bitcoin and the blockchain 2016

Bitcoin and Blockchain

Outline

v What is Bitcoin?

� How does it work?

� Remittance

� Bitcoin as an asset

v Blockchain

� Smart contracts

� Bank implementation

v Ethereum

� Expanding blockchain functionality

� Decentralized Autonomous Organization

BitcoinA Virtual Currency

v World’s first decentralized cryptocurrency

v Peer-to-peer transaction network launched in 2009

� Circumvents the need for a middleman

v Transactions verified by network nodes and recorded in a publicly distributed ledger

v As of Feb. 2015, accepted by over 100,000 merchants worldwide

v 66 active exchanges worldwide

v Current market price for one bitcoin = $671

� Demand driven due to predetermined supply

v Essentially virtual bank accounts

v Wallets vary depending on how and where you use Bitcoin

v Vary based on:

� Control over bitcoins

� Privacy

� Encrypted backups

� Security

v Private Key

� Only way to access wallet

BitcoinWallets

https://blockchain.info/charts

BitcoinAddresses

v Created privately by each user

v The only information used to define where bitcoins are allocated and sent

v Once addresses are used they become tainted by the history of all transactions they are

involved with

v Addresses do not tend to remain anonymous

� Bank account details must be provided for transactions with exchanges

v Advisors recommend using a different address with every transaction

[QR code associated with the address]

[Value of transaction]

[Received]

[Paid]

[Transaction Label]


[Payer using balances from multiple addresses to execute transaction]

[QR code associated with the address]

[Value of transaction]

[Transaction Label]


BitcoinMiners

v Offer their computing power to process and record transactions into the public ledger

v Must solve complex, mathematically encrypted problems to access hashes

v Bundle transactions into blocks

� Blocks have a maximum of 1 MB of storage

� Takes about 10 minutes to fill a block

� Difficulty adjusted every 2016 blocks (about 2 weeks) to maintain steady production rate

v Miners compensated 12.5 new bitcoins per block created plus transaction fees

[Rate at which blocks are mined]

[Difficulty of mining a block]


BitcoinHalving

v Mining reward cut in half every 210,000 blocks (about 4 years)

� Miners will eventually only receive compensation through transaction fees

v Follows Bitcoin protocol

� Maximum of 21 million bitcoins to be produced

• Estimated to be reached by 2140

• Currently 15.75 million in circulation

v Decreasing-supply algorithm was chosen because it approximates the rate at which

commodities like gold are mined

[Second halving][First halving]


BitcoinTransaction Fees

v Voluntary on the part of person conducting transaction

v No miner necessarily needs to accept the transactions

� Transaction fees are incentive for user to make sure transaction will get included in

blockchain

v Default fee = 10 satoshi (.0000001 BTC)

v 20 satoshi will get you the fastest and cheapest transaction on the network

v Miners prefer transactions with greater fees

[Block size with a 1 GB maximum]

[Block creator]

[Time transaction added to blockchain]

[Aggregate transaction fees]

[Average transaction value based on certain price]

[Aggregate value of transactions]

[Transactions in block]

[1,000,000 bits per bitcoin]

[Arbitrary metric of difficulty]

[Time transaction was executed]

[Number of blocks preceding]

[Program used to identify miner’s software]]

[32-bit number used to create a hash]

[Miner’s bitcoin compensation]


BitcoinNodes

v Full nodes download every block and transaction to check them against Bitcoin’s core

consensus rules:

� Blocks may only create a certain number of bitcoins

� Transactions must have correct signatures for bitcoins to be spent

� Transactions and blocks must be in the correct data format

� Within a single blockchain, a transaction output cannot be double-spent

v If a transaction violates the consensus rules, then it is absolutely rejected, even if every other

node on the network thinks that it is valid

v Lightweight nodes do whatever the majority of the mining power says

v Running a full node bolsters the network, adds security and speeds up verifications

66 Active Bitcoin Exchanges

https://data.bitcoinity.org/markets/volume/5y/USD?c=e&r=week&t=a

BitcoinATMs

v 681 Bitcoin ATM’s worldwide

v Easiest way to get bitcoins

v Operate solely in cash

v Buying bitcoins

� Provide Bitcoin address for deposit using private key

� Put cash into ATM

� Bitcoins transfer to corresponding address

v Selling bitcoins

� Provide Bitcoin address using private key

� Bitcoins sent to corresponding address

� Receive cash

681 Global Bitcoin ATMs

CircleSocial Payments

v Founded October 2013

v Operates as an exchange, wallet and social payment app

� Currently can exchange bitcoins for USD and GBP

• Exchange rates are more conservative than large exchanges in order to take

commissions

� Merging of messaging, media and payments

• Can personalize messages accompanying money transfers with pictures, emojis and

GIFs

� Two-factor authentication

� No fees to move money and no limits on how much you can send and receive each week

v Hopes a user-friendly app will prompt consumers to pay for extra features

� Possibilities of issuing credit and loans

CircleTotal Funding = $136 million

Date Amount/Round Lead Investor Investors

Jun., 2016 $60M/Series D IDG Capital 9

Apr., 2015 $50M/Series C Goldman Sachs 6

Jul., 2014 $17M/Series B Breyer Capital 8

Oct., 2013

$9M/Series A - 2

Investor Round

Accel Series C

Baidu Series D

Breyer Capital Series B, Series D

China Everbright Investment Management Series D

China International Capital Corporation Alpha Series D

Credit Ease Series D

Digital Currency Group Series B

Fenway Summer Ventures Series B, Series C

General Catalyst Partners Series A, Series B, Series C, Series D

Glenn Hutchins Series D

Goldman Sachs Series C

IDG Capital Partners Series D

Jim Breyer Series A

Leonard Schrank Series B

Michele Burns Series B

Oak Investment Partners Series B, Series C

Pantera Capital Series B, Series C

Sam Palmisano Series D

https://www.crunchbase.com/organization/circle-2/investors

BitcoinRemittance

v Average transaction fee for money transfer = 9.6%

� Western Union’s fees = 5.5-10%

v Western Union’s market share = 12.5%

� Proven quite progressive in adopting to digital evolution

500000

520000

540000

560000

580000

600000

2011 2012 2013 2014 2015

Global Remittance ($m)

http://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data

BitcoinRemittance

0 5 10 15 20 25 30

USA-Guatemala

USA-Vietnam

Saudi Arabia-Egypt

USA-Philippines

Saudi Arabia-India

USA-India

UAE-India

Hong Kong-China

USA-China

USA-Mex

2015 Remittance ($b)

https://openknowledge.worldbank.org/bitstream/handle/10986/23743/9781464803192.pdf?sequence=3&isAllowed=y

BitcoinRemittance

ABRAA Better Remittance App

v “Uber for Money”

� Goal: turn every smartphone in the world into an ATM to process transfers between digital

and fiat currencies

� Making cash mobile in a frictionless marketplace

v Raised $14 million in venture financing since 2015 inception

�

Launched June 30, 2016 in the United

States

v Assumptions:

� By 2020, an estimated 80% of adults will own a smartphone

� 250 million immigrants around the world

� ~66.7% of adults (15-65) with access to financial services (bank accounts, credit, etc.)


v A peer-to-peer network of independent “human ATMs”

v Basic process:

� App participant stores and purchases money in wallet via bank account or cash

� Depositing cash done through Abra Teller who transfers equivalent amount to wallet for

small transaction fee

� Participant sends balance to family member’s wallet without a fee

� Family member then transfers balance to Abra Teller who gives cash in return for a small

fee


v Wallet balances displayed in local currency, however balance contents are bitcoins

� Transactions settled on the blockchain

v Abra users don’t need to know about Bitcoin or how it works

v Wallet balances remain stable even as the price of bitcoin fluctuates

� Abra partnered with an unnamed derivatives company that enters into future contracts in

order to hedge bitcoin price fluctuations

v User’s asset portfolio is a mix of bitcoins and hedges, which are tucked under the hood of the

smartphone and user never needs to know what’s exactly in their portfolio


v Abra never touches customers’ money

� Avoids dealing with complex regulatory requirements for remittance firms in countries

where they operate

v Only charge Abra tellers .5% while assuming all FX risk

� Tellers include individuals and corporations which hold substantial amounts of cash

v Risks

� Mobile data connectivity is usually non-existent in areas in need of remittance

� Currently no voluntary tellers

� Safety

• Criminals can quickly identify tellers holding substantial amounts of cash

ABRATotal Funding = $14 million


Sep., 2015

$12M/ Series A Arbor Ventures 12

Mar., 2015

$2M/Seed - 6

Jul., 2014 Undisclosed/Seed

Digital Currency Group

1

Investor Round

American Express Ventures

Series A

Arbor Ventures Series A

Blockchain Capital Series A

Carthona Capital Series A

Digital Currency Group Series A, Seed, Seed

First Round Series A, Seed

Future Perfect Ventures Series A, Seed

Jungle Ventures Series A

Lerer Hippeau Ventures Series A, Seed

Pantera Capital Series A

Ratan Tata Series A

RRE Ventures Series A, Seed

Silicon Badia Seed

https://www.crunchbase.com/organization/abra#/entity

BitcoinAn Asset

v Deemed a commodity by the Commodity Futures Trading Commission

v Widely used for speculative trading

� Some exchanges have allowed leverage up to 50:1

v As of late has been used to protect from currency devaluations, high inflation, and volatile

economic environments

v Risk-off selling in wider capital markets triggers Bitcoin’s gold-like qualities

� Relatively low correlation to traditional asset classes

v Bitcoin up 57% in 2016

v Bitcoin up 170% in the last twelve months

Mar. 2013 – Cyprus banking crisis

Feb. 20, 2014 - Mt. Gox goes offline following large security breaches

Aug. 11, 2015 -People’s Bank of China devalues Yuan 1.9%

June 23, 2016 –Brexit Referendum

Dec. 5, 2013 – People’s Bank of China bans financial institutions from Bitcoin transactions

Aug. 18, 2014 – BTC-E, flash crash

Oct. 2, 2013 – FBI shuts down Silk Road

Nov. 18, 2013 – Beyond Silk Road Senate Hearing

Dec. 2, 2013 - 96,000 bitcoins stolen from Sheep Marketplace

Apr. 20, 2013 – Bitcoin Central hacked

May 2, 2013 - $75 million lawsuit against Mt. Gox

June 30, 2015 –Greece defaults on $1.7 billion IMF Payment

Apr. 10, 2014 – Deposit freeze at Chinese exchanges

Oct. 2013 - BTC China becomes largest exchange


https://data.bitcoinity.org/markets/volume/5y/USD?c=e&r=week&t=a

Bitcoin StatisticsWeekly Percentage Change in Bitcoin Price

Jan. 2013 –Present

MSCIAW

MSCIEM

S&P500

ShanghaiComposite

Stoxx600

Gold CrudeOil

VIX US 10Yr.

Bond

CNY/USD

GBP/USD

EUR/USD

JPY/USD

Correlation 0.007 -0.057 0.041 -0.020 -0.048 -0.062 -0.137 0.003 -0.004 -0.038 0.036 0.012 0.092

Beta 0.058 -0.478 0.352 -0.082 -0.319 -0.398 -0.470* 0.002 -0.011 -1.507 0.453 0.149 0.967

R2 0.001 0.003 0.002 0.001 0.002 0.004 0.019 0.001 0.001 0.001 0.001 0.001 0.008

* Value is statistically significant at a 10% significance level

May 2014 –Present

MSCIAW

MSCIEM

S&P500

Shanghai Composite

Stoxx600

Gold CrudeOil

VIX US 10 Yr.

Bond

CNY/USD

GBP/USD

EUR/USD

JPY/USD

Correlation 0.014 -0.038 0.053 -0.032 -0.062 -0.134 -0.141 -0.054 0.025 0.105 -0.045 0.006 -0.109

Beta 0.060 -0.162 0.232 -0.065 -0.209 -0.524 -0.229 -0.021 0.040 2.038 -0.305 0.038 -0.670

R2 0.001 0.001 0.003 0.001 0.004 0.018 0.020 0.003 0.001 0.011 0.002 0.001 0.012

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One Year Moving Correlation with Bitcoin PriceEquities

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Bitcoin One Year Moving BetaCurrencies

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BitcoinRisks

v Price volatility

� Young economy and novel nature

v Scalability

� Can only operate 7 transactions per second

v Regulations

� Banned in Iceland, Bolivia, Ecuador, Kyrgyzstan and Vietnam

� Countries starting to impose know-your-customer regulations on exchanges for taxing purposes

� 2014 IRS deems Bitcoin as a capital asset subject to capital gains taxes

• Trading through an exchange is a taxable event

v Criminal Activity

� Theft

� Black markets due to Bitcoin’s anonymity

http://www.coindesk.com/information/is-bitcoin-legal/

BitcoinChinese Demand

v Stock and real estate bubbles of late 2013 as well as high savings rate led to a corresponding

Bitcoin price surge

v Chinese government was alarmed at how fast the market had grown and tried to rein it in by

banning financial institutions from facilitating Bitcoin transactions on December 5, 2013

v China’s growing middle class attracted to Bitcoin due to a lack of other alternatives

� A lot of speculative trading as well

v Accommodative monetary policy that allows Bitcoin market to thrive, through legal protection

over non-physical property

v Yuan trades have accounted for up to 95% of daily exchange volume following August 2015

devaluation

Bitcoin Investment Trust GBTCv First publicly quoted investment vehicle deriving value from Bitcoin price

� Investors gain exposure to price movements of Bitcoin without the challenges of buying,

storing and safekeeping bitcoins

� Legitimate avenue for buying on margin and shorting bitcoins

v Publicly listed starting May 4, 2015 on OTCQX, following approval from FINRA

v Market Price = $103.5

� Market Cap = $176.97 million

� NAV = $63.46

v Accredited investors (SecondMarket) purchase shares at daily NAV in baskets of 100 shares

� Shares restricted and subject to significant limitations on resale and transferability

v Each market share represents ownership of approximately 0.1 bitcoin

� However, trades at a premium due to higher demand than availability

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GBTC vs Underlying Bitcoin

GBTC

BTC/10

Bitcoin Investment Trust Cease-and-desist

v July 11, 2016 SEC issued a cease-and-desist order against Bitcoin Investment Trust and its

authorized participant SecondMarket

� SecondMarket is the only entity that may place orders to create and redeem Bitcoin

Investment Trust shares

� Cease-and-desist order relates to a share redemption program in 2014

• SecondMarket repurchased 85,721 shares between April and September as shares were

being created

� SecondMarket settled with SEC for the $51,650.11 they earned through the redemption

program plus interest of $2,100

BitcoinExchange-traded funds

v Winklevoss Bitcoin Trust

� July 1, 2013 filed with the SEC to launch an ETF on NASDAQ under COIN

• Would offer exposure to Bitcoin, without the hassles of buying and storing the

underlying asset

� Still awaiting regulatory approval, now seeking to list the product on BATS Global

Exchange

� Have increased the size of offering from $20 million to $65 million

v SolidX Bitcoin Trust

� July 12, 2016 filed with the SEC to launch an ETF that would offer exposure to Bitcoin

� Raised $3 million since 2014 with the goal of offering ‘total return swaps’ to large

institutional Bitcoin investors

� Unlike Winklevoss, has secured insurance that would cover the loss or theft of bitcoins in

the trust

� Will be listed on NYSE under XBTC

� Will not be actively managed

BlockchainA Decentralized Ledger

v The distributed ledger behind Bitcoin

v Way of using modern encryption to enable entities to share a common infrastructure for

database retention

v Provides proof of who owns what at any given juncture

v Unalterable and immutable data stored without requiring any central authority

v Cryptography so powerful that it’s typically dismissed as “impossible to alter”

� If anyone tries to corrupt a transaction, nodes will not arrive at a consensus and transaction

not included in the blockchain

v Trust established through mass collaboration and clever code

BlockchainSmart Contracts

v Computer protocols that facilitate, verify or enforce the negotiation or performance of a

contract

v Emulate the logic of contractual clauses

v State how asset is to be used and executes automatically

v Enforce compliancy upfront

v Minimize counterparty risk, reduce settlement times and increase transparency

BlockchainAdvantages

v Independent nodes converge on a consensus even with poor interconnectivity and potentially

dishonest operators

v Any well-connected node able to determine with certainty whether a transaction exists and is

valid

v Prohibitively high cost to attempt to rewrite or alter transaction history

v Conflicting transactions never become part of the confirmed dataset

BlockchainLargest Demands

v Instantaneous transferring and exchanging digital representations of assets

v Storing raw, unprocessed data and turning it into an immutable distributed database

0

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2012 2013 2014 2015 2016 (Through April)

Blockchain VC Funding ($m)

http://www.coindesk.com/state-of-blockchain-q1-2016/

BlockchainBank Implementation

v Develop distributed, encrypted, straight-through processing tools that allow them

essentially to share common database infrastructure

v Able to cut a significant amount of cost out of the post trade financial manufacturing

� Post-trade processing hasn’t been revolutionized in any meaningful sense in decades

v Blockchain would provide:

� Instant settlement

� Fewer fees per trade

� Lower cost

� More robust and transparent trading environment

� Less clearing and settling

ChainBlockchain infrastructure for banks

v Building suite of blockchain based tools for banks, stock exchanges, credit card companies,

etc.

� Will enable them to move, store, trade and manage financial assets quickly, securely and

with less risk to the system

v May 2, 2016 released new open-source, permissioned protocol built in collaboration with 10

financial and telecom firms

� Applications including clearing and payment processing

� Achieves finality in seconds, even for high-volume transaction

v NASDAQ using platform for private market securities testing, proxy voting and clearing

efforts

ChainTotal Funding = $43.7 million


Sep., 2015 $30M/Series C RRE Ventures 11

Aug., 2014 $9.5M/Series B KhoslaVentures

11

Jan., 2014 $4.2M/Seed - 5

Investor Round

500 Startups Series B

Betaworks Seed

Blockchain Capital Series B, Series C

Capital One Growth Ventues

Series C

Citi Ventures Series C

Digital Currency Group Series B

Draft Ventures Series C

Fiserv Series C

Homebrew Series B

Kevin Ryan Series B

Khosla Ventures Series B

NASDAQ Series C

Orange Series C

Orange Digital Adventures Series C

Pantera Capital Series B, Series C

RRE Ventures Seed, Series B, Series C

Scott Banister Series B

Semil Shah Seed

SV Angel Seed, Series B

Thrive Capital Seed, Series B

Visa Series C

https://www.crunchbase.com/organization/chain-2#/entity

http://www.coindesk.com/10-vc-firms-bullish-on-bitcoins-potential/

R3 CEVBlockchain adaptation for banks

v Leading a consortium of 45 financial firms in research and development of blockchain usage

� Collaborate with partner institutions on research, experimentation, design and engineering

v March 3, 2016 concluded an R3-led, 40 bank trial of five different blockchain solutions

� Each bank given a separate node in which to issue, trade, transfer and redeem digitized

assets in a peer-to-peer transaction network

� Participants modeled commercial paper and a short-term bond

v R3 Corda

� Developing a distributed ledger tailor-made for financial institutions

• Starting point is individual agreements between firms

• Reject the notion that all data should be copied to all participants, even if it’s encrypted

Hyperledger ProjectBlockchain adaptation for business

v Open-source project to advance blockchain technology under oversight of Linux Foundation

v Exploration of the characteristics of blockchains

v Engineering an underlying, universal blockchain platform for business

v 30 partner firms see a value in sharing ideas and bringing a mature technology to market

� Partners have voiced their confidence in private blockchain networks, criticizing public

versions as ill-equipped to handle the requirements of business

Private blockchainsBlockchain or Database?

v Proponents argue “blockchain” applies to any data structure which batches data into blocks

which are time-stamped and serve as a distributed multi-version concurrency control

� Many proposed private systems would allocate full nodes to a number of trusted entities to

facilitate and compile transactions and ledger

• Firms would be able to leverage blockchain’s instant settling and smart contract

capabilities while having control over the network

v Opponents say permissioned systems look like traditional corporate databases

� Not supporting decentralized verification of the data

� Not hardened against tampering and revision by their operators

� “A private blockchain is nothing more than a new type of shared database”

EthereumA Bitcoin Competitor

v Contains a peer-to-peer money system comparable to Bitcoin

v Uses cryptocurrency Ether

� Current ether price = $11.20

v Miners rewarded 5 ether per block plus transaction fees

v Difficulty adjusts so one block produced every 12 seconds

v Can process 25 transactions per second

v No current cap on Ether production

� 82 million ether currently in circulation

� No halving

Ether Historical Ether Price (USD)ices

http://coinmarketcap.com/currencies/ethereum/

EthereumExpanding Blockchain

v “A next generation cryptocurrency and a decentralized application platform” – VitalikButerin, founder

v Basic aim: to make it possible to program binding agreements into the blockchain

v Bitcoin’s blockchain used as the base for Ethereum’s, but the ability to execute code allows developers to innovate with far less effort and far more speed

� Security of the computation is guaranteed by the same kinds of cryptography and economic incentives as Bitcoin

v At the forefront of smart contract development

� Digitization of real world assets, derivatives, smart bonds, secure internet infrastructure, etc.

v Attracting interest from JP Morgan, Microsoft, IBM, etc.

Consensus SystemsEthereum Development

v Venture production studio building decentralized applications and various developer tools for

blockchain ecosystems

v Spawns, coordinates, incubates and accelerates ventures through development, resource

sharing, acquisitions, investments and formation of joint ventures

v 68 employees in nine countries developing applications to be organized, governed, funded

and executed on Ethereum blockchain

v UJO Music

� Website for buying music online

� Software that facilitates direct trade between musicians and customers

� Traded with ether

� Smart music contracts

Decentralized Autonomous OrganizationAn Ethereum Application

v Investor-directed venture capital funds

v Instantiated on Ethereum blockchain without management structure

v Crowd-funded via token sale in May 2016

� Set record for largest crowd-funding campaign in history ($150 million of Ether in 21 days)

v June 2016, hacker siphoned $55 million of DAO’s ether, revealing flaws with regards to

recursive calls

DAOEthereum-Based Venture Capital

v Candidates for investment provide investors:

� business plan

� smart contracts defining relationship between them and DAO

v Curators (group of volunteers) check identity and legality of projects before whitelisting them

v In exchange for Ether, investors receive voting rights by means of digital share tokens

� Purest form of shareholder governance

v Once proposal is approved, funds flow automatically under rules specified by smart contracts

DAO.LinkBridging Ethereum and Reality

v Bridge between DAOs and real world where companies need to pay taxes and adhere to

regulatory requirements

v Businesses wishing to send corporate invoices, purchase orders and pay taxes won’t be able

to attribute those funds to the Ethereum blockchain

v Provides a physical address through which outside companies can interact with DAOs

� Incorporated in Switzerland

• Swiss law makes it possible to “take money from an unknown source as long as you

know where it is going”

Conclusion

v Bitcoin

� World’s first decentralized cryptocurrency

• Circumvents the need for middlemen in transactions

� All transactions are recorded in an immutable, publicly distributed ledger, the blockchain

� Historically volatile prices are demand driven due to predetermined supply

� Relatively uncorrelated to most asset classes

v Blockchain

� Uses modern encryption to share a common infrastructure for database retention

� Trust is established through mass collaboration and clever code

� Smart Contracts

• Protocols emulating contractual clauses and executing automatically

• Enforce compliancy upfront

v Ethereum

� Operates using its own cryptocurrency, ether

� Expanding off of Bitcoin’s blockchain, the ability to execute code allows developers to innovate with far less effort and far more speed

� At the forefront of smart contract development

bitcoin and the blockchain 2016

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