Crypto 2.0 in 2015: Turning Bitcoin Theory Into Big Business

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3 January 2015

2014 may be remembered as the year the bitcoin protocol became unrealistically lauded as a magic cure-all to problems plaguing everything from cancer research to copyright law.

What may have been lost in this stream of sometimes sensational headlines is that, while bitcoin’s distributed ledger technology is empowering a new wave of entrepreneurs to experiment with legal contracts, identity and ownership, the foundations for such solutions are, in reality, still being built.

Looking ahead, though, the crypto 2.0 community believes it will take sizeable strides toward these goals over the course of 2015, garnering increased investment and attention from the wider bitcoin industry as major projects finally hit market.

Fueling this presumption is the fact that the industry has seen an uptick in attention in 2014. In addition to the formal launch of pioneering projects like BitShares, Counterparty and NXT, the period was also marked by the emergence of Ethereum, Medici and Reddit Notes – projects that all garnered mainstream news coverage for their ambitious aims.

Jack Wang, CEO of decentralized application exchange Melotic, suggested that he sees the competition in the still-nascent ecosystem helping to push overall development forward in 2015. In a conversation with CoinDesk, however, he cautioned that hard work remains:

“The industry is still building its foundation, and made great strides in 2014. There are still very few projects, bitcoin 1.0 or 2.0, that have really reached the mainstream consumer, so the challenge is to create applications that users want to use, and then convincing users to give it a try.”

Wang’s comments come as part of a wide-ranging survey conducted by CoinDesk of the crypto 2.0 industry that sought to detail the hopes, fears and ideas that are defining what has become one of the bitcoin industry’s most exciting and controversial sectors.

All eyes on Ethereum

Perhaps the most ambitious project in the wider bitcoin space, Ethereum raised more than $15m through a pre-sale of its native token, ether, in 2014.

Helmed by former co-founder of Bitcoin Magazine Vitalik Buterin, Ethereum seeks to provide a platform that will inspire developers developers to build decentralized applications that seek to do for a wide range of products and services what bitcoin did for payments processing.

Ethereum, which will launch its own blockchain and smart contracts platform this spring, has been widely anticipated by a number of respondents, including DigitalTangible CEO Taariq Lewis, who believes its smart contracts platform will be important for the ecosystem at large.

Gideon Greenspan, CEO of Coin Sciences, the company that oversees asset-transfer service CoinSpark, agreed, saying:

“Ethereum takes the capabilities of blockchains to the next level and it will be fascinating to see which applications will be built on top, and if any will become breakout successes.”

Indeed, many of the responses focused on foundational platforms that could in turn enable businesses to reap new levels of efficiency. These include decentralized record-keeping network Factom, Ripple’s smart contract system Codius, distributed document storage platform Proof of Existence and digital contract verification system BlockSign.

There was also excitement for the projects that will seek to build on top of one or more blockchains or protocols in order to provide more complex consumer-facing products, including recently launched decentralized crowdfunding platform Swarm, decentralized social network Gems and decentralized application funding platform Koinify.

“The impact of these projects could be quite significant to the crypto world as a whole, as we are starting to move from a currency-only ecosystem to projects that have more functionality and try to solve real-world issues,” said a representative of Storj, a decentralized cloud storage platform.

Legal questions still loom

The crypto 2.0 community was perhaps unfairly caught up in a controversy earlier this year involving the US Securities and Exchange Commission (SEC) when bitcoin blog Coinfire now famously stated that a number of unnamed projects have been the recipient of communications from the government agency. The site claimed to have seen some of the letters.

While the community has strongly denounced these accusations, questions about whether digital tokens could be viewed as securities certainly remain top-of-mind for those who are seeking to profit from projects that issue such assets.

Swarm CEO Joel Dietz, whose company is grappling with many such concerns, echoed this belief, saying that the legal challenge for businesses like his own would be “massive” in 2015.

“Thankfully, I find this aspect of the business immensely fun,” he quipped.

CoinPrism‘s Flavien Charlon was more blunt about the regulatory quandaries that still surround decentralized crowdfunding platforms.

“A crowdsale is a crowdsale, and using the blockchain to run it doesn’t really change anything as far as regulations are concerned,” Charlon said. “It is conceivable that authorities will investigate past crowdsales, especially given the sums of money moved during those.”

Greenspan echoed these concerns, adding:

“There have been quite a few public stock offerings conducted over bitcoin 2.0 platforms, which violate securities laws in the US and Europe. I think it’s just a matter of time before regulators sit up and pay attention.”

Still, others don’t believe that there is any immediate threat to the industry. DigitalTangible’s Lewis, for example, noted that US regulators tend to take action only when lawmakers or consumers demand it.

Most respondents voiced their belief that New York’s proposed BitLicense will not affect the industry, given that New York State Department of Financial Services (NYDFS) superintendent Ben Lawsky has publicly suggested an exemption will be made for such projects.

Investors could flood market

Although disagreements about potential regulatory action were apparent, there was widespread consensus that 2015 will bring about a massive increase in investment in this segment of the bitcoin space. The principal factor behind this migration, some argued, would be the lack of returns provided by bitcoin and its surrounding ecosystem.

“We expect will see more investor interest as they seek returns outside of falling bitcoin price and the lack of quality altcoins in which to participate,” Lewis said.

Greenspan added that entrepreneurs won’t be so much pushed out of other markets, but will begin to pay attention to the opportunities presented by crypto 2.0:

“Bitcoin has not yet found its killer application, and as a result is not breaking into the mainstream. Several candidates for this killer app can be found in the bitcoin 2.0 space.”

Others provided insight into where this funding will go. For example, Koinify CEO Tom Ding voiced his belief that most crypto 2.0 funding will go toward developing the ecosystem’s technological infrastructure.

Still, Maidsafe COO Nick Lambert, whose decentralized Internet platform was at the center of one of 2014’s biggest crypto 2.0 controversies, indicated that investors will likely be observing the market first, to see if projects such as will actually deliver the goods.

“There are so many great and exciting ideas floating around at the moment, but the companies, MaidSafe very much included, need to demonstrate that they can turn their visions into reality and into businesses,” Lambert said.

Philosophical battles to continue

As the crypto 2.0 community has also been one of the more theoretical parts of the bitcoin community, the sector is where some of the technology’s toughest questions are being resolved in ways that could greatly influence the entire industry’s future.

When asked which arguments are likely to impact 2015, a common response was the fight over ‘bitcoin maximalism’, whether the bitcoin blockchain provides the best and most secure platform for the ecosystem’s continued experiments.

That mindset has been attacked by those seeking to build alternative blockchains as short-sighted, while defendants call the view practical in light of the bitcoin network’s substantial security.

“The reasons for sticking with bitcoin are myriad, the most important being simple, trustless interoperability with bitcoin itself,” Adam Krellenstein, chief scientist at Counterparty, said.

More veteran projects such as NXT and BitShares will also to continue to build support for their dedicated blockchains. For example, community manager Bas Wisselink noted NXT is looking forward to the release of Monetary Systems, a project that seeks to do for the altcoin markets, what sidechains aims to do for bitcoin.

On a less technical note, Charlon also voiced his belief that smart contracts, while arguably one of the most impressive practical realizations of blockchain technology, will be influenced by those outside the community, most notably in courtrooms.

“Contract law is complex, and until a precedent has been set by a judge, no one should assume such contracts are valid in court,” he noted.

Greenspan, in turn, suggested that the biggest battle would be the argument that industry is seeking to wage through the sum total of its work, concluding:

“To my mind the biggest philosophical question remains whether bitcoin is primarily a currency, or primary a platform for other decentralized applications.”

 Abstract numbers image via Shutterstock

For further information on cryptocurrency 2.0 projects download our research report.