Is the Brooklyn blockchain industry becoming a real business?

Some parts of Brooklyn these days feel like a version of what you might imagine the early days of Silicon Valley were like when the Internet was born. Enthusiastic developers and entrepreneurs are leaving behind Manhattan's uniforms, briefcases and glass towers for T-shirts, jeans, bookbags and refurbished factories. This time, the technical set is working all day to produce what they think is the new Internet: the blockchain.

Last week, many of them gathered at the Williamsburg Hotel for a conference called Brooklyn Tech Week, hosted by Brooklyn-based Brooklyn-based Heritage Equity Partners, and with many speakers from Brooklyn's biggest blockchain company (and perhaps of the world), ConsenSys.

In the last two years, blockchain technology and token-based tokens, cryptocurrencies, have been both the hottest and most overheated subjects in the technology world. ConsenSys, based in East Williamsburg, which develops applications for Ethereum's blockchain platform, was founded in 2015 and already has around 1,200 employees worldwide.

"Last year was all about the purchase of Lambos.This year we have to discuss Nouriel Roubini," said ConsenSys marketing manager Amanda Gutterman, referring to the Lamborghini, a symbol of the future of the "cryptocurrencies" and the economist dubbed "Dr. Doom," who gained fame by correctly preaching the financial crisis a decade ago and who has now set up a space for himself as the main blockchain bear.

Will the blockchain revolutionize the infrastructure of the global financial system and much more? Is it the madman's gold? And outside of the hype, what's really going on with the technology that has found a starting point here in Brooklyn? We headed to the conference to try and get some answers on the current state of blockchain technology.

A regular business in difficulty

It was thought that many people playing at the conference were a recognition of the fact that the cryptocurrency party had arrived and finished. Now it's a question of how long the hangover would last the next afternoon. Last fall and winter, cryptocurrencies across the board, but driven by bitcoin and ether, have experienced a speculative boom with few precedents in the history of humanity, enriching the first users who owned tokens. This year has led to a reduction in that speculation, with prices for almost all cryptocurrencies that have shrunk between 50% and 75%.

Brittany Laughlin is partner of Lattice Ventures, a semi-stage fund that invests in many blockchain companies. During his round table, he said it is time for blockchain startups to reign in their forecasts and start producing.

"There are these very grand plans." People say, "We're going to be the new Internet." Okay, how are you going to do it? "

It was a thought of Charlie O & # 39; Donnell, a venture capitalist who gave birth to the Brooklyn Bridge Ventures fund. In his keynote he said that companies in the blockchain space needed to answer the same questions that startups in any industry had to answer for decades: someone wants to buy what I have just built? Does a consumer want to use what I have just created?

"I think there was a time when investors got excited about the use of the blockchain and there was a land grab to jump into space, but I think the window is closing and they want to see the dimensions of the market and the traction and the same questions I have always had, "he said.

Yossi Hasson, CEO of the TechStars startup incubator, compared the blockchain to the birth of the Internet, but noted that the Internet took a long time to reach its promise and had many false starts.

"In blockchain we're still a little bit in the Linux phase, but we're seeing people trying to build the new Facebook," he said in a panel. "You still have to build the infrastructure, at this time the infrastructure is slower and more difficult to use than its competitor, which is cloud-based technology … We're seeing some applications, but there really are few that fit perfectly why it's important to use blockchain. "

Many people at the Brooklyn event had been at a different conference the week before, DevCon IV, in Prague, in the Czech Republic. DevCon is an annual conference for developers of Ethereum that has grown in recent years to be one of the toughest tickets in the blockchain world.

Sam Cassatt, ConsenSys' chief strategy officer, said The bridge he had a different feeling this year.

"In previous times, when people focused only on the [cryptocurrency] price and there is a lot of exuberance, there were a lot of people trying to capitalize on that exuberance and try to throw their random token project, "he said." At DevCon's last week, we focused a lot on the main platforms, on ideas, on overcoming the next border and I think it's a really healthy thing. It shakes a little noise. "

The Blockchain impact in Brooklyn

Based in a brick building with adhesive and graffiti in East Williamsburg, ConsenSys was one of the first blockchain companies, founded by the co-creator of the blockchain Ethereum (the second biggest blockchain after Bitcoin), Joseph Lubin. It is considered by some to be the major holder of Ether and, in February, Forbes estimated that its fortune is between $ 1 and $ 5 billion, although the price of ether has decreased by 75% since then. However, ConsenSys is a center of economic activity, a new industry on a block of old factories and warehouses that have been converted into co-working spaces and cafes.

"When people come from international consulting firms and I see people walking down the road in Bushwick, I tell them that there's really that door with stickers and graffiti," Cassatt explained, with a laugh.

Apart from the works, there are ancillary economies that grow around the blockchain space of Brooklyn. Behind the corner from Consensysys headquarters is a building called the Bushwick Generator. Currently, space is used as a "community-oriented innovation hub" and when it is fully built it will bring 100,000 square feet of offices and retail space to East Williamsburg. The space holds a regular blockchain meeting and is the basis of an organization called the Bushwick Blockchain Alliance. It is owned by Heritage Equity Partners, led by Toby Moskovitz, the real estate developer in Brooklyn, and has received a loan of over 30 million dollars from Kushner Credit Opportunity Fund by Jared Kushner to bring the renovated industrial building online.

It's not just real estate, though. We met a media entrepreneur, Rachel Siegel, who lives in Bushwick and recently created a design business around blockchain technology. He was at the networking conference, he said The bridge. His company, Blocknoodle, is an animation company that creates marketing videos for blockchain startups that explain what they do. Siegel said that business is good. In fact, he recently expanded his repertoire to include viral video production. His most recent work, Top Six, writhing on the steps of the New York Stock Exchange in underpants with the XRP (another cryptocurrency) brand that sings a rewritten version of Britney Spears & # 39; Toxic. (Top Six refers to the first six cryptocurrencies.) The video has generated some thousands of YouTube views and dozens of comments on Reddit.

"My thesis is that there is no way to get a common consumer invested in cryptocurrency, wondering what's happening on blockchain technology", if the message is too technological, he said The bridge. "Not everyone can understand it."

All of this fits into a trend of technology companies increasingly starting from Brooklyn and renouncing the crossing of the East River, said Charlie O & # 39; Donnell, in his keynote.

"Over the past decade, the critical mass of people starting businesses is more likely to live in Brooklyn than anywhere else, and when people start thinking about lifestyle, family and commuters, people are asking themselves," Why? am I going to the city? "There are many more co-working spaces in Brooklyn, and now there are three or four venture capital firms in Brooklyn, if you look at where the investors live, a Brooklyn company that is trying to mount a Manhattan VC, the founder probably has a better chance of having breakfast in Brooklyn with that investor rather than going to town and planting. "

Where is the political revolution?

One of the main reasons why blockchain and its cryptocurrencies have captured the imagination of so many people is that it is not just a technology. Its use can also be seen as a political act. The supporters of Blockchain cite his inability to be censored and his pre-planned dilution of the token offering as key features.

With the freedom of speech, once again, in the political life of our country and the inflation at crisis levels in some countries, these seem characteristics that could be great justifications for technology. But transactions on the blockchain for something other than cryptocurrency speculation remain extremely rare. So, why do people have such a political attachment to technology?

At the core, Bitcoin's original value proposition was that it could be digitally translated money with a technology that prevented double spending, which means that it was not possible to send $ 5 digitally to Steve and then send $ 5 to Arden. The need to avoid this double expense has inspired the creation of blockchain, which is essentially a database of every transaction that occurs on it. This database is operated by computers, by many computers and is freely published for inspection, although the names of people have been replaced by long strings of letters and numbers.

The result of this invention is that it could solve the main function of the many companies that have built large companies doing the job of exchanging money between people. These would be companies like PayPal, American Express, Visa, Western Union, banks, virtually any company that takes the money from Steve and sends them to Arden and takes a commission to make sure the accounts are reconciled.

This too has political implications. According to current electronic funds transfer systems, banks and other financial companies have a right of veto on permitted transactions. Last week, the US government rejected the sanctions against Iran that do not allow many transfers of money with the Iranian government and citizens. PayPal has removed accounts belonging to organizations that it considers politically questionable, including the far-right Proud Boys and some radical left-wing anti-chapters.

This financial censorship, or "deplatforming", is not possible using blockchain technology. Since there is no intermediary, and therefore no organized body that supervises the processing of payments, it is not possible to close the asset transfers on a blockchain; there is no one to do it.

A second reason why people are interested in cryptocurrency is that the generation of new tokens is not a matter of anyone's discretion. In almost all reputation blockchains, there is a certain rate of adding new tokens to the ecosystem, and therefore a constant (and low) inflation rate. There is no governing body such as the Federal Reserve Board which controls the supply of money on the basis of economic judgments. It is this fact that aroused the interest of many people, including Sam Cassatt, who was a graduate student in the neuroscience department at Johns Hopkins University when he became fascinated with monetary policy and theory during the 2008 financial crisis.

"It is the first time ever that actors other than nation states can issue a currency and then change that whole dynamic into who becomes the player who controls it," he said The bridge at the conference. "Control of the money supply is one of the most important tools for governments".

The initial way in which the blockchain has subverted traditional financial structures has been used as a means of increasing investment money. Through fundraising methods called Alternatively Initial Coin Offering (ICO) or Token Generating Event, a company creates its own tokens, the currency of its app, and sells them to the public.

Investors buy tokens because they want to be able to use the product, how to buy tokens in a game room, or buy tokens because they expect the app to be heavily used, generating a high demand for future tokens, allowing buyer to sell them at a markup or often a couple of both reasons. What ICO investors do not get is equity in the company or a dividend, the two things that investors usually get when they put their money on a company.

Blockchain applications have increased the suprises puzzling by ICOs. In 2017, a startup called Filecoin raised $ 257 million in a coin offering and a new blockchain called Tezos raised $ 232 million. These sums were collected because anyone, anywhere in the world, could participate in raising funds to any extent they liked. Rather than venture capitalists choosing startups to invest their wealthy money, anyone with a computer could put their money in an ICO.

"I do not think there's ever been a time in history when an entrepreneur has this kind of options and this distribution of power," said Hasson, the TechStars executive at the conference. "All of a sudden there is a plethora of capital that can be globally distributed with this type of technology."

Some venture capitalists, however, do not think it's that simple. "It has never been the case that VCs were the only source of funding," said O & # 39; Donnell, the Brooklyn venture capitalist. "There are many things that came out and they said," Oh, this is the end of the VC! "At the end of the day, you have to convince a person to put their money in your business. need to do the block and face the job. "

The investment landscape is changing, however. In 2018 regulators took a good look at raising funds through symbolic offers, with the Securities and Exchange Commission indicating the application of fraudulent transactions in a far more diligent manner, a move that put a sharp cold in the practice, partly because of uncertainty about how the application will be applied.

"I think we are at a standstill," said Rodrigo Seira, a lawyer at the blockhouse boutique house DLxLaw, explaining why the prevalence of money supply is very much down in the United States. Many blockchain startups are now raising funds through more conventional means. "I think it's actually overwritten," explained Seira. According to a study by the accounting firm Ernst & Young, published last month, of the 141 largest ICOs in 2017, 86% are traded below the list price, 30% have lost almost all their value and an investor who buys a token portfolio would have lost on average 66% of their investment.

In conversations with almost everyone at the conference, it is clear that the days simply adding "blockchain" to the name of a company and seeing its evaluation jump are over. But it could be a good thing for the industry, as expectations are recalibrated and real and unexpressed work is done. At Hotel Williamsburg, the uncertainty was high and the hype had been questioned, but the promise of technology persisted. The next few years will show whether this technology will become, in effect, the new Internet or a case study in speculation for future economics books. Or somewhere in the middle.

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A Bushwick-based venture capital fund with $ 50 million to discuss blockchain

November 21 |
By Tyler Woods