving is the same that is actually being recorded by the vehicle. This can be done without necessarily de-anonymising the data.
In a way, this is the easiest step because this kind of framework can be applied everywhere you look.
The snowball effect of removing the overhead of trust
One of the most important takeaways is that the benefits of removing this overhead of trust go well beyond simply letting businesses cut out a middleman and save some costs. This isn't just a cheaper and more ethical data source for businesses, but a holistic improvement that brings follow-up improvements and immense total savings once you factor in the indirect costs.
The actual profit earned by the data harvesters is put back into circulation (Google's annual revenue in 2018 was US$136 billion), the quality of the data improves, customers benefit from getting rewards of their own and all businesses which use customer data – that is to say all businesses – can enjoy savings.
It's hard to actually quantify the untapped upsides you can start tapping once you remove the overhead of trust, McDougall says.
Even simply reinvesting the money saved on bad analytics into good analytics is a game-changer, he points out.
"We don't know what the real business models are that can be created. I've seen a couple of studies saying if people had perfect data policies, every dollar you spend on data and analytics gives you a 9 times return on upside revenue. Take $100 billion wasted in ad fraud, apply that 9x multiplier... there's almost a trillion dollars there."
But once you put everything together, the total gains are literally incalculable. You can't predict the total economic benefits of blockchain for the same reason it's not possible to work out the total economic value of the combustion engine. The world will simply be a different place in countless ways.
"There's business models we just can't comprehend yet. There's net new businesses that just goes out into the world. Direct costs, indirect costs, untapped upside... all that capital that gets set aside behind the scenes to finish transactions, settlements."
And how about the follow-on benefits of a single person being able to run a business that would previously have taken a full team to operate?
"There's a minimum size of business that makes sense for a business," McDougall points out.
"The ability to provably show what we're doing and who's doing it, and their reputation, takes out billions in KYC and AML costs, accounting, and audit and tax fraud, all of that type of stuff. KYC and AML right now is a bit of a proxy, because we cant actually follow the money. We look at the person instead and take some very basic information, and use that to build a model of how risky we think a person is."
"Capital gets set aside just to execute deals, financial exclusion, cheque settlement fees.. all that's because we have these billions trapped in capital. Take all that away and you have a viable banking system that works. The amount of new money that gets added when you scale.. trillions of dollars. Direct costs, indirect costs, untapped upside."
Case study: Velocia
Velocia is one of the projects in Bicameral Ventures' portfolio. Depending on where you are, there's a decent chance you've heard of it.
On the front end it's a rewards app where people can collect "frequent flyer" type rewards points for ground transportation, as they drive, ride bikes, use scooters, take rideshares or even walk. Those rewards points are dubbed VELO and can be redeemed for various mobility services, including ridesharing.
The decision to avoid touting it as a blockchain or crypto app was very deliberate, because it's largely beside the point for the end user, and trying to advertise it as a pure-play blockchain product would likely be net detrimental. It's typical in this respect, McDougall reckons.
"Long term, our hypothesis is that the average consumer or user will interact with blockchain applications probably unknowingly," he predicts.
But the blockchain element is exactly what makes it such a game-changer, turning it from some kind of frequent flyer-like system into a "supercharged collaboration mechanism", in McDougall's words.
"Velocia has built an open rewards platform that allows anyone to put out bounties," he explains. "For example, take 3 rideshares [and] get tokens [then] redeem them for public transport. You connect your favourite ridesharing app, the platform reads the API from that provider. The fact you've taken 3 trips is what triggers the payment; all behind the scenes to make it easy for the user. They're partnering with the private and public sectors to get them engaged within this platform, to allow everyone to target and tailor this experience."
"All of your data, which used to be held by rideshare providers, your metro, the government, starts accumulating back to you. It actually pulls out all your data - you can start building this 360 degree view of how you can move around the city."
"That's an incredibly valuable data set, and you can control and spend it on subway rides, rideshares and more. It's a supercharged collaboration mechanism. They (Velocia) provide a service that's differentiated from what singularly exists in the world right now - what people see as a better experience, powered by blockchain stuff under the surface."
What actually is Velocia?
The system is win-win-win all around.
- Users download the Velocia app, pair their favourite mobility apps and start earning VELOS as they commute around their cities. They then use VELOS for discounts and credits on mobility services.
- Businesses have access to an engaged user base which they can target through campaigns on the app.
- Ecosystem participants such as cities can post bounties to encourage certain behaviours, such as taking more public transport.
It's a nice, largely self-sustaining mutually beneficial system, it tears down large parts of the overhead of trust, and at its heart it all comes down to those five blockchain functions: immutability, auditability, instant settlement, smart contracts and the ability to validate independently-reported data.
But what really is Velocia in the end? It's not stealing that precious data. It's not actually providing the mobility services for users, or dragging maximum profits out of the ecosystem, so what is the Velocia product that helps justify it as a commercial investment?
How about a solution to traffic congestion, McDougall suggests.
"You can package this up as 'here's how you can solve congestion,'" he said. "The government's only incentive is negative. They can fine, they can tax. They don't have a positive way to target consumer behaviours or engage the private sector to help solve these problems."
And that's largely what Velocia is when you break it down – a rewards-based behavioural modification tool. Traffic congestion is an enormous global problem, and it's on track to get even worse, so giving governments the ability to reward desirable behaviours like carpooling or biking to work is enormously useful.
The value of these reinforcements cannot be overstated. Firstly, just about all the behavioural science in existence says that utilising both punishments and rewards is more effective than either by itself.
And secondly, punishments alone can deliver unexpected downsides. Just look at Singapore where the ultra-high car tax, which was meant to discourage driving and help solve congestion, partly backfired by making cars highly desirable and turning driving into its own reward.
Plus, even in the world of transport there's plenty of scope for use beyond congestion-busting.
For example, life insurance companies will often reward people for taking healthier options like biking to work, because apparently the cardiovascular benefits of cycling outweigh the risk of getting wiped out by reckless drivers. There's little reason you can't integrate insurers, government health departments and other areas beyond transport alone into Velocia.
In this case, the end product being invested in is a highly-compelling behavioural modification tool, of the kind that was only made possible through blockchain. And simply by existing, it helps push back the overhead of trust.
It's a behavioural modification tool, McDougall said, but "it's entirely at people's discretion. Google opts you into their behavioural modification. They leverage your cognitive biases to do things to make your data more valuable. It's not opt in."
"This is extremely transparent - we want you to rideshare, we will do this thing if you do."
This is part one of a two part series.
Part 2 places Velocia in the context of the Bicameral Ventures' "interconnected investing" strategy, features an interview with Aion Network CEO Matthew Spoke, and explores how to actually design and build that wider ecosystem from an investment perspective with further commentary from Bicameral Ventures.
Disclosure: The author holds BNB, BTC at the time of writing.