This is an archival report, originally published in early March 2020.
We concluded 2019 with our second annual survey, polling the founders and CEOs of our more than 130 active portfolio companies on a range of topics and trends.
By sharing insight into these executives’ accomplishments, challenges, goals, and expectations, we aim to provide a snapshot of the state of the digital asset market and blockchain ecosystem. As this survey matures, it will serve a dual purpose: identify material shifts in sentiment and chronicle the progression of this fast-moving industry.
One prominent theme across our findings is that the next wave of blockchain adoption and growth depends on the emergence of compelling use cases — as opposed to overcoming regulatory challenges or accessing greater amounts of capital.
Q: What is public enemy #1 for digital currencies & blockchain?
This is a change from last year’s survey results, when 53% of respondents characterized the regulatory environment as “public enemy #1,” and a majority cited regulatory uncertainty as their main operating challenge. Our last survey followed Facebook’s Libra Announcement and the industry was on alert for increased regulatory scrutiny.
The industry made some progress with global regulators in 2019. Chinese regulation remains volatile, but President Xi Jinping called for prudent oversight to support blockchain development and delivered stablecoins a boost, with the People’s Bank of China announcing the development of a digital yuan. In Europe, France is piloting a central bank digital currency (CBDC) and announced that crypto-crypto trades were no longer taxable, while the German government gave banks its blessing to serve crypto companies. In total, about 50 countries are exploring some form of digital currency.
In the US, results were mixed: President Trump, Treasury Secretary Mnuchin, and Fed Chairman Powell all discussed bitcoin (albeit in a mostly negative light), while key Congressional leaders debated the utility of digital currencies and blockchain technology. The SEC provided additional insight on digital currencies; however, most industry observers were unhappy with the guidance.
Our portfolio company executives suggested that, as regulation stands today, the regulator is often a scapegoat for other business shortcomings. Astyanax Kanakakis, founder of Norbloc, a Stockholm-based KYC data platform for banks, reflected on his company’s experience, “once we proved the product-market fit and our banking partners realized value, the regulator was positive on the application of blockchain technology to regulated data sharing. Many people who say the regulator is the biggest problem (incorrectly) assume product-market fit.”
BANKING & ADVERTISING CHALLENGES
Many crypto exchanges and payment companies still struggle to open or maintain bank accounts, even where it’s sanctioned by the regulator. “With the absence of clear regulatory guidelines in some markets, banks have become the de-facto regulators of the crypto industry,” said Marcus Swanepoel, CEO of Luno, a cryptocurrency platform in Africa, Europe, and Asia. Many banks are de-risking across their businesses and associate crypto companies with money laundering concerns. While those risks exist, blockchain monitoring tools that reduce them — from the likes of Chainalysis and Elliptic — are sometimes misunderstood or underutilized.
Payments companies can circumvent banks, but often at prohibitive costs. Elizabeth Rossiello, CEO of AZA, a corporate payments business based in Africa that requires on and off-ramps in every jurisdiction in which it operates, stated, “using a digital currency broker is faster and more convenient (than banks). But they’re often more expensive, so even though using a bank as a trading counterparty is cumbersome, it can still be cheaper in some corridors, and I’m a businesswoman and I have to go by price.”
Advertising restrictions at large tech firms present another external challenge. During the ICO craze, many platforms such as Google and Facebook banned ads from crypto companies to shield users from scams. While the space has matured and, arguably, self-regulated since then, restrictions persist. Approximately 50% of survey respondents reported that they would advertise on popular platforms if restrictions were lifted, with that number higher for retail-focused businesses that would deploy traditional programmatic advertising campaigns.
FINDING PRODUCT MARKET FIT
“Finding Product-Market Fit” was named by most respondents as both their greatest accomplishment and their biggest challenge in 2019. This echoes the macro-level sentiment — that the industry’s ability to develop compelling, in-demand use cases will determine the next stage of adoption and growth.
Q: LEFT — Your greatest accomplishment this past year was:
Q: RIGHT — Your greatest challenge in this past year was:
Product-market fit is an elusive term. Across the DCG portfolio, we see an iterative process, rarely marked by a single event. However, there are recognizable signs: customers get real value out of the product, which accelerates the sales process, and product usage rises. Indeed, our companies are squarely focused on customers, with 50% of respondents reporting that “customer growth” will most define a successful 2020, compared with product improvements (16%), profitability (12%), pilot success (10%), and monetization (10%).
Tim Rice, CEO of data provider CoinMetrics, explained that, for his business, achieving product-market fit is partly about customers reaching a conclusion organically: “Investors have started to understand that they’d rather get all their crypto-related data from a single source, and we’ve built a platform with all the data they need in one place.”
Do companies pay less attention to the competition when they achieve product-market fit? Not in this nascent space; respondents who reported achieving product-market fit as their greatest accomplishment in 2019 were just as likely as their peers to admit to worrying about competitors.
Q: Do you worry about your competitors?
Industry competition stabilized over the last year, with less than half of respondents believing competition is on the rise. In contrast, at the end of 2018, two-thirds of survey respondents believed the level of competition was rising.
Q: Is the level of competition in the industry rising or falling?
Some businesses that raised funds at the peak of the crypto bubble exited the space, while stronger ones have gained traction. Additionally, founders have experienced a more challenging fundraising environment, as generalist VCs shied away from the market. Consolidation was also a factor; M&A activity peaked in 2018, with more than 160 deals, before dropping in 2019, to fewer than 100 acquisitions.
Competition varies by vertical. Mike Alfred, CEO of data provider Digital Assets Data, believes the competition has leveled out in the data space, “There were 30 firms making noise in the last bull market and half of those firms are gone. They either went out of business or pivoted to a new market because they realized selling a data platform is still hard. The net result is a smaller and more stable pool of companies going after a growing market.”
Exchanges and payment firms have also seen competition stabilize, while adjacent businesses are increasingly open for business, resulting in greater partnership opportunities.
Competition has intensified in the security space, across both B2B and B2C solutions. Pascal Gauthier, CEO of Ledger, finds this unsurprising: “security is paramount for the industry, so for every product line we’re seeing a new set of competitors. Some died in the bear market, but many are thriving.”
Security firms were the darling of crypto investors in 2019. Curv, Anchorage, and Fireblocks raised large rounds, while Coinbase acquired Xapo’s custody business. Competition has also come from outside the industry with large financial institutions — including State Street, ING, and Fidelity — architecting systems in-house.
New products are emerging, particularly around insurance. BitGo, Curv and Anchorage partnered with financial institutions (Lloyd’s of London, Munich Re, and Aon, respectively) to offer insurance coverage to institutional investors, and several exchanges have rolled out insurance products.
The pie is growing fast. Institutions are vying for best-in-class security solutions as they shore up risks before making further investments in digital currencies, while retail customers are also growing more cautious. Hardware wallet usage is rising; Research and Markets, a research consultancy, forecasts a 25% compounded annual growth for hardware wallets between 2020 and 2025 — putting the total market value above $700 million by 2025.
BLOCKCHAIN BEHIND THE SCENES
At a quick glance, several DCG portfolio companies don’t scream blockchain. They operate traditional business models and their marketing materials make little or no mention of decentralized technology. We count among these businesses some of our most compelling investments.
OXIO is a New York-headquartered firm aiming to create a decentralized marketplace for mobile connectivity. That is an ambitious goal in the telecom industry which has historically been slow to embrace change. Rather than deploy a “build it and they will come” approach, OXIO has moved incrementally, launching as a wireless connectivity wholesaler (an MVNO).
Wireless connectivity is converted into vouchers which are re-sold and tracked on the Stellar blockchain, but OXIO founder Jason Evans says that his business’s blockchain underpinning is shared on a need-to-know basis: “early on we talked about it more, but it just clouded the story. CRM salespeople talk about the product and only if it’s relevant they’ll mention it’s built out on AWS. It’s about ‘what’s your product and why do I care.’”
Figure has also taken a measured approach to building Provenance, a decentralized marketplace for financial loans, which uses the Hash token. To the outside world, the company is best-known as a newcomer to home equity lending. To us, it’s the first lender to execute and securitize loans on Provenance. With $1 billion in loans, Figure successfully attracted a top-ten mortgage provider (Caliber) to Provenance, with more lenders in the pipeline.
Decent provides health insurance to self-employed individuals and uses blockchain to expedite many of the back-office functions that drive the industry’s mounting costs. Founder Nick Soman is excited about the potential for ‘blockchain behind the scenes’ solutions: “our expectation was always that blockchain would make the health insurance industry more efficient by tackling boring back-office tasks. Sometimes it’s programmable money to release payments quicker or when payment terms are met, but it’s not about creating new activities.”
As we look across the DCG portfolio, promising B2B use cases are often “boring” — solutions to automate routine operations or ensure compliance and data irregularities are caught. It’s no secret that B2B businesses must increase revenues or decrease costs for clients, but the sentiment from executives is overwhelmingly that decreasing costs is an easier sell for blockchain B2B businesses.
BLOCKCHAIN BEYOND BUZZWORDS: PERCENT OF TOTAL DCG INVESTMENTS (NEW AND FOLLOW-ONS) BY YEAR WHOSE NAMES DO NOT INCLUDE “BIT, CRYPTO, BLOCK, COIN OR CHAIN”
THE HUNT FOR THE BEST USE CASES
The challenge for the industry in 2020 and beyond is proving compelling use cases where the technology generates value — beyond what legacy systems offer.
Q: What do you view as the biggest opportunity for blockchain?
While executives named the same top-three use cases as the biggest opportunities going into 2019, responses were more dispersed in this year’s survey. Payment use cases are losing some of their luster; one-fifth of respondents named them as the most exciting applications in this year’s survey, down from one-third of respondents a year earlier.
Executives consistently express that use cases which remove friction to improve existing behaviors are more promising in the near-term than use cases intended to produce new behaviors.
In keeping with that view, within payment solutions, respondents are bullish on remittances and clearing and settlement solutions, and less optimistic about efforts to make digital currencies a medium of exchange.
Gaming is a consumer use case that plays into existing behaviors. Lucid Sight is a blockchain-based game developer that uses top-notch IP — its MLB Champions game is supported by Major League Baseball — to reach traditional gaming audiences. Blockchain can provide a unique marketplace function, where users can store and trade in-game assets and, eventually, sell them on exchanges, like OpenSeas.
Lucid Sight co-founder Octavio Herrera says that the technology solved a key problem for gamers: “(they) have always wanted to transact with one another, but they’ve been forced into grey or black markets. We saw that the ledger for peer-to-peer transactions could be applied to the world of gaming.”
For digital currencies, the long-term vision remains undaunted. 60% of the founders we surveyed cite trustless financial systems as the biggest opportunity for digital currencies, followed by borderless payment networks.
Q: What do you view as the biggest opportunity for digital currencies?
“Trustlessness” implies the absence of a central authority dictating the flow of money, but founders highlighted other markers that are gaining steady, tangible traction, including cheaper movement of value, cheaper and easier compliance measures, and wider financial access. Many view unreliable monetary policy and currency swings in emerging markets as key tailwinds.
The stablecoin market continued to grow in 2019. Michael Moro, CEO of Genesis, affirmed this trend, “as more exchanges and OTC trading firms adopted stablecoins throughout 2019, borrowing demand for USDT/USDC/PAX saw a corresponding increase. Those three stablecoins comprised nearly 12% of the Genesis loan portfolio at year-end 2019, compared to less than 1% a year prior.” Executives view this development positively. In attracting new audiences who psychologically accept ‘digital money’ more readily than ‘decentralized currencies’, stablecoins can play an onboarding role for the wider industry.
INFRASTRUCTURE & GEOGRAPHICAL DEVELOPMENT
Survey respondents expect it will take 3–5 years for the industry’s infrastructure to mature to the point required for mass adoption.
Q: How long will it take for the infrastructure to mature?
We identified three main obstacles to maturity: scalability, security, and education. Respondents caution that education may take the longest, with technical challenges potentially overcome in 2–4 years.
On the topic of scalability, several executives invoked CryptoKitties, the blockbuster game that jammed the Ethereum blockchain in late 2017. A cautionary tale on what happens when demand outpaces scale, the experience has been formative for the industry in spurring improvement.
To solve for the challenges that they encountered, Dapper Labs, the creators of CryptoKitties, launched the Flow platform in 2019, which improves scalability by reducing redundant work. Instead of every node storing the entire state of the blockchain and performing the work associated with each transaction, Flow effectively spreads the work across multiple nodes.
Founders are excited about the potential for the Lightning Network and other “Layer 2” solutions to accelerate transaction speed and enable more sophisticated apps in the next few years.
Survey respondents noted that infrastructure deficiencies constrain consumer adoption more than enterprise adoption, which is delayed by lengthy sales cycles that are further extended in projects involving multiple participants.
Q: In what area of the world do you see the most development in blockchain and digital currencies?
For the first time, an overwhelming majority of survey respondents named Asia as the epicenter of industry development — today and five years into the future.
Executives attributed the shift to an array of attractive market dynamics including capital controls fueling interest in digital currencies, supportive regulations, and top-down decision-making structures which may accelerate enterprise adoption. Outside of Binance’s global presence, APAC-based blockchain businesses or product innovations were not cited as a reason for the region eclipsing North America as the land of blockchain opportunity.
Roughly 60% of our executives plan to raise capital in 2020. Product development is where capital is most needed, followed by team growth and marketing and sales budgets. This is already reflected in job openings; as of the end of January, our companies were hiring for 130 marketing, sales, and business development roles, compared with 45 posts for those functions a year earlier.
Elevated Bitcoin prices have historically boded well for venture investments in the space, and the outlook looks positive on that front. As the Bitcoin halving looms, we asked the group whether they believed it was fully reflected in BTC prices. Only one-third of survey respondents think the halving is priced in, while 46% believe the currency to be undervalued and 23% hold a neutral outlook.
Investor demand is coming from diverse sources — institutional appetite holds steady, while younger audiences appear highly receptive to digital currencies. According to Charles Schwab data for 3Q19, the Grayscale Bitcoin Trust was the fifth-largest equity holding in millennials’ self-directed brokerage accounts (SDBAs), following shares in Amazon, Apple, Tesla and Facebook.
Q: Is the BTC halving fully priced in?
Looking back, our founders were conservative in their forecasts for 2019, with 54% of respondents rating the outlook for digital currency prices in as “Pessimistic” or “Neutral” at the start of the year. The bitcoin price ended 2019 88% up.
At DCG, we provide capital and a robust community for our portfolio companies to help them navigate the challenges of operating in a nascent space. We routinely gather our executives, in virtual and in-person sessions, to tackle shared concerns and trends — many of which were highlighted in this survey.
We also recognize our responsibility to reach beyond our network, and that’s why we have a renewed commitment in 2020 to harness our executives’ insights, and our own learnings, and share them with the world outside DCG.
As we reflect on 2019, we recall the start of the year. The price of bitcoin was ~$3,740, capital was sparse, and sentiment was bearish. But there was also a sense of opportunity — that 2019 presented a test; companies that could succeed through another down-cycle would prove our industry’s staying power. Many DCG portfolio companies passed that test. We look to 2020 with a renewed sense of opportunity. The digital currency price outlook is stronger, setting the stage for increased investor interest, and our companies have done the hard work. They’ve built capable teams and well-run businesses that are poised to thrive in a supportive environment. We’re more confident than ever about the long-term prospects for this industry.