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Digital Currency Journey Digital Currency Journey Presentation Transcript

  • Digital CurrencyA Journey with Bitcoin, Ripple and MoreWednesday, June 5, 13
  • OverviewThis project seeks to outline some of the earlyforces and ideas behind the currently emergingdigital currency landscape.It is not an all encompassing analysis but ratherfocuses on distilling some of the highlights of thisnascent market.Wednesday, June 5, 13
  • What is Digital CurrencyA Digital Currency is electronic money that actsas an alternative unit of value exchange.Today, none of these currencies are produced bygovernment-endorsed central banks or backed bya national currency.Wednesday, June 5, 13 View slide
  • The first wave of digital currencies in the 1990s(beenz, flooz, eCash, bit gold, RPOW, b-money) allfailed due to issues around controlling supply anddouble spend or a reliance on traditional paymentinfrastructure.There was a company (eGold) that solved thesupply control problem by tying deposits to goldbut end users still had to trust a central entity.What is Digital CurrencyWednesday, June 5, 13 View slide
  • In 2008, a person going by “Satoshi Nakamoto” createdBitcoin with a system based on cryptography that solvedmany of the problems that plagued other digital currencies.In short, Bitcoins are mathematically generated as thecomputers in the network execute difficult number crunchingtasks in a process know as “mining.”The system was set-up so that it becomes progressivelymore difficult to mine over time and that the total numberthat can ever be mined is around 21 million.What is BicoinWednesday, June 5, 13
  • Also, important the code is completely open source and hasno central governing group that controls transactions.Rather, the system is built as a P2P network where eachindividual computer on the network maintains a record oftransactions on the network with every new transactionbroadcast across the network.The ledger (called the “block chain”) is publicly distributedand users on the network would collectively work tomaintain the global record.What is BitcoinWednesday, June 5, 13
  • Despite all of Bitcoin’s transparency, no one reallyknows who “Satoshi Nakamoto” actually is or if hereally exists.Satoshi was not well known prior to the release of hisresearch paper on Bitcoin on the Cryptography MailingList, but he remained active on the forums andcontributing code to the project until Mid 2010.Satoshi NakamotoWednesday, June 5, 13
  • You can read the original paper here:http://bitcoin.org/bitcoin.pdfWednesday, June 5, 13
  • Satoshi NakamotoVice has done a good round up of theories at thelink below about the identity of Satoshi - its aninteresting mystery in an otherwise open andtransparent ecosystem.http://motherboard.vice.com/blog/who-is-satoshi-nakamoto-the-creator-of-bitcoinWednesday, June 5, 13
  • CryptocurrencyFollowing the launch of Bitcoin, a large number ofalternative cryptocurrencies were created in 2011and 2012 - most are also peer-to-peer anddecentralized.Bitcoin is by far the largest with 3 other minoralternatives including Litecoin, Namecoin, PPCoinwith 20+ tiny or dying other systems in existencetoday.Wednesday, June 5, 13
  • Notable Digital CurrenciesName Year Created Ledger Crytpo?Monetary Base(May 2013)e-Gold 1996Gold & SliverReserve IncNo DeadpoolRipple 2005 OpenCoin, Inc No Not launchedBitcoin 2009 P2P Yes ~$1bLitecoin 2011 P2P Yes ~$38mNamecoin 2011 P2P Yes ~$4.5mPPCoin 2012 P2P Yes ~$4mWednesday, June 5, 13
  • Early UseIn January 2009, the first digital transaction occurredbetween Satoshi and another early Bitcoin contributor.In May 2010, the first real-world transaction for Bitcoinoccured with a user agreeing to buying ~$25 worth ofpizza for 10,000 BTC.In July 2010, the first Bitcoin exchange (Mt. Gox) isestablished. It was originally designed as a place to trademagic the gathering cards. It was acquired by its currentowners in March 2011.Wednesday, June 5, 13
  • Early UseWhile Bitcoin was publicized early-on for its “grey”market use (mainly drugs and gambling), its merchantbase has grown steadily since inception.In June 2011, early adopter merchants included webservices firms (SEO, Design) and second-tier and smalleCommerce merchants (cellphone jammers, used goodsand many weird products like alpaca wool socks.)Wednesday, June 5, 13
  • Early UseMany of these early merchants took primary currencyrisk, but real adoption from merchants started in late2011 with the launch of the early payment processors(who take payments in Bitcoins and provide USD tomerchants.)Most notably is BitPay who launched in May 2011. Theyare the largest BitCoin payment processor (both forweb and local retail.) They processed $5.3m inpayments in March 2013 across ~4,500 merchants(including Automattic.)Wednesday, June 5, 13
  • Growing UpOn March 20, 2013 the Financial Crimes EnforcementNetwork issued a document classifying digitalcurrencies such as Bitcoin as “virtual currency”because they are not legal tender under any sovereignjurisdiction.This is a big deal because it reduced some of the greyarea with regulation of the digital currency market andeffectively said it won’t touch transactions until theyinvolve changing value back into fiat currency.Wednesday, June 5, 13
  • Growing UpBecause of that ruling, Bitcoin is taxed the same way asbartering income.You keep records of its value when you get it, its valuewhen you sell it and report the gain just as if it werereported to you with a 1099-B.This will be an interesting issue to watch as thecurrency grows more powerful with influence and as apercentage of GDP.Wednesday, June 5, 13
  • Buying BitcoinThe next set of slides walks through the process ofbuying Bitcoin across three of the most popularchannels: Coinbase, Mt. Gox, and P2P.Additionally, it has screenshots of other relatedproducts and currencies such as OpenCoin / Rippleand BlockChain.Wednesday, June 5, 13
  • CoinbaseCoinbase is the simplest way to buy Bitcoin. It isbacked by USV &YC and is focused on becoming theplace that gives everyday individuals access to Bitcoin.You have to purchase Bitcoin using cash and Coinbaseoffers a direct ACH withdrawal. They simply verify theaccount with small deposits making the processrelatively seamless for on boarding.Wednesday, June 5, 13
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  • Success!Wednesday, June 5, 13
  • Mt GoxMt. Gox is the largest exchange in the world forBitcoin trading started in 2010. In April 2013, itrepresented 63% of global trading volume.In 2011, the Founder Jed McCaleb sold the companyto an individual in Japan. The company has seen ahandful of security breaches and trading issues. It iscurrently being sued by another exchange for breachof contract.Wednesday, June 5, 13
  • Mt GoxMt Gox offers no easy way to place USD in youraccount and requires heavy identity documentation forUS users.To do so you have to use a system like BitInstantwhich leverages ZipZap / MoneyGram’s payment railsto take cash in person from a store and send it toyour Mt Gox account.Wednesday, June 5, 13
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  • Person to PersonThe roots of Bitcoin is enabling person to persontransactions outside the centralized money system.There are many different methods to find individualsto trade with - these slides go through my experienceon message boards, Craigslist and finally Twitter to findsomeone in my personal network to trade with inperson.Wednesday, June 5, 13
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  • OpenCoin / RippleRipple is an alternative payment protocol started by JedMcCaleb who was the Founder of Mt Gox.The companyhas raised $2m from GoogleVentures,A16Z, FoundersFund, other to date.Ripple is both a currency and a unit of exchange; in theorymaking the practice of exchanging money more efficientand less costly.While the system is currently closed-source andcentralized; the plan is to eventually open up and run in adistributed fashion.Wednesday, June 5, 13
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  • BlockChain.infoBlockChain.info is an ad-supported Bitcoin utility siteoffering a number of services including eWallet andP2P transfer services.It was launched in August 2011 and has two of theearliest Bitcoin mobile applications which enablemoney transfer.Wednesday, June 5, 13
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  • Other Creative ProjectsThe magic of Bitcoin is a huge reduction in friction andcosts for online transactions. Similarly, the semi-anonymous nature of the product lends itself to newopportunities not previously thought of on the web.While there are a bunch of early products thatcompete with traditional businesses, here are some ofthe interesting weekend hack projects that wereshared with me.Wednesday, June 5, 13
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  • Looking forwardDigital currency is still in its infancy, but has grownsubstantially in just a few years.Lots of legitimate questions about the “real” value of usingthis type of product given high friction and no “killerapplication.”But has captured imagination of tons of early alphaadopters who are building fun products on nights andweekends.Wednesday, June 5, 13
  • Early traction in businesses for micropayments (lowtransaction fee), currency remission (less friction), and greymarkets (less government oversight.)More broadly, there are both benefits and risks to beuntied to a government (and not subject to the same lawsas a “sovereign currency”) and will be interesting to see ifthese benefits (effectively bringing an efficient bartersystem to the web) are allowed to continue.Looking forwardWednesday, June 5, 13
  • More exciting for me is the new increase in interest andexperimentation around cryptography and systems theory(the basis for cyrptocurrencies.)Bitcoin is exposing real technology to individuals whowould have never been interested in those subjects before- potentially leading to a renaissance in thinking acrossthose two spaces in infrastructure technology.Looking forwardWednesday, June 5, 13
  • Given the large amount of currency risk, the rewardprofile for technology infrastructure for the Bitcoinecosystem doesn’t feel appropriate for institutionalfunds.For individual investors or small angel funds who cantake direct Bitcoin exposure along with infrastructureinvestments, the risk-reward ration feels more aligned(but the percentage of activity related to speculationversus usage would make me wary)Looking forwardWednesday, June 5, 13
  • For reference, a 2012 academic paper thatquantitatively analyzed the entire transaction graphbelieves that 78% of total Bitcoins purchased are beinghoarded by speculators.Even Coinbase whose data should skew towards moreactive consumer users believes that for every 1 Bitcoinused for economic transactions, roughly 3 Bitcoins arepurchased for speculation.Looking forwardPaper: http://eprint.iacr.org/2012/584.pdfWednesday, June 5, 13
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  • Bitcoin InvestorsBitAngels:$15m angel fund with over 100 LPs.Started at the Bitcoin Conference in San Jose.Liberty CityVentures:$15m side fund focused on Bitcoin.May 2013: 15 investments.AlsoRun NY Bitcoin IncubatorBitCoin Opportunity Fund:Launched by Barry Silbert of SecondMarket.Direct exposure as well investments into related companies and funds.Wednesday, June 5, 13
  • Bitcoin InvestorsBoost.VC: Incubator but with heavy exposure to Bitcoin. (50% of batch)GoogleVentures / A16Z: Investors in Ripple ($2m seed round)Union SquareVentures: Investors in Coinbase ($5m Series A)Draper Associates: Investors in CoinLab and direct Bitcoin exposureFounders Fund: Investors in BitPay ($2m Series Seed), OpenCoin / RippleLightspeedVentures: Investors in CoinlabWinkelvoss Twins: 100,000+ Bitcoin exposure; Investing in related startupsWednesday, June 5, 13
  • Notable CompaniesMt Gox:Largest Bitcoin exchange started in 2010; 63% of global transactions (April 2013)Handful of security breaches and trading issues; currently being sued by CoinLabFounder sold company in 2011 to individualCoinLab:Building first US focused on exchange; founded in Seattle by ex-MSFT employeesRaised ~$1m seed round from Draper, LightspeedSigned deal with Mt Gox to manage their US trades; Mt Gox didn’t executeCoinbase:Y-Combinator, USV-backed startup; has raised >$6m to dateGoal is to simply buying and using Bitcoin for average user; no trading,ACH, etcIts dead simple to use, but potentially too basic for current usersWednesday, June 5, 13
  • Notable CompaniesBitPay:Leading Bitcoin payment processor online and in storeLaunched May 2011; March 2013: $5.2m of payments, 4,500 merchantsMay 2013: Raised $2m of funding from Founders FundOpenCoin / Ripple:Distributed currency exchange; founded by Jed McCaleb (Mt Gox)Ripple is both a currency and a unit of exchange; in theory making thepractice of exchanging money more efficient; less costlyRaised $2m from GoogleVentures,A16Z, Founders Fund, othersOther Names:BitSpend, BitPremier, CoinSetter,Tradehill, CoinapultWednesday, June 5, 13
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