The 2 biggest emerging opportunities in cryptocurrency

A few interesting bits of cryptocurrency news were announced within the past week. First, a team and project near and dear to me, Blockstream, publicly launched with a white paper for the first time rigorously documenting sidechains. Second, Oliver Bussmann, CIO of UBS, publicly stated “blockchain technology will not only change the way we do payments but it will change the whole trading and settlement topic.” Finally, a group I advise, Counterparty was one of many Bitcoin based teams receiving inquiry letters from the SEC pertaining to unregistered securities.

[Update (11/3/2014): Early reports of SEC letters to Counterparty were incorrect. Despite speculation, Counterparty — to its knowledge — has yet to be contacted by the SEC.]

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I first met Blockstream cofounders Austin Hill and Adam Back in early 2014 when teaching a Cryptocurrency Seminar at Stanford. At the time there was decent buzz in the community around a project the two of them were working on that would fundamentally augment Bitcoin’s infrastructure and take it a step function forward. My simplified personal thesis on Bitcoin is, and has been for quite some time now, that the two greatest areas for innovation and value creation are:

1. Leveraging the current technology to bring banking solutions to the under-banked in developing communities. Here people don’t have access to traditional value storage and value transfer mechanisms. In layman’s terms: the traditional banking infrastructure doesn’t work at this scale.
2. The Bitcoin ledger is the largest and most secure decentralized ledger in the world, but its prominence is almost an anecdotal side effect to Satoshi’s initial goal: a proof-of-concept for decentralized ledgers.  As such, the current implementation has very real flaws thatlimitthe applicabilityofBitcoin and its potential to become a global transaction network. Tangible shortcomings include:
   • A difficult to maintain infrastructure. One that is both hard to keep consistent and allows for very little innovation and experimentation.
   • A static, singular set of logics and rules. For example, an unchanged and single monetary policy and inflation rate enforced for everyone independent of context.
   • An increasing arms race in hashrate, one that is both a race to the bottom, and has very real negative effects in energy consumption, that if projected forward is unsustainable.
   • A limit of both 7 transactions per second, and an average wait time for transaction approval that is measured in minutes, not seconds. That is low throughput and high latency for what is ideally a push or pull request to a digital database.
   • A single currency, with little space for development and implementation of alternative currencies, securities, digital rights, smart contracts, or generalized assets.

From early conversations with Austin and Adam it was clear they agreed and saw eye-to-eye with the above shortcomings, particularly regarding core infrastructure. What excited me most about these conversations was their ability to synthesize an understanding and aggressive vision of a future blockchain, its tangible current shortcomings, and a technological path forward vis-a-vis side chains to immediately address the shortcomings and bring the current incarnation one step closer to the grandiose future industry experts like UBS CIO, Oliver Bussman, are only now beginning to understand.

To date, the work of Counterparty (which extends the current protocol to allow for the creation and issuance of additional digital assets) and Blockstream are the most impressive efforts on extending core Bitcoin infrastructure and bringing it closer to Bussman’s above goal.

These early talks led to an exciting session at the Stanford seminar, one where Paypal founder Max Levchin, Counterparty’s Robby Dermody, and Blockstream’s Austin and Adam all engaged in a class wide discussion. This was easily a highlight of the quarter as reviewed by pundit Tim Swanson.

Flashforward months later, while wearing my new hat as an investor for Lux Capital. Why is this interesting? I suspect we’re sitting at an inflection in history where recent traction by Counterparty and Blockstream show that the early evangelists of decentralized ledgers are finally ready to show early technical and meaningful product progress. This is coupled with industry and regulatory understanding of the potential to deploy this technology in meaningful capacities to both decrease costs and create entirely greenfield opportunities.

It’s no longer Blockstream, Counterparty, and Paypal having a theoretical debate in the confines of a Stanford classroom. Rather, it’s Overstock working with Counterparty to create a decentralized exchange, it’s Blockstream issuing technical specs for sidechains and building community momentum towards an initial proof of concept, it’s large banks realizing the potential to leverage this infrastructure, and it’s regulatory bodies admitting this isn’t fringe libertarians but rather a meaningful technological disruption that has the potential to undermine or disintermediate much of the status-quo. As a technologist and investor, these are trends that are impossible to ignore and exciting to observe. If the previous 6 months are indicative of the rate of progress, we can expect much more to come in the near term future.

Zavain Dar is a Senior Associate at Lux Capital. Previously, as an investor at Eric Schmidt’s Innovation Endeavors, he invested and worked with numerous early stage technology companies including Zymergen and HumanAPI, while concurrently leading the firm’s theses in Genetics, Synthetic Biology, and Bitcoin. Prior to Innovation Endeavors he was an early employee at Discovery Engine, a next generation keyword search engine acquired by Twitter. There he engineered Machine Learning and Data Science algorithms across a proprietary distributed systems framework to build web scale ranking algorithms. He was also a founder of Fountainhop, one of the first hyper-local social networks. Zavain was a researcher in Stanford’s Computational Logic Group through which he co-chaired the 2012 General Game Playing Championship at IJCAI in Barcelona. He is currently an adjunct instructor at Stanford University, recently teaching the first Cryptocurrency class offered from any top-25 school. You can follow him on Twitter @zavaindar.