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Five things VCs need to understand about blockchain

Investment into blockchain technology has grown exponentially over recent years. In 2012 just $2.13 million was awarded by Venture Capital funds to blockchain startups. That number is now in the hundreds of million and growing each and every year.

The catalyst for blockchain’s initial growth has arguably been the finance industry. The technology’s ability to automate processes through smart contracts and simplify trades and transactions saw it rapidly rise to prominence with the planet’s biggest banks working to form blockchain consortium R3. The organisation last month raised $107 million.

For those willing to invest in blockchain, the rewards can be significant – cryptocurrency Ethereum has risen in value by more than 2,000% in the last year.

The transformational nature of blockchain is relatively unprecedented, which means the level of knowledge and understanding amongst those outside of the sector is considerably lower than in other comparable areas of technology. To make the best investment decisions, potential investors must have a basic grasp of the nature of the technology and its potential. As someone who works in and has invested in blockchain and cryptocurrencies, these are the five key things I believe you should understand about the distributed ledger technology:

1. It’s not just about finance

Finance applications of blockchain have arguably seen greater hype than other vertical sectors, largely because the nature of finance means the necessary funding to get projects off the ground is more easily available, with many existing organisations exploring the space.

It is important to note however the widespread appeal of blockchain. It is at its heart a distributed immutable ledger – a database that doesn’t require central management by any individual or organisation operating to a set of rules. The nature of the technology essentially makes it applicable to any sector which would benefit from independent management under specific rules and or guidelines. An example is music. The sector faces a challenge around rights management and making sure artists and producers are all properly rewarded for their work. Streaming platforms have made this more challenging as music is not directly paid for anymore. Platform Aurovine for example is using blockchain to build a new model through which payments are automated and value generated by users listening to music.

2. It is separate to Bitcoin

Blockchain is often associated with cryptocurrency Bitcoin. The two are related in that Bitcoin is built on a blockchain. However, blockchain technology is not one single thing, and shouldn’t be tarnished with the same brush as the cryptocurrency. Bitcoin is by nature unregulated meaning it has widely been used for illicit transactions. The recent Wanna Cry bug that targeted the NHS asked for payment via Bitcoin for example.

Blockchain on the other hand distributes untampered immutable, making it both secure and trusted. Essentially to fraud a blockchain you would need to own over half of all the blocks in the world, which would be near on impossible and go against the principle of the system – a distributed ledger.

3. It is an enabling technology – not a business model

One thing people outside of our space sometime fail to understand about what my company BlockPool does is that blockchain is our enabling technology – not what we base our business model on. Companies working with the technology take all sorts of forms, from consultancies through to technology enablers.

Some organisations like BlockPool have developed their own cryptocurrencies, using these as a means to raise finance through initial coin offerings or token exchange campaigns, however these shouldn’t be viewed as defining business models – rather a different way to raise money.

4. It must be done in a network

Blockchain transactions are validated by a delegated community and in no single place. Blockchain is therefore designed to connect multiple things, objects or pieces of data and information. In finance for example, transactions are currently processed and cleared by a middle man, however in a blockchain based environment, the technology provides the validation.

5. It provides new models for project collaboration

A key benefit of blockchain is that smart contracts can be integrated into platforms and solutions. A smart contract defines how a blockchain network operates. It is essentially a piece of code capable of enforcing or mediating an agreement. In music for example, a smart contract could be built to ensure artists, producers and record labels each receive their share of royalties from the playing or purchasing of a specific song, splitting payment along pre-agreed immutable parameters. The benefit is that every party is safe in the knowledge they will always be payed their accurate share – also making it easier for more than one party to work together on a single project.

Ultimately, blockchain technology is set to continue to grow in number of applications and potential. For interested investors, distinguishing between hype and truly transformational applications is key. Growth to date highlights those able to invest intelligently will be set to benefit the most.

David Blundell, CoFounder and Director of BlockPool

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