An article to understand the investment logic in the blockchain field

Preface

The term blockchain has recently appeared frequently in various venture capital activities. Many investors have sensed that the trend is coming and want to make some advance arrangements, but they don’t want to pay tuition blindly. When talking about blockchain with many institutional investors, the basic answer is that they are watching. The common feeling is that there are too few projects, the valuation is too high, and the key is that they don’t understand it! The author has been paying attention to blockchain since the Bitcoin era. Let’s discuss and share some current investment logic in the blockchain field from the perspective of investors.

Part One

The projects that investors are exposed to can be roughly divided into the following categories:

1. Projects related to virtual currency or mining

Bitcoin has been considered the most mature blockchain system for many years. The time window for early investment in its ecosystem has basically passed. Many channels of currency exchanges on the market have matured, and mining machine manufacturers are also about to go public. There are also some opportunities in the subdivision, such as Bitcoin mining pools. From a macro perspective, the bottleneck of the mining POW verification model is obvious, and whether related businesses will continue to exist in the future is a question. No matter how profitable the currency speculation projects are, they are not suitable for mainstream investment institutions.

Projects related to blockchain technology can be roughly divided into three categories:
The underlying blockchain technology includes platform routing and encryption algorithms, consensus mechanisms, etc.

The middle layer encapsulates some protocols, provides open source or commercial API interfaces, and some platform services, similar to IBM's BAAS (Blockchain-as-a-service);
At the top level are the applications of blockchain in different industries, including finance, copyright protection, anti-counterfeiting, the Internet of Things, etc.

2. Projects at the underlying technology and protocol layers

Investors who pay attention to blockchain should have some understanding of it, such as foreign Bitcoin blockchain, Ethereum, Hyperledger Fabric, domestic Jingtong, Xiaoyi, Bubi, Yunxiang, Taiyi, etc. White papers are like a mystery to most non-technical investors.

The general characteristic of the technology circle is that people look down on each other and think highly of themselves and their competitors. From consensus mechanisms, the universality of protocols to security, bandwidth, etc., investors are confused and still find it difficult to distinguish the pros and cons. However, investors with a technical background think that the threshold for the underlying technology of blockchain is not high, and this statement is not without reason.

The current blockchain technology is actually at the top application layer of the TCP/IP five-layer protocol, and is essentially the same level of technology as email. Many of the world's well-known blockchain underlying project codes are open source, and excellent programmers can use them by modifying them. After visiting a series of blockchain projects, I found that the most popular version on the domestic market is the modified version of Ethereum. In fact, I am not opposed to borrowing and improving (copying), because the progress of human technology is always based on the exploration of predecessors.

However, how to make better changes depends on the team's capabilities and actual trial and error. Different applications have different requirements for functions, performance, and security, and need to be redesigned and optimized. Therefore, it is necessary to be proficient in basic technologies such as the underlying cryptography of the blockchain, consensus algorithms, and distributed database design, as well as overall architectural design for large-scale applications.

Part Two

Looking back at the entire industry, the underlying technology platforms like Bitcoin and Ethereum are open source. It is a community organization without any company or person. Even if you buy tokens to invest, it cannot be counted as a capital table.

What is more important is that for companies that work on underlying technology and protocol layers, no matter whether you are improving based on foreign open source code or re-architecting it yourself, no matter how awesome the technology is, it will be difficult to gain recognition in the capital market without a clear business model.

One of the simplest ways to survive is to rely on ICO (cryptocurrency crowdfunding). The value of Ethereum is already 1 billion US dollars. Simply put, instead of looking for VCs, you can look for people who speculate in cryptocurrencies to raise funds. This brings some conveniences but also many problems: most of the speculators who speculate in cryptocurrencies will make your valuation go through all kinds of roller coasters, and there may be suspicion of diluting the ratio by paying out your own money during ICO. How will the money obtained from ICO be spent (it cannot be supervised), etc.

Another common business model is to do POC (proof of concept) for banks, securities firms, and various large companies. If they are recognized, they will help you with some private chain customized development and charge case by case. For example, Jingtong’s HNA Group project, Bubi’s Shubei points project, Yunxiang’s smart city project, etc., but this looks more like an IT service company. As more and more developers understand the underlying technology, one day it will become a job similar to helping companies develop apps today.

People who pay attention to technology projects should understand that doing some protocol encapsulation and providing paid API interfaces will not make much money in the long run, and they will definitely be free in the future. Another option is to develop some applications by yourself, although they basically cannot be actually operated. At present, most of the companies in China that claim to be doing underlying technology are doing underlying protocols, POC, private chain construction, and application projects, just to survive.

But in fact, smart investors understand that early-stage startup teams only have so many people and resources, and it is good enough if they can do one thing well. It is absolutely nonsense to learn from LeTV and create a blockchain ecosystem without even having a solid grasp of the underlying technology.

Although the business model is not clear today, I still believe that there will be several excellent companies developing underlying technologies and protocols in the market in the future. They will build multiple public chains or alliance chains for different purposes, based on different requirements for performance, security and application scenarios, and then grow and graft many applications from different industries. For example, there may be a public chain that supports high concurrency and high transaction volume, a alliance chain between financial institutions that focuses on security, and so on.

Part Three

Underlying technical considerations: design concept and application maturity

Regarding the first point about the design concept, many people in technology may not agree with it. Personally, I think the underlying technology of blockchain should not be completely open source, because the largest application area of ​​blockchain in the short term is finance. The financial field has extremely high requirements for supervision and security. Only applications that have been reviewed like Apple IOS can access the blockchain, rather than being as casual as Android.

Secondly, regarding the consensus mechanism, some Chinese teams have realized that the absolute decentralization approach does not work in China, so projects like Jingtong and Antminer are similar to PBFT or improved versions. The idea of ​​authorized node verification is a bit like the National People's Congress system under China's representative system. Ripple's fine and the Ethereum DAO incident also serve as a warning that financial applications must be real-name registered. Regarding the maturity of the application, it is necessary to consider how much experience it has gone through and what real applications support it.

Focus on blockchain application projects

In fact, most of the blockchain projects that are suitable for most institutions are at the application layer. In simple terms, the investment point is still the commercial value itself. For example, using blockchain for anti-counterfeiting is very good. Whether it is using QR code or NFC chip, it is not a difficulty or a barrier. The key is that blockchain can only trace the process. The control of the source is not something that can be solved by online blockchain technology. How to ensure the authenticity of bills, artworks, etc. at the source requires entrepreneurs to find a way to solve it.

For example, when it comes to digital copyright protection, blockchain can provide digital signatures and timestamps, but this is far from enough. Design copyright-related experience resources and recognition from copyright bureaus, courts and other agencies are also indispensable.

There are also the recent popular Internet mutual aid projects, for which blockchain has basically become a standard feature, which basically improves the transparency of funds and operations and cannot be tampered with. You should not find it difficult to find a pattern, that blockchain application projects essentially use blockchain as a tool, and entrepreneurs in some specific fields may have used a dagger to fight, but blockchain has upgraded his weapon to a submachine gun, but whether he can win depends on himself.

There is a core reason why there are few domestic blockchain application projects at present. People who understand technology do not understand the subdivided industries at all and are still at the concept verification stage. Entrepreneurs who really have experience and resources in the subdivided industries do not understand the new technology of blockchain at all. Cross-border talents are bound to be rare. Therefore, companies like Jingqu Technology have emerged. Based on mature underlying technology platforms, they look for excellent entrepreneurs to incubate application projects, help them sort out the application of blockchain technology in their industry, connect various resources, invest funds, and string everything together. The success of a specific single application project still depends on implementation and operation, which is also what entrepreneurs should be good at. For some application projects that claim to use blockchain, after a detailed discussion, it was found that they have either not been implemented yet or have been built by themselves based on Ethereum open source code. For startups, a server networking system is to VC, and projects connected to a certain underlying platform are real blockchain applications.

Is blockchain a bubble?

A misunderstanding needs to be corrected. Some people think that all kinds of movies, music, pictures, and big data can run on the blockchain. In fact, this is unlikely in the short term. At present, the blocks of mainstream public blockchain technology are still at the level of several MB. If a lot of data is written into the block, the size of the blockchain will expand to the point where it cannot be stored in the short term. If the Bitcoin blockchain is likened to the DOS system, then Ethereum-like smart contract support is like Windows 95/98. So it is not difficult to understand why blockchain technology has great potential, but it is still in its early stages.

So, is the current blockchain worth investing in? You know, many famous software, game, and Internet companies in the United States started in that era. Although the Internet bubble appeared in 2000, a group of excellent companies eventually grew up. In today's domestic capital market, which is entertainment-oriented and trend-following, there are indeed many people who hype the concept and make the blockchain sound magical. This may be what secondary market analysts call a bubble period.

My view is that blockchain essentially solves the trust and fairness issues of value interaction between people through mathematical cryptography, and is an upgrade and supplement to existing Internet technology. Some people worry that quantum computers will make blockchain asymmetric encryption meaningless in the future. First of all, it will take at least 20 years for quantum computers to be popularized. Secondly, with the continuous development of technology, encryption algorithms will also be upgraded, and similar quantum dynamic encryption will appear. Maybe other terms will be used to replace the name of blockchain in the future, but the decentralized thinking of blockchain and the elimination of third parties will continue to develop. In the long run, I am optimistic about blockchain technology.