Blockchain/AI/IoT | April 24, 2018

Deals lag hype in ‘Blockchain for Good’ investments

Dennis Price
ImpactAlpha Editor

Dennis Price

With David Bank.

ImpactAlpha, April 24 – “Show me the deals.”

For all the promise of blockchain-enabled technologies to solve a variety of global challenges, investors say actual investments in “blockchain for good” ventures have been slow to emerge.

The market frenzy around bitcoin and other cryptocurrencies put blockchain on the map. Blockchain, essentially a distributed, encrypted ledger for transactions and data, is the technology behind the cryptocurrencies, but also has much broader applications.

As excitement grew, so did forecasts of blockchain solutions to identification and migration, supply chain-transparency, land registration, lending to the poor and a host of other social and environmental challenges. Your inbox may well be full of invitations to events, conferences and networking opportunities to talk about driving social impact with blockchain.

Moving beyond talk has been a challenge. The latest signal: One of the most ambitious efforts, the $50 million in-house venture fund of Consensys, the Brooklyn blockchain provider, is scaling back the social impact-focus of the fund.

Consensys would have seemed to have the tech chops and the impact pedigree, and the capital, to help bring blockchain-for-good to market. The firm was founded by Joe Lubin, a co-founder of Ethereum, one of the biggest platforms for blockchain applications. Lubin recruited Kavita Gupta, who had helped the World Bank create its first green bond and the family foundation of Google’s Eric Schmidt make impact investments, to manage Consensys Ventures.

“[Blockchain] can enable solutions to almost any Sustainable Development Goal,” Gupta told ImpactAlpha at the time of the fund’s launch.

In an interview, Gupta said Consensys Ventures now believes it is “too early” for social impact investments and that the firm hasn’t found enough traction among impact-tech solutions built on the distributed ledger. The fund has taken on a “broader investment thesis,” she said.

“First we must build the ecosystem and prove the technology at the scaleable stage before we make focused impact investments,” Gupta told ImpactAlpha.

Moving money

Venture capital investments in blockchain startups reached almost a billion dollars in 2017, and are on pace to exceed that in 2018. The larger pool of capital for blockchain startups came from initial coin offerings, whereby cryptocurrency startups raise funds by selling a portion of their cryptocoins directly to early supporters (similar to crowdfunding), which raised about $5.7 billion last year. (David Ellington, founder of the Silicon Valley Blockchain Society, at What’s Now San Francisco this Thursday, will deliver his message about blockchain investment opportunities: “Fund the revolution.”)

ImpactAlpha has identified a handful of deals that could be categorized as blockchain-for-good.

Humanity United, which earlier this year launched the $23 million Working Capital fund to bring transparency to global supply chains, led an $800,000 round for Provenance, a U.K.-based startup, that uses blockchain software to combat “food fraud” and track food supply chains. Synergy Health founder Richard Steeves backed Arc-net, based in Northern Ireland, also taking on food fraud, using DNA sampling to verify food sources then blockchain to track products’ path to market.

Moeda, a Uruguayan-domiciled firm, bypassed venture capital altogether and raised $20 million through an initial coin offering. The firm is building a blockchain-powered platform to ease and secure lending to rural farmers, initially in Brazil.

RippleWorks, which helps startups with mentorship and leadership training, worked with Stanford’s Graduate School of Business to catalog 193 blockchain-for-social-impact projects. The report’s conclusions: many blockchain initiatives are still in their early days – nearly three-quarters are in the pilot or idea stage. But more than half expect to deliver impact to beneficiaries by the end of this year. One-fifth of the projects say their solutions would not have been possible without blockchain and the vast majority “are material improvements over existing solutions.”

Some startups are gaining traction without the need to raise capital. Aid:Tech, the U.K.-based software company, has partnered with the Red Cross, the UN Development Program and other international organizations to monitor and track aid donations, grants and investments, from funder to point of use, as well as remittances, by logging every commitment on a blockchain. In AID groups, the firm has found a large market of customers that want to get better, more efficient and be more transparent with their transactions. The firm has found limits, however, because of the energy and data power necessary to scale the technology.

Hype cycle

The well-known technology “hype cycle” has since the 1990s proved a reliable guide to the arc of tech breakthroughs. Of course, it’s hard to know whether blockchain-for-good has hit the Peak of Inflated Expectations, just like it will be difficult to say when it’s at the bottom of the Trough of Disillusionment. It is likely fair to say the technology will eventually climb the Slope of Enlightenment to become a genuinely powerful solution for certain problems.

In some cases, blockchain has appeared as a solution in search of a problem. One oft-cited use-case, for example, is off-grid solar deployment to boost energy access in countries without reliable electricity grids. Many such systems are pay-as-you-go, with access sold in much the same way as mobile telecom minutes. Such transactions could, of course, be stored in a blockchain, but the absence of such a distributed ledger is far from the limiting factor in off-grid solar deployment. The availability of commercial lending for low-income customers has been a bigger hurdle to overcome (see, “The impact opportunity in the mispriced risk of lending to the underserved”).

The economic structure and environmental impact of the blockchain code itself has become another issue.

Many of the ‘4good’ projects overlook the impact of their code itself, says Jem Bendell, founder and director of the Institute for Leadership and Sustainability at the University of Cumbria in England. “Is it appropriate for people apparently seeking economic justice and equal opportunity to use a blockchain in which only heavily invested actors receive new tokens?” Bendell writes for the World Economic Forum.

He continues. “Is it appropriate for those seeking to put a new medium of exchange in the hands of the masses to use a blockchain whose tokens are mostly hoarded by speculators? Is it appropriate for a carbon emissions reduction project to use a blockchain which emits as much CO2 as a small country?”

Bendell and the Institute for Leadership and Sustainability have introduced ‘integral blockchain’ concepts, which aim to balance the often lofty goals of blockchain solutions with how they’re produced. One project, the Yetta blockchain, requires less energy than Ethereum and offers rewards for sustainable energy use. Holochain, which shares data and doesn’t rely on a single blockchain, aims to reduce data redundancy and dependency on any particular group of ‘miners.’

Market development

If interest in blockchain-for-good is indeed ebbing, that just might mean it’s an opportunity to buy in.

Consensys has made 11 investments from the new fund, including in BlockFi, which provides loans to crypto-asset owners, and Unikrn, a blockchain-based e-sports betting service.

At the same time, it is working to educate investors and others on how blockchain products and solutions can address the SDGs. Its Blockchain for Social Impact Coalition includes Acumen Fund, ImpactAssets, Grameen Foundation, MIT’s Solve and others, and runs an incubator to develop and implement such solutions and is hosting a conference in Washington, D.C., in June. The firm is also advising the U.N. and World Bank on blockchain.

Gupta, in addition to her role at the venture fund, also leads Consensys India. The firm signed an agreement with an Indian state government to build a land-titling solution that maps and tracks land-ownership.

There are “use-cases for this application all over Africa and the Middle East as well,” says Gupta. Secure land tenure is considered a precondition for economic development, but few such contracts are digitized or transparent, she says.