On a sweltering afternoon in Singapore, I received a ping on WeChat with a link to an insightful speech that had just been delivered. The sender crafted that speech too 😉 and of course the first thing I asked to do was to translate it so I can share it with our English-speaking friends.
It just so happens that in the last article that I wrote, there were references to how blockchain was a shining hope that people in a region, who felt they had passed up the internet age, held on to tightly. They had made their fortune on the real economy — fundamental goods in the economy such as agriculture, manufacturing, telecommunications and so on — and wanted to stay on the cutting edge in economic development, so they embraced blockchain as that next wave.
The Financial Times further defines “real economy” as: The part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets.
In this speech by Richard, he argues that in fact, to truly thrive and shape the future, blockchain should be applied to the real economy. It is an interesting convergence in these two worlds — real economy and emerging technology, and certainly something that many of the big Chinese internet companies are applying to areas like logistics.
This keynote speech was delivered on June 6 at the Global Sleepless Blockchain Leadership Summit held in Hangzhou. Richard Wang, the partner at DFJ Dragon Fund China spoke eloquently on the topic of “Blockchain investment opportunities in the global economy”.
Richard Wang is undoubtedly an investment rockstar who has surged to the top of the blockchain space in the past few years.
He has 18 years experience in the semiconductor industry, leading market development, technical support, channel sales, and a multitude of other roles asked of him. In 2011, he joined the team of DFJ DragonFund China. Established in 2006, DFJ DragonFund China is an early-to-mid stage investment fund co-founded by the world’s leading venture capital funds Draper Fisher Jurvetson and DraperDragon, focusing on investment in high-tech companies in or associated with China. In the past few years, from Silicon Valley to Shanghai, from Taiwan to the mainland, Richard Wang’s investment footprint has been spotted all over the world. His name is inextricably linked with innovation.
In his speech, Richard expounds on the fact that it is the real economy that will drive the development of the blockchain industry. Blockchains are inherently trustless and eliminate intermediaries, which will be pivotal in real-world economies and applications. Citing how “last centimetre” experiences need to be improved in order to perfect public blockchains, his strong belief is that in the next year or two, the real economy will be the true validator and driver of blockchain development and adoption.
Comment: This part about “last centimetre” experience (or direct interactions) comes from the Chinese expression of “helping the user through the last centimetre”, the point of friction in the interaction between users and a product or service; for example, you could even say something like “The tax authority has introduced a bootcamp to help users through the last centimetre of their tax-paying journey.” Sometimes I think of it as “last mile problems”, if that makes it clearer .
In this presentation, Richard also shares his interpretations of the investment opportunities that exists in the blockchain field, drawing on his discriminative insights into underlying technologies, public chains, decentralization, and exchanges.
On my way here today in a private-hire ride, the driver lamented the fees that Didi extracts as the intermediary for our ride. When we talk about the possibilities of blockchain, we are really referring to the elimination of these fees in the middle. But what does it really mean?
Comment: Didi is the Chinese version of Uber, and in fact acquired Uber’s operation in China; they have far surpassed the scale of Uber, branching into all kinds of investments and business lines, following the Chinese fashion of expansion. Riders in China have complained about the lack of competition (and thus higher prices) since Didi is the only major player in the ride-hailing space now, and drivers have complained that they no longer receive as much incentive as when there were competing companies attracting drivers to work on their platforms. Such is the nature of centralized monopolies…
I persist in my belief that the future of blockchain and the real economy is strongly intertwined. Blockchain has an intimate relation to all kinds of projects, whether online or offline, upstream or downstream; although scenarios where users can directly interact with it provide the largest prospects for development of the technology.
Blockchains are trustless, decentralized — and these properties lend themselves very well to the unique problem sets that the real economy presents. Hence, I believe in the next one to two years, we should leverage on the real economy to push the envelope of blockchain development.
We know that cryptocurrencies and blockchain technologies are global, crossing international lines. International collaboration will therefore be imperative to the growth of these technologies.
This is the underlying rationale behind our investment network. It covers three continents, across Europe, Americas, and Asia. We tap into global projects, economies, trends and even governments. With a network like this, we can get the latest insight into recent developments around the globe. Under the mast of this comprehensive network, our funds exchange project ideas, processes and models around the world. Keeping this tight coordination and cooperation, we can share, collaborate, and invest together.
This is important because it is relatively difficult for most to evaluate blockchain projects today. Our organization started equity investing in China since 2006, and therefore has become a typical example of an equity investment institution. Since we have tried-and-tested processes and requirements in our due diligence process, it is actually easier for us to apply our methodology to blockchain or token investing. Of course, the pace is faster now, but we can still apply the same rigor to these projects, and keep the same sense of responsibility to our investments.
Another benefit of international cooperation is the comprehensive nature of our due diligence efforts. Since we have a plethora of talents exposed to different market trends, each with their own perspectives and judgments, we can do a better job at it.
Another is value-added services — There is a concept in traditional equity investment that a dollar from me is not worth the same as a dollar from another. Why? It’s not just about investing money, it’s about investing resources as well. Some may think that for new technologies, just funding will do the trick — but as traditional funds, it is crucial that we provide these value-added funds and value-added services. Whether that comes in the form of media support, industry evaluations, even getting companies on exchanges, or helping them expand to another territory, we have to be prepared to set up and provide these value-added resources.
Those are the fundamentals when thinking about a fund. But what does that have to do with the investment opportunities in the blockchain? Our blockchain-related equity investment journey began four years ago. Back then, the Chinese yuan (renminbi) and our U.S. dollar fund could be used for equity investment — that was all that was needed for investing. At the time, there were no cryptocurrency issuances yet, so with the advent of new investment opportunities, we set up new funds. It is all still relatively new, having just been established last year and earlier this year. All over the country, new blockchain industry funds are being created en masse since the end of 2017. However, importantly, there are two major differences between a good fund and a mediocre fund:
In traditional equity investment, the lifespan of a fund is about 7 years. In traditional VC investment, you might be able to invest and exit in a company within three months. With blockchain projects, it makes more sense for a long-term horizon: strategizing for the secondary markets and operational plans over time — not just invest in the primary markets and leave once profit has been made. Basically, blockchain funds need to exist for a longer period of time. You shouldn’t just invest for three to nine months and just move on — you should be finding ways to run the company together with the projects you have invested in.
Comment: This is quite a fundamental shift in mindset. For those of us who have been through VC funding, accelerators, incubators, etc, it has been drilled into our minds that the VC model is to get you to the next round so they can exit, and that’s usually between 9 to 18 months. But that makes sense in its own way, because unlike a token project that can be traded on an exchange, there is hardly any way for a traditional VC to cash in on their investment unless there is a liquidity event like a sale or IPO. This is the reason why people say you shouldn’t do “risky” startup investments unless you are in it for the long haul.
Equity investment is pretty much limited to IPO and M&A. It happens over a long period of time and it is more difficult to get to the next round or increase the number of rounds. In contrast, we specifically refer to token issuance these days, or TGE for short (token generation event). Why is a token different from traditional equity? Because tokens exist within a blockchain. If you use the underlying blockchain technology, you must use the token — tokens are akin to your bloodstream, and the larger community surrounding you. However, you may not necessarily use the tokens you own right away; it depends on whether you urgently need to use the tokens generated, drawing a link between production and consumption. Hence, we use the broader term TGE.
In 2014, global blockchain project financing was 1.6 billion US dollars, much larger than traditional equity investment. As such, the growth curve is not as obvious in 2018, although the size of token financing in 2018 will far outstrip that of traditional equity financing, especially in the field of blockchain projects.
Being involved in the entire ecosystem enables us to cooperate with funds around the world for all kinds of collaborations. At our headquarters in Silicon Valley, we have an entrepreneurial university, where more than half of the graduates in the past two years are blockchain entrepreneurs. Our other important investment is an incubator, one of which is blockchain focused — so far, nearly 100 blockchain projects have been incubated, mostly in the United States. Therefore, in order to meet the new opportunities of blockchain, we must all continue to strengthen and cultivate initiatives such as accelerators, incubators, universities, as well as deploying more capital across countries.
In the entire spectrum of the operation of blockchains, whether vertical or horizontal, we have to be prepared with a variety of plans and strategies. When we refer to any application on the blockchain, we observe that the “last centimetre” of user interaction is often fraught with problems: Let’s just take putting false information on the blockchain as an example. Even after this false information is put on chain, there still needs to be various ways to augment this issue after the fact.
Therefore, you can imagine how crucial it is for the global development of the real economy to stimulate the healthy growth of blockchain through these real-world scenarios. This applies across industrial projects, but also application projects and private chain projects. Why? It all comes down to the belief that closing this “last centimetre” gap between blockchain potential and application is fundamental to growing value within the real economy. However, particularly in solving these gaps and problems, a lot of time and effort needs to be invested, step-by-step, for it to actually work.
Companies like Didi and Uber are in essence following these same principles, where they want to weaken the middleman as much as possible. The point is: There are massive investment opportunities in this field. But kind of opportunities are these? Well, these are not investments that will return in 3, 6, 9 months or so; when you look at blockchain projects, or even projects on the secondary markets, set your timeframe to be in years, not months.
When you take a step back and think about why things are set up the way that they are in our investment landscape, you may ask: Why an incubation lab?
We know that many of the underlying technologies are still imperfect and immature, and many of these use cases have yet to be expanded upon. The range of blockchain technologies that we see today are mostly based on the concept of chains, but what that fundamentally means is that it is a non-closed-loop, unidirectional technology. It is a chain of time — so it’s a timestamp. Do all real-life scenarios require timestamps? Are there other structures out there that can fulfil what blockchain aims to deliver? These are all topics that are worthy of being studied in an incubation lab. Other than these deep technical explorations, there are also some new projects in the lab that focus more on closing the “last centimetre” gap. This involves partnering with the “traditional” equity-funded companies, and even very mature internet companies who can put their products on the blockchain and invest resources in its development.
Another swathe of the landscape includes chips and mining rigs. There are a whole lot of nodes and even storage devices that need to be supported by corresponding hardware. The hardware does not necessarily have to be in the form of a computer as we might typically understand it, where we refer to its computing power as its defining feature; a chip does not necessary require high computing power. For IoT projects, any sensor that can provide small amounts of computing power can serve as a contributing node in the network. As long as that sensor continues to pipe data through, it has value, and any such node should continue to exist in this network.
What kind of value does such a node have then, and what kind of profit can be realized with such a chip design? Take smart meters as an example. The smart meters of today can compute, store and broadcast data, but it cannot be used to receive payment. It can provide this data, but it is unable to leverage on the vast network effects in terms of economic value. So, even in just an area like smart metering, there is already lots of opportunity to be had. Hence, hardware is clearly a strategic part of the investment landscape.
The competition for private chain dominance is intense, but we can draw a parallel to the operating system wars 10 years ago. There were more than 100 operating systems in contention, but now only three remain. Could this also be true for public chains? It’s hard to imagine that a public chain can satisfy all the scenarios required of it, where only one public chain rules them all. For example, you might need a public chain to support the entire sharing economy, but it would be difficult to have such a general and scalable chain that can support all apps. This underpins the reality of why there are a hundred chains competing. There will definitely be a few teams that jostle and get ahead. Finding these depends entirely on the founding team, and your investment acumen — whether you can find the future Google or BAT in there.
Comment: BAT stands for Baidu, Alibaba, Tencent, the three kingpins of the Chinese internet.
Exchanges are also an investment priority. Whether decentralized or centralized (of course, today, most are still centralized), wallets and exchanges are important entry points for users. When you make equity investments, you tend to ignore the secondary market. But TGE’s primary and secondary markets have vague boundaries and tend to be oriented to be short-term, so secondary market analysis become vital. We must establish and support community operations in these dynamic secondary markets.
There is another pertinent point pertaining to secondary markets. In equity investment, there is an important aspect: corporate governance. In early stage equity investments, we usually are only board observers, so it is difficult to give them the help they need. With TGE projects, the role we can all play is diminished even more, since there is no legal support for it. Many of these projects have foundations, and foundations have directors, but there is basically no place for investors on these boards. Therefore, when designing a blockchain, accounting for the design of its community and protection of its holders are vital, a key takeaway from the study of secondary markets.
In the application dimension on our landscape, games are definitely the easiest class to take off in a big way. In applications involving trading, we should avoid narrowly understanding trade as being limited to only financial transactions. In fact, aspects such as information and data transactions are included; in the future, every byte of data I transmit should garner me its corresponding value, even if it is only a penny. All medical applications, such as medical care, insurance, and more are ultimately linked to these data — data generated by real users in the real economy. Projects in information security, social networking, IoT, and artificial intelligence, stem from the use of application-based public blockchains.
In China, we focus on projects with viral application. In the US, we evaluate projects for their technical merits. The process of evaluation hearkens back to early stage venture investment where talent is the critical factor. We start by understanding more about founders and the team, such as what extraordinary things they have done in the past, why they banded together and formed a team, what goals they have in the future, and how far they can go… these are just a few of the factors to consider.
Another aspect is the potential of the application and use cases. How does one grapple with the notion of potential? One way is to use the maturity of the use case as a gauge — if it already sees a lot of use, and has millions of users in the community, but it can be decentralized, can cogently introduce tokens as an incentive, and can start the network effects of a blockchain using its community. Keep in mind, however, that many technologies are not perfect yet, so there is room for improvement. Every public chain these days says that it can support millions of nodes, and other big claims, but we still have yet to test the limits of the technology beyond the lab.
Comment: Maturity of use case is sometimes also a justification for what we call “reverse ICOs”, ICOs by companies who are already established but can find a good use case for introducing blockchain to some part of their business.
Wallet protocols are another interesting section. Beyond development of the underlying technology, security is a key focus, along with computing power and other related technologies. There definitely are going to be more effective and elegant mechanisms waiting for new, innovative teams to discover. Today, people only focus on the chain and the “timestamping” effects, soon the conversation will shift to block size and space allocation and use on the blockchain as well.
Moving on to the service sector, hedging and custody of digital assets in the secondary market are of particular interest. We know that there are currently no strong custody services for digital assets due to legality issues, which has led to exchanges being the default candidate for custody. With changes in regulatory landscapes, custody is another investment opportunity.
Covered above are the entire set of good investment opportunities in blockchain, spanning the underlying technology, public chains and decentralization, and exchanges. Let’s summarize the thoughts above further.
Turning to the development of protocols, our belief is that many of them will not be used publicly for now. In the long run, the public chains of many different application scenarios will survive, but now they are still in the initial stages of competition. In the short term, due to computing power, there will be no truly better, differentiated service.
Third generation blockchains and technology should achieve several characteristics: first, scalability; second, operationality; third, sustainability; fourth, privacy; fifth, security; sixth, governance. Is it possible to and define these using smart contracts? It is absolutely possible, even though it does not yet exist today. Based on the trend of development however, these requirements will certainly be met in the future.
Observing exchanges today also sends a strong message. The transaction volume of all decentralized exchanges now only accounts for 1% of the trading volume of the top (centralized) exchange, so the development potential of decentralized exchanges is particularly huge. By scanning the entire choice set of investment opportunities today, we are essentially searching for market gaps and white spaces. Just from this data point alone, the opportunity in exchanges is huge — for both centralized and decentralized exchanges.
Wallets are an entry point, and wallet projects should be equity investments. In the future, B2B markets will depend on some of these underlying products and services to support them, in order to really tap on and expand the B2B offerings available.
In conclusion, under the development of the real economy, the “last centimetre” use cases will provide the perfect breeding grounds to perfect blockchain technology, supporting the development of blockchain as a whole.
Thanks for reading! I personally found this an interesting overview of how funds are thinking about investments in blockchain. It corroborates well with some anecdotal experience I’ve been hearing from others around me.
If you found it interesting, don’t forget to check out my other writing and follow. See you at the next one!