The first half of 2018 has been difficult for crypto investors. The fervor that dominated the market in late 2017 has waned, leaving questions about regulatory uncertainty, ICO governance, and market manipulation. Even investing in “large cap” tokens, which seemed like a sure bet to some, has been revealed to hold sizable risk — Bitcoin, Ethereum, and Ripple have all seen their prices slashed to less than a third of their highs.
While this price volatility has resulted in some retail investors exiting the space, we haven’t lost enthusiasm about the fundamental value of blockchain. We believe that the true opportunity in crypto lies not in speculative trading and “get rich quick” schemes, but in the long-term development of coins that function as currency and enable improved communications, transactions, and other enterprise and consumer processes. (Mike Maples from Floodgate expanded more on this mindset in his great article Slow Money Crypto).
That being said, the first “killer app” of blockchain is undoubtedly cryptocurrency. Recent fluctuations have prevented most coins from being used as true currencies, but as prices stabilize, we believe that crypto has huge potential to beat out fiat currency in two of the three functions of money (and at least tie the third):
- Medium of exchange — crypto arguably represents a big improvement as it can be transacted P2P or B2C instantly, permanently, anonymously, and without fees between anyone around the globe.
- Store of value — Bitcoin was originally intended to create a more stable currency that could not be manipulated by a central bank or government (by interest rate policies, inflation, etc.). As crypto continues to develop, we believe more of this initial use case will be realized.
- **Unit of account —**like traditional money, each cryptocurrency can be expressed in units that allow for setting prices of goods and completing transactions. If a few coins were to become a global standard, this could represent another advantage in standardizing price units worldwide.
We’re hopeful that as blockchain technology develops and some of the investment buzz dies down, we’ll see crypto gain widespread adoption as currency. In the meantime, we’re excited to see signs of life in other parts of consumer blockchain. Cryptokitties exploded onto the scene in late November, 21 Inc. pivoted from hardware to a commercial social network (Earn.com, later acquired by Coinbase), Steemit grew to more than 350k users and distributed upwards of $30M to community members, and Telegram announced a $2B ICO (preceded by Kik and YouNow).
According to Dapp Radar stats (data pulled on 7/20), gaming currently dominates dApp usage, representing the plurality (42%) of the top 50 dApps, followed by Exchanges (22%). These are currently the only two categories whose top 50 dApps see upwards of 100 DAUs and $100k weekly transaction volume, on average. (Check out Chris McCann’s awesome post for more stats!)
All data from Dapp Radar as of 7/20 at 5 p.m. We re-categorized all Dapp listings under the “High-Risk” category as “Gambling”, and also re-categorized several apps listed under “Other” that we believe do fit into another category. All data is for the top 50 dApps only. $USD volume is calculated based on Ethereum average price on 7/20 of $503.
While no dApp has become a mainstream hit, it’s a very promising sign that even a small group of dedicated users is willing to jump through the technical hoops to engage on these platforms (especially given the counterparty risk of exchanges, custodians, and the dApps themselves, since the space is largely unregulated). We’re excited about opportunities to engage these early users, and are looking for dApps and platforms with the following characteristics:
- Unique and necessary implementation of the blockchain. We’ve seen many projects where blockchain makes a platform unnecessarily complex and limits functionality. We think that Cryptokitties falls into this category in its current state. While the cat characteristics, generations of cats, and cat breeding are interesting, none of these require blockchain, and the need to pay for actions and wait for verification detracts from the user experience. Due to the complexity of building on blockchain, development has been slow — users can’t do anything other than trade or breed the cats, which may be why activity dropped dramatically after the initial hype.
Data from Bloxy shows a severe decline in Cryptokitties market activity — with DAUs down to <500 in early July, from 15k+ at peak last November.
- Privacy and/or security aren’t the only value add. While a small number of consumers are intensely concerned about privacy and security, most place more value on convenience. Startups trying to build a decentralized version of something like Facebook or Twitter will find it difficult to break the existing network effects that hook users in these platforms. The average user likely won’t see value in switching from the established platform used by all of their friends to a competitor that’s harder to use and only populated by die-hard blockchain fans, even if the latter is slightly more secure or provides anonymity.
- Approachable consumer experience. If you’ve ever tried to make a dApp transaction, you know how painful the process is. You need to set up an account to purchase coins, make the purchase, create a MetaMask account, send the coins to MetaMask, and, finally, verify the transaction. This is too much friction for the mainstream user. Coinbase did an exceptional job bringing crypto to the masses via credit/debit card purchases, and has continued to thrive despite competitors that undercut Coinbase’s 8% (!) transaction fee. We think it’s worth it for consumer blockchain startups to build a user experience that is as seamless as possible, even if the initial implementation isn’t entirely decentralized.
Even heavy crypto users have trouble with the usability of most dApps, as evidenced by the tweet above referencing Augur’s recent launch.
- Existing user base. We believe that the first consumer blockchain applications to get mainstream traction will focus on meeting the needs of large groups of users who already “fans” of the non-crypto use case. For example, we’re excited about platforms like Unblockable and Hashletes that are tokenizing professional athletes and creating a marketplace for these digital collectibles — we know there’s a huge market of sports fans who already spend billions of dollars annually on merchandise and content related to their favorite athletes and teams. Eventually, we expect to see successful consumer blockchain apps targeting more niche communities (or even solving problems that people didn’t know they had!), but we think these will take longer to materialize.
Some of the early success cases in consumer blockchain fall within these parameters. The Brave browser (which recently announced more than 3M monthly active users) has many advantages beyond security and privacy: it’s extremely fast, blocks standard ads, gives users more control over ads they do see, and allows users to earn revenue from these replacement ads. The browser also takes advantage of an existing community that coalesced around private browsers and search engines like DuckDuckGo and Tor.
The Brave browser opens with a tab showing activity blocked (above is a screenshot from a Reddit user). Users tend to save 2–3 hours of time in only a few months of using Brave.
As this space continues to evolve, we’re also excited about platforms that allow consumers to access multiple blockchain apps in one place, particularly if they streamline the onboarding and verification process. Blockstack is a great example of this, and Status is another. We’ve outlined some of the consumer-facing blockchain apps we’ve seen in the market map below, many of which operate on Blockstack or Ethereum (which Status uses).
*Note: We’ve purposefully left out trading exchanges and P2P payment startups. There are too many of these to list, and we see them as fulfilling the “money” use case, while this post is focused on other consumer blockchain implementations.
From an investment perspective, we’re looking for consumer blockchain platforms that can attract a critical mass of users over the next three to five years. This will be more difficult in some categories than others given existing non-blockchain competitors and how much value blockchain can truly add. Here’s a few markets that we are particularly excited about:
- Digital asset sharing/rental — as we discussed in our side hustle space thesis, many millennials and Gen Zers are eager to make extra income. Blockchain provides a secure and anonymous way to rent digital assets like computer storage (Storj, Sia, Filecoin), internet access (Open Garden), compute power (Golem, Gridcoin), or even data (DataWallet). These platforms are currently too complex for the mainstream user, but we envision a future where users can easily toggle on and off a system that allows them to make passive income by renting or selling these assets.
- Identity management — enterprises are adopting blockchain for managing employee and customer identities (ShoCard, Cambridge Blockchain), and this will bleed into the consumer market. We see significant potential for blockchain to: (1) track ownership and history of high-value assets (art, jewelry, real estate); (2) verify personal history (employment, education, residence); and (3) easily and securely access private data and make transactions, or credential others to act on your behalf. Verified identities also enable exciting opportunities in recruiting, knowledge-sharing, and identity-oriented tasks (e.g. Earn.com).
- Games with digital/physical crossover — given the complexity of building on a blockchain and accessing dapps, it’s tough to build games that compete with non-blockchain games in entertainment value (at least, in the near term). There is one notable exception — an organized and verified ledger of ownership and transactions can open up access to digital IP for real-world assets. We already mentioned Hashletes and Unblockable, which allow special access to digital and physical content and experiences through owning part of an athlete’s token. Cryptokitties’s charity auctions are another good example of this.
- Streaming with payments — we’re big believers that streaming video will continue to be the primary source of entertainment for Gen Z and younger millennials. As traditional ads lose their appeal (a key takeaway of this year’s VidCon), streamers are increasingly depending on viewers for financial support. We expect to see digital tipping/gifts become more mainstream, and have already seen success with YouTube SuperChats, virtual gifts on Chinese livestreaming apps, and Bits on Twitch. Token-based streaming platforms have the potential to offer fast and secure monetization options for creators without the pesky transaction fees.
Thanks to Saar Gur for his help with this article!
Thanks for reading! We’re excited about the opportunity to build amazing consumer applications in the blockchain space, and would love to talk to anyone working on something we should know about.
We’d also appreciate your questions or feedback — you can reach us at twins@crv.com or on Twitter @venturetwins.