SPECIAL REPORT: 2019 Outlook Reality Check

Produced by: INTRODUCTION

After a breakout year in 2017, the blockchain sector suffered a series of blows in 2018 that included crashing prices, increased regulatory scrutiny of crypto ventures, and continued skepticism about the utility of . Now, the industry has entered a crucial phase in which blockchain developers are working to overcome the limitations of the technology and find use cases that will win widespread adoption by businesses and organizations.

In this Xconomy Special Report, veteran technology journalists Bernadette Tansey, David Holley, and Jeff Engel bring you deep insights, based on conversations with key industry leaders and observers, on what 2019 and beyond hold for blockchain companies and their customers.

In this Report, you'll learn:

• Which types of blockchain applications are gaining traction, and why.

• What blockchain executives and investors—including IBM executive Ramesh Gopinath, Microsoft executive Rohit Amberker, and venture capitalist Tim Draper—believe are the opportunities and challenges for this emerging sector.

• How cloud services companies such as Microsoft, with its Azure business, and hardware startup Filament are smoothing out the barriers for enterprises that want to give blockchain applications a try.

• Practical tips for business leaders who are considering whether to adopt blockchain products. SPECIAL REPORT: 2019 Blockchain Outlook 3

No Blockchain Revolution Yet, Though IBM & Startups Make Progress

By Jeff Engel

Blockchains were supposed to be so much more than . Those include mechanisms designed to allow blockchain users to reach a consensus that a transaction should be written Enthusiasts see big opportunities for blockchains, the online to the blockchain, even if the parties don't necessarily know distributed technology that underpins Bitcoin and other or trust each other. The structure is intended to enable secure . They say it could improve everything from and trusted transactions without the need for a central authority healthcare to voting systems, to the music industry and such as a bank. Such features are integrated in public education—and beyond. blockchains, such as the one that powers Bitcoin—although cryptocurrencies haven’t proven immune to hacks. The blockchain industry could still make good on that potential. But the reality thus far is that it has had little impact on Instead, while businesses are using forms of consensus most businesses. Progress on getting large enterprises to technology, they do so primarily within private networks of embrace the emerging technology has been slower than known and somewhat trusted participants, Litan says. some expected. In addition, Litan says, businesses have been using "The elephant in the room is there’s no revolution going on," blockchains for purposes that aren't radical or all that says Gartner vice president Avivah Litan, one of the research imaginative. The most popular business application to date is firm's lead blockchain analysts. shared record-keeping, according to one Gartner survey.

Most of the businesses that have begun adopting blockchain However, Litan says she doesn't want to minimize the tools are, for various reasons, not taking advantage of some of usefulness of having a more robust record-keeping system the technology's most innovative features, she says. shared by multiple businesses. SPECIAL REPORT: 2019 Blockchain Outlook 4

She says a group of businesses could use blockchain technology to create a mutually trusted record-keeping system if each business agreed to submit data to a shared repository. The elephant in the room is there’s no revolution Once uploaded to the blockchain, it's difficult to change or “ delete the data, and network participants would be able to see going on. that changes were made, Litan says. Copies of the records are distributed to more than one machine—another safeguard —Avivah Litan, Gartner against tampering. This secure ledger could theoretically help ” resolve business disputes over payments or other transactions because all parties are operating from an identical copy of the ledger, Litan says. It is in those types of applications where Even so, Ramesh Gopinath, vice president of supply chain businesses are having the most success adopting blockchain solutions at IBM, isn't discouraged by the doubters. He helped technologies, she adds. launch two major blockchain programs last year aimed at improving global supply chain operations—one focused on food Still, businesses have crawled, not run, to blockchains. In a and the other on shipping and trade. Dozens of companies and 2018 Gartner survey of more than 3,100 chief information organizations are participating in those initiatives, including officers (CIOs) worldwide, just 1 percent said their business grocery and retail giant Walmart (NYSE: WMT) and global had already deployed blockchain-enabled products or container shipping leader Maersk. Gopinath, previously IBM's services. A year later, a similar survey found that 3.3 percent vice president of blockchain solutions and research, is proud of the CIOs' companies had deployed blockchain products. that those two programs are up and running. But he says he’d expected that the blockchain industry as a whole would've Other stats are perhaps even more concerning for companies deployed more real-world business products last year. developing and selling blockchain products. Gartner's 2019 CIO survey found that 40 percent of them had no interest in "It's happening. It's real," Gopinath says of businesses' adopting blockchain tech, an increase from 34 percent in the blockchain investments. Nevertheless, "it could be faster. previous year. Only 4.4 percent of CIOs surveyed by Gartner At least, I thought it would be faster." believe blockchains will be a "game changer" for their businesses, compared with about 26 percent who feel that way about and 24 percent who say it STRUGGLING OUT OF THE “HYPE CYCLE” about data analytics. Litan argues that the blockchain sector is "falling into the trough of disillusionment." That’s Gartner’s term for the Some technology experts also remain skeptical of the discouraging middle phase of the "hype cycle"—the research usefulness of blockchains, particularly the private versions firm’s map of the series of stages that emerging technologies that early business users have tended to adopt. typically go through on their journey to gaining widespread acceptance. "These are not anything new; they’re distributed, append-only data structures with a list of individuals authorized to add to "I’d characterize it as the blockchain winter," Litan says of the it," wrote Bruce Schneier, a security technologist and Harvard current state of blockchain companies' efforts to sell to business University lecturer, in a recent op-ed for Wired. Schneier customers. "The market was characterized by too much hype, was the chief technology officer of cybersecurity startup too high of expectations, and not enough understanding of the Resilient Systems, which IBM (NYSE: IBM) acquired in 2016. state of the technology and what it can do." He's currently an IBM advisor, an IBM spokesperson says, while emphasizing that Schneier’s opinions don’t necessarily Although some enterprises prematurely jumped "on the reflect the company's views. bandwagon without understanding the constraints," it's a natural part of the process of developing technologies for Private blockchains, Schneier wrote in the op-ed, are projects to fail and for people to get disillusioned, Litan says. "blockchains in name only, and—as far as I can tell—the only reason to operate one is to ride on the blockchain hype." SPECIAL REPORT: 2019 Blockchain Outlook 5

The market was characterized by too much hype, too high of expectations, and not enough understanding of the “ state of the technology and what it can do.

—Avivah Litan, Gartner ”

"But out of the dust and ashes are coming some bright spots," TradeLens has so far tracked more than 441 million transactions Litan says. "Some projects are succeeding." involving shipping containers, an IBM spokesperson says.

Blockchain investments are poised to rise this year, according "Now that information is flowing through the system, to a recent report from International Data Corporation. value-added services can be built on top of the platform," The market research and advisory services firm predicts Gopinath says. For example, the data could be used to solve businesses worldwide will spend nearly $2.9 billion on the disputes over invoices for a container by verifying information technology in 2019, up almost 89 percent from the $1.5 billion such as how long the container sat in a port, he says. That's spent in 2018. IDC projects annual global business investments important because a delayed shipment might result in a in the sector will reach $12.4 billion in 2022. delayed payment or incur a fee, for example.

The financial industry will spend the most on blockchain products Some shipping firms haven't been eager to jump aboard this year, for applications such as cross-border payments and TradeLens, which was originally going to be a joint venture trade finance, followed by the manufacturing and resources between Maersk and IBM. Maersk competitors have voiced sector, which will use the technology for tasks such as concerns that its structure gives too much control to IBM and managing and tracking assets, according to the IDC report. Maersk. In an attempt to address those concerns, the two partners re-structured TradeLens as a technology platform "Blockchain is maturing rapidly, and we have reached an whose intellectual property they own. IBM and Maersk, in a inflection point where implementations are moving quickly “joint collaboration,” are investing in the platform as well as beyond the pilot and proof-of-concept phase," said James marketing and selling it, Gopinath says. It's not clear how Wester, IDC's research director of Worldwide Blockchain much the tweaks to the model have helped recruitment Strategies, in a prepared statement. efforts, but Gopinath says IBM and Maersk have signed up "several major" container shipping companies to date, including POCKETS OF ACTIVITY Singapore-based Pacific International Lines and Miami-based Gopinath says IBM's two supply chain initiatives are among the Seaboard Marine. blockchain projects delivering results. "From a governance perspective, we are listening to all the TradeLens, the one focused on shipping and trade, launched concerns and feedback we have had so far," Gopinath says. in August and now has more than 60 members worldwide in "I think we are on the right path." its private blockchain network, Gopinath says. Participants include port operators, customs authorities, and Meanwhile, IBM's private blockchain system for tracking the transportation and logistics companies. food supply, called Food Trust, has signed up more than 80 companies, a spokesperson says. The system is meant to Gopinath says the system serves as an "information-sharing more reliably track food products as they travel from the farm platform for the ocean shipping ecosystem," and he says it to the end consumer. One of the big goals is to trace the source aims to provide real-time tracking for shipping containers. of tainted food products more quickly, in order to enact recalls SPECIAL REPORT: 2019 Blockchain Outlook 6

sooner and more precisely, and reduce the number of people He said that AWS doesn’t “build technology because we think it who get sick. Walmart officials have said a search for a tainted is cool,” according to a TechCrunch report. A year later, Jassy food's source used to take them around seven days, due to a introduced an "quantum ledger database" and a reliance on paper records; the blockchain system has cut that managed blockchain service. time to a few seconds, they have said. There's also a horde of startups in this arena. They include Members of Food Trust, which also include retailer Carrefour Algorand, a Boston-based company co-founded by A.M. Turing and food supplier Smithfield, have used the system to run Award winner Silvio Micali, which has raised $66 million in around 500,000 food traces, a spokesperson says. There are to develop a blockchain-based transactions currently more than 1,300 food products being tracked system that's practical for mainstream businesses and their through the system. users. In New York, two former members of J.P. Morgan's blockchain team are building Clovyr, a startup trying to make "It's early days," Gopinath says. "There are millions and millions it easier for businesses and other customers to develop and of food products in the world." try out blockchain applications. Out west, Reno, NV-based Filament is developing blockchain-enabled hardware and BUT CAN BLOCKCHAIN SERVICE COMPANIES software products for enterprise use in sectors such as MAKE MONEY? automotive, manufacturing, and energy. It's hard to tell how well IBM's blockchain products are doing financially. Gopinath says Food Trust and TradeLens are FINDING USE CASES generating revenue, but he wouldn't share how much. The For companies considering purchasing a blockchain product Armonk, NY-based company's blockchain products, all of or participating in a blockchain network, experts say the first which are built on open-source Hyperledger software from step is identifying a clear business problem and evaluating the Linux Foundation, also include systems focused on whether they could solve it with other technology, such as a payments, trade finance, identity management, and other database. After all, cloud database vendors already tout their areas. An IBM spokesperson says the company has worked ability to securely store and share data among multiple parties. on more than 500 client "projects" involving blockchains to "If that solves it sufficiently, I wouldn’t bother with blockchain," date—including proof-of-concept work, pilot programs, and IBM's Gopinath says. fully fledged networks—and dozens of those are currently running live blockchain networks. Thus far, the most important factors in businesses' decisions to adopt blockchain are the strong safeguards against altering Of course, IBM isn't the only big tech company wading into the data once it's uploaded to the blockchain, and that all members blockchain sector. In the past year, competitors such as of the network are working from a single, shared copy of the Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN) have ledger, according to blockchain experts interviewed also rolled out blockchain products and services aimed at by Xconomy. business customers. In theory, in addition to helping settle business disputes, Executives' views of the technology can shift quickly. In blockchains might also help businesses produce documentation November 2017, Andy Jassy, the chief executive of Amazon's for audits and comply with government regulations. The cloud computing business (AWS), technology might also fight fraud, advocates and observers say. largely dismissed blockchains as having few use cases. SPECIAL REPORT: 2019 Blockchain Outlook 7

That's one of the goals of 14bis Supply Tracking, a startup When asked about traction with customers, Mitch says commercializing blockchain-based supply chain software for two-year-old 14bis has finished a pilot study of its product the aerospace and defense industry. A lot of the industry's with an undisclosed organization in the aerospace and supply chain processes are still paper-based. Even when defense industry. a company uses software to aid these processes, such as enterprise resource planning (ERP) programs, it's not always "We're aware it's a long sales cycle, especially in aerospace easy to link its systems with those of suppliers and other and defense," Mitch says. "But we see that as an opportunity partners, says 14bis co-founder and CEO Eleanor Mitch. to really drill down and find out what our clients need."

Her company's software can create a "secure chain of Gartner's Litan says one of the blockchain use cases she finds custody that provides, as a result, this end-to-end visibility" of intriguing involves pharmaceutical drugs. Nearly 59 million the supply chain, she says. The software can be used to log units of drug products are returned by pharmacies, hospitals, each step of a part's journey, from manufacturing to shipping and clinics to their distributors each year, often because the and delivery. 14bis's technology can be deployed in different medicines were overstocked and doctors haven’t ordered ways, but one example is a mobile app that can scan barcodes them for their patients. or read various other part-tagging signatures such as serial numbers—and upload that information to a blockchain, while That represents about 2 to 3 percent of the industry's total automatically updating the company's ERP systems, Mitch annual sales in the , according to the Healthcare says. Her company's software has the potential to help Distribution Alliance, the group representing US wholesale aviation companies more easily track parts and more pharmaceutical distributors. Distributors are allowed to resell efficiently manage their inventory, she says. unused drugs, but only if they can prove they're the same ones that were returned, Litan says. A blockchain might help "We saw blockchain as a unique opportunity to solve that establish that proof, she says. problem," Mitch says. "That’s worth billions of dollars to them," Litan says. "That’s a Mitch says such a product might help weed out fraudsters perfect use case for blockchain," she adds. like Edward Carl Fernandez, a former representative of the US Federal Aviation Administration (FAA) who pleaded guilty last Such projects are already underway, including the MediLedger year to certifying "numerous commercial aircraft parts" Project launched last year and spearheaded by San as being airworthy, even though he hadn't physically Francisco-based blockchain startup Chronicled. inspected them, according to a US Department of Transportation statement. A parts broker paid Fernandez $75 for each certification.

It's hard to tell how big a problem counterfeit parts are in the aviation industry. Mitch points to data shared in 2016 by the It's happening. Organisation for Economic Co-operation and Development, which estimates that fake goods comprise about 2.5 percent “ It's real. of total global imports of goods of any kind. Within the aviation industry, the FAA's Suspected Unapproved Parts program It could be faster. hasn't logged more than 15 alleged counterfeiting cases in a single year since 1996. But that might be underestimating the ­—Ramesh Gopinath, IBM, ” problem: The FAA program involves voluntary reporting of suspected unapproved parts, and a 2017 audit report from speaking about businesses the US Office of the Inspector General determined that adopting blockchain products. enhancements to the program's processes were needed to increase its effectiveness. SPECIAL REPORT: 2019 Blockchain Outlook 8

"It’s not just about [solving business] disputes," Litan says of "Now, we have a governance model for data sharing that I think current enterprise blockchain initiatives. "You need immutable is probably applicable to any supply chain solution," Gopinath audit trails for revenue, too." says.

But there's a big caveat to all of this. Having a tamper-proof log He thinks one of the next advances in enterprise blockchains of data is one thing, but Litan says it doesn't guarantee that the will be connecting different blockchains to create new information being uploaded to the blockchain is "honest." products and services. For example, perhaps when a shipment delivery gets logged in one blockchain, it could "It's just what the record is," Litan says. "If you put some bad trigger a payment managed by another blockchain, Gopinath information in the record, that can happen." says. He predicts that "this notion of a network of networks" will make progress in 2019. Technology might help avoid this, IBM's Gopinath says. For example, IBM researchers are developing cryptographic Gartner's Litan thinks chances are good that the blockchain "anchors," which the company describes as "tamper-proof industry will create "some really exciting ways of doing digital fingerprints," such as tiny computers or optical codes, business that we haven’t even thought about yet." But that could be embedded in products and linked to a blockchain potentially transformative blockchain applications are at least to verify a product's legitimacy. five to 10 years away, Litan says. She argues that's because the technology isn't ready, the "operational models" need to The issue of data authenticity demonstrates that a blockchain be developed, and business leaders generally lack "the developer's work doesn't end with getting the platform to imagination to make it happen." function well. The next step is to "make sure the edges are secure," Gopinath says. Blockchain's distributed ledger technology "is definitely here to stay," she says. "But I don’t think [blockchain] is going to be this radical revolution for the foreseeable future." NAVIGATING CHALLENGES Once a business decides to invest in blockchain tools, that opens up a new set of potentially complicated and thorny questions. In private blockchain consortia such as Food Trust, Gopinath says, founding members must create a process for vetting and selecting new members. They must choose the type of blockchain technology they want to use, craft the business model, figure out who will write and manage the contracts that govern how transactions are executed on the blockchain, and establish policies for data ownership and sharing, among other decisions.

The data ownership question is an interesting one, and the general framework that IBM and the Food Trust members ultimately chose is that whoever uploads the data owns it, Gopinath says. The owner can then decide whether to share that data with other members, and those granted access can use the shared information internally to guide their own business decisions—say, to perform data analytics that would help manage their strawberry inventory, Gopinath says. But if an organization doesn't own the data, it cannot sell it or share it outside the Food Trust consortium, he says. SPECIAL REPORT: 2019 Blockchain Outlook 9

The Firms That Ease Businesses Into Blockchains: Filament, Microsoft, IBM

By Bernadette Tansey

Allison Clift-Jennings began building what would become a The Reno, NV-based startup is part of a new class of plug-in gateway to the blockchain sphere for automakers and businesses that are using their own innovations to make other big companies when she co-founded her hardware adopting a blockchain, or some of its underlying technology, startup Filament in 2012. But that wasn’t her original aim. more accessible to a broader range of companies and industries. It’s not just startups that are doing so, but also At the beginning, Clift-Jennings, an experienced software blue-chip enterprises such as IBM (NYSE: IBM), Amazon engineer, was interested in helping people in the do-it-yourself (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT). While and maker communities connect the devices they’d invented to blockchains are best known as the book-keeping systems each other and to the web, using a wireless microcontroller that behind cryptocurrencies such as Bitcoin, they are being could link machines together in a network. This was before applied separately for other uses. Filament is offering them as the term “Internet of Things” was popularized, or “blockchain” the record-keeping backbone for transactions among machines, became a buzzword, or “mobility” emerged as a common way and between machines and their owners and operators. to talk about transportation. One example of what Filament’s blocklets might make possible: But through a series of evolutions, Filament’s business model Autonomous vehicles would be able to blow through the fast has since come to touch on each of those concepts. The lanes on a toll bridge, wirelessly leaving behind a digital company now makes small “blocklets”—physical, code-bearing payment for the toll, or at least an IOU, Clift-Jennings says. The implements that plug into vehicles and devices, equipping them mix of components inside a blocklet could send a driverless to sense things around them, to interact with other machines, car out on the road with what amounts to its own wallet, ID and to feed records of their activity directly to a blockchain, card, smartphone, and credit card. where it can be stored and accessed. Filament also makes a chip with similar functions that can be embedded directly The combination of Filament’s hardware and software with a in devices. blockchain can also be harnessed to make recurring payments SPECIAL REPORT: 2019 Blockchain Outlook 10

for rented machines, or to keep tabs on a factory’s supply chain, Clift-Jennings says. We’ll get into more about Filament’s plans and methods soon. But first: Understanding how or Attestation has huge value why a customer might apply Filament’s technology, or other across industry. blockchain-based tools, requires knowing more about why “ anyone might use blockchain technology itself. —Allison Clift-Jennings, Filament ” WHY USE A BLOCKCHAIN? Much of the interest in blockchains comes from fields such as finance and e-commerce, where data is generated by multiple Even for companies that are eager to give blockchains a parties, and disagreements over record-keeping can arise. try, the process of setting one up for their own specific Blockchains are being touted as mechanisms to create and purposes may be a daunting prospect. But blockchains, and preserve true, reliable documentation of transactions or other some elements of the technology, are increasingly filtering data that is accessible by all the parties concerned, without into use among businesses, spurred by companies such as the need for a central authority such as a bank. A blockchain Filament, IBM, Amazon, and Microsoft, which offer utilizes a peer-to-peer network of multiple “nodes” that each pre-made models and some hand-holding support. receive shared data. This creates a “distributed ledger” that theoretically would guard against data loss or tampering. If one WHY BLOCKCHAIN TECHNOLOGIES MAY GET A BOOST computer in the network were destroyed, or one copy of the FROM SMART MACHINES records were falsified, other true copies would still exist in the Automakers have become top-target customers for Filament other nodes, blockchain advocates say. because of a business trend to move away from direct ownership of hardware. That began with the adoption of the The claim that blockchain technology can provide immutable Uber and Lyft (NASDAQ: LYFT) mobility model of data records also rests on a number of other features, such transportation-as a-service, which may lead to a future when as advanced encryption of the data, and processes to verify fewer people own cars. Filament CEO Clift-Jennings says her the origins of information, to judge whether it should be added company can help automakers adapt to a business landscape to the digital record, and in what order. These latter steps are where many vehicles may operate within fleets, and fleet among the goals of “consensus technology,” a complex element owners or other organizations might have to keep track of of blockchains that can vary from one blockchain to the other. the temporary usage of vehicles by a multitude of customers. That means there might be a need to outfit machines to track Whether blockchains are adopted more widely will depend on themselves, using a tool like Filament’s blocklets to report back the extent to which companies believe these networks can information to a reliable data archive such as a blockchain. deliver on the promised benefits. The image of blockchain technology has been tarnished somewhat by the rocky track In addition to the automotive industry, other large businesses record of its first major application—cryptocurrencies such as such as mining enterprises often like to lease rather than own Bitcoin. Blockchain's history has been marked by huge heists equipment—a finance and book-keeping preference, of digital currency, disagreements among nodes about Clift-Jennings says. Leasing hardware qualifies it as an transaction records, wild swings in coin values, warnings to operating expense, she says, while owning it defines it as a coin buyers from regulatory agencies, and suspected capital expenditure that goes on the balance sheet and must corruption in cryptocurrency exchanges that are not be depreciated. themselves part of the blockchains. Filament’s blocklets, and its software that equips machines to Although companies aren't rushing in droves to adopt enforce their own payment contracts, could allow Filament’s blockchains, many entrepreneurs and investors still believe in customers to offer their devices as leased equipment, defining the technology’s potential, investing billions annually. In 2017, them as operating expenses, Clift-Jennings says. For example, the research firm Gartner estimated that blockchain technology it could enable an automaker to rent cars to customers such would add $176 billion in value to businesses by 2025, and then as fleets, by empowering the vehicles to generate digital surpass $3.1 trillion by 2030. records that attest to the time and circumstances of their usage. SPECIAL REPORT: 2019 Blockchain Outlook 11

“Attestation has huge value across industry,” she says. Filament’s plug-and-play blocklets recently attracted a partner in Portland, OR-based Daimler Trucks North America Most cars in the United States can already attest to some (DTNA), which announced in November it would use Filament’s of their inner workings and trouble spots because of the USB-compatible blocklets as a shortcut to exploring the on-board diagnostics (OBD) systems installed in them. But it use of blockchains to manage its supply chain. DTNA, which usually takes a mechanic to hear them “speak” by plugging makes commercial vehicles including buses and trucks, has a scanner into the OBD port below the dashboard. Filament deployed Filament’s product called the Blocklet USB Enclave to takes advantage of the near-universal presence of those keep track of remanufactured components used in repairing diagnostic systems and OBD ports—mandated in US cars in vehicles. The company, a division of German automotive giant some form since 1996—by equipping blocklets with OBD plugs Daimler AG, wants to be able to pool and share data with the so they can also be popped in under the dashboard. (Filament many other companies that interact with its remanufacturing also makes blocklets the size of a thumb drive that plug into operations. any device with a USB port.) Filament has raised a total of $23 million from investors The blocklet, through a cellular connection, allows the car to including Verizon Ventures, Bullpen Capital, Intel Capital, communicate over the Internet. It also contains more sensors JetBlue Technology Ventures, CME Ventures, Flex technology than the car already has, so the device can reveal more about accelerator program Lab IX, Backstage Capital, Tappan Hill the car than factors typically tracked by on-board diagnostics, Ventures, Samsung NEXT, Resonant Venture Partners, and such as mechanical problems or engine performance. Digital Currency Group. Filament’s blocklet includes sensors that detect the car’s movement in three-dimensional space: a gyroscope, an THE BLOCKCHAIN BUFFET accelerometer, a magnetometer, and a barometric pressure People often refer to “the blockchain” as though it were a gauge, which can report changes in elevation. With that single entity. But in fact there are a multitude of blockchains combination of sensors, the route of a traveling car could be designed by different organizations for their own purposes. plotted even if it doesn’t have GPS, Clift-Jennings says. And their numbers and diversity are growing. Crashes could also be detected. Support companies such as Filament are shepherding their Continuous reports from sensor-equipped machines customers through the process of assembling a blockchain could open up new financial models for leasing contracts, infrastructure that will suit them. A key decision for an Clift-Jennings says. A company that leases freight delivery enterprise is whether to feed its data into a public blockchain trucks could base rental rates on a measurement of torque— such as Ethereum—where anyone can set up a node to store or, how hard the engine is turning during a trip—rather than data—or to rope off a private, by-permission-only network of charging flat rates based on mileage clocked, or days rented. nodes to receive data. That means the truck’s renter would pay more for using it to haul heavy loads, rather than lighter ones that put less wear Filament offers both choices. Clients who opt for a private on the vehicle’s shocks, tires, engine, and other components, structure can make use of the software frameworks provided she says. by Hyperledger, a project under the Linux Foundation where

There are a multitude of blockchains designed by different organizations for their own purposes. And their numbers and diversity are growing. SPECIAL REPORT: 2019 Blockchain Outlook 12

companies and developers are creating software and by Xbox and its business partners, disputes could break out applications to make blockchains work better, or to increase over the data on game downloads, and payments could take as the ways they can be used. Companies can run Hyperledger much as 45 days, Amberker says. in their existing multi-cloud environments to create their own nodes, and manage the technology that creates a distributed Amberker says he was able to hasten the royalty payments ledger, according to Filament. They can choose how many by setting up a blockchain governed by a that copies of a shared set of records are stored, specify who can makes calculations based on the contract terms between get access to them, and decide whether the data can ever be Xbox and the game companies. permanently removed from their blockchains. BLOCKCHAIN FACES CHALLENGES, BUT Aside from the Ethereum and Hyperledger options it now INNOVATION CONTINUES supports, Filament may add other blockchain choices, as its The gateway companies that hope to build profitable business technology is “blockchain agnostic,” Clift-Jennings says. lines by helping customers adopt blockchains will succeed to the extent that blockchains have wide applications. But A company’s private blockchain can be intertwined with currently, experts see limitations to some broader uses. While its cloud storage networks, so it’s not surprising that cloud the multiple nodes in a blockchain network are useful for services companies such as Microsoft, IBM, and Amazon have verifying the authenticity of transaction records and other entered the fray as gateways to blockchain design for data, the process can also slow down transactions. And their clients. blockchains may not be able to handle huge, data-rich records such as medical imaging scans. , the cloud services division of Microsoft, offers customers software to support the functions of their However, innovators might improve the speed and scalability blockchains, and also provides “off-chain” storage for data of blockchains by making the component parts of the that the client wants to hold outside of its blockchain, technology work better. One of the businesses engaged in work says Rohit Amberker, a finance director at Redmond, related to this task is WANdisco, which has co-headquarters WA-based Microsoft. in San Ramon, CA, and Sheffield, UK.

“If you keep it all on the chain, it slows down the network,” The company has focused on improving one element of the Amberker says. blockchain repertoire, consensus technology—a tool that was developed before blockchains emerged on center stage, He says the blockchain design options offered through according to WANdisco CEO David Richards. His company’s Microsoft Azure can solve problems that can’t be addressed version of consensus technology can be used, for example, to by cloud-based data management tools alone. He used try to ensure that businesses can maintain consistent copies these blockchain options himself to create a faster, less of their data when it is distributed among an array of different cumbersome way of calculating royalties owed by Xbox to outside cloud storage providers, or replicated from one cloud companies that make the games played on that Microsoft to another, he says. Another imperative is to keep the data game system. Under the old manual spreadsheet method used available for operations even while it is being moved around. SPECIAL REPORT: 2019 Blockchain Outlook 13

“ The heart of blockchain is consensus. ” —David Richards, WANdisco

Richards says his co-founder Yeturu Aahlad devised the Richards says two other main elements of blockchain tech- company’s consensus technology, Distributed Coordination nology, cryptography and storage, are “solved problems.” But Engine, in an attempt to solve a looming problem—that the consensus is a difficult problem, he says. volume of global data being generated was exploding. When a huge amount of company information is spread out across “The heart of blockchain is consensus,” Richards says. WAN- multiple locations, such as cloud servers, it can be difficult to disco’s consensus technology could be adopted by outside analyze it, because one location might not contain the same blockchain infrastructures, he says, but at this point he pro- up-to-date data that another does, Richards says. Thousands fesses no ambition to replace them. “We don’t want to become of employees may be making entries at the same time in the blockchain application.” various data centers, and that can lead to inconsistent records, Richards says. Yet consistent data is the foundation for data analysis and artificial intelligence, he says.

According to Richards, WANdisco’s consensus technology is superior to that used in many blockchain infrastructures, and could help provide distributed ledgers with more capacity to scale up. The company’s consensus tool is currently marketed as an augmentation to cloud services, whether the customer is using a blockchain or not. WANdisco’s technology is embedded in Alibaba Cloud, the cloud computing division of ’s tech giant Alibaba Group. WANdisco also has arrangements with IBM to sell its services to IBM customers. The company brings in most of its revenue from such partnerships, Richards says.

WANdisco’s consensus technology works by requiring the storage points, or nodes, across its network to approve any transaction that may be entered. Unlike traditional blockchains, which might require all the nodes in the network to verify a transaction, WANdisco’s tech only requires a quorum of the nodes to approve the same entry, as the company explains it. The software allows for multiple transactions to be processed simultaneously—one reason why the company maintains that its technology can produce a more scalable distributed ledger in multi-cloud networks, with lower lag times for transactions, than typical blockchain frameworks. JULY 16, 2019 Cambridge, MA, USA

Program location: MIT Media Lab Gala Dinner location: Café ArtScience

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LEARN MORE: https://xconomy.com/net50/ SPECIAL REPORT: 2019 Blockchain Outlook 15

VCs Pour Billions Into Blockchain as Sector Reels From Crypto Crash

By David Holley

When the cryptocurrency markets tanked in 2018, who funded leaders in other countries such as South Korea and China have the budding blockchain and crypto businesses looking for attempted bans (sometimes without effect). cash? Venture capitalists, of course. While the market for ICOs hasn't gone away, it's considerably Venture investors globally poured $5.5 billion into blockchain diminished. A few sites track data for ICOs, but the record companies last year, up from barely more than $1 billion the keeping is pretty unreliable. Companies raised $6.9 billion via year before, according to Seattle-based research firm ICOs in the first quarter of 2018, according to research site PitchBook. Venture investments in US-based blockchain TokenData, as reported by the Wall Street Journal. During the first businesses accounted for a little less than half of the sector's quarter of 2019, ICOs only raised $118 million, the report says. global investment total in 2018—$2.58 billion—up from $628 Venture capitalists have taken advantage of the market shift. million a year earlier, PitchBook data show. “The drastic reduction in the frequency and size of token sales Meanwhile, the prices of Bitcoin and other leading have created a gap that is now being filled by venture capital,” cryptocurrencies fell sharply, and the market for so-called wrote Joel John, a research analyst at Outlier Ventures, in a "initial coin offerings" (ICOs) sank as the year went on. ICOs are recent report on ICOs. online sales of the digital "tokens" that power cryptocurrencies and many other blockchain-based products and services. It isn’t just opportunism that’s driving the venture world to Such offerings became a popular way for crypto projects blockchain. Boutique investment shops and venture giants to raise capital, but regulators from the US to the UK have from Silicon Valley are jumping into blockchain businesses begun to crack down on the practice over the past year, while because they believe the industry could usher in the next wave SPECIAL REPORT: 2019 Blockchain Outlook 16

Valuations [of blockchain startups] “ are down, and the need for help —Gavin Gillas, YGC is high. ” of technological development. If they're right, these early fund in June 2018 to invest in both seed-stage "projects" and backers could make fortunes while helping guide a sector later-stage "networks," with the goal of maintaining a long-term whose impact could rival the Internet. If they're wrong, the (more than 10 years) view on those deals. The firm's leaders financial implications are obvious, and widespread failures believe that blockchain computers represent the next evolution could further delay—or even doom—the potentially broad of computing, general partner Chris Dixon wrote in a blog post market adoption that blockchain investors and entrepreneurs at the time. believe is to come. “Blockchain computers are new types of computers where Longstanding cryptocurrency investors, such as Tim Draper, the unique capability is trust between users, developers, and believe the industry still has plenty of room for growth. Draper the platform itself,” Dixon wrote. “We want services powered made waves with his claim that the value of each Bitcoin will by crypto protocols to be used by hundreds of millions and reach $250,000 by 2022. It is priced around $5,100 as of this eventually billions of people. Crypto tokens are the native asset writing, down from an all-time high of $20,000 in December class of digital networks, but their value is driven by the 2017. Draper reiterated his prediction as recently as March, underlying, practical uses cases.” despite the drastic drop in Bitcoin's price last year. A person who participates in an ICO is buying a digital token Draper Associates, which was historically Draper's personal (or tokens) of some sort, and the type of token can vary from investment vehicle, opened to outside investors and raised something that is like a stock, to something that might a $190 million seed fund in 2016 focused on early-stage represent reward points or a voucher that can be exchanged investments in financial technology, government-focused for a product or service delivered by the parent company. The tech, healthcare, education, insurance, and logistics. The San tokens are often assigned fiat monetary value, which can Mateo, CA-based firm is also targeting blockchain products, fluctuate based on demand for the token. For entrepreneurs, which could be combined with other technologies to impact it’s a way to raise funding without giving up equity. various sectors. Many of the companies that rose and crashed in the ICO “I am currently looking for businesses that build on the Bitcoin market were driven by speculation or lacked viable products ecosystem, and those that use blockchain with AI to go after that people wanted to buy, according to Croom Beatty, a big markets like healthcare and government,” Draper wrote principal at Menlo Ventures, which announced a new $500 in a recent email to Xconomy. “I also hope to soon see some million fund Feb. 20 focused on growth-stage companies. services that provide all the accounting for Bitcoin and others Menlo has stayed away from token investments and instead on the blockchain.” geared its blockchain strategy toward making traditional venture investments in companies that are delivering a product Meanwhile, larger firms like Andreessen Horowitz, the Menlo that has paying customers, such as the cryptocurrency Park, CA-based venture firm that’s raised $7.1 billion since it payments app developer BitPay, Beatty told Xconomy in a was founded in 2009, have launched crypto-focused funds. phone interview. BitPay is Menlo’s largest blockchain-related Andreessen Horowitz announced its $350 million crypto investment, he said. SPECIAL REPORT: 2019 Blockchain Outlook 17

“When we invest in a company, it’s ideally something that can mobility of money, have lately been the focus of investments [achieve] cash flow and create a profit,” Beatty said. “We’re for Yeoman’s Growth Capital (YGC), according to Gavin Gillas, a looking for companies that are hopefully insulated in some way managing partner at the Austin, TX-based fund. from price fluctuations" of the ICO market. That means YGC might be interested in backing, say, a BitPay lets merchants accept Bitcoin, typically through their wearable device business developing a way to continuously websites. It raised a $40 million Series B funding round in April glean data from the thousands of Internet-connected gadgets 2018 and interested Menlo because the startup solves a operated by its users. A blockchain might help such a company “real-world” problem, Beatty said: helping people who want collect the data. YGC might also be interested in investing in to buy things with Bitcoin, especially internationally. BitPay an operator of a , like Austin-based processed more than $1 billion in Bitcoin payments in 2017, Wanchain for example, if it needed funding to expand its the company said last year. Other blockchain businesses that technology for use by industries beyond financial markets. have similar appeal to Beatty include CipherTrace and Overall, YGC intends to invest in blockchain companies that Chainalysis, both of which focus on preventing fraud and have viable products, and are ready for growth and money laundering in cryptocurrencies. (Menlo hasn’t invested commercialization, Gillas said. Some of those businesses in either one). Menlo is also interested in other areas, such haven’t had access to capital, in part due to the crash of digital as blockchain infrastructure technologies and supply chain token prices. YGC plans to invest between $2 million and applications, if there’s a revenue-generating product, $5 million per deal, and it may invest directly in tokens to help a Beatty said. company’s liquidity, Gillas said, among other investment strategies.

“We're looking for a company that's creating a product that's “From our perspective, we’re injecting cash in ideas that are a valuable for consumers or businesses,” he said. little farther along,” Gillas said in a phone interview. “Valuations [of blockchain startups] are down, and the need for help is As the market matures, Beatty said he believes people will high.” perceive more of these blockchain applications in the way they do products from more established sectors. More venture Not everyone is rushing to feed at the blockchain trough. funding will funnel in, he said, and the market won’t seem scary Houston-based Mercury Fund, which invests in early-stage or confusing. software-as-a-service, cloud computing, and data analytics companies, isn’t opposed to investing in a blockchain Some emerging blockchain investment firms also have in- business. But it hasn’t seen many compelling arguments for terests beyond currency, such as companies that are using why the blockchain is a better solution to certain problems blockchain technology to solve issues in business supply than existing technology, co-founder and managing director chains and connected device networks, often referred to as Dan Watkins told Xconomy in an interview. the "Internet of Things." Those two sectors, as well as the That is key for a firm like YGC: finding blockchain businesses whose tools are “better, cheaper, faster” than traditional software products, said Gillas, who is one of three Once it is just as easy to managing partners at the firm. YGC was founded in December buy coffee with Bitcoin as it by long-time cryptocurrency investor David Johnston, who is “ is with dollars, there will be the managing director of the fund. Johnston lists himself as the co-founder of what he says was the first angel investment no reason for people to try group for crypto, BitAngels, and the first crypto investment to hang on to political (fiat) fund, the DApps Fund. Gillas is a former intellectual property currency. attorney who co-founded and led media tech startup The Magazine Channel. YGC's other managing partners, Henry Liu —Tim Draper, Draper Associates and Mark Thorsen, previously worked at Facebook and the ” Central Texas Angel Network, respectively. SPECIAL REPORT: 2019 Blockchain Outlook 18

YGC is in the process of raising a $200 million fund and has Bitcoin and other blockchain-enabled products still have plenty received commitments from investors, Gillas said. But it hasn't of maturing to do. Bitcoin has long been seen as an outlet of been easy, despite its founder's blockchain expertise and its criminal activity and speculation, which some have argued managing partners' business experience. Gillas blames the played a role in the crypto crash. Law enforcement agencies challenging blockchain venture fundraising environment largely have discovered better ways to track illicit crypto activity, on regulatory uncertainty in the US, as well as the so-called Bloomberg reported last year. Still, there are technological “crypto winter” that has followed the digital currency market hurdles to overcome with Bitcoin and some other blockchain downturn. networks, such as slow transaction speeds and high energy usage. Some of that uncertainty might be tapering. Some pension funds and other institutional investors are apparently Even though concerns about regulation caused some of showing more interest in the sector, in part because of the the crypto market turmoil, digital tokens and ICOs will recommendations of consultants and investment firms like eventually have the blessing of regulators, Draper argued. Cambridge Associates, a Boston-based firm that in February Then he’ll be interested in investing in them. It just might take recommended the blockchain asset class to large investors if a year or two for greater regulatory clarity, he wrote in the they're willing to research more about the risk, according to message to Xconomy. Bloomberg. Two pension funds in Fairfax County, VA, said in February they plan to contribute to a $40 million investment in “Entrepreneurs were bypassing the venture capitalists for a a venture firm that backs blockchain startups and might also while there, and there were and still are so many new uses buy cryptocurrencies, according to news reports. for the token economies,” Draper wrote. “Eventually, I think tokenization will better connect the service provider with the Even so, YGC has looked outside the country for investment. service requester.”

“Most of our [investors] are coming from outside the US. That Still, the number of verified cryptocurrency owners remains sucks,” Gillas said. “We’re American, we believe in American small, at about 35 million worldwide, according to a study innovation. Innovation is being stifled right now because of released in December by the Cambridge Centre for Alternative uncertainty.” Finance at the University of Cambridge in the UK. Although that is a small number globally, it grew dramatically in 2018 despite YGC’s Johnston is also the chairman of Austin-based the market turbulence, nearly doubling from the 18 million blockchain business Factom, which closed on a $6 million people that were accounted for a year earlier. venture investment from FastForward Innovations in August. Factom has attracted plenty of interest, including from Draper Draper said he believes there will be many uses for Bitcoin, Associates, which invested in an $8 million Series B funding from micropayments to automatic accounting, and that round the year before. broader market adoption will happen eventually. On a podcast hosted by a Bay Area NBC affiliate in March, Draper said he “Factom was ahead of its time because while others were thinks Bitcoin will supplant all other forms of payment within pursuing the consumer applications, Factom was the first to four years. (He also continued to defend former CEO focus on blockchain uses for the enterprise,” Draper wrote to , who was charged with fraud last summer. Xconomy. Of course, many other startups have joined Draper was an early investor in Theranos, a blood-testing Factom in developing blockchain products for business company that shut down three months after the fraud charges.) customers. The best, in Draper’s opinion? , the San Francisco-based cryptocurrency exchange operator, “Once it is just as easy to buy coffee with Bitcoin as it is with and Ledger, a French company that makes hardware for dollars, there will be no reason for people to try to hang on to securely storing cryptocurrency holdings. (Draper has political (fiat) currency,” Draper wrote to Xconomy. invested in both companies.)