The Investment Case for Blockchain Executive Summary Blockchain is the brainchild of a person or group of persons known by the pseudonym Satoshi Nakamoto. First devised for the digital currency Bitcoin, the technology community has embraced blockchain’s potential beyond cryptocurrency due to its many different use cases across various industries. Blockchain is heralded as an incorruptible digital ledger of economic transactions on a distributed peer-to-peer network.1 Simply put, blockchain is akin to a shared ledger duplicated thousands of times across a network of computers. The information existing on the ledger is shared and continually reconciled. Since the blockchain ledger is not stored in one location, this means records are decentralized, made public and more easily verifiable. Hosted by a peer-to-peer network of millions of computers, information on the blockchain is stored in “blocks” that are identical across the network, making data and transactions more transparent and less corruptible, without the need for an intermediary. Blockchain is a mechanism that brings everyone to a higher degree of accountability. The potential of this foundational technology has led many to liken it to the early days of the internet. According to Markets and Markets2, the global market for blockchain is expected to grow at a compound annual growth rate (CAGR) of 67.3% by 2025 to $39.7 billion. This forecast does not fully take into account the mass economic value of blockchain- enabled applications such as cryptocurrency, tokenization and smart contracts. If growth projections prove correct, blockchain represents a huge early-stage opportunity for investors. Annual global spending on blockchain applications has almost tripled since 2017 and is expected to reach nearly $16 billion by 2023.3 1Tapscott, Don and Alex, Blockchain Revolution, How the Technology Behind Bitcoin is Changing Money, Business, and the World, Portfolio, May 10, 2016. 2 Markets and Markets, May 2020, https://www.marketsandmarkets.com/Market-Reports/blockchain-technology- market-90100890.html 3 Banking Is Only the Beginning: 58 Big Industries Blockchain Could Transform, CBInsights, April 2, 2020, https://www.cbinsights.com/research/industries-disrupted-blockchain/ 1 A Brief History of Blockchain Many of the technologies we now take for granted were “quiet revolutions.” Think about the extent to which smartphones have changed our lives, creating a mobile nomadic society untethered and empowered with information. And the smartphone has only been around a mere decade. Blockchain is another such quiet revolution, much like smartphones were a decade ago and the internet a few decades prior. Consider how blockchain has evolved over the last 10 years, from a digital currency experiment to the realization that blockchain technology can be used for all kinds of inter-organizational cooperation, from smart contracts to supply chain to medical research. Here’s a brief timeline highlighting some of the major milestones in the history of blockchain. Sources: GEM, CoinDesk, EQM Indexes LLC, Emerita Capital Indices Inc. 2 Value Proposition Certainly, one of the driving forces behind the growth of blockchain is its unique value proposition, which is extendable to many business verticals. Sources: EQM Indexes LLC, Emerita Capital Indices Inc. 3 Blockchain Disruption Although still in its nascent stage, blockchain is a foundational technology with the potential to disrupt many different industries over the next five to ten years. Research firm CB Insights has identified approximately 58 industries that blockchain could transform4. Blockchain has gone far beyond its initial use cases for banking and cryptocurrency. Many industries, including insurance, gaming and health care have started to consider blockchain applications. Here are a few examples: • Banking and Payments – Many believe blockchain will democratize banking just as the internet has done with media and information. It could give billions of people worldwide access to financial services, including those in the Third World without traditional bank accounts. The blockchain could also enable cross-border payments and transactions that occur instantaneously and for reasonably low fees. • Messaging Apps – Encrypted messaging application Telegram is developing a blockchain-based platform called the Telegram Open Network (TON) that extends Telegram’s services into payments, file storage and browsing for its 200 million users. • Hedge Funds – With venture capital backing, Numerai is taking the hedge fund model, employing traders and quants, and decentralizing it, creating a meta model to make trades. • Voting –The blockchain has the potential to facilitate secure elections, not subject to voter registration and identity fraud and/or the miscounting of ballots. Creating an immutable, public ledger of voting results would be a giant step toward ensuring fairer and accurate election results. • Internet Identity and DNS – Platforms such as Blockstack and uPort envision a future where a person’s identity can be ported around the internet. • Cyber Security – Although data on the blockchain is public, the data is verified and encrypted using advanced cryptography techniques. Data is less prone to being hacked or changed without permission. • Ride Sharing – Using a distributed ledger, drivers and passengers could create a more user-driven, value-oriented marketplace. 4 Banking Is Only The Beginning: 58 Big Industries Blockchain Could Transform, CBInsights, April 2, 2020, https://www.cbinsights.com/research/industries-disrupted-blockchain/ 4 • Internet Advertising – Users who opt-in receive fewer but better targeted ads, while advertisers get a better return on their ad spending. Brave’s Basic Attention Token (BAT) is one example, geared toward compensating advertisers and users. Instead of using a middleman like Facebook or Google, advertisers list directly onto Brave’s blockchain browser. • Crypto Exchanges – One-way blockchain reduces conventional cybersecurity risk by removing the need for human intermediation, thus reducing the risk of hacking, corruption or human transaction error. Uniswap, a decentralized exchange protocol running on the Ethereum blockchain, is an example of a Crypto Exchange with billions of dollars in liquidity. • Auto Sales and Leasing – The experience of leasing, buying or selling a vehicle could be improved with the use of smart contracts. Visa has partnered with Docusign to provide a proof-of-concept streamlined auto lease. Using the Visa-DocuSign tool, prospective customers choose the car they want to lease and the transaction is entered on the blockchain’s public ledger. • Supply Chain – The distributed ledger creates a way to monitor items and transactions in the supply chain transparently and securely. It can be used to manage logistics and monitor parts, costs, labor, and even waste and emissions. A more recent application has been in the area of food safety, where keeping track of crucial data such as suppliers, how and where food was grown, and who inspected it provides an accounting from origin to completion. • Internet of Things (IoT) – The blockchain could facilitate a decentralized network of IoT devices, operating like a public ledger, thus eliminating the need for a center of communications. Devices would communicate with each other, potentially with the assistance of Artificial Intelligence (AI) to update software, manage bugs and monitor energy use. • Insurance – The blockchain could be used to verify the many types of data embedded in insurance contracts. So-called “oracles” can be used to integrate real-world data and blockchain smart contracts. The technology is particularly helpful for insurance types requiring inspection. Drones could be deployed to inspect properties, data securely recorded in the blockchain, and then integrated into the insurance contract. LenderBot is a micro-insurance proof of concept for the sharing economy that demonstrates the potential for blockchain applications and services in the industry. 5 • Charity – One of the concerns facing charitable contributions is that they often fall prey to corruption or mismanagement. Using the blockchain to track donations, donors can be assured that donations go directly to the intended recipients. • Cloud Storage – Blockchain cloud storage solutions allow storage to be decentralized and less prone to attacks, which can cause data damage and loss. Dubbed the “Airbnb for file storage,” Filecoin is a crypto project that rewards the hosting of files. • Cloud Computing – Blockchain technology can facilitate decentralized cloud services, while increasing connectivity, security and computational power. • Forecasting - The research, analysis, consulting and forecasting industries will be transformed by the use of impeccably accurate transaction records to support their data analysis and forecasting, combined with machine learning algorithms to cultivate targeted predictions and insights. Augur, built on the Ethereum blockchain, allows users to forecast events and be rewarded for predicting them correctly. • Health Care – One major challenge the health care system faces is the lack of a secure platform to store and share medical data and records. This is further complicated by privacy issues. The blockchain could help improve data security and allow medical records to be shared with authorized professionals for the purpose of diagnosis and/or research. Tierion is a blockchain startup that has built a platform for data storage and verification