When people speak of blockchain, the mention of cryptocurrencies is never far. Yet CV VC’s co-founder tells finews.com why blockchain technology is not synonymous with cryptocurrencies and why functionality is key to the industry's success.

Until now cryptocurrencies, with their dramatic gains and losses, have been the focus of everyone’s attention. Much time has been spent debating whether cryptocurrencies are necessary and how to regulate them, often to the detriment of the underlying technology, co-founder and chief investment officer of CV VC Olaf Hannemann said.

The recent collapse of the digital exchange FTX added to the sector's negative coverage, but also led to more differentiation between corporate governance, cryptocurrencies, and blockchain technology itself.

Long-term Beneficiary

What's more, the shake-up enabled Switzerland’s crypto scene - also known as Crypto Valley - to stand out. Many companies are benefiting from operating in a country with a «clear and established regulatory environment,» Hannemann said in his interview with finews.com.

He even sees Switzerland's crypto sector as having the potential to become «a net beneficiary long-term, particularly the crypto banks and projects that act as service providers to a functioning digital asset ecosystem.»

Within this ecosystem, understanding which infrastructure, also referred to as layer-1 protocols, the services are based on is key to grasping where the country’s crypto industry is positioned globally.

«One of the biggest challenges of blockchain technology is that on the one hand, you have a quasi currency such as bitcoin, and on the other hand you have the rails such as Polkadot, Tezos, Ethereum, and Cardano, for building use cases on,» Hannemann said.

A Lot Will Be Lost

From the outset Zug-based venture capital company CV VC, invested in companies using the technology to either make existing systems more efficient or to disrupt industries altogether, regardless of the underlying infrastructure or rails on which the applications are built on.

For Hannemann, it is likely that only one or two handfuls of the hundreds of rails, referred to as layer-1 protocols, will survive in the future. This means «the percentage failure rate for this protocol level is going to be so high that a lot of money will be made on the endgame winners. A lot will be lost on the others, and that will have a spillover effect on the overall industry,» he said.

Not About Valuations

People are starting to realize one doesn’t need so many rails to build on. «The ultimate success of these rails is not whether they achieve tons of funding and a massive valuation today or tomorrow but whether there are enough use cases and whether people choose them to build their applications on,» Hannemann said.

But betting on the right horse is never easy. «I could not tell you today with certainty who the end game winners will be,» said Hannemann, who has funded over 50 companies.

Failure Rate

He did give insights into what the uncertainty means for investors, however. «The regular failure rate of 75 and 80 percent for tech venture capital investments, also applies to blockchain-based companies building applications. As an investor however, you may also choose to invest in companies creating their own layer 1 protocols, which can have a potential failure rate of 95 percent or more, he said.

In this area of the industry, it is even more critical to diversify a portfolio to balance risk appropriately, and «the question remains what effect the high failure rate has on the overall dynamics for the sector,» he said.

To put this into context, Hannemann mentions other industries, such as large-cap pharma companies, where the R&D failure rates of new drugs may be «just as high, except you don’t hear much about it.»

Zug to Cape Town

Besides offering investment opportunities in a wide range of blockchain projects via its actively managed certificates, CV VC runs an incubator and ecosystem business called CV Labs, consisting of co-working spaces, advisory, and events.

Its coworking spaces exist in Zug, Vaduz, UAE, Cape Town, and most recently in Berlin and Portugal. 18 months ago, the Swiss government gave CV VC funding to share experience and know-how gathered in Zug with African startups and create a blockchain hub there.

This ecosystem serves as a breeding ground for startups. Next month CV VC will open its designated African blockchain fund for its clients.
The new entity starts with around seven investments transferred from another fund and is expected to grow over the next three years to up to 40 companies.

Leapfrogging Technologies

Whereas in Europe and the US blockchain’s purpose is often used to make existing systems more efficient, «in emerging markets such as Africa, blockchain can really make a difference,» Hannemann said.

Hannemann names «HouseAfrica,» a company bringing land registration onto the blockchain, as an example. By using distributed ledger technology to verify, value, and transact property in Nigeria, the company is creating an official and trustworthy documentation system, which did not exist before, while implementing the latest technology.

Young Population

With an average age of 19 years, the continent’s demographics are also expected to drive blockchain adoption.

Furthermore, around 75 percent of the African companies they invest in are working towards the UN’s Sustainable Development Goals, including financial literacy, banking the unbanked, and smart cities. «We like that,» Hannemann said, «it’s good to do good business and to do something good for the world at the same time.»