May 29, 2018 | Techcelerate Ventures |
The fuel of the blockchain TOKEN FRENZY Important disclosures appear at the back of this report GP Bullhound LLP is authorised and regulated by the Financial Conduct Authority GP Bullhound Inc is a member of FINRA Subscribe to receive GP Bullhound Research and News on www.gpbullhound.com/subscribe/ Dealmakers in Technology April 2018 5 04 THE VIEW FROM GP BULLHOUND Sebastian N. Markowsky, GP Bullhound 06 CHAPTER 1: HISTORY & OVERVIEW OF THE BLOCKCHAIN UNIVERSE 12 CHAPTER 2: FUNDING ACTIVITY IN BLOCKCHAIN - VENTURE CAPITAL & ICOS 22 CHAPTER 3: LEADING PROTOCOLS & BLOCKCHAIN ECOSYSTEMS 24 EXPERT VIEW Joseph Lubin, Co-founder Ethereum & Founder ConsenSys 26 CHAPTER 4: KEY CHALLENGES TO BE SOLVED 28 BLOCKCHAIN SCALABILITY 29 EXPERT VIEW Prof. Emin Gn Sirer, Associate Professor at Cornell University 30 DECENTRALISATION OF EXCHANGES 31 EXPERT VIEW Peter Czaban, Polkadot Contributor & CEO Web3 Foundation 32 STAYING PRIVATE 33 EXPERT VIEW MacLane Wilkison, Founder NuCypher 34 EFFECTIVE GOVERNANCE 35 EXPERT VIEW Tatu Krki, Communications Lead Aragon 36 CONSENSUS EFFICIENCY 37 CHAPTER 5: OUTLOOK - FINAL REMARKS 42 METHODOLOGY Dealmakers in Technology CONTENTS GP BULLHOUND: TOKEN FRENZY 3 5 GP BULLHOUND: TOKEN FRENZY 4 Sebastian N. Markowsky Director Cryptographically enabled virtual currencies equivalent to pieces of code: Can this be sustainable? Do they carry any value at all? Are they secure? While these questions are controversially debated for major cryptocurrencies ("cryptos") like Bitcoin or Ethereum, it becomes a totally unsolvable task when looking at the plethora of altcoins or tokens that exist. In our view, the underlying technology has the potential to become a catalyst for the most pivotal technological transformation. However, we are skeptical about the "Token Frenzy" happening at the moment. With over USD 800bn total market cap at the beginning of 2018, total funding of almost USD 5bn in 2017 alone and a volatility that has created greed and fear cycles in their most drastic form, it is no wonder the sector has captured global awareness. We expect the crypto market to materially mature and the token phenomenon to undergo major changes over the months to come, not least driven by regulation. Regardless of the immaturity of the current activities, the ongoing buzz will likely give birth to a quantum leap of technological achievements in the distributed ledger technology space. What began among an evangelist group of academics, computer scientists and developers has now captured the zeitgeist and captivated the technology industry. While the media examines every fluctuation of the cryptocurrency markets, investors have, in 2017, poured almost USD 5bn into the industry through venture capital and initial coin offerings. This rise has taken the better part of a decade, beginning in 2009 with the introduction of the first peer-to-peer cryptocurrency, Bitcoin. For many, this currency and its underlying distributed ledger technology remain synonymous with blockchain. In truth, Bitcoin's core technology offered little more than a payment system and its true value only lies in its ability to demonstrate the long-term potential of distributed ledger technologies. The vision depicted by early evangelists was one of decentralisation of power, distrust of traditional institutions and an infrastructure based on encrypted, trustworthy transactions. While this vision has since been applied to industries as diverse as supply chain logistics, finance, winemaking and insurance, the first adopters of Bitcoin were far from mainstream software developers. Its extensive use on 'the dark web' by suspected criminal groups did little to bolster the technology's credentials in the public eye. From these origins, few would have expected blockchain's climb to the top of the global economic agenda. The transition that has taken place in recent years with blockchain moving from hype to adoption can be substantially credited to Vitalik Buterin, the pioneer behind Ethereum. In 2013, as a 19-year-old cryptocurrency researcher and programmer, Buterin created his version of a blockchain-based protocol, which today is one of the largest, most influential distributed ledger technologies. Ethereum differed from Bitcoin in a number of important ways. First, Buterin created a platform that could be used by everyday developers. To do this he decoupled the protocol and application layers, creating a platform for decentralised applications that allowed non-blockchain experts to contribute. Second and perhaps most crucially, Buterin built a smart contract functionality into Ethereum. These smart contracts cryptographic agreements enforced by digital, rather than legal, code have a potentially endless number of commercial applications across industries as diverse as finance, energy, healthcare, and logistics. The first revolutionary use case of the Ethereum protocol, particularly its approach to smart contracts, was the initial coin offering (ICO). The ICO is an entirely new form of fundraising that has transformed the way start-ups can access capital. Being an automated form of crowd funding through blockchain technology, ICOs became an overnight phenomenon, with around USD 4bn raised in 2017 alone. This momentum appears to be continuing into 2018. Telegram, the Russia-founded instant messaging service, plans to raise USD 2bn through its own ICO this year. As a result of these larger and larger funding rounds, the bar for the average ICO is rising every day and increasingly, only leading projects with reputable teams and backers are succeeding. In contrast, the broader strategic applications of blockchain technologies have yet to achieve widespread adoption. While Ethereum has managed to build a strong, mutually supportive, talented community led by inspirational leaders, the platform continues to face significant challenges. As highlighted by the contributors to this report, the challenges around security, privacy, and scalability are keeping the blockchain community awake at night. THE VIEW From GP Bullhound From its inception, the decentralisation of the blockchain ecosystem has tended to inspire an anarchic system of governance. Given that the technology remains immature, the market is largely driven by speculation, suffers from insufficient transparency and close to non-existent regulation, and is plagued by constant rumours of fraudulent activity. This has left many strategic and institutional investors wary of the technology. Nonetheless, this has done little to deter retail investors buying into the cryptocurrency boom. The overall market for alternative currencies exploded in 2017, reaching a total market cap of over USD 800bn towards the end of the year. Ether the cryptocurrency behind the Ethereum protocol had risen to a market cap of USD 80bn by the end of 2017, and continued to grow to USD 130bn by mid-January 2018. Only two years after its creation, the widespread use of Ether in ICOs had driven its value to historic highs that put the currency to the top of the media, political, and economic agendas. In spite of concerns of a boom and bust cryptocurrency market, the underlying promise of blockchain remains intact. Through our detailed analysis of the ecosystem laid out in this report, we have encountered exceptional projects working on near-term, real-life uses for blockchain, such as bringing transparency into the supply chain of food products and conflict minerals, creating a decentralized, secure cloud storage and computing marketplaces as well as solving challenges in international logistics. However, core activity is still focused on building next generation base protocols, infrastructure projects and developer tools. Distributed apps seem to be an early area yet to engage. Overall, the market is still immature, and the largest rounds raised by blockchain focused companies are still far behind of what we see in more mature sectors; even ICO funding cannot compete with the mega-rounds we see in the broader tech investment space. As technology becomes more reliable and secure, visibility of near-term use cases increases and investors become more sophisticated on a broader scale, we expect fundraising volumes to rise substantially. All this adds up to an exciting future for blockchain. At GP Bullhound, we have worked side-by-side with a generation of leading entrepreneurs that have transformed the digital economy worldwide. We are prepared to harness this network, our dealmaking experience and technological and financial expertise to enable the rise of a new generation of technology pioneers. EXECUTIVE SUMMARY 7 GP BULLHOUND: TOKEN FRENZY 6 HISTORY & OVERVIEW of the blockchain universe EVOLUTION OF BITCOIN & ALTCOINS A retrospective of cryptos Cryptocurrency market capitalisation development and major milestones December 2005 October 2009 November 2013 March 2016 Mid-2017 & ongoing February 2018 Ongoing Nick Szabo lays out the foundation for Bitcoin by releasing a paper titled 'Bit Gold'. It outlines some of the concepts that would later be implemented in distributed ledger technology. Bitcoin whitepaper is published by an unknown author under a pseudonym Satoshi Nakamoto. Ethereum whitepaper is released. The following year the project commences and in 2015 raises funds through one of the first ICOs ever. Cabinet of Japan approves a bill recognising virtual currencies as payment method. The country becomes the first major economy to do so. During an unprecedented 'ICO wave', blockchain start-ups raise funds in the scale of USD billions. This still relatively new form of financing catches the eye of regulators. After weeks of speculation, China blocks internet access to foreign crypto exchanges, citing 'financial risks' associated with crypto trading. Regulator scrutinization of ICOs and exchanges regarding KYC and AML compliance continues to grow; the role of of non-profit foundations in certain cases remains unclear; types of token and connected rights continue to multiple. Source: GP Bullhound analysis based on Coinmarketcap and publicly available data as of March 5, 2018. Current share of total market capitalisation 41% 18% 8% 5% 27% Bitcoin Ethereum Ripple Bitcoin Cash Other 2010 2012 2014 2016 2017 2018 March 5, 2018 USD 470.5bn January 8, 2018 USD 828.5bn CHAPTER 1 9 GP BULLHOUND: TOKEN FRENZY 8 Transaction & payment services Ecosystem Cryptocurrency exchanges & trading platforms Social, games & gambling Identity, authentication & security Enterprise blockchain solutions Other Ethereum WAVES Bitcoin NEO Own base protocols BLOCKCHAIN TECHNOLOGY UNIVERSE Overview of selected base protocols and dApps 1) These companies use directed acyclic graphs which is a blockless distributed ledger technology. 2) Not exclusive to Ethereum, based on publicly available information. 3) Scalability layer that can be ported to other blockchains (e.g. Litecoin). CHAPTER 1 APPLICATION CATEGORYBASE LAYER PROTOCOL NVO Bitcoin Cash Bitcoin (3) (1) (1) (1) (2) Cent 11 GP BULLHOUND: TOKEN FRENZY 10 MVPs IN THE BLOCKCHAIN SECTOR The people behind Bitcoin, Ethereum, etc. HAL FINNEY Bitcoin Pioneer NICK SZABO Cryptographer Blogger Supporter Co-Founder & Chairman Tech & CryptoInvestor 5th richest person worldwide (Forbes) Board Member Member of original core BTC development team Previously Software Engineer at AirBnb & CarWoo Founder & CEO IOHK (Ethereum Classic, Cardano) Former member of Bitcoin Foundation Founder Mattereum Strategic Architect at ConsenSys Designer of Dubai's national blockchain strategy Founder & CEO ConsenSys Leader of Ethereum Council and research team Founder of Jaxx & Decentral Author of Polkadot whitepaper Advisor for numerous projects Co-Founder of Bitcoin Foundation and founder of bitcoin.com Leading figure in Bitcoin community advocating Bitcoin Cash Pioneer in cryptocurrency and smart contracts Author of Bit Gold paper in 2005 CEO at Blockchain Lab Former Director at coinbase Founder & Executive Chairman at Blockchain Research Institute Co-Author of 'The Blockchain Revolution Crypto Valley Association Global Blockchain Business Council Forbes editor (Blockchain and Fintech) Podcast 'Unchained' Co-presenter of Kaiser report JOSEPH LUBIN Founder Ethereum ANDREAS ANTONOPOLOUS Bitcoin Expert GAVIN ANDESEN Founder BTC Foundation MIKE NOVOGRATZ CEO Galaxy Expert WINKLEVOSS BROTHERS Internet Entrepreneurs STEPHEN BROTHERS Blockchain Capital MARC ANDREESSEN Founder a16z BARRY SILBERT Digital Currency Group ALBERT WENGER Managing Partner USV OLAF CALSON-WEE Founder Polychain Capital JOSHUA SEIMS Founder MetaStable Capital NAVAL RAVIKANT Founder Angel List BROCK PIERCE CEO Bitcoin Foundation ROGER VER Blockchain Investor SATOSHI NAKAMOTO Aurthor(s) of Bitcoin whitepaper VITALIK BUTERIN Author of Ethereum whitepaper TIM & BILLY DRAPER Draper Associates LAURA SHIN Journalist DON TAPSCOTT Professor & Author OLIVER BUSSMANN Fintech Expert MAX KEISER Journalist INDUSTRY EXPERTS CHRIS LARSEN Founder Ripple VINEY GUPTA Founder Ethereum CHARLES HOSKINSON Founder Ethereum GAVIN WOOD Founder & former CTO Ethereum BRIAN ARMSTRONG Founder Coinbase CALIN CULIANU BTC Cash Contributor CHARLIE LEE Creator Litecoin ANTHONY DIIORIO Founder Ethereum Receiver of first ever Bitcoin payment Author 'Mastering Bitcoin' and 'The Internet of Things' Former Relationship Current Relationship Investment KATHLEEN & ARTHUR BREITMANN Founders Tezos CHAPTER 1 ? ? ALTCOINS INVESTORS ETHEREUM BITCOIN 13 GP BULLHOUND: TOKEN FRENZY 12 Leading blockchain investors are almost exclusively based in the US. These investors are largely general technology venture capitalists that have shifted their focus towards blockchain technologies. European blockchain funding is currently experiencing strong momentum due to a large base of top blockchain talent, particularly in Berlin and Zug (Switzerland). Still, most investments into European blockchain companies originate from the US. While there is a vibrant scene of angels and seed investors that have shifted towards crypto investments, only a few funds of meaningful size currently focus on the space. Asia is also picking up pace quite fast with a number of leading entrepreneurs in the region having realised the potential of blockchain. These investors and supporters often focus on local blockchain projects. Venture capital funding into blockchain companies, by region Source: Pitchbook and publicly available data. 2015 2015 2015 2017 2017 2017 447 152 111 247 50 45 (USDm) Venture capital funding volume (2015-2017) CAGR 75% 57% 35% VENTURE CAPITAL FUNDING Strong momentum in Europe North America Europe Asia FUNDING ACTIVITY IN BLOCKCHAIN Venture capital & ICOs CHAPTER 2 15 GP BULLHOUND: TOKEN FRENZY 14 Peter Thiel Naval Ravikant Top 10 blockchain companies by cumulative venture capital funding (2014-2017) Cumulative venture capital funding (USDm) Selected investors Source: Pitchbook and publicly available data. 251 121 136 116 100 94 90 77 71 107 VENTURE CAPITAL BLOCKCHAIN TARGETS Venture capital activity remains early stage The 10 best funded blockchain companies combined only accumulated USD 1.3bn of venture capital funding between 2014 and 2017 Investors by number of blockchain companies in which they have invested Investors with holdings in 6-8 blockchain companies Source: Pitchbook and publicly available data. Note: Includes both past and current investments. 1) Including investments by CEO Barry Silbert. 2) Companies linked to Adam and Timothy Draper (who are father and son). 3) Including investments by Founder & Managing Director Timothy Draper. USA Asia 45 27 17 14 11 9 9 9 9 9 11 (2)(3) (2) (1) MOST ACTIVE INVESTORS Regional concentration is high 9 out of the top 10 blockchain investors are based in the US Top 10 investors made 13.3% of total investments from 2015-2017 Naval Ravikant Founder of Angelist Ben Davenport Founder of BitGo CHAPTER 2 17 GP BULLHOUND: TOKEN FRENZY 16 Total venture capital funding vs. ICO funding (USDm) Top 10 ICOs with prior venture capital funding Source: Pitchbook, Cryptocompare, Coinmarketcap, ICO Bench, ICO Bazaar, ICO Drops and publicly available data. Note: Includes disclosed venture capital rounds. Includes ICOs with >1 USDm funds raised and ICO end date between 2015 and 2017. 1) Kik did not start as blockchain project but raised significant ICO funding. This resulted in a distortion of the data presented. 181.4x 4.8x 22 105 0.8x 121 98 14.1x 4 59 11.8x 5 53 9.3x 6 52 34 45 1.3x 5.1x 7 36 ICO Venture Capital 457 85 709 4,044 341 5 2015 2016 2017 23.2x 232 10 1 145 (1) 72.2x 1 80 ICO FUNDING BOOM Funding explosion in 2017 For blockchain companies ICO funding outperforms venture capital funding by a factor of 5, while 1 USD of venture capital funding usually translates into over 4 USD of ICO volume when looking at the top 10 ICO rounds Due to the surge in 2017, ICOs now constitute around of all funding in blockchain start-ups in 2015-2017 Projects with the potential to generate traction near term prefer ICO funding. Longer term ecosystem projects are less suited for coin offerings ICO vs. venture capital funding volume across categories (2015-2017) Transactions & payment Services Social, games & gambling USD 1,011m USD 786m Cryptocurrency exchanges & trading Identity, authentication & security USD 1,451m USD 407m Ecosystem Other (1) USD 946m USD 1,040m Source: Pitchbook, Cryptocompare, Coinmarketcap, ICO Bench, ICO Bazaar, ICO Drops and publicly available data. Note: Includes disclosed venture capital rounds. Includes ICOs with >1 USDm funds raised and ICO end date between 2015 and 2017. 1) Other includes Cloud Services, Enterprise Blockchain Solutions, Supply Chain Solutions and companies without blockchain focus. 54% 46% 9% 91% 17% 83% 15% 85% 37% 63% 24% 76% USD 5,642m ICO Venture Capital 27% 73% INVESTOR FOCUS Venture capital vs. ICO preferences CHAPTER 2 19 GP BULLHOUND: TOKEN FRENZY 18 With the rapid rise of the ICO funding market, the period from venture capital funding to the ICO has shortened significantly. This is partly driven by the fact that venture capital funding typically available for a couple of years of development was completely overtaken by ICOs as a relatively young exit route promising more or less similar exit times. As shown in the graph, many younger companies pursuing an ICO have completely ignored venture capital funding and started raising money through a private pre-ICO round, followed up by a public ICO. However with the predicted cooldown of the ICO market, we expect to see venture capital funding picking up versus ICOs and periods of venture capital funding before ICOs increasing. Venture capital with a strong understanding and hands-on mentality that can add value to a proposal and its execution will clearly win over crowd investor money. Number of years of venture capital funding prior to ICO vs. year founded Horizontal axis denotes founding year Vertical axis denotes time period between year founded and the ICO financing round Bubble size denotes number of companies / projects for a given founding year and time period Source: Pitchbook, Cryptocompare, Coinmarketcap, ICO Bench, ICO Bazaar, ICO Drops and publicly available data. Note: Includes disclosed venture capital rounds. Includes ICOs with >1 USDm funds raised and ICO end date between 2015 and 2017. RETURN OF VENTURE CAPITAL Equity funding into blockchain is here to stay 1 USDm funds raised and ICO end date between 2015 and 2017. 1) 60-day multiple of ICO price (adjusted for ETH price development, ICO volume-weighted). Performance multiples only include ICOs with available 60-day trading data. Data as of March 5, 2018. 2) Only includes ICOs which specified a hard cap on their fundraise. 3) Defined as investors that invested in more than six blockchain projects. (normalised vs. ETH) Multiple(1) Funding cap reached(2) #ICOs (USDm) Funds raised Overall 1.7x 17 20% 250 Top venture capital investors(3) 3.6x 50 43% 21 Other investors/ no investors 1.3x 14 17% 229 INVESTOR INFLUENCE ICO performance is driven by reputation CHAPTER 2 21 GP BULLHOUND: TOKEN FRENZY INTRA-YEAR SENTIMENT After peaking in October 2017, the ICO market has cooled down Monthly ICO count (1) Funding cap reached (average per quarter 2017) (2) Max.# of ICOs October 2017 72 Jan-17 Apr-17 Jul-17 Oct-17 Q1 53% 18% 72% 72% 99% 100% 62% 9% Q3 Q2 Q4 Source: TokenData, Cryptocompare and publicly available data. 1) Includes all ICOs in the database from tokendata.com which have been completed and feature a specified ICO date. ICOs with unavailable funds raised are assumed to have raised < 5 USDm. 2) ICOs which exceeded their funding cap are recognized as 100% in the average. Only includes ICOs which specified a hard cap on their fundraise. Major outliers are excluded. ICO Volume > USD 5m ICO Volume < USD 5m ICO Volume > USD 5m ICO Volume < USD 5m In Q3 & Q4 2017 there was a large number of smaller, less successful ICOs Average 65% Average 22% Many projects conducting an ICO specify soft and hard caps in their whitepaper. The former indicates the minimum amount of funds required to pursue the project. Should this threshold not be reached, all funds invested in the project are returned. The latter represents the upper boundary of funds required for the project. Funds in excess of this figure are returned. The chart below examines trading performance in relation to funds raised as a fraction of communicated hard cap. The bar to the right shows the performance of projects that reached or exceeded their funding goals. It should be noted that not all ICOs specify funding caps, essentially "taking all they can get". The largest ICO in 2017, Tezos, collected USD 232m without specifying the amount of funds the project would require. Reaching (or in some cases exceeding) the funding cap is positively linked to trading performance. Projects that reached less than 50% of their funding goal underperformed on average. In contrast, projects that exceeded their pre-specified fund requirements were able to more than double the quote of their token 60 days after their ICO. Average 60-day performance by % of funding cap reached Source: Cryptocompare, Coinmarketcap, ICO Bench, ICO Bazaar, ICO Drops and publicly available data Note: Includes ICOs with specified hard cap, >1 USDm funds raised and ICO end date between 2015 and 2017. 1) 60-day multiple of ICO price (adjusted for ETH price development, ICO volume-weighted). Performance multiples only include ICOs with available 60-day trading data. Data as of March 5, 2018. Multiple(1) (normalised vs. ETH) # of ICOs 0-49% 50-99% >100% 75 0.7x 41 1.8x 48 2.3x FUNDING GOALS ICO hype and performance 20 CHAPTER 2 23 GP BULLHOUND: TOKEN FRENZY 22 LEADING PROTOCOLS & blockchain ecosystems POTENTIAL CHALLENGERS KEY BASE PROTOCOLS Who dominates the market? Source: GP Bullhound analysis based on Pitchbook, Cryptocompare, Coinmarketcap, ICO Bench, ICO Bazaar, ICO Drops and publicly available data Note: Includes ICOs with >1 USDm funds raised and ICO end date between 2015 and 2017. 1) Defined as (market cap of ICO companies on base protocol ) / (market capitalisation of base protocol). Data as of 5 March 2018. 2) Market share as of total market capitalisation ETHEREUM WAVES BITCOIN NEO # of ICOs to date ICO volume (USD) Market cap ratio (1) Market cap share (2) Maternity of platform (year of release) 201 3,213m 21.2% 18.1%
With over USD 800bn total market cap at the beginning of 2018, total funding of almost USD 5bn in 2017 alone and a volatility that has created greed and fear cycles in their most drastic form, the sector of Cryptographically enabled virtual currencies has captured global awareness.
Do Bitcoin, Ethereum, and the plethora of altcoins or tokens carry any value at all? Are they secure? Will they last? In our view, the underlying technology has the potential to become a catalyst for the most pivotal technological transformation.
Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.