Introduction to CryptoEconomics New frontier or tulip mania?
Sep-2017
Disclaimer → This report is not an investment recommendation → There is no direct connection between past performance and future results → Do not invest more than you can afford to lose → Always control and keep private keys safe → Invest on your own only if you understand technology → Give funds to third party only if you trust incentives of the team which will be managing assets on your behalf → Do not stress and have fun
1
Table of Content I.
Gentle introduction to CryptoEconomics
II. Deep dive to public blockchain – technical, but essential to understand and follow the topic! III. DApps - Would we see social media, messaging and other apps in a decentralized form? IV. Infrastructure – gate from fiat to crypto world V. Contacts
2
I. Gentle introduction to CryptoEconomics
3
CryptoEconomics has emerged and it is difficult to ignore. Bitcoin is its core, but CryptoEconomics expands far beyond it CryptoEconomics market capitalization US$bn
Source: Coindance
Relative performance: crypto vs. traditional assets LTM
Source: Coindance, Bloomberg
Last twelve months Bitcoin outperformed all traditional assets and was itself outperformed by emerging CryptoEconomics asset class
4
Bitcoin was introduced by Satoshi Nakamoto in 2009. It innovated blockchain technology and gave a birth to the new ecosystem - CryptoEconomics
Enterprise Solutions
Private
Crypto Currencies
Public
Decentralized application platforms
Public
Decentralized applications
Public 5
Attention to CryptoEconomics from investment community and social media is increasing y-o-y In 2017 for the first time ICOs funding exceeded venture capital... US$mln
…while retail and social media attention is still primarily with Bitcoin Google trends index 120
Bitcoin
Ethereum
Blockchain
Cryptocurrency
100
80
60
40
20
0 Aug-15 Source: Coindesk
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Source: https://trends.google.ru/
Some understand the underlying technology and other don’t, but everyone – from JP Morgan CEO Jamie Dimon to regular Joe - has an opinion about Bitcoin and CryptoEconomics these days
6
Majority of global regulators are taking a closer look at blockchain technology and CryptoEconomics 58 countries Permissive
8 countries Contentious
3 countries Hostile
Source: http://map.bitlegal.io
Regulation of CryptoEconomics is a matter of time. Recent actions in China confirm that regulator’s agenda is to regulate participants and instruments rather than banning CryptoEconomics as an asset class
7
Impact of CryptoEconomics on the real economy may be significant, but it’s a matter of time, tech development and regulation 58% of surveyed executives from tech sector believe 10% of global GDP will be stored on blockchain by mid-2020s…
… and blockchain technology would have the greatest impact on finance industry
US$trln 84.6
Finance
75.2
77%
Identity
54%
Property title
63x
9.4 0.15 World GDP 2025
RegularE
CryptoE 2025
Source: WEF, Bitcoin and Blockchain Thought Leader Annual Survey, RCP Research
38%
Communication
23%
Decentralized coordination
23%
Other
15%
Privacy
15%
CryptoE Sep-16 Source: WEF, RCP Research
Evangelists say it would change everything and skeptics say it would die and change nothing. The answer most likely will be somewhere in between, but to which of these two extremes the outcome skews towards and when it will do so is the subject of much speculation
8
II. Deep dive to public blockchain – technical, but essential to understand and follow the topic!
9
Using Bitcoin example to understand key terms and definitions 1
Bitcoin uses a distributed database to store transactions
Distributed ledger
2
in blocks, which refer to previous blocks,
Blockhain
3
and anyone can join the network
Public / permissionless
4
submit transactions
Users
5
create and add blocks
Miner
6
subject to commitment of computational resources
Hash power
7
and validate transactions and blocks by
Miner / Node
8
using consensus algorithm
Proof of work 10
Top-10 public blockchain account by ca. 70% of CryptoEconomics capitalization and represented by cryptocurrencies and decentralized applications platform Consensus algorithm
Highlight
→ $62.0
→ PoW, SHA-256
→ Peer-to-peer cryptocurrency → Digital gold
→ $270
→ $25.6
→ PoW, Etash
→ Smart contracts and decentralized applications platform
→ Cryptocurrency
→ $420
→ $6.9
→ PoW, SHA-256
→ Fork from Bitcoin
→ XRP
→ Permissioned settlement system
→ $0.17
→ $6.7
→ Trusted ledger consensus
→ Settlement system for banks
→ 2011
→ LTC
→ Cryptocurrency
→ $48
→ $2.5
→ PoW, Scrypt
→ Peer-to-peer cryptocurrency → Digital silver
→ DASH
→ 2014
→ DASH
→ Cryptocurrency
→ $358
→ $2.7
→ PoW, X11
→ Privacy-centric digital currency with instant transactions
7
→ NEM
→ 2014
→ XEM
→ Decentralized applications platform
→ $0.21
→ $1.9
→ Proof-of-Importance
→ Smart contracts and decentralized applications platform → P2P messaging system
8
→ IOTA
→ 2015
→ MIOTA
→ Cryptocurrency
→ $0.53
→ $1.5
→ n/a
→ Cryptocurrency for internet-of-things
9
→ Monero
→ 2014
→ XMR
→ Cryptocurrency
→ $89
→ $1.3
→ PoW, CryptoNight
→ Private and untraceable cryptocurrency
10
→ Ethereum clasic
→ 2015
→ ETC
→ Decentralized applications platform
→ $10
→ $1.0
→ PoW, Etash
→ Fork from Ethereum
№
Name
Year
Ticket
Type
1
→ Bitcoin
→ 2008
→ BTC
→ Cryptocurrency
→ $3,743
2
→ Ethereum
→ 2015
→ ETH
→ Decentralized applications platform
3
→ BCash
→ 2017
→ BCC
4
→ Ripple
→ 2012
5
→ Litecoin
6
Source: https://coinmarketcap.com, Sep-23,2017
Px US$
MCap US$bn
11
Bitcoin price performance Bitcoin price performance since Jan-1, 2012
Key events:
US$ 1
Oct-14, 2013 Baidu begins accepting Bitcoin
2
Nov-20, 2013 Subway begins accepting Bitcoin
4,000
3
Dec-13, 2013 China's Central Bank bans Bitcoin transactions
3,500
4
Feb-24, 2014 Mt. Gox closed
5
Jan-4, 2015 Bitstamp hacked
2,500
6
Apr-1, 2017 Japan declared Bitcoin as legal tender
2,000
7
May-23, 2017 Number of Tx/day reach all time high
8
Jun-1, 2017 Bitcoin hard fork fear
9
Aug-1, 2017 Bitcoin Cash splits from Bitcoin
5,000 11
BTC Price
4,500
3,000
8
10
9
1,500 3
6 4
1,000 1st halving day
7
2
500
5
0 Jan-13 May-13 Sep-13
End of Aug, 2017 SegWit locked in
11
Sep-13, 2017 China gov orders to stop local bitcoin trading
2nd halving day
1 Jan-12 May-12 Sep-12
10
Jan-14 May-14 Sep-14
Jan-15 May-15 Sep-15
Jan-16 May-16 Sep-16
Jan-17 May-17 Sep-17
Source: RCP Research
Regulation, technological development of Bitcoin protocol, business use of Bitcoin and malicious attacks have had significant impact on Bitcoin price during last years
12
Bitcoin is a pure speculation now. Multi-billion question - can it fulfill vision of its creator? Key facts
Network scale and security increased by 3.5x in LTM… 10
250 Hash rate, mln TH/s
8
245
6
240
4
235
2
230
0
225 Sep-16
Nov-16
Jan-17
Mar-17
Founder
→ Satoshi Nakamoto
Vision
→ Peer-to-peer digital currency
First block
→ Jan-3, 2009
Token
→ Bitcoin = BTC → 1 BTC = 100,000,000 Satoshi
Mining
→ Proof of work, SHA-256 → Block size 1 megabyte → 1 block every 10 minutes, ca. 2K Tx per block
Supply
→ BTC supply is capped at 21mln BTC → 75% has already been mined
Security
→ Bullet proof and military grade → Hash rate: 7.8mln TH/s (3.5x Y-o-Y growth)
Network processing capacity
→ Max of 3 transactions per sec → Fully utilized, scaling is required
Transaction confirmation time
→ Minimum: 10 minutes, e.g. 1 block → Recommended: 60 minutes, e.g. 6 blocks
Users
→ 17mln BTC wallets (2.3x Y-o-Y growth)
Development community
→ Bitcoin Core → >1000 developers, etc.
Difficulty, #
May-17
Jul-17
Sep-17
Source: https://blockchain.info
…and reached its transaction processing capacity limit 4.5
Tx/second
4.0 3.5 3.0
Maximum transaction capacity
2.5 2.0 1.5 1.0 0.5 Jan-11
May-12
Sep-13
Jan-15
May-16
Sep-17
Source: https://blockchain.info
13
Miners economic incentive mechanism embedded into Bitcoin PoW protocol creates additional pressure to scale the network ca. 90% of the miners revenue comes from the block reward that halves every 210,000 blocks…
…currently users are paying only a fraction of the miners fees, but this is not sustainable long term Miners revenue as % of daily transaction volume
Block reward, BTC
25
BTC supply, mln
0.80%
50.0 50.0
20
40.0 15 30.0
0.09%
Tx cost
25.0 10
Block reward
Miners revenue
Source: RCP estimates
Decreasing miner compensation could be balanced by increase in…
20.0 12.5 5
10.0
1,956 BTC daily
60.0
6.3 3.1
1.6
0.8
0.4
0.2
2028
2032
2036
2040
0.0
Bitcoin price
Tx Fees
Tx volume
x
x
x
0 2009
2013
Source: RCP estimates
2016
2020
2024
Source: RCP estimates
Mining is essential to cryptocurrency as it provides security of the network, lack of economic incentive would eventually result in decrease of security and make Bitcoin more vulnerable for the malicious attacks
14
Ethereum price performance Ethereum price performance since ICO Key events:
US$ 7
400
8
Daily ETH exceeded BTC transactions
350
300
1
Mar-14,2016 HomeStead protocol upgrade to ETH network
2
Apr-30, 2016 DAO established and raised US$150m
3
June-12, 2016 DAO is compromised by the hacker, US$60mln lost
4
July-02, 2016 Ethereum Classic hard fork
5
Nov-11, 2016 Further improvement of ETH protocol, thwarted further spam attacks
6
Apr-1, 2017 Japan declared Bitcoin as legal
7
Julu-2017 1st all time high for BTC in 2017– US$2,800
8
Sep-2017 2nd all time high for BTC in 2017 – US$4,800
9
Sep-2017 Announcement of technological roadmap for 2017-2018
250 9
200
150
100 ICO Mania begins
50
0 Nov-15
Jan-16
1
2
Mar-16
May-16
3
4
Jul-16
6
5
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Source: RCP Research
Bitcoin developments as well as ICO mania have had significant impact on Ethereum price during last year
15
Ethereum is an evolution of blockchain technology from being a pure cryptocurrency to a foundation layer for DApps Key facts
Network scale and security increased by 19x in LTM… 100.0 Hash rate, K GH/s
90.0
250
Founder
→ Vitalik Buterin and the team
200
Vision
→ Censorship-resistant self-sustaining decentralized world computer that can perform calculations, store data, and allow communications
First block
→ July-30, 2015
Token
→ Ethereum = ETH → 1 ETH = 1,000,000,000,000,000,000,000 Wei
Mining
→ Proof of work, Etash → Maximum block size in Ethereum is around 5.0mln Gas. Average transaction = 50,000 Gas
Supply
→ Uncapped → Constant supply- ca. 18mln. ETH/year → May change when PoW -> PoS
Security
→ High → Hash rate: 97.6 K GH/s (19x Y-o-Y growth)
Network processing capacity
→ Max of 6 complex Tx per sec, e.g. smart contracts → Fully utilized, scaling is required
Transaction confirmation time
→ Minimum: 17 seconds, e.g. 1 block → Recommended: 2 minutes, e.g. 6 blocks
Users
→ 3.5mln ETH wallets (7x Y-o-Y growth)
Development community
→ Ethreum Foundation → Turing colmplete programming language
Difficulty, #
80.0 70.0 60.0
150
50.0 40.0
100
30.0 20.0
50
10.0 0.0
0
Sep-16 Nov-16 Source: https://blockchain.info
Jan-17
Mar-17
May-17
Jul-17
Sep-17
…and as well as Bitcoin has reached its capacity limit Tx/second 7.0 6.0
Maximum transaction capacity
5.0 4.0 3.0 2.0 1.0 Jul-15
Dec-15
May-16
Oct-16
Source: https://etherscan.io, http://www.ethgasstation.info
Mar-17
Aug-17
16
Ethereum developers proposed miners incentives mechanism whereby miners are not required to compensate its falling revenues by users users are paying only a fraction of the miners’ revenue and it looks sustainable until ETH supply model stands unchanged
For the time being Ethereum protocol assumes unlimited supply of its token with a stable block reward…
Miners revenue per one block 120
Sypply, ETH mln
7.0
Reward, ETH/block
100.00%
6.0
110
5.0 100 4.0 0.01%
90 3.0
Tx cost
Block reward
Miners revenue
Source: RCP estimates
80 2.0
70
One of the questions is how migration from PoW to PoS would impact existing equilibrium?
1.0
PoW 60 Jul-15
PoS
0.0 Oct-15
Source: RCP estimates
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
17
Scaling is the main and universal challenge for the public blockchain that stands on a path to the mass adoption In order to scale public blockchain to a billion of users…
…community needs to develop a technical soliton(s) to find an equilibrium between security, speed and cost
Transaction cost
High
Medium
Medium
Low
Low
Security
High
High
Medium
Medium
Medium 175,000
Processing capacity (Tx/ second)
1,700
3 BTC
7 ETH
200 PayPal
VISA
Facebook
Source: @VladZamfir | Twitter Source: RCP Estimates
18
Various scaling alternatives are being considered and implemented by the blockchain community Security
Speed
Tx cost
№
Solution
BTC
ETH
WTF?
Status
1
→ Segregated witness
Yes
No
→ Decreases average size of Tx → Increases number of Tx that could be fit in one block → Expected Tx processing capacity increase – 60%
→ Implemented in Q317
2
→ 2MB block size
Yes
No
→ Increases block size from one to two megabyte → Increases number of Tx that could be fit in one block → Expected Tx processing capacity increase by 2x times
→ Ongoing debate → Hard fork is needed → May happen in Q417
3
→ Off-chain payment channels
Yes
Yes
→ Mechanism by which Tx that would normally occur on the blockchain instead get conducted off of the blockchain
→ Ongoing debate → BTC: Lightning → ETH: Raiden
4
→ Sharding
Yes
Yes
→ Blockchain is separated into different shards → Each shard is process by different nodes → Shards communicate to form the blockchain
→ Ongoing debate → ETH is more advanced
5
→ Plasma
No
Yes
→ A series of contracts that run top of a blockchain and treated as blockchain with its own history and computation – “Plasma child chains”
→ Ongoing debate → May happen in 2018
6
→ Off-chain computation
No
Yes
→ Mechanism by which computation, e.g. PoW that would normally occur on the blockchain instead get conducted off of the blockchain
→ Ongoing debate → May happen in Q118
7
→ Proof of stake
No
Yes
→ Stakeholders vote with their “dollars” instead of computational power
→ Ongoing debate → May happen in 2018
Source: RCP research
There is no single silver bullet to deal with the scaling challenge - most likely combination of various approaches will eventually solve the issue and allow public blockchain to leap forward
19
If scaling issues are resolved and Bitcoin is not banned by the regulator, the price could rise by multiples Metcalfe’s law - network value is equal to the number of connected users^2 …
…give an indication that w/o resolution of the scaling issue BTC price should be around US$2,000 80
US$bn
BTC/US$ Mcap
Network
Peers
Connections
Value
5,000
Matcalfe's law 4,500
70
4,000 60 3,500
2
1
4
50
3,000
40
5
10
25
2,500 2,000
30 Average mining cash cost/ BTC
1,500
20 1,000
12
66
144
10
500
Jan-13
Aug-13
Mar-14
Oct-14
May-15
Dec-15
Jul-16
Feb-17
0 Sep-17
Source: RCP Research
It seems that market is already pricing the resolution of the technical issue on the back od SegWit implementation, but it is not the case yet and therefore ST price correction to US$1,500-2,000 is possible
20
III. DApps - Would we see Social Media, Messaging and other apps in a decentralized form?
21
As Ethereum and DApp platforms persist, the DApp ecosystem is able to roll out
Prediction markets
Augur REP
Gnosis GNO
Gaming
GameCredits GAME
FunFair FUN
First Blood 1ST
Data Storage
Siacoin SIA
Storj STORJ
Asset Managers
Iconomi ICN
Melonport MLN
Filecoin File
Capitalization of DApp ecosystem has exceeded US5.5bn in 2H2017. It is below 10% of the total CryptoEconomics capitalization, but has the highest potential
22
ICOs – an objective was and is to introduce a funding tool for open software development projects… Token’s functionality can vary… Asset
Peers
Connections
Value Network utility
Token
ETH
IOTA
STORJ
REP
0x
Overview
DApp platform
IoT currency
Storage platform
Prediction market
Decentralized exchange
ICO date
07/22/14
11/25/15
7/18/14
08/01/15
08/15/17
ICO price
$0.311
$0.000
$0.009
$0.602
$0.048
x Debt / Equity
Real life asset holder
x
x
Ethereum DApps account for 5% of its Mcap 25.6
Current price
$283.350
$0.537
$0.552
$18.009
$0.194
US$ ROI
+90,886%
+123,511%
+6,021%
+2,890%
+305%
BTC ROI
+522%
+1092%
+749%
+794%
-7%
1.6 ETH
ETH DApps
Source: RCP Research
Ethereum was funded via ICO in 2014 and probably is the best up-to-date example whereby developers team delivers its ICO promises
23
… today 95% of the ICOs is a dog fight between greed and fear in a wild-wild west Everyone irrespective of business niche or needs…
Source: @VladZamfir | Twitter
… is doing or thinking about ICOs these days…
Source: @VladZamfir | Twitter
Current state of the ICOs mania is harmful to the CryptoEconomics. External regulation which is being introduced by SEC and other global regulators is a positive news for the crypto community
24
IV. Infrastructure – gate from fiat to crypto world
25
Blockchain infrastructure is evolving with a fast pace together with CryptoEconomics Infrastructure
Crypto Exchange
Wallets
Payment rails
Mining
Facilitating payments using cryptocurrency
Folks that hold, secure and add new blocks to blockchain
$
Function
Purchase, sale and trading of cryptocurrency
Storage of crypto currencies and assets
Examples
Source: RCP research
26
Crypto-exchanges are an investor’s gate from fiat to the crypto world …and as anticipated Bitcoin and Ethereum are dominating the trading volume
More than US$2bn worth of assets are daily changing hands on the crypto-exchanges… US$mln
484
Bitcoin
Ethereum
Bitcoin Cash
Litecoin
Other
481 453
26.0% 40.28%
262
180
168
160
6.98%
159 135 111
8.78% Bithumb KRW
Bitfinex US$
BitMEX US$
Bittrex Crypto
GDAX US$
Poloniex US$
Source: https://coinmarketcap.com/exchanges/volume/24-hour/all/, as of Sep-22,2017
Kraken Coincheck HitBTC EUR
JPY
Crypto
Coinone
17.97%
KRW Source: https://coinmarketcap.com/exchanges/volume/24-hour/all/, as of Sep-22,2017
Top-tier crypto exchanges are located in a jurisdictions with crypto-friendly environment such as Japan South Korea or in USA whereby they are licensed by the local state authorities
27
You would need a wallet to store cash/asset, even if it is a digital one Wallet type
Security Score
Clint has access to private key
Cryptography work
Transaction validation
Hot wallet
0
No
Third party
Third party
Light dependent
1
Yes
User’s computer
Third party
Light independent
2
Yes
User’s computer
SPV
Hardware wallet
2
Yes
User’s USB stick
SPV
Full client
3
Yes
User’s computer
Full node
Paper wallet
3
Yes
Client side
Computer is needed
Example
Source: RCP research
To draw the analogy – public key is a debit card and private key is the pin, so the objective is to control and keep private keys in the safe place
28
Crypto exchanges and wallets are relying on the software and therefore are subject to malicious hacker’s attacks Hack
MtGox
DAO
Parity
Date
2012
2016
2017
Asset type
Exchange
DApp
Wallet
Size
US$450mln
US$60mln
US$32mln
Why?
Exchange wallet was compromised
Vulnerability of smart contract
Code of multi sig wallet was compromised
Hack Consequences
MtGox bankruptcy and bitcoin price recession
ETH hard fork
-
Investigation results
Some funds were returned
Funds are not returned
Funds are returned by White Hat Hackers
Source: RCP research
Source: @VladZamfir | Twitter
Malicious hacker’s attacks have had significant impact on Bitcoin and Ethereum infrastructure, but never effected underlying blockchain networks
29
Pace of payment infrastructure roll-out would depend on the resolution of the scaling issue and regulators view on the cryptocurrencies Bitcoin to Business
Source: https://coinmap.org/
30
V. Contacts
31
Please let us know should you have any questions. You feedback is much appreciated… → Nikolay Vasilkov
[email protected] → Marina Alekseenkova
[email protected] → Igor Mazilin
[email protected]
…as well as donations if you find materials beneficial to you: 1GYtmdJmwEMDTL7QrXSDJonPrcssMucvWk 32