I.D.E.A.S.: Investing in the Future of Digitization and Computing

Bitcoin and its blockchain burst on the scene in 2009. Its mission was decentralized money and a peer-to-peer payment system. But pretty quickly people started to emphasize a different perspective on the Bitcoin project: its role not as a currency but as a new form of computing. Forming circa 2015-2016, these observers (known as Blockchain-Not-Bitcoin) said: “Well, I don’t care about decentralized money and a peer-to-peer payment system, but we’re really excited about the underlying blockchain technology.”

This sort of thought process is not unique to Bitcoin or crypto. The internet started as something prosaic (a means for researchers to share information) and has now evolved to shape the highly dynamic world of today.

Blockchain tech is a foundational shift in computing, allowing investors to get excited about new use cases for technology because with new use cases come new opportunities for financial return. Bitcoin’s success is in computing and digitization.

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I spent time discussing two use cases with someone smarter than I am: Max Good, senior index research analyst at CoinDesk Indices (CDI). Max is part of the team that developed CoinDesk’s Digital Asset Classification Standard (DACS), which aims to provide taxonomy with comprehensive and standardized industry definitions and classifications for digital assets.

Let’s dive in.

The computing sector, as defined by CDI, consists of projects that aim to decentralize the sharing, storing and transmission of data. CDI further breaks down this sector into five industry groups: oracles, shared storage, internet-of-things, private computing and shared network.

The types of projects and companies included in these groups dabble in on-chain and off-chain data transmission, social data platforms, peer-to-peer secure data transactions, open networks, free-market private computation, and decentralized file storage and sharing.

OK, but what do all of these mean? My conversation with Max Good suggested that the two sub-categories in computing with the most to offer at present are oracles and shared storage.

Oracles send data from the outside world, like the price of bitcoin or the temperature in Orange County, to a blockchain so specific data can execute the disbursement of money. Right now, the world of on-chain to on-chain oracles is relatively robust. For example, there are price index feeds available via oracle networks powered by Chainlink that feed into futures trading contracts powered by Ethereum. From Good’s perspective, the important thing about these price feeds is the “index’s methodology is replicable, which makes them candidates for easy and transparent auditing.”

When we discussed the “next big thing” in oracles, Good said the next natural step comes from effectively connecting the real world to on-chain by “providing an infrastructure service that facilitates on-chain activities governed by the incorporation of off-chain data.” This is where the so-called oracle problem lies. It is difficult for blockchains, even with oracles, to securely interact with external sources of data.

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For clarity’s sake, here’s an example where an oracle may or may not help. Let’s imagine a thermometer that feeds into an oracle is put into a refrigerated 18-wheeler carrying perishable food. There is an insurance policy on that perishable food that is built into a smart contract. The insurance policy will cover the financial damage of the spoilage of that perishable food if a) the food is spoiled upon arrival and b) the temperature of the trailer was continually kept below 55 degrees. The insurance policy will automatically pay out if these a) and b) are satisfied.

Proving that a) happened is somewhat difficult but likely trivial for all stakeholders involved with the transport of the food; b) is even more difficult. How can we guarantee that the thermometer functioned properly or otherwise not tampered with? How do we know the oracle was not somehow paid off-chain (or on another chain) to lie about the temperature in the trailer? What’s the point of having a decentralized oracle as the source of truth on what the real-world data says if the real-world data can be manipulated and there’s no way to double-check the data?

But there are a lot of projects working on the oracle problem, which you can check out on CoinDesk’s Indices DACS 500 list.

Shared storage refers to the decentralization of storage servers that are, traditionally, owned and operated by a central organization. On its face, the shared storage protocols have a clear investment merit. In the world of cloud storage where big companies like Google, Amazon and Microsoft dominate, keeping you or your company’s sensitive information safe from competitors and potential hackers is attractive.

Shared storage platforms, to their credit, aim to increase security of data storage by running on a blockchain network that allows for privacy and pseudonymity of data transmitters. That said, there are two particular places where shared storage projects might run into potential headwinds.

The first is simply economies of scale and the cost. It’s really not that expensive to store data with a centralized company when it has literally exabytes of capacity (an exabyte is huge, like 500 billion photos huge), plenty of deployable capital and know-how to store even more data in data centers.

The second is reliability, which needs to be achieved without a corporate third party. A corporate third party can be held liable for losing your data. To get around liability, current shared storage crypto projects use schemes such as proof-of-storage to check that the disparate parties storing your data do in fact have that data stored.

Given its immense competitive disadvantage, shared storage projects are not as well built-out as oracle projects. Given this, there doesn’t seem to be a short-term opportunity for investors, but there is certainly something attractive about decentralizing the storage of potentially sensitive and confidential data.

The digitization sector, as defined by CDI, refers to the process by which real-world documents, contracts and the like are uploaded to a blockchain for the purpose of transparency, publicly verifiable ownership and immutability. According to DCI, digitization is currently the smallest sector in the DACS, but it has a wide range of potential use cases like helping brands establish digital identity or establishing ownership of real estate through blockchain-izing deeds to property.

Blockchain-enabled digitization has already taken root in the realm of digital identity with projects like Ethereum Name Service (ENS). ENS allows users to convert a public Ethereum address into a recognizable identifying name on the blockchain. Be it nike.eth or george.eth, these more digestible (and memorable) addresses, like domain names, have obvious advantages for companies for branding purposes, and for individuals for vanity purposes.

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Of course, any discussion about digitization enabled by crypto will be incomplete without what feels like the oldest use case of them all: Allowing patients to digitize their medical records to enable faster exchange of information without loss of privacy. While this, on paper, sounds like a wonderful use case and implementation of digitization, there are significant headwinds inherent in how health-care information sharing, especially in the United States, is structured.

In the U.S., health-care provider billing practices and claims management large payers still rely on fax machines. Further complicating the issue is how the proliferation of electronic health records (EHR) occurred. In 2009, the U.S. Affordable Care Act provided incentives for health-care providers to implement federally approved IT systems. Companies were reeling after the 2008 financial crisis and took advantage of these incentives by swiftly putting together projects that were ultimately implemented in a disjointed manner.

Sure, this has become more cohesive with companies like Cerner, Epic and athenahealth working on the interoperability of these disparate systems. But the short-term issue with the “crypto” digitization of health care remains: The original digitization of health care was done so poorly there isn’t a layer that can be easily migrated from an old, dull non-crypto layer to a new, shiny crypto layer. You’d be better served blowing the system up and starting from scratch.

There are significant headwinds for the adoption of crypto projects focused on computing and digitization given how large the entrenched parties in the two spaces are. That doesn’t mean all attempts should be abandoned. To be sure, Bitcoin, the payment system, itself is looking for adoption in face of equally large entrenched parties.

All said, although these projects face significant headwinds in the short term, there are surely opportunities for the improved privacy, transparency and ownership that crypto promises to improve computing and digitization overall.

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