Main Take-aways:
Our insights on the German Blockchain Ecosystem:
Most German blockchain start-ups are located in Berlin, the equivalent of Silicon-Valley in Europe; followed by Munich and Frankfurt. Berlin focuses on building underlying infrastructure, Munich focuses on industry-related blockchain projects, and Frankfurt consists of mostly blockchain service providers. Blockchain projects in Berlin can be thought of as having two streams, one of which is industrial-focused (B2B2C) and the other consists of developer-backed Ethereum and cross-chain communities. Though we see limited interaction between the two communities at the moment, we believe that, with the launch of more stable infrastructure providing security and scalability, e.g. the design of Parachain-Relaychain-bridge of Polkadot, industrial and application focused projects backed with strong industrial knowledge will be able to focus more on the specific use cases, user experience, and ultimately increase the speed of adoption.
Attraction from Old Money:
In 2019, with conservative money flowing into the industry, we saw the emergence of new funds dedicated to DLT in Germany. This is a great sign to see in the bear market environment. It is also said that Siemens alone in the past few years has done around 120 proof of concept (POC) projects and there are many hidden champions testing the market as well. Though the federal government has been hesitating for a long time, recent gestures indicate that Germany is willing to play an important role in blockchain technology.
Industry focus from Germany:
In the next two years, we believe there will be a sharp increase in terms of the number of MVPs. In the next two to five years, there will be an increase in market adoption especially in the field of industry 4.0, and areas which Germany has traditionally focused on. After missing the train to the digital age, we believe that Germany is willing to become more open and active to drive blockchain innovation.
Why Berlin:
Many tend to get depressed especially in the bear market and get distracted from their vision and goals. Berlin, however, is the place where you will find like-minded peers, get in touch with the Cypherpunk spirit, and define the future of Web3.0 alongside the evangelists who are passionate, open-minded and also crazy enough.
Let’s take a closer look.
Berlin, with home to 104 blockchain projects according to chain.de, is certainly a DLT hub in Germany; followed by Munich and Frankfurt. Two mainstreams stand out, specifically business-backed industry-purposed blockchains and developer-backed infrastructure projects. The latter consists of mainly the Ethereum community and the interoperability-focused community (Polkadot & Cosmos). The business-backed industry-purposed blockchain projects focus on proof of concepts and ultimately promote decentralized ledger technology among corporates and the government. The developer-backed infrastructure projects focus on consensus on technology and are driven mostly by the innovation breakthroughs.
We see now few interactions between the two communities, however, there might be more synergies on the horizon. For instance, the structure of Parachain-Relaychain-bridge from Polkadot might enable projects backed with strong industrial knowledge to focus more on the use case, user experience, and ultimately increase the speed of mass adoption and become the underlying infrastructure for many industry-purposed blockchains.
In 2013, Germany Finance Ministry recognized bitcoin as a financial instrument under German banking rules, which was a big step forward for the bitcoin movement.
On Sept. 18th, 2019, Germany has finally passed a national strategy that sets the framework for blockchain-related innovations aimed at strengthening Germany’s position in decentralized ledger technology, according to the document published by the Federal Ministry for Economic Affairs and Energy.
The document mainly covered the following matters:
· Determination of being a leading blockchain technology location
· The Federal Government’s principles and agenda
· STO & ICO
· State piloting projects and industry-purposed blockchains in energy sector, logistics, certifications etc.
· Adoption especially in areas of identification, trust services and public-administration projects
· Stablecoin not become an alternative to state currency
The document shows the Federal Government’s willingness to explore blockchain technology. In the following segment, we will highlight some key points of the document by describing some examples and ending with some of our thoughts on the matter.
(1) STO
Securitization has been one of the hot topics in Germany, or even within the whole DACH area. It is believed to be a key application of blockchain in the future. By securitizing the assets on a blockchain and reducing the need for intermediaries, the process and settlement of securities can be traded faster and with enhanced security.
Bitbond is the first STO in Germany to have its prospectus approved by BaFin. It is said that the global online lender has taken around 1 year to get approval and at the end of the token sale, it has raised approximately 2.1 million Euro with participation coming from 87 different countries. Token holders receive the first payment on Oct. 1st, 3 months after the token sale.
After Bitbond, we have seen a few other companies exploring the possibility of using security token offering as a funding method, e.g. Bitwala and Brickblock. Though most of Europe holds a relatively positive attitude towards STO, we also see the tremendous challenges behind it. Firstly, startups need to provide a comprehensive coverage of intended token usage and be prepared to spend both time and money in getting it approved. Secondly, secondary markets for trading such tokens are still limited, especially in Germany, which will prevent investors’ willingness to participate. Lastly, education in investing in STO and custodian solutions are needed.
(2) Crypto exchanges and custodians
In early December 2018, the G20 set AML standards for crypto tokens. On July 31st this year, the 4th AML directive required token issuers, wallets, and exchanges to hold licenses, to fight against money laundering and terrorist financing. This implies that the costly infrastructure that exists within traditional financial markets will also be introduced to the management of crypto assets. One entity might need to apply for different licenses if they aim to conduct various businesses. While the federal government made a step forward by providing clearer guidelines for companies who want to enter this field, it might also introduce new challenges. For instance, crypto exchanges who are allowed to convert crypto assets into fiat currency and vice versa in Europe might need to face BaFin and apply for separate licenses in Germany. It might, however, ultimately create a similar situation as what occurred during the ICO period, which saw Germany projects register their foundations in Singapore or Switzerland because of these countries’ crypto-friendly environments as compared to that of Germany.
BSDEX & Bison: Germany’s second-largest stock exchange, Börse Stuttgart, introduced its cryptocurrency trading platform BSDEX in September 2019. The platform is currently limited to German residents. Prior to that, Börse Stuttgart launched a crypto trading app, Bison, providing trading pairs of Euro and BTC, ETH, LTC and XRP. It is said that Bison is aiming to reach 100,000 users by the end of 2019. It is encouraging to see a license-backed stock exchange with traditional background enter the crypto exchange business in Germany. Moreover, with the passing of the bill on November 29th, Germany banks are allowed to sell and hold cryptocurrencies for their clients starting 2020.
Bitwala: A crypto bank licensed to allow users to manage both fiat and crypto currency within one account. With the new rule, Bitwala might also be required to obtain a license from BaFin.
(3) Industry-purpose blockchains
Germany is the 4th biggest economy worldwide and 1st in Europe. “Made in Germany” has become a guarantee of quality under Germany’s strong real economy and producer services. In the past few years, we have seen many DAX30 companies (e.g. Bosch, Daimler, Commerzbank, Deutsche Börse, SAP, Simens) showing interest in exploring blockchain technology. The energy sector, supply chain management, industry 4.0 and such were mentioned multiple times in the document, and we believe that there might be more industry-purposed blockchains in the market in the upcoming years. Many German blockchain projects have conducted pilot projects in various industries.
· Energy Sector
The document highlighted significant potential for the energy transition in terms of transparency and process efficiency. At the same time, sustainability-oriented has become a crucial consideration in state-funded or state-initiated blockchain projects.
Slock.it: Together with Energy Web Foundation, they have formed a framework for blockchain-based certificate market by combining IoT devices (smart meters).
Share & Charge: A pilot project working with Innogy and MakerDao to enable electric vehicles to charge at Innogy charging stations and pay with DAI.
· Industry 4.0
As the country which invented the concept of Industry 4.0, Germany has always been eager to explore industry 4.0-enablers. Internet of things (IoT) is the technical foundation of Industry 4.0, which aims at enhancing the interoperability among machines. The internet connects all the computers and achieves remote communication all over the globe, while IoT connects all the machines, creating a smart and convenient world.
MXC: MXC protocol involves deploying low-power network (LPWAN) around the city to collect and trade data to build smart cities. They have pilot projects in New York City, South Korea and Shanghai City.
IOTA: IOTA’s distributed ledger, Tangle, consisting of a stream of individual transactions intertwined together with zero transaction fees, high scalability is designed for IoT. IOTA has been focusing on areas such as Global trade & Supply Chains, IoT, eHealth and smart energy.
· Identity
The federal government will initiate an identity project utilizing blockchain technology to evaluate potential value creation and encourage startups to explore decentralized identity related topics.
Xride: A pilot project led by Deutsche Telekom Innovation Lab (T-Labs) with partners Riddle, Code, Bundesdruckerei, and Jolocom. The e-mobility pilot allows for a less costly and more efficient vehicle for sharing that benefits both providers and users.
· Others
Other than those mentioned above, supply chain finance, digital health and certifications are all directions that the government will support.
Our thoughts about German Blockchain scene
In general, German blockchain projects are tech-focused and eager to achieve innovation breakthroughs. Berlin, especially has a developer-friendly environment and there are all kinds of weekly tech workshops led by various communities. While exploring the potential of decentralized autonomous organizations, the developer communities are also keen on building a utopia with open-source software. Especially compared with Asian projects, the German ones generally are neither interested in being listed on multiple exchanges nor actively doing market-making. One of the benefits from this is that institutional investors who are more speculation-driven will pass on German projects, which also leaves projects enough space and time to be focused on their goals and visions.
In 2017, we started to ask ourselves how to leverage blockchain technology in real-world applications and noticed that one problem that is not to be ignored and yet to be solved is scalability. In 2018, there was a rise of layer1& layer 2 solutions with claiming to fix the problem with “high TPS” and aiming to build individual defendable moats. Then they struggled to get developers on board to build an ecosystem after the mainnet went live. In 2019, cross-chain become a mainstream topic aiming to bring interoperability between chains. While the bear market continues, we see excitement and hope in the long run. There might be more talents joining the industry as the technology matures and the developer environment becomes more friendly. Old demands will be solved, while new demands will be created. We also think there might be more protocols coming out in the next two years. The importance of protocols lies in that, any public chain would need protocols to increase its usability and various protocols could be deployed to build more user-friendly products. Building protocols is a B2B business that requires strong technology backgrounds and we haven’t seen one with a successful business model that serves both public chain and DApps.
As an early-stage dollar fund headquartered in China, we are longing German blockchain projects. Web3.0 stems from Europe and has gained its popularity through all the hard work done by the developer communities there. We have seen the rise and fall of many developer-backed projects which indicates the passion and perseverance of the German developer community, and we believe there will be a more open and lively industry-purposed blockchain scene ahead as well. We are excited to see more early-stage startups entering the niche market, traditional corporates embracing the technology, and eventually, there market will see a new wave of adoption and upgrades.
https://www.coindesk.com/germany-official-recognises-bitcoin-as-private-money
https://www.fintechfutures.com/2019/07/bitbond-celebrates-sto-raising-2-3m/