June 9, 2015

Startups Adopt Blockchain to Disrupt Big Industry

Blockchain is a public, digital ledger for recording and verifying transactions that has its roots in bitcoin. A decentralized and distributed record-keeping system, blockchain is not run by any one authority and is designed to make transactions safe and trustworthy among thousands or millions of users.

Though blockchain was built to run the global bitcoin network, tech startups are now adopting the framework in hopes of disrupting many different industries - especially those dominated by powerful monopolies and central authorities. In other words, startups are using blockchain to build products that cut out the middleman. Blockchain, therefore, symbolizes a larger movement towards decentralization and democratization that extends far beyond digital currency. “Blockchain has genuine potential to tip power dynamics in banking, politics, the internet, and everywhere authorities authorize things,” is how a recent Gizmodo article explained it.

The first wave of startups using blockchain-like techniques are tackling an array of problems such as helping protect consumer privacy, securing online transactions, and creating new efficiencies in established industries. For example, Namecoin is using blockchain to build a distributed domain name registry that helps prevent censorship an disintermediates ICANN. Ethereum applies blockchain principles to smart digital contracts that automatically enforce agreement terms across multiple parties. Further, Ethereum believes such “decentralized business logic” will form the foundation of new distributed applications that will have profound implications for companies. 

Other startups looking to use the blockchain to disrupt existing industries include Eris (open application platform), BitMesh (a bandwidth marketplace/ISP alternative), Storj (cloud storage), Blocktrace (a registry for diamonds), Onename (alternative to online passwords), Proof of Existence (legal document storage), Colu (a digital purchase vault) and Ripple (secure financial transactions). Large companies are also experimenting with blockchain, such as IBM and Samsung’s ADEPT project , which aims to create a blockchain-powered backbone for IoT devices. NASDAQ recently announced plans to test financial transactions powered by blockchain. 

The implications of blockchain’s potential disruption are enormous. Blockchain-based startups are attempting to decentralize traditional “hub-and-spoke” industries like real estate, manufacturing, healthcare, entertainment, biotech, payments, and communications. These sectors have long been controlled by multinational corporations and centralized governing bodies. The next generation of blockchain startups will create “mesh” industries where smaller companies can compete with entrenched corporations through crowdsourcing, shared resources, and distributed governance.

Do blockchain-driven startups actually have a chance to succeed? We’re in the very early stages of this revolution, but there will almost certainly be companies that successfully use blockchain concepts to disrupt entrenched industries. However, the challenges blockchain startups must overcome are numerous, one of the biggest being the ‘wonk factor’. Blockchain, like its big brother bitcoin, is seen as a complicated, super-techie concept that many customers just don’t understand. Blockchain startups will have to find a way to communicate what they do in straightforward terms and build simple user interfaces.

Blockchain also has many technical challenges, not the least of which is its reliance on a balance of trustworthy participants for the system to function properly. The 51% problem, whereby a party that controls a majority of the computing resources can adversely impact transactions, is a real threat. Some studies suggest the blockchain system can even be manipulated by a minority. Another important issue is privacy. If the blockchain is a public record of every transaction ever made, techniques must be implemented to ensure transaction histories cannot be linked back to individuals. 

Despite these and other challenges, blockchain startups have a lot of promise, and we’re actively looking for investment opportunities in this area. In particular, blockchain could prove extremely useful in the IoT sector, allowing large numbers of devices to work cost-effectively together in a distributed mesh network instead of relying on the hub-and-spoke IP network that runs the internet today. Blockchain is decentralization on steroids, a concept that could support billions and billions of IoT devices. Filament is one of the more promising startups bringing blockchain to IoT device management. Silicon Valley startup 21 Inc. recently announced $116M in funding to embed bitcoin mining chips into cell phones and connected IoT devices.

Smart entrepreneurs already see the vast possibilities blockchain offers to create flexible, secure, distributed businesses. Whether they will succeed in using the anarchic blockchain technology to create trusted companies used by consumers and businesses alike remains to be seen. My view: watch this space. The demand for these services is real and the technology enablers are maturing quickly. I, for one, believe blockchain is here to stay. 

Tags: Blockchain , Bitcoin , Security , David Famolari , Startups , Payments