Crypto in 2019: Kleiner Perkins 5 Focus Areas

Given the breakneck pace of evolution in crypto, the ideas below could become obsolete overnight. That said, here’s a snapshot of what we’re thinking as we enter 2019 driven by what happened in 2017-2018:

Where we’ve been

Despite all of the Games of Thrones signs around town, winter is here in crypto-land. After an explosion of altcoins and funding, technical constraints and regulatory angst have taken over the headlines. Still, the frenzy of the past two years set the stage for the next wave of adoption with a steady inflow of talent and new, uniquely compelling use cases of digital assets.

Three themes dominated the space’s mindshare in 2018:

Protocol gaps exposed, which led to novel approaches:

• Algorand, DFINITY, EOS raised deep war chests to tackle scalability, while the Lightning Network gained traction, with network capacity up 7x in the past 4 months.
• 57 projects have announced stablecoin initiatives, with Dai, TrueUSD and USDC gaining traction as Tether shrunk.
• (d)PoS gained steam and staking-as-a-service emerged as a business model

Institutional money on the sidelines:

• Regulators deemed Ethereum not a security, but started to crack down on predatory ICOs.
• Startups embraced regulations, acquiring broker dealers and launching the first qualified crypto custodians.
• Established brands announced entry (i.e. ICE with Bakkt, Fidelity with custody).

Burgeoning consumer innovation:

• Augur and other dApps launched, accelerating development with storage, decentralized exchanges and games accounting for the lionshare of dApp engagement.
• Cryptokitties bred the formalized Non-Fungible Token, which enabled new types of digital assets from invoices to game components and virtual land.
• Governments like Sweden trialed a land registry on the blockchain, while Finland used the blockchain for refugee identification.

Where we’re headed

Here are 5 areas we’re eager to see evolve in 2019.

Financial Infrastructure

Institutional investors have long relied on financial infrastructure to manage the tens of trillions of global assets under management – the top 4 custodians alone have a market cap > $550bn. Yet much of the existing infrastructure will not immediately port to crypto given cyber and physical security risks, lack of insurance, regulatory uncertainty, new tech stacks, and complexities introduced by protocol nuances such as staking.

Meanwhile, crypto has captured institutional investors’ attention, with low correlation to other assets and tremendous return potential. While that uptake has been slow, digital assets appear to be a logical additive component when constructing a diversified modern portfolio. As such, we see potential in the full stack of financial infrastructure necessary to meet institutional needs – custody, prime brokerage, liquidity, derivatives, research, margin / lending, and so on. We see Anchorage, Skew, Compound and others as the first wave of many businesses in this space.

Security Tokens

Crypto’s core functionality around immutability and smart contracts has reimagined the need for trust and intermediaries in a powerful way. This is powerful across 3 major use cases:

1. Digitally wrapping real world assets like the $11T of US commercial real estate to enable fractional ownership and secondary liquidity
2. Representing traditional financial instruments to transform lengthy (sometimes weeks-long) settlement and improve transparency of assets like the $1T of US leveraged loans
3. Creating equity-like stakes in new companies to bootstrap demand and reward early adopters

Digital assets are well poised to take over the world of contract exchange and tracking. Moreover, by lowering the cost of administration, crypto enables fractional ownership and thus widens the aperture of possible investors. Those features, paired with the ease of reporting & transparency from platforms like Harbor or TokenSoft, represent meaningful improvements for investors and regulators alike.

Developer Tools

Massive businesses like Stripe and Twilio were built on the back of one mission: abstracting complicated building blocks for developers, so they can focus on bringing new ideas to market faster. Such companies enabled quick solutions for money exchange and communication connectivity, paving the way for a wave of novel businesses like subscription e-commerce brands and two-sided marketplaces.

Now, as dApp development accelerates and and talent flows into the space, there is a similar window for businesses within the crypto ecosystem. The opportunities mentioned in this post represent just the tip of the iceberg for crypto, yet teams are facing market headwinds which demand leaner organizations. Larger developer tool businesses counter that, creating foundational solutions while selling nuanced value-add services atop them. Lightning Labs is a great example, having dedicated years to making the Lightning Network more accessible and liquid, thus discovering additional pain points that they’re best positioned to solve going forward. Companies can also tackle repeated blockers such as smart contract simulations like Gauntlet and blockchain querying / analytics akin to the Graph. The problem set here is expansive – challenges from interoperability to smart contract security to reimagining MetaMask for non-crypto-native developers are still yet to be "solved".

NFTs & Gaming

Since the formalization of Non Fungible Tokens (NFTs), new entities have become interested in the possibilities of crypto – Major League Baseball launched digital baseball cards, Activision Blizzard vets created a crypto-native gaming studio?, and artist marketplaces sprung up. While in-app gaming purchases have ballooned with users spending $85+ on phenomenons like Fortnite, there is no solution for cross-game, cross-platform liquidity, and existing account security methods have proven insufficient. A second potentially explosive focus for crypto gaming is E-sports, as native digital assets would allow for dynamic monetization and micro-betting. Finally, crypto solutions could accelerate the professionalization of user-generated content in ecosystems like Roblox, Minecraft and Second Life, and tipping-based economies like Twitch and Patreon. As such, we expect experimentation to continue here and would not be surprised if this bred one of the first breakout apps, buoyed by a community beyond core-crypto fans.

New Business Models

Cryptocurrencies inherently revolutionized the existing marketplace model, offering a monetary incentive to bootstrap utility as an application scales. Now, we’re starting to see business model disruptors take shape, leveraging that benefit and crypto’s ease of micropayments. Our portfolio company Audius is reimagining music origination, curation and value transfer, liberating artists and removing intermediary fee-share. Along with similar models, we’re excited about novel business models that may not have been viable previously – everything from prediction markets to IoT monetization and far beyond.

If you are tackling one of these opportunities, we’re eager to learn more! Please reach out to [email protected] to get the conversation started.