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Blockchain & Cryptocurrencies Intro - July 2017

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An overview of blockchain, cryptocurrencies, Bitcoin, Ethereum, ICOs. Meant to be introductory level but provide a slightly higher level of detail. Includes some companies to watch in the blockchain space. Prepared before the August 1 fork, which did occur.

Published in: Technology

Blockchain & Cryptocurrencies Intro - July 2017

  1. 1. blockchain and cryptocurrencies audrey chaing july 2017
  2. 2. Table of Contents • Background • Trends and News in Blockchain, Bitcoin, Ethereum, and ICOs • Companies to Watch
  3. 3. Background
  4. 4. What is Blockchain? Source: Blockgeeks • Blockchain technology allows digital information to be distributed but not copied • Invented by person/group Satoshi Nakamoto • Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology • It is: – Distributed database – Public and easily verifiable. No centralized version. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet – Transparent & Incorruptible - Network reconciles every transaction that happens in ten-minute intervals. Each group of these transactions is referred to as a “block”. Altering any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network – A network of nodes - Every node is an “administrator” of the blockchain, and joins the network voluntarily (in this sense, the network is decentralized). However, each one has an incentive for participating in the network: the chance of winning Bitcoins. Nodes are said to be “mining” Bitcoin, but the term is something of a misnomer. In fact, each one is competing to win Bitcoins by solving computational puzzles
  5. 5. How Does Blockchain Work? Source: Blockgeeks
  6. 6. Blockchain Market Map Source: CBInsights
  7. 7. Major Cryptocurrencies Source: coinmarketcap.com, wikipedia.com • As of July 2017, there were over 900 digital currencies in existence • The cryptocurrency index CRIX is a conceptual measurement jointly developed by statisticians at Humboldt University of Berlin, Singapore Management University and the enterprise CoinGecko and was launched in 2016. The index represents cryptocurrency market characteristics dating back until July 31, 2014
  8. 8. Major Cryptocurrencies Source: wikipedia.com Release Currency Symbol Founder Hash Algorithm Timestamp Notes 2009 Bitcoin BTC, XBT Satoshi Nakamoto SHA-256d Proof of Work 1st decentralized ledger currency. Most famous, highest market capitalization 2011 Litecoin LTC Charles Lee Scrypt Proof of Work 1st to use Scrypt 2013 Ripple XRP Chris Larsen & Jed McCaleb ECDSA “Consensus” Designed for P2P debt transfer. Not based on bitcoin 2015 Ethereum ETH Vitalik Buterin Ethash Proof of Work Supports Turing -complete smart contracts
  9. 9. Bitcoin vs. Ethereum Source: Ameer Rosic • Ethereum not just a digital currency. It is a blockchain-based platform with many aspects. It features smart contracts, the Ethereum Virtual Machine (EVM) and it uses its currency called ether for peer-to-peer contracts. • The smart contract applications are powered by ether, Ethereum’s blockchain based cryptocurrency • Bitcoin is a store of value, can tell where money is. Ethereum has the capability of saying where the money will be • Ethereum allows you to create digital tokens that can be used to represent virtual shares, assets, proof of membership and more. These smart contracts are compatible with any wallet, as well as exchanges that use a standard coin API • Bitcoin’s average block time is about 10 minutes, while Ethereum’s aims to be 12 seconds. This quick time is enabled by Ethereum’s GHOST protocol. A faster block time means that confirmations are quicker. However, there are also more orphaned blocks • More than two-thirds of all available bitcoin have already been mined, with the majority going to early miners. Ethereum raised its launch capital with a presale and only about half of its coins will have been mined by its fifth year of existence • The reward for mining Bitcoin halves about every four years and it is currently valued at 12.5 bitcoins. Ethereum rewards miners based on its proof-of-work algorithm called Ethash, with 5 ether given for each block. Ethash is a memory hard hashing algorithm, which encourages decentralized mining by individuals, rather than the use of more centralized ASICs as with Bitcoin
  10. 10. Initial Coin Offerings (ICOs) Source: Techcrunch, Travis Scher • Start-ups and founders have raised more than $1 billion so far in 2017 by selling customized virtual currencies via ICOs • July 25, 2017 SEC finally weighed in: at least some virtual currencies should be considered securities and made subject to federal securities laws. It suggested that not every token should or will be defined as a security but rather that determinations will be made on a case- by-case basis, depending on “facts and circumstances . . .” • ICO is a crowdsale of cryptographically secured blockchain tokens to fund the development and operation of one of three types of blockchain projects: – A platform-layer blockchain (such as ethereum or Lisk) – An organization that operates on a blockchain (known as a decentralized autonomous organization (’DAO'), or a centrally organized distributed entity (’CODE') – A decentralized application ('dapp') that runs on a platform-layer blockchain • Lots of excitement but pitfalls – – Regulatory uncertainty – High valuations/over-capitalization – Lack of controls – Lack of business use cases
  11. 11. Trends and News In Blockchain, Bitcoin, Ethereum, and ICOs
  12. 12. The August 1st Bitcoin Fork Source: Various – bitcoinexchangeguide.com, 1August.org, coinworld.io • Most blocks now hit the 1MB blocksize limit of the bitcoin blockchain – Resulting in higher fees, lower transaction throughput, slow transactions – Makes bitcoin an increasingly worse payment platform as popularity increases, which effects broader mainstream adoption • Each block holds a finite number of transactions. – Let’s say a block can be only 1mb (1,000,000 bytes) in size, and the average transaction is 500 bytes, then on average each block will be able to hold ~2000 transactions • This can create an issue since blocks are created on average every 10 minutes – This means that in one hour you’ll confirm an average of 12,000 transactions – Compared to credit card companies that confirm 2,000 every second -> Bitcoin network is slow • Once a transaction is confirmed 6 times (takes an hour on average) it is irreversible
  13. 13. The August 1st Bitcoin Fork Source: Various – bitcoinexchangeguide.com, 1August.org, coinworld.io • Bitcoin Core: UASF (User Activated Soft Fork), also called BIP148, uses Segwit (Segregated Witness), by users – A transaction contains a lot of different pieces, and one of them is the transaction identification. Segwit will split the block in two parts, separating the identification from the rest of the transaction data. The transaction data size shrinks and more transactions fit in the new block, thus increasing the bitcoin network capabilities. – Also enables the Lightning Network which enables users to make smaller payments almost instantly without a fee. – Main criticism is it’s temporary fix -> hard fork still needed down the line • Segwit2x - hard fork that also activates segwit to speed up transactions, increases the block size to 2MB, by large miners – Allows more transactions to fit into each block. – Segwit2x receives a lot of criticism as a larger block size makes it more difficult for smaller miners to compete. It will centralize the bitcoin network and give Jihan (the main proponent, large miner) and other big miners more control. • User-activated hard fork that was initially supposed to just be a contingency plan against the user-activated soft fork (UASF) probably happening. This means Bitcoin Cash supporters will try to veer off from the main chain and operate on their own terms of consensus
  14. 14. The August 1st Bitcoin Fork Source: Various – coindesk.com • August 1 at about 12:20 UTC, mining pool ViaBTC will give miners who are a part of its pool the option to direct their computing power to a new, controversial software client known as Bitcoin ABC – Should enough miners take up that option, the result will be a permanent divergence in the bitcoin blockchain and the creation of a new cryptocurrency known as Bitcoin Cash, or BCC (update: now BCH) – Increases bitcoin's block size parameter to 8 MB and removes the long-debated code optimization Segregated Witness, which is due to activate on the main bitcoin blockchain later in August – Of the more than 20 bitcoin mining pools, ViaBTC is the only pool to publicly support Bitcoin ABC, so far – Unclear how much mining power will go to the new blockchain, whether the fork will result in something long lasting or if the new cryptocurrency will fall to the wayside due to lack of support • Bitcoin cash futures are currently trading at $275 on ViaBTC’s exchange • Must control your private keys before the fork in order to have both BTC and BCC • Btcforkmonitor.info is one site tracking potential bitcoin forks. If it detects a fork, a red notification promises to pop up at the top of the website. – Developers of the site are running both Bitcoin ABC and Bitcoin Core nodes, so they can compare the two clients and see how many blocks are on one chain versus the other
  15. 15. News in Q1 2017 Source: Various – coindesk.com • Aggregate cryptocurrency market cap hits all-time high of $25bn as every top 10 asset rallies • Bitcoin used more than ever with over 287,000 transactions per day, leading to .92 MB blocks and $0.62 transaction fees • Ethereum gains $3.6bn or 500% in market cap as transaction numbers rise and enterprises display interest publicly • Early sectors become more defined as developer and investor interest grows, including privacy based cryptocurrencies, asset management platforms and prediction markets • Hyperledger grows in enterprise membership, proofs of concept and frameworks, Enterprise Ethereum Alliance launches with industry leaders and a vision of interoperability between permissioned and public ethereum • Blockchain venture capital totaled $107m, ICOs totaled $36m with several major deals on the horizon • Regulation makes a large impact on cryptocurrency markets as the U.S. SEC rejects 2 ETFs, PBoC warnings lead to global volume crash and Chinese 'Big 3' instituting trading fees, Japan sees bitcoin as legal payment method
  16. 16. Companies To Watch
  17. 17. Blockchain-Backed Loans Source: saltlending.com, crunchbase.com, nasdaq.com • Use XRP, BTC, ETH as collateral for loans. Receive RMB, USD, EUR • Based on idea that collateral > credit score • SALT is a membership based financing ecosystem. Those who own blockchain assets can take out a loan, of any size, without selling their collateral • Secured Automated Lending Technology is a protocol and asset agnostic architecture. If you have collateral you wish to retain, you can borrow in an asset you prefer to spend, regardless of credit history or geographic constraints • SALT is automated, cost-effective, transparent and cryptographically secure • This allows Members to plan tax events, and maintain their long position in a chosen blockchain asset • Tethered to Ethereum ERC20 smart contracts • Doesn't perform credit checks on borrowers but does conduct full Anti-money Laundering (AML) and Know Your Customer (KYC) verification checks. Loans made via the platform are denominated in and repaid with traditional currencies
  18. 18. Market Source: Federal Reserve Bank of New York • Q1 2017, consumer debt rose to $12.73 trillion, exceeding its peak in 3Q 2008. Student loans account for 10.6% of that total, up from 3.3 percent in 2003, while housing’s share, though still great, has fallen back to 2003 levels • Typically credit cards and student loans are not backed by collateral, but rates should be better if collateral is provided
  19. 19. Competition Source: EthLend.com • Blockchain Technologies – EthLend enables secured lending to Ethereum users. Fully decentralized peer to peer lending Smart Contract on Ethereum block-chain for lending Ether by using tokens as a collateral. Token pre-sale starts in 55 days – Ether being lent and being used as collateral, no fiat currency involved • Traditional Secured Lending – Secured loans and lines of credit from well-known banks, with personal assets such as equity in your home, car, or savings account used as collateral – Slow process including appraisals – Factors like credit score still matter – Only fiat currency • Traditional Unsecured Lending – Credit cards and student loans are large segments of consumer unsecured debt – Rates for credit cards can be egregious – Student loans only given for the specific purpose of attending school – Only fiat currency • Peer to Peer Unsecured Lending – Platforms like Lending Club and Prosper provide peer to peer loans which are typically unsecured – Funding times may be slower – Only fiat currency
  20. 20. People Source: saltlending.com, crunchbase.com • Based in Denver, CO • 15 employees • 5 advisors • Erik Voorhees (Founder, Board Director) – CEO & Founder of ShapeShift, and previously founded Satoshi Dice and Coinapult. Erik is well known within the digital asset community for his involvement in numerous high-profile ventures • Shawn Owen (Founder, CEO) – Serial entrepreneur. Involved with blockchain technology through his advocacy of bitcoin in early 2011. He frequently speaks and writes on Blockchain technology and digital currencies
  21. 21. Milestones Source: saltlending.com, angel.co • Investors – Michael Perklin, also Advisor - Blockchain Security Expert. Founded Bitcoinsultants, CryptoCurrency Certification Consortium, Bitcoin Alliance of Canada. CISO of ShapeShift. Angel Investor – Grant G – preferred Angelist investor • Funding? Not public but call 15 employees @ $100k each = at least $1.5mm
  22. 22. Product Development Source: saltlending.com, angel.co • Already had first round of membership sale • Website is designed well and has the expected security features like 2-factor auth using Google Authenticator • Sales/Distribution: token offering, paid in ether, to fund membership fee. Mailing list, Facebook page, meetup events, speaking at conferences
  23. 23. Product Development Source: saltlending.com
  24. 24. Potential Exits Source: Venture Scanner • Some examples of Bitcoin Financial Services exits, though none in Ethereum • However, it is widely speculated that Ethereum will overtake Bitcoin in importance • Traditional financial services firms are also becoming more involved in blockchain technologies • The number of exits has increased dramatically over the past few years
  25. 25. Key Risks • Business Case/Execution – Unlike many other blockchain intitiatives, there is no white paper, so unclear on the exact mechanics – Executing KYC and AML correctly – However, many tokens have now been built on Ethereum so the road has been traveled (mitigating factor) – Company leaders and advisors are knowledgeable in the space – If you have money (in the form of crypto), do you need money (in the form of fiat loans)? – How to mark such volatile assets? Will additional collateral be needed during life of loan? • Revenue Model – Will the membership fee be enough for a profitable business? Is there enough demand? – Will SALT tokens be worth anything? – How to deal with potentially restricted fiat currencies like RMB? – How high are interest rates compared to more traditional loans, and are these rates compelling to both lender and borrower? – Potential to be stuck with a wild card asset should borrowers default on their loans • Scalability & Security – There have been instances of blockchain technologies struggling with growth, as well as examples of systems being hacked – If collateral is held in escrow, who is responsible if the crypto is stolen?
  26. 26. Payments To/From Frontier Markets Source: bitpesa.co, angel.co, cex.io • Digital F/X platform that offers businesses a fast, easy and low-cost way to make payments to, from, & within frontier markets, particularly Africa • BitPesa was launched on November 1, 2013 in Nairobi, Kenya, and also has offices in Lagos, London, and Dakar • $5.75mm raised in 4 rounds from 9 investors (BitFury Capital, Blockchain Capital, Draper Associates, and more). Most recent Series A funding $2.75mm in January 2017 • Founders : Elizabeth Rossiello, Charlene Chen, Amy Ludlum (no longer with firm). All who have lived in Africa for substantial amounts of time • 25 employees from companies like Google, Facebook, Apple, Credit Suisse, KPMG and JPMorgan • They have already covered over 85 countries, 6,000 users and 17,000 transactions
  27. 27. Blockchain for Enterprise Source: bloq.co, angel.co • Delivers enterprise grade blockchain technology to leading companies worldwide • Software platform allows companies to build, manage and scale robust blockchain-enabled ecosystems, backed by enterprise-grade service and support. Bloq’s solution set is built on open source technology, and provides the key connective tissue to securely interoperate with existing business systems • Founded November 2015 and headquartered in Chicago, with offices in Atlanta, Washington, DC and Shanghai • Acquired Skry (blockchain analytics, $1.1mm seed from The Hive) in February 2017 • Founders: Jeff Garzik (longtime engineer & Bitcoin Core developer), Matthew Roszak (founding member Blockchain Capital, Tally Capital, Chicago Blockchain Center) • 5 advisors, 11-50 employees, currently hiring for Blockchain Engineer and Engineering Intern • Partners include Deloitte, Microsoft, Circle, Bitpay

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