Our Investment in Blockstream


Mosaic recently participated in the $55M Series A financing for Blockstream, an unusual start-up founded by a group of idealists with a cypherpunk-inspired vision of revolutionizing the world of money, assets and contracts. The round was led by Li Ka Shing’s Horizons Ventures.

We first invested in the company as part of the 2014 $21M seed round led by Reid Hoffman, who introduced us to CEO Austin Hill just as that financing was coming together (and our first fund was closing).

At a time when sceptics are speculating about the demise of bitcoin the currency, and casting doubt on the viability of the “trustless trust” blockchain on which it’s built, it’s worth reiterating why we are long-term believers in this space, and the potential for Blockstream’s approach. We believe one of their key innovations, “sidechains”, could become an important solution to some of the structural and constitutional issues the blockchain will need in order to reach its full potential.

Over the 18 months since we first invested in Blockstream, the Bitcoin ecosystem has continued to grow, but not explosively so.  The value of the network is $6.5B at the time of writing, there are now over 10m wallets worldwide (our portfolio company Blockchain provides over 5 million of them), and throughput/network usage is increasing at about 2x annually on a dollar basis. This is of course compounding, but on a shallower slope than the birth of the web in 1994-5 (to which it’s often compared) -- all of which is encouraging, but suggests the timing of this market truly “arriving” remains an open question. There are lots of explanations why the Bitcoin ecosystem has yet to realize its full potential, that probably belong to another post.

The Blockstream team includes several active contributors to the so-called “Bitcoin Core” project, around which an ecosystem of miners, exchanges, wallets and application companies is being built -- funded by $1B+ of venture capital as well as mining/BTC speculation profits.

This core protocol is open source -- by design a proverbial public good -- that inspires passionate debate over every major change. It’s also fiendishly complicated: out of 200ish committers in total, just a small number of self-taught programmers, working quasi-independently, are responsible for the vast majority of code commits; and not all of them are actively contributing today.

What this means, to quote Reid, is that “advances to the codebase, the software at the heart of the system, happen slowly. Volunteer developers work on the project on their own time. Changes are only implemented when consensus … is achieved”.

The governance of Bitcoin Core, like many other open source projects, is technocratic, where a handful of “core devs” (a dynamic group that includes several Blockstream team-members) deliberate the merits of various changes to the protocol, and decide how to move the puck forward, hoping to convince each other and the wider industry of their consensus. The technocracy is at least meritocratic, in the sense that the core devs are recognized -- by their peers, the community itself -- based on their significant contributions to the code. For an emergent platform that only a small number of people on the planet holistically understand, this process is not perfect, but that seems to be the best we have for now.

Sidechains, Blockstream’s invention, are one way to allow for experimentation on the Bitcoin protocol without risking the $6.5B, or fragmenting developer efforts across multiple code forks. Note that sidechains are not under any one company’s control nor operated by one company. Sideschains are, instead, an extension mechanism with the same decentralized, “trustless trust” properties on the main chain. Blockstream’s vision is that successful sidechain modifications could conceivably also gradually repopulate Bitcoin Core, the mother blockchain, if specific elements are proven to work and become popular. The first example of this is the company’s Segregated Witness proposal, which was deployed last year in a fully working sidechain. Blockstream has been running Segwit, as it’s come to be called, since it released the code back last year. It was because of its work with working code on a sidechain that the developers realized it could be used to help in scaling Bitcoin.

Sidechains are not a theory. Blockstream launched its first sidechain, called Elements, in June 2015 as an open developer platform, and is launching a commercial version now, called Liquid, to provide an interchange settlement layer for Bitcoin exchanges and brokerages. It works. And the company’s architectural approach has also been embraced by independent developers, including, for example, the cryptographer Sergio Demian Lerner, whose Rootstock project is a sidechain initiative to connect Bitcoin Core to Ethereum, a generally programmable blockchain-based platform.

Beyond upgrading the underlying blockchain infrastructure, perhaps the biggest challenge for the ecosystem as a whole remains to develop a range of “killer” applications that take advantage of the secure, distributed ledger. Many new companies, products and services are in development -- and not just from the thousands of talented developers working in startups. Financial institutions around the world are exploring how the blockchain could replace existing legacy systems across their business, including trading, settlement and clearing. There are related application initiatives we have seen in legal (smart contracts) and accounting. Here in the UK, the government recently released a fascinating report on how countries could leverage blockchain technology to run their welfare systems or manage overseas aid.

To fulfil all the potential that the blockchain enables, we continue to be optimistic that the Blockstream team will play a key role in enabling the ecosystem to thrive. Realizing the cypherpunk vision, we hope their contribution will enable the blockchain to become an open, highly adaptive platform upon which a vast array of complementary products and services can be built.