There’s a new wind blowing in the startup ecosystem these days — blockchain and a world of technical and organizational innovations that it is ushering in. There are new blockchain currencies, technology platforms and ecosystems, beginning with Bitcoin and Ethereum, but now also including Lisk, Kin and many others.
The big change is yet to come. Yet to be built are new cryptocurrency concepts, cryptocurrency exchanges, soft and hard crypto wallets, identity management solutions, and different kinds of blockchain infrastructure as decentralized apps and applied solutions in sectors like healthcare, energy and many others.
FactorDaily last week wrote about how blockchain as a technology could be the silver bullet for all governments and all things governance in India. But, how well positioned is the technology ecosystem in India to take advantage of the blockchain revolution? Not very, I’m afraid. We have yet to hear of a single important blockchain company from India, so let’s admit we’re coming from behind. Let me list some specific reasons for this and also point to some silver linings.
1. Hierarchy is baked into the deep structure of our social and psychological life.
The blockchain releases a new structure of trust which is neither peer-to-peer (P2P), the way microfinance works, nor vertical, the way kingdoms, corporations and nation-states work. The so-called Trustless Trust of the blockchain causes huge transformations in how we transact and interact, and that changes the very nature of the organizations and institutions that result.
Our first challenge here in India is the pervasive hierarchical nature of our society and worldview, which does not align closely with the distributed, lateral structure of the blockchain ethos. We must learn to trust that strangers will not collude to corrupt the blockchain and that the records maintained therein are most reliable when no one person or group is actually in charge. Blockchain-enabled organizations are now more like communities than vertically siloed companies, and their leaders communicate through social media rather than through internal company confidential emails. No one person is in charge and yet there is all kinds of innovation and funding activity going on.
2. For over a century, India has been centralizing all kinds of economic activity.
For at least three millennia, the subcontinent was a hodge-podge of mini maharajas, ruling lightly upon their small fiefdoms, even as a diversity of castes and tribes made and kept their own traditional laws. All this changed with colonialism, when centralized positive systems of law and administration took hold. Through the 20th century we have seen ever more centralized patterns of administration, finance, commerce, media, and technology, most of which cluster around a few major cities.
It is early days to say, but there is some evidence that a new wave of blockchain technology might be more distributed and decentralized than before. So we might see amazing new startups from smaller towns and cities across the country building partnerships with remote teams in Russia, the Ukraine, Hong Kong and other regions of the world. The old umbilical relationship between Bengaluru and Silicon Valley may itself be disrupted. How comfortable are we with this more democratic way of working? We’ll soon be finding out.
3. The faith of Indians in state systems is at an all-time high.
Who sanctions a cryptocurrency? Its promoters, its early adopters, its users, and its traders. No one group and all of the above. But where is the army and the courts system and the parliament to regulate it all? There is nonesuch.
This is the fundamental conceptual challenge for most people when they confront cryptocurrencies. They can’t see who authorizes the existence of the whole system, and they really aren’t comfortable with the idea that it is the people who use it and the market they create that brings about the value of the token or coin. The logic of the blockchain is also inviolable and immune to legislative or regulatory intervention: there is no way to undo the records already encoded into the chain, even though new reverse direction transactions could be mandated by an external authority such as the state.
This is heady stuff: hard to conceptualize and adapt to if your everyday life and personal identity is deeply tied to the idea of a nation state.
4. Indian startup founders are accustomed to serving a large integrated national market.
Large nations like India, China and the United States are more likely to establish firewalls, attempt aggressive regulation or outright ban new technologies. Smaller nations are less capable of resisting innovation on account of two key factors: legal and technological capacity and the leveraging power of their population and market.
Governments of small nations usually lack the will and the ability to develop the sophisticated technologies that might be required to control the internet. At the same time, they often have no choice but to bend to market forces because if they do not, a neighbor will, and they will lose out on the business.
Venezuela, for instance, has suffered extraordinary economic turmoil and its currency has been devalued many times over, in response to which Venezuelans converted their savings to bitcoin
Small nations are also more vulnerable to financial instability, making cryptocurrencies more attractive. Venezuela, for instance, has suffered extraordinary economic turmoil and its currency has been devalued many times over, in response to which Venezuelans converted their savings to bitcoin. Here in India we do not suffer some of the everyday challenges that citizens of smaller nations and weaker states might, and there is therefore less of an incentive for us to adopt cryptocurrencies either as a store of value or as a medium of exchange.
5. Blockchain investments represent regulatory risk at the horizon of global innovation.
India’s startup success stories have so far had to do with new ways of buying and selling clothes, houses, life insurance, plumbing services, taxis and holidays. Relatively tame, cash-flow positive stuff. As we get deeper into the maelstrom of blockchain we’ll likely encounter a new, more complex, and aggressive type of Indian startup, which will change the ecosystem as we now know it.
The rise of blockchain technology changes not only the underlying logic of the product, but also how it is financed, how it monetizes and scales, and what kind of organization wraps itself around the new product, platform and processes. Blockchain changes everything. It is not just a new way of ordering and paying for pizza. This is not the kind of change Indian investors or founders have typically been comfortable with. They have so far preferred relatively simple to understand market propositions that have already been tried and tested elsewhere in China or the United States.
And yet there are always reasons to hope.
Blockchain represents a second in a lifetime opportunity to participate in an extraordinary realignment of technology, organizational transformation and consumer behaviour change. India has some natural strengths that can and must be built upon so we can actually take advantage of this wave. I’ll count them down below.
1. India has a large active cryptotrader community.
A senior counsel working in this area recently told me that almost three million Indians possess cryptocurrency in their name. This is an astounding figure, and has been driven by so-called multi-level marketing schemes in smaller towns and cities. And that’s despite there being only a few exchanges that even accept Indian rupees as a fiat medium of investment.
As a subset of this larger figure, my friend Sunil Aggarwal and I recently estimated that there are at least 10,000 active high volume high frequency cryptocurrency traders in India. Think for a minute about how this situation contrasts with prior waves of technological change in India: two decades ago, India had many backend or offsite technologists but only a few users of computers and the internet. This lead to the lopsided development of an export-oriented software services industry unable and unused to serving the Indian market.
A decade and a half ago, India had many potential users of mobile phones, rapid adoption and growth, but no local hardware or software industry to speak of. Again, this was a lopsided opportunity through which the market grew but the technological innovation largely came from outside India.
More recently, we have seen the emergence of an Indian product-business ecosystem attempting to serve its own people, including for example FreshWorks, Zomato and PayTM. A slow growth of a few entrepreneurs, a few early investors building in momentum gradually over time and finally a clutch of Indian and international funds. At best, there might be some 2,000 angel investors making startup investments in India.
It is against this background that we must weigh the importance of the 10,000-odd active crypto-traders and enthusiasts that now exist in India, using both Indian and international exchanges for their trades, discussing tips and gossip amongst themselves in the way that their forefathers might have traded grain or cattle futures. This community is both superuser and potential angel investor. It is knowledgable about market prospects but not about the underlying technology. It is capital rich and risk savvy. It is a tremendous asset for the future growth of blockchain projects in the country.
2. A new generation of crypto entrepreneurs is rising.
Over the last few weeks I’ve reviewed some of the first blockchain pitches in India. I met a 19-year-old who had left engineering college to design his token. I met another 19-year-old who had helped publicise several ICOs. I met a recent graduate who was running a successful mining farm and renting out his hashing power. These young entrepreneurs are a new breed, unlike those I’ve met before. They have recent success behind them and they have no barriers to their imagination. They aren’t waiting to be groomed through either college or early apprenticeship in a technology firm – they’re going flat out to the next big thing.
3. Blockchain offers a compelling alternative to IndiaStack.
At a time when many Indian coders and technologists have become invested in the IndiaStack, blockchain technologies offer a new global framework for identity, financial transactions, record keeping and a new ecosystem that isn’t restricted to any one national market.
A dual key approach comes from the discipline of cryptography and has been now embedded in nearly all blockchain applications
One of the central criticisms now emerging of the Aadhaar program is that it does not use a public versus private key, but has only one unique identifier, putting all users at risk for identity theft and fraud. Such a dual key approach comes from the discipline of cryptography and has been now embedded in nearly all blockchain applications. This approach will be the basis of new distributed identity management solutions which will soon be live, globally adopted and superior to any state-supported identity system including Aadhaar.
4. India has the technical talent pool to build on blockchain.
India has the technology talent to understand and design databases, algorithms, security, and even complex systems like microeconomies. What remains is to put these existing skills together with cryptography and an understanding of new blockchain platforms like Ethereum. This is already happening, but slowly. As it builds momentum, we are going to see a plethora of new blockchain-oriented, tokenized startups in the country.
5. Blockchain communities are mushrooming in every Indian city.
A friend in Chennai recently caught the blockchain bug and he called a bunch of friends and co-workers to talk and learn blockchain together. Over rum and cola and three hours, they covered the basics and will now be meeting again in two weeks. This is how new communities begin.
I’m doing something similar in Bengaluru and Delhi along with friends and partners. We’ve gone through Bitcoin 101, how Ethereum blockchain differs from Bitcoin, and what alternatives have emerged to Ethereum. We’ll now be looking at the top ten crypto-currencies and what kinds of ecosystems are emerging around them.
Blockchain startups have all the same problems of any other kind of startup: are they headed in the right way, do they have enough funding and the right advisors, when do they begin to monetize? Still, blockchain startups also have new and special problems: should they have a token strategy along with their decentralized app? What new business and growth models do tokens allow them to pursue? Which ecosystems should they align with? Should they attempt a token sale? Where can they go for an ICO? What advisors can help them with all this? Which angels are open to blockchain efforts, which may be considered more risky, both for commercial and regulatory reasons? What can they do to remain in compliance with still emergent regulation?
These are the kinds of questions Indian blockchain startups need help figuring out before they can go forth and conquer the world.
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Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.