(First of a two-part interview)
Driven by the cryptocurrency mania, initial coin offerings have offered a new means for startups and projects to raise capital, with many tokens issued via ICOs reaching return rates of 10 and even hundreds of times.
A year after Hong Kong-based blockchain startup Datum closed its ICO, its co-founder and chief executive Roger Haenni told EJ Insight that the firm cannot rely solely on the funding raised by ICO, and is now tapping the corporate market.
“We definitely also overestimated the real blockchain adoption,” Haenni said, although he believes the business model will become the “new normal” in the blockchain sector.
Datum aims to build a decentralized data storage and trading platform powered by blockchain technology. In November last year, it raised US$7.2 million (about HK$56 million) through its ICO. Datum currently has a team of 21 people in Hong Kong, Switzerland, and the United States.
Blockchain technology and cryptocurrency are attracting a lot of investors, who believe it offers a fast way to grow money. At the same time, however, the sector has been plagued by scammers and charlatans who have nothing of value to offer and simply want to fleece gullible investors of their capital.
Haenni admits that there is a “very small wave” of startups that are only interested in taking the money of their investors and running away. But there are also many legitimate projects that are worth studying and investing in, he said.
“It’s still basically very early days for blockchain space, and the biggest challenge for the sector is that the adoption for blockchain technology is not as expected,” he told EJ Insight.
“If you had asked me the same questions one year ago, I would have been much more bullish and would have said, ‘At least tens of thousands of people would be using them every day by now,’” Haenni said.
The reality is that one of the most popular decentralized applications (dApps) on the Ethereum network, CryptoKitties, has only a few hundred daily users.
“Token-economics just hasn’t really materialized so well yet,” said Haenni.
Protocol developers adopt token-economics, issuing crypto tokens with the promise that investors will share in the success of their blockchain technology network and motivate network members to behave for the benefit of the network.
That creates a loop of value creation: applications built on top of the protocol will increase the crypto-token’s value. As the protocol accrues value, people are incentivized to build more applications.
Since the tokens are needed to access and use the protocol, they face a lot of usage and draw a lot of demand. The tokens go up in value, as a result.
For protocol creators and developers who are holding the tokens, they can liquidate or sell their holdings, which will create revenue or bring in capital to develop the technology.
However, the adoption of blockchain technology is lower than expected; we are still far from the situation where ordinary people widely use bitcoin and other cryptocurrencies to do their daily transactions.
Despite a successful ICO last year, Haenni said Datum’s business model cannot rely on token-economics within the public blockchain network.
He said the firm has expanded to “traditional” enterprise services in recent months, after selling its blockchain encryption technology for storing data in the form of an enterprise technology solution. The move is aimed at establishing a tangible source of income.
Haenni believes that more blockchain startups will adopt this “hybrid” development model: “We will see a lot of [blockchain] projects realizing that they need an alternative business model to create some value to secure the continued development of the platform.”
By next year, the market will see more blockchain startups, even those that have raised huge amounts of capital via ICOs, shutting down their operations as the sector goes through a consolidation phase.
The coins they have been selling will morph into “zombie coins”, he added.
At the same time, Haenni expects more blockchain startups, especially those who have raised capital via ICO, to turn to “traditional” venture capital support.
“Over 90 percent of [ICO] projects have seen issuers issuing a fixed amount of crypto-tokens, but that also means that there was basically one round of funding. Ultimately, this funding will run out, no matter how much was raised,” he said.
“We are probably going to see, ironically, a lot of more traditional fundraising, the [venture capital] route, starting to happen eventually in the blockchain space.”
Haenni said that one factor hindering the mass adoption of blockchain technology is the user experience for blockchain Dapps.
Even the blockchain technology used in payments only provides a “substandard” user experience. For example, payments using bitcoin take users some time to confirm transactions, and it will still actually cost them transaction fees. For end-users in the mass market, blockchain-powered applications are also not appealing to them because they can use other e-payment apps such as Alipay, WeChat Pay and HSBC’s PayMe for free, instant payment transactions.
Blockchain developers should focus on creating solutions that really adds value that the existing data store doesn’t bring, Haenni said, adding that blockchain technology, realistically, is still immature and in the exploration phase.
“Ultimately the big question is: What does blockchain solve that we can’t solve now, with just using a normal centralized database?”
Haenni noted that for the end user, his primary concern in many cases is not that something is decentralized, “they are concerned about how the blockchain technology is helpful or valuable to them”.
He believes the end user in the mass market, in general, considers the blockchain solutions too complicated to use, and the industry should work on “making the blockchain solution as simple as possible as we don’t want the user to basically feel like he is using blockchain”, which is what the Datum team is working on.
Since the beginning of this year, the cryptocurrency market has experienced a “bubble blasting” process, with a significant fall in the prices of cryptocurrencies from record highs.
“The recent bear market did bring the [blockchain project] valuations into a more reasonable territory, but for most projects, the valuations are still extremely high,” said Haenni.
While cryptocurrency enthusiasts are hunting for the next bull run, Haenni believes that the next bull run for the blockchain sector would be related to “fundamentals, that would mainly be basically adoption”, instead of the valuation driven by speculation.
“I don’t see [the next wave of growth] happening at the moment. I would be surprised if anything really changes in this market by end of this year,” he added.
Second part: Data breaches raise public awareness of risks to privacy, says Datum
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