Investment Analysis (3) — Filament, powering machine-to-machine communication with blockchain technology

Part one: Why I’m interested in Blockchain-based applications in Internet of Things (IoT)

A blockchain network is a decentralized system that uses a shared ledger (public or private) for recording the history of electronic business transactions that take place in a peer-to-peer (P2P) business network. Major challenges in building a scalable IoT network include traffic constraints in current radio-frequency-based transport media between machines, difficulties in machine authorization and authentication, high costs of centralized cloud infrastructure, and system compatibility. The best way to monetarize IoT is through micro-payments. Blockchain technology will enable large scale machine-to-machine transactions by building trust without middleman costs. Notable cases include Filament (uses wireless sensors to create low-power autonomous mesh networks for data collection and asset monitoring) and P2P energy transactions like Transactive Grid.

Investing in blockchain-based applications is difficult. Unlike traditional internet, the value distribution here is different: the market cap of the “protocol” always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer. While the long time focus has been on payments and the securities industry, early real-world blockchain applications will still be limited to use cases such as trade finance, syndicated loans, or reference data management — all activities that are not dependent on a critical mass of assets already being on blockchain. Real-world use cases for payments and clearing & settlement purposes, however, will take years, and incumbent efforts like R3CEV and Hyperledger will leave thin profit for application-based startups.

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Part two: Investment opportunity analysis: Filament (https://filament.com)

Founded: 2012

Funding: Seed round $1.5M in Aug 2013, series A $5M in May 2015

Investment Thesis

As billions of devices are expected to connect to internet by 2020, IoT is showing particular promise when it comes to industrial applications, in which significant value is derived from detection/control to optimization/prediction. Global manufacturers are expected to invest $70bn on IoT solutions in 2020, up from $29bn in 2015. This trend is enabled by developments in lithium battery technology and smartphone-powered mobility; in addition to advancements in cost, power, and efficiency of sensor technology. However, the increase in volume of devices results in growing demand for machine-to-machine (M2M) communications that build an IoT system into a “single product.” Major challenges include:

• Security: Many devices use simple processors and operating systems that may not support sophisticated security approaches. The rise of M2M transactions present a greater vulnerability in potential attacks.
• Connectivity: More devices are needed in environments with low connectivity. Using radio frequency (RF) as a transport medium for devices within close proximity could cause frequency interference in certain spaces.
• Infrastructure: Cost of centralized network hardware lead to high logistical costs. Cloud processing and storage capacities could also become network bottlenecks.
• System compatibility: Diversity of device ownership and their supporting cloud infrastructure make M2M communications difficult. Cloud services are not interoperable and cross-system implementations need to balance many conflicting requirements.

Filament solves these problems with long-range wireless sensor networks secured by blockchain technology — a decentralized network in which autonomous endpoints can interact and exchange value without cloud or a central authority management device. Filament’s products include Tap — a hardware device with embedded environmental sensors, and Patch — a surface-mount module for custom solutions.

Key issues for this solution are: identity management, security, discoverability, digital trust, power, and integration of crypto-currencies. Filament’s platform leverages open protocols such as Telehash (private communication), JOSE (smart contracting), TMesh (mesh networking), and BitTorrent (over the air firmware and management updates) to ensure digital trust for frictionless M2M transactions.

Value for customers: The decentralized approach can significantly improve M2M communication security, reduce infrastructure costs, and broaden application cases. Paid-as-use model will also reduce ops expenses while blockchain-based technology will secure and simplify data exchange.

Filament has an impressive management team with rich history in technical entrepreneurship. CTO Jeremie Miller is experienced in decentralized computing by authoring the XMPP protocol and founded instant messenger Jabber. CEO Eric Jennings is a serial entrepreneur and software architect.

No public financial data is available yet.

Exit opportunities include going IPO in 5–7 years and acquisition by incumbent entrants to decentralized platform, such as IBM, Microsoft and Verizon (Verizon ventures invest in Filament).