Over the next twelve months, we’ll see major changes in the blockchain space. While significant technical improvements in extant blockchain projects are to be expected, as are many new innovations and projects, the most important and interesting blockchain industry trends will concern the relationship between the blockchain space, and the wider business and institutional worlds.
In 2018, blockchain has proved its capacity to deliver real value to businesses, as evidenced by the increasingly widespread adoption of the technology. But even as continuing success will mark the year ahead there are challenges too.
Here are the blockchain trends 2018 has already seen the beginning of, and where they’ll go over the next twelve months.
1. Blockchain will make industrial IoT profitable and safe
Industrial IoT is too vulnerable without a decentralized security tool.
The immense potential of industrial IoT lies in its capacity to make productive plant work seamlessly as a unit. We can see this in factories, mines and other environments where much work is already done by machines; linking them together so they can communicate slashes wasted time and effort at every stage, translating directly to money saved — and profits earned.
How the IoT is changing hospitals
But there’s a catch.
That enormous network of unsecured connections is massively vulnerable: it presents what cybersecurity experts call a large ‘attack surface.’
The blockchain offers a way to have a large network of interconnected computers that’s simultaneously encrypted, auditable, and permissioned.
Blockchain and the Internet of Things
Network size ceases to correlate with attack surface, major hacks become impossible when data isn’t stored centrally, and the activities that make IoT effective can be performed on the blockchain too.
2. Blockchain will make AI for business secure
Businesses are reaching for AI to extract value from the increasing quantity of data they’re collecting, but without blockchain it’s too insecure.
AI has developed to the stage where it’s usable in normal businesses. In fact, ‘weak’ AI is almost everywhere, including email inboxes, enterprise CRMs and the Grammarly account I’ll use to make sure I didn’t leave any typos in this post before I hit ‘publish.’
It’s also finding a role in supply chains and manufacturing, as well as marketing, sales, healthcare, education…
Anywhere that data analytics can yield results, in fact.
The problems AI faces are very similar to those faced by early blockchain-based currencies. AI itself isn’t necessarily insecure, but the data lakes it relies on are. Centralized collections of personal data are massive hacking targets.
But it’s in the realm of manipulating large quantities of data that AI has proved its value. How do we give AIs the data they need without exposing that data to theft and bad actors?
Maybe we could design a database structure that automatically, modularly encrypts data, creating an instant, automatic audit trail of every event that takes place relating to that data.
That’s a blockchain.
Using blockchain technology we can create data lakes — including customer data, proprietary product performance data, or any other data — and allow AI to access that data, knowing that other actors can’t do so. Trends in blockchain technology are bringing the two tools closer together because of their capacity to co-potentiate: organizations like Namahe are working to make both tools available on the same platform.
3. Smart Contracts come into their own — everywhere
Smart contracts will become a standard way to manage value exchange, whether that’s trades of currency or commodities, or of effort for currency, or simply the transition of items along manufacturing or supply chains.
Obviously, we can expect to see companies that rely on trading stocks and shares utilizing smart contracts; but it’s the spread outside of direct trading and into more general value exchange and transition that will see smart contracts really define themselves as an indispensable business asset.
The French airline AXA, for instance, is taking its flight insurance to the blockchain using Fizzy. Rather than employ staff to access passenger data from a centralized data lake and assess the validity of insurance claims, fliers simply enter into a smart contract: if your flight is more than two hours late, you’re automatically refunded.
Fizzy flight insurance explained
The blockchain future trend toward smart contract ubiquity isn’t confined to consumer applications. In non-customer-facing situations, smart contracts are demonstrating their versatility:
We can see this blockchain trend starting with consumer-oriented tools like Fizzy, because they’re easiest to implement. But once consumers are familiar with a product or tool, it rapidly finds its way into industry, and smart contracts will enter industry from all directions:
- From the top, at the behest of managers attuned to their potential
- From the bottom, as workers utilize smart-contract-powered consumer tech at work
- From the middle, as other businesses build smart contracts into their as-a-service offerings.
4. Regulations bring respectability, and restriction
Regulation is initially focusing on digital currencies and especially on ICOs. In the US and elsewhere, regulations are increasingly treating digital currencies as securities.
While some blockchains will be affected more than others by these regulations, the net effect will probably be to encourage more traditional investment.
Digital currencies face a tightening of regulations around the world, as governments attempt to wrest back control over them and to protect their citizens from fraudulent actions like fake ICOs. It’s one of the key blockchain trends 2018 has inaugurated: finally, some regulatory clarity.
In the USA, Brooklyn federal judge Raymond Dearie ruled in August that the SEC (Securities and Exchange Commission) rules concerning securities applied to tokens issued in an allegedly fraudulent ICO, creating legal precedent for all ICOs to be governed by the SEC.
Meanwhile, in China, Myanmar, North Korea, Iran, Syria, Cuba and New York State, citizens cannot participate in US-based digital asset sales.
Crucially, as Ari Paul recently told Penn State, what we’re mostly seeing now is old laws, applied to a new paradigm.
Ari Paul’s 2017 speech to Penn State
To adequately address the new technology and new opportunity of the blockchain, new laws will be required.
The EU has announced its intention to ‘build an open forum for Blockchain technologists, innovators, citizens, industry stakeholders, public authorities, regulators and supervisors, to discuss and develop new ideas and directions,’ partly in an effort to assess what regulations are appropriate to the space.
In the meantime, we can expect certain current trends to continue: Belarus, for instance, will continue to have a supportive regulatory environment for blockchain technological development; less-regulated locations like the Cayman Islands will continue to be favored locations for blockchain companies to register their head offices.
Regulations that affect ICOs will tend to reassure more traditional investors, who tend to regard ICOs as unreliable investments. However, as the number of traditional IPOs falls across developed markets, the quality of ICOs rises, and regulation reassures traditional investors, we can expect to see more of this type of investment in the blockchain space.
5. Limited ‘Blockchain Winter’: the frost will kill the weeds
Following hard drops in BitCoin and ETH values recently, there has been some talk about a ‘blockchain winter,’ in which incoming investments to the sector are supposed to freeze; fruitful projects will wither and a once-exciting sector, starved of money and interest, will lie dormant. In fact, the ‘blockchain winter’ is one of the most-hyped blockchain technology trends 2018 has seen so far. A more likely blockchain trend is a smaller, localized ‘winter’ which disproportionately affects ICOs that never had anything real to sell in the first place.
We all know there are fraudulent ICOs. More common is the ICO that’s just ill-thought-out. Maybe the business model isn’t going to work. Maybe there’s no real business, just hope. There are more of these ‘magical thinking’ ICOs than there are outright frauds. But the frost will kill most of them over the next year.
Low-quality ICOs will begin to die out as an increasingly sophisticated and educated market differentiates between fundraising for a sustainable business model, and ICOs for vaporware and bad actors.
At the same time as institutional investment appears on the scene for blockchain projects that make real business sense, available funds will dry up for low-quality projects.
In many ways, this blockchain investment trend represents a period of transition from IPOs to ICOs: ‘once there’s a stable technical and regulatory framework for tokenized equity (and a liquid secondary market) we will see the disruption of the Venture Capital industry as LPs (limited partners) won’t tolerate 10 years of illiquidity once liquid options exist,’ says angel investor Florian Huber.
The transition might be aided further by the advent of ‘ICO 2.0’ methods, in which a variety of token types might be issued, some of which represent actual shares in the company. Activision/Blizzard CEO Howard Marks explains:
- Simple Agreement for Future Token (SAFT) is a derivative securities instrument. It is simple to put in place and offers investors the ability to invest before the token is ready.
- Real Agreement for Tokens and Equity (RATE) is a two token offering. One of them is equity in the company and the other the delivery of another token as a perk.
- Simple Agreement for Future Equity (SAFE) is an equity-only offering. The token can be a preferred or common equity investment. If it is a preferred offering, it can offer a non-convertible security with a dividend similar to a revenue share.
- Straight equity offering by issuing a token. This is simple because the company offers a new class of equity, be it common with or without voting rights. The token can also be preferred and offer dividends.
6. Tokenizing will prove its worth
Tokenizing offers the opportunity to fractionalize an asset’s value and trade it while the asset itself remains secure. It’s distinct from tokenization, a data security principle.
‘Tokenized securities are bridging the gap between traditional financial markets and crypto markets because they are aligned with everyone’s interest. Regulators want to protect the investors, investors want their assets tradable, and crowds from all over the world want to invest in the most promising startups at an early stage,’ Laimonas Noreika, CEO and founder of Desico, a platform launching next year for retail investors to invest in Security Token Offerings (STOs), told Forbes earlier this year.
Tokenized assets allow the value of an item to be broken up into arbitrary pieces, moved onto the blockchain and traded or held. For instance, a large building might be worth a million dollars, and be unable to find a buyer; tokenized into a million tokens, it might sell to several hundred people, buying amounts ranging from a few tokens to a few hundred thousand. The building’s value can be accessed, leveraged and traded by people and entities all over the world.
In conjunction with the ICO 2.0 methodologies outlined above, a new emphasis on the tools of the traditional financial world, such as support for KYC (Know Your Customer) and funds protection, will bring ICOs closer into line with the expectations of the traditional financial world.
Tokenization is another technology that allows blockchain to go beyond ICOs and cryptocurrencies backed by consensus algorithms, and represent real-world value directly on the blockchain.
7. Scalability will be solved by adoption of highly-scalable blockchain technology, not workarounds
Scalability has always been an issue for blockchain. It became apparent as soon as the space’s leading minds began to realize the potential of distributed ledger technology distinct from the online currencies it was invented to support.
It’s easy to see that most blockchains aren’t able to scale easily. Those based on Proof-of-Work, the basis of the original BitCoin blockchain and now of Ethereum, run up against the fundamental problem that, as Preethi Kasireddy says, ‘every fully participating node in the network must process every transaction.’
More nodes — ie, more participants — means more participants in each transaction.
Getting around this fundamental flaw in early consensus protocols is vital if blockchains are ever to take their place at the center of our business and institutional lives.
Throw in a preexisting speed issue that hobbles transaction speed across most PoW blockchains to a fraction of that expected by modern consumers and business buyers, and you see the problem.
There are multiple solutions being floated to this crucial problem, all of which involve some degree of compromise; moving transactions off the chain, sharding the chain, adopting a different consensus mechanism or a hybrid consensus mechanism, or some combination of these.
The trend we’ll see over the coming year is that these solutions will be tested severely as more and more businesses turn to the blockchain to solve their security, privacy, auditability and automation problems.
I tend to see solutions that involve shifting transactions off the chain as a bigger problem than those that alter the underlying consensus mechanism, and I don’t see workarounds being the way forward: even the sophisticated workarounds proposed to accelerate the widely-used Ehtereum blockchain don’t seem to me likely to permanently solve the problem.
Rather, the blockchains that can scale quickly and effectively will probably be those like BitShares, EOS, genEOS and others, whose underlying consensus mechanism doesn’t yoke them to a 1:1 relationship between additional users and additional computations.
The blockchain space will continue to change rapidly over the next twelve months, but the direction of those changes will look something like:
- Greater integration of blockchain’s basic offerings with the wider business world
- More services based on smart contracts. Initially these will be discrete and aimed at consumers; later they will be integrated and business-oriented.
- Industry will reach for the blockchain to make IoT and AI safe and profitable
- Within the space we’ll see a sharp drop in low-quality ICOs and projects without real business value.
Twelve months from now, we can expect to be living in a world increasingly defined by blockchain’s interactions with other transformative technologies.