Paul Veradittakit, Pantera Capital
Dan Kahan, Morrison & Foerster LLP
Nick Chirls, Notation Capital
Emma Channing, Satis Group
Dan: So what is blockchain?
Nick: A new kind of database that has interesting properties – it is a database where a distributed group of people can verify transactions and data in a way that doesn’t need a centralized third party and doesn’t require them to trust one another. The data sits permanently and publicly on the blockchain.
Dan: What’s the connection between blockchain as a technology and cryptocurrency and tokens?
Paul: The blockchain is a decentralized immutable transparent ledger that enables peer to peer transactions of value or tokenized digital assets. There are two types of tokens emerging:
- Utility token, which is a token required to use a certain technology or product. Bitcoin is an example of a utility token.
- Security token, which represents equity or profit in a company. ICO coins are an example of a security token.
Dan: There are a lot of distributed databases that came out over the last 40-50 years, which you don’t hear about in public media. What is it about blockchain specifically that is exciting in the world of finance?
Nick: Blockchain is a pretty bad database in many ways; for example, it’s not very scalable, has low throughput of transactions. Its good in areas where there is poor trust among different parties. There are very few use cases that need this type of capabilities
Dan: So censorship resistance is considered a big plus to some groups, but are there other groups that see this as a bug, and not a feature – perhaps regulartory groups?
Emma: We’re seeing a very diverse approach. The EU commission is coming with guidelines for what they find acceptable tokens and security systems. For example, German regulators mandate an income source to approve a security token. It’s important to get legal advice if you’re thinking about it.
Dan: What are some of the features of a security token vs a utility token?
Emma: The utility token is something that is inherent to the blockchain technology, that is at the heart of the project. It can be a form of payment, or a discount, but a clear function in the project. In Swiss law, to count as a utility token the platform has to be fully functional at the time of the ICO.
Dan: On utility tokens, looking at them as items that have non-investment purposes, what do you see the types of projects out there using them?
Paul: We look to see what the problem the company is trying to solve, and see if the token will enable the company to open a new market or gain market share in an existing market. We’ve been investing more into new projects, because we see that a lot of projects that add tokens into existing projects are really just bolting on tokens with no real need for them. We want to see a real problem is solved, like fraud prevention.
Nick: We treat blockchain projects like traditional startups when we come to analyze them. We look at the founding team, its technical ability to get a project to market (not just raise an ICO). We look for market opportunity, and is the blockchain technology critical to the technology. We can see a lot of projects that add blockchain to the name of the project, when in 99% of the time it’s not relevant or critical to the project.
Dan: How do you measure when a project has achieved success?
Paul: Where blockchain is today there’s really early days for this type of technology. The technology is not really ready for the applications we want to use with it. We measure success by seeing actual real value to people. Most of it today isn’t.
Emma: We define success as going live, with actual users on the system, and regular updates to the GITHUB repository. Only about 2-4% actually succeed; 80% of ICOs can be considered scams. This noise is something we hope the regulatory bodies will dampen down.
Paul: Timewise we’re on the first half inning of a baseball game. The technology is still being worked out. It’s like working on a 56K modem. It will take time.
Dan: Are there any protocol level things or products on blockchain that you would like to see coming down the line?
Nick: Scalability is obviously a major problem that needs to be solved, and we’re seeing lots of different approaches to that. There are lightning networks, that allow some activities to be done off chain. Proof of work is another big item. We’re looking for infrastructure layer stuff that would make blockchain more usable.
Paul: The potential around security tokens have not yet been fully realized. For example, being able to use the transparency and trust features of the blockchain to participate in fractional real-estate ownership; that will open up a lot of possibilities. There is a problem of liquidity – which exchanges are licensed to support and exchange security tokens.
Dan: There’s a lot of discussion in media about blockchain disrupting banking; when you have token that are potentially purchaseable by anybody, could anybody be a venture capitalist, or is there still room for institutions? What role is there for asset managers when the asset purchase is democratized?
Nick: Some VCs are thinking about new models for Crypto, and some discussion of raising tokenized funds; so there’s significant interest from traditional agencies in the topic. But it still represents a very small percentage of the available funds. The traditional VC business will not change and convert to crypto funds on mass. The discussion about the disruption of the venture business has been going on for a long time, but the reality is there a set of services that VCs provide beyond just money, and people will still need that.
Paul: There’s the ability to be able to filter out noise, to understand the new technologies, and to do reference checks and all the groundwork required; as an individual person that’s hard to do, but a VC fund or an ICO fund has this experience and the access to the information, so we’re better positioned to succeed in this.
Dan: What other opportunities are there that blockchain offers?
Nick: Micropayments were one of the original advantages considered using blockchain; but in the world of bitcoin, the per transaction cost is still too high to make micropayments viable. We’d need to see scalability improve and cost per transaction go down substantially to make micropayments a reality.
Paul: In terms of usecases, there are microtasks, such as mechanical turk type of tasks, where people around the world can perform small jobs for tiny payments. Right now in the traditional network there’s a minimum of transaction size of $0.27, but if we can get the cost per transaction we could enable micropayments across boarders. Another use case, what if you could be paid a small amount to watch a small amount of content online, that could open up new business opportunities.
Dan: Everyone talks about the positive aspects of blockchain, are there any negative implications to blockchain?
Nick: the energy usage is a major issue, blockchain uses an incredible amount of compute and energy power to verify transactions. Governance is still in question as well, in regard to many different types of blockchains. You could consider each blockchain as a mini-financial system, which has its own governance system, and there are a lot of challenges around governing these systems and will need to be solved as well.
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