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In last week’s newsletter, we talked about a couple projects being developed using public blockchains, namely Ethereum, and discussed why we think these projects pose a direct threat to traditional financial institutions.

This week we will expand on this thesis by discussing two important concepts — sustaining and disruptive innovations. We also recap important news and events of last week.

Enjoy,

Cryptiv.

Disruptive vs Sustaining innovation.

Clayton Christensen is a Harvard professor and author of ‘The Innovator’s Dilemma’. His book famously details why established and well-run corporations become disrupted by new technologies. Christensen outlines how incumbents have historically failed to become early adopters of disruptive technologies because the technology initially underperformed existing alternatives, the market size was too small, and there was no demand for the new technology among their existing customers. Here is a short video explaining the book’s main concepts.

So lets look at Christensen’s definitions of disruptive and sustaining innovations:

Disruptive innovation:

“An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.”

And sustaining innovation:

“making good products better in the eyes of an incumbent’s existing customers”

“Companies pursue… sustaining innovations at the higher tiers of their markets because this is what has historically helped them succeed: by charging the highest prices to their most demanding and sophisticated customers at the top of the market, companies will achieve the greatest profitability.”

Now, which definition do technologies like Bitcoin and Ethereum fit into?

One of Bitcoin’s first use cases was speculation. Consumers within a niche market started trading this new asset class through crypto-exchanges. It only costs pennies to enter into a trade (with some exchanges still offering zero trading-fees) versus the tens or sometimes hundreds of dollars charged by traditional brokers. This provided greater access to individuals, some of whom may have never participated in traditional capital markets, to start making bets at a lower cost.

With Ethereum, you can create peer-to-peer financial agreements with smart contracts, enabling the creation of decentralized applications and allowing organizations to issue custom tokens and raise money for a project (ICOs). Traditionally, raising money was only made possible through the financial industry, which largely caters to sophisticated “consumers with a lot of money or a lot of skill.” While smaller ventures, like a startup, must go the venture capital route. Applications like Augur, Melenport, and ICONOMI are using these Ethereum to raise funds and to build alternative financial products. This is being done entirely outside of the traditional financial system, it provides financial services at lower costs and with fewer regulatory barriers and constraints, and is targeting a new market of crypto-consumers.

We believe these examples conform well to Christensen’s definition of disruptive innovation. While the strategies of the incumbents adopting blockchain technologies is more akin to that of a sustaining innovation — making existing services cheaper to current customers. Whether this will prepare incumbents against the disruptive wave of open blockchains is the big question. We will expand on this in next week’s newsletter.

This Week’s Updates!

Bye-bye China Bitcoin bubble

China’s regulators had held meetings with the big three Chinese exchanges (BTCC, Huobi and OKCoin) forcing them to put an end to both margin trading and zero-fees. The exchanges have now introduced a 0.2% fixed-rate fee on all Bitcoin trades. This resulted in reduced volatility and lower volumes within China. It became clear that a significant portion of trades were being conducted by bots taking advantage of the zero fees. It’s interesting to note that, despite being used to circumvent capital controls within China, the government chose to regulate instead of try to outright kill Bitcoin trading. The new rules have been viewed positively by some suggesting it helps legitimize Bitcoin while others fear it could be just the first steps of the government crack-down on the new asset class. This regulatory intervention could be viewed within the larger strategy of China attempting to stem speculation as they have also increased interest rates and forced banks to curb lending.

Bitcoin Options trading for Wall Street

This week we’ve seen yet another Bitcoin-based financial product that is marketed towards mainstream investors and financial institutions. LedgerX, a New York-based company backed by Google Ventures, is seeking regulatory approval for their bitcoin options market. It will be one of the first to facilitate trading of fully collateralized bitcoin option trades. Another step closer towards mainstream adoption? This project, along with the three different Bitcoin ETFs trying to get listed, will give us a chance to see how a Trump administration views Bitcoin.

Tokenize everything!

Deutsche Börse completed a blockchain POC that runs alongside their existing infrastructure that saw the transfer of collateralized commercial bank money. This follows the trend of tokenizing assets to place them onto a blockchain — a low hanging fruit that others had predicted. The POC used Hyperledger’s Fabric as the blockchain infrastructure. Deutsche Börse is also a minority stake holder of Digital Asset Holdings, a startup lead by former JPMorgan executive Blythe Masters.

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