2nd Global Crypto Asset Benchmark Report

Dec 17, 2018 | Publisher: Techcelerate Ventures | Category: Technology |  | Collection: Blockchain Crypto Currencies and ICOs | Views: 4 | Likes: 1

Michel Rauchs, Apolline Blandin, Kristina Klein, Gina Pieters, Martino Recanatini, Bryan Zhang December 2018 2ND GLOBAL CRYPTOASSET BENCHMARKING STUDY The Cambridge Centre for Alternative Finance (CCAF) is an international and interdisciplinary research centre based at the University of Cambridge Judge Business School. It is dedicated to the study of innovative instruments, channels, and systems emerging outside of traditional finance. This includes, among others, crowdfunding, marketplace lending, alternative credit and investment analytics, alternative payment systems, cryptoassets, distributed ledger technology (e.g. blockchain) as well as related regulations and regulatory innovations (e.g. sandboxes and RegTech). TABLE OF CONTENTS FOREWORD ......................................................................................................................................5 RESEARCH TEAM ............................................................................................................................6 ACKNOWLEDGMENTS ................................................................................................................7 EXECUTIVE SUMMARY ............................................................................................................ 10 METHODOLOGY .......................................................................................................................... 14 SETTING THE SCENE .................................................................................................................. 17 The Year in Review ..........................................................................................................................................................................17 SECTION 1: THE CRYPTOASSET INDUSTRY ............................................................................................. 19 1.1 Segments .....................................................................................................................................................................................19 Industry Structure .............................................................................................................................................................................. 19 Mining Segment................................................................................................................................................................................... 20 Storage Segment ................................................................................................................................................................................. 21 Payments Segment ............................................................................................................................................................................ 24 Horizontal Expansion: The Growth of Multi-Segment Firms ...................................................................................... 25 1.2 Industry Growth .......................................................................................................................................................................26 1.3 Geography ..................................................................................................................................................................................28 A Global Industry ................................................................................................................................................................................ 28 Legal Headquarters and Operations ......................................................................................................................................... 28 SECTION 2: GLOBAL USAGE ................................................................................................... 30 2.2 Who Is Using Cryptoassets? ................................................................................................................................................31 Total Users ............................................................................................................................................................................................. 32 User Types .............................................................................................................................................................................................. 34 User Activity ......................................................................................................................................................................................... 35 User Location........................................................................................................................................................................................ 35 2.3 Cryptoasset Usage Characteristics ..................................................................................................................................37 On-chain Payments............................................................................................................................................................................ 37 Off-chain Payments ........................................................................................................................................................................... 39 Decentralised Applications and Timestamping ................................................................................................................... 40 Speculation and Investment .......................................................................................................................................................... 40 SECTION 3: GATEWAYS AND ECONOMIC CONNECTIONS .................................... 42 On-Ramps and Off-Ramps ............................................................................................................................................................. 43 Internal Cryptoasset Ecosystem Flows ................................................................................................................................... 45 Managing Volatility ........................................................................................................................................................................... 47 SECTION 4: STORAGE AND CUSTODY SEGMENT ...................................................... 49 Source Code .......................................................................................................................................................................................... 51 Key Storage Can Take Different Forms ................................................................................................................................... 52 Multi-Signature.................................................................................................................................................................................... 53 4 SECTION 5: REGULATIONS AND COMPLIANCE ........................................................... 54 5.1 The Impact of Regulations ....................................................................................................................................................54 User Impact of Regulations ........................................................................................................................................................... 54 Cryptoasset Firms Collaborate Directly with Regulators .............................................................................................. 56 5.2 KYC/AML Policies ....................................................................................................................................................................57 Implementation ................................................................................................................................................................................... 57 Criteria ..................................................................................................................................................................................................... 58 Account Suspensions and Closures ........................................................................................................................................... 59 5.3 Compliance Team .....................................................................................................................................................................60 5.4 Licensing ......................................................................................................................................................................................61 SECTION 6: IT SECURITY .......................................................................................................... 63 IT Security Team .................................................................................................................................................................................. 64 Security Audits .................................................................................................................................................................................65 Internal Policies ................................................................................................................................................................................... 67 SECTION 7: MINING SEGMENT ............................................................................................. 68 Cryptoasset Selection ...................................................................................................................................................................... 68 Influence on Decision-Making Process ................................................................................................................................... 70 Concentration Concerns ................................................................................................................................................................ 71 7.2 Hardware Manufacturing .....................................................................................................................................................72 Mining Equipment and Algorithms ............................................................................................................................................ 73 Distribution Channels ...................................................................................................................................................................... 75 How Concentrated Is Manufacturing? ..................................................................................................................................... 75 7.3 Mining Facilities .......................................................................................................................................................................77 Meet the Hashers ............................................................................................................................................................................... 77 Facility Set-up Decision Factors .................................................................................................................................................. 77 Distribution of Mining Facilities .................................................................................................................................................. 78 How Much Energy Does Cryptoasset Mining Consume? .............................................................................................. 81 How Wasteful Is Cryptoasset Mining? .................................................................................................................................... 83 What Do Miners Think? ................................................................................................................................................................... 85 7.4 Pool Operators ..........................................................................................................................................................................86 Pool Operations ................................................................................................................................................................................... 86 Pool Concentration ............................................................................................................................................................................ 87 FUTURE OUTLOOK ..................................................................................................................... 90 APPENDIX: SENTIMENT QUESTIONS ................................................................................ 94 5 FOREWORD It is my great pleasure to announce the release of the second Global Cryptoasset Benchmarking Study produced by the Cambridge Centre of Alternative Finance based at the University of Cambridge Judge Business School. It examines significant developments in the global cryptoasset ecosystem that have occurred since the publication of our initial benchmarking study of cryptocurrencies in April 2017. The emphasis on 'global' in the title of this study is critically important given the increasingly fluid, borderless nature of the cryptoasset industry. It also reflects a core competence of our research centre, which is engaging in empirical research investigating global technology-enabled financial innovation emerging outside of the incumbent financial system. For our 2nd cryptoasset report the research team spent several months collecting data from more than 180 entities in 47 different countries, which represents a 25% increase in both the number of participants and countries represented in comparison to our 2017 benchmarking report. Our series of benchmarking studies analysing emerging forms of alternative finance provides a comparative global snapshot of rapidly developing ecosystems impacting the incumbent financial system. Our goal from the outset was that these periodic reports would become a valuable reference for a wide audience of actors in the financial system, including disruptive product and service innovators, incumbent financial services firms, investors, academics, regulators and policymakers, and the general public. Each of these constituents deserves to be heard in debates about financial innovation, and few finance innovations have been as controversial and attracted as much misinformed opinion as the developments associated with cryptoassets. Our aim is to inform these voices by providing empirically-based evidence of developments to provide common points of reference to build upon. Sometimes this challenges prevailing wisdom. For example, the analysis of excess renewable energy used by a share of mining facilities suggests that the negative environmental externalities and associated costs of the energy consumed by proof-of-work consensus systems could be lower than previous estimates. We continue to believe that good research should generate at least as many new questions as it answers, and we hope this report passes that test. Dr. Robert Wardrop Director Cambridge Centre for Alternative Finance 6 RESEARCH TEAM Michel Rauchs: Michel is the Lead in Cryptocurrency and Blockchain at the Cambridge Centre for Alternative Finance. He co-authored the inaugural benchmarking studies on the cryptoasset and enterprise blockchain industries, and was the Project Lead of the Distributed Ledger Technology Systems: A Conceptual Framework report. m.rauchs@jbs.cam.ac.uk @mrauchs Apolline Blandin: Apolline is a Research Manager in Cryptocurrency and Blockchain at the Cambridge Centre for Alternative Finance. Prior to joining CCAF, she graduated from Peking University and the London School of Economics with a dual Master's degree in International Affairs. Her research has mainly focused on mobile finance and financial inclusion in China. a.blandin@jbs.cam.ac.uk @ApollineBlandin Kristina Klein: Kristina is a Visiting Student at the Cambridge Centre for Alternative Finance. She is pursuing a Master's degree in Management and Technology at the Technical University of Munich (TUM) and focuses on entrepreneurship and computer science. k.klein@jbs.cam.ac.uk @kklein93 Dr. Gina Pieters: Gina is a Lecturer at the Department of Economics at the University of Chicago and a Research Fellow at the Cambridge Centre for Alternative Finance. Her research examines the economic implications and behaviour of cryptocurrencies across different currencies and monetary systems. gcpieters@uchicago.edu @ProfPieters Martino Recanatini: Martino is a Visiting Student at the Cambridge Centre for Alternative Finance. He is pursuing a Master's degree in Finance and Banking at the Politecnica delle Marche University in Italy. His Master's thesis assesses the potential impact of DLT systems on securities post-trading services. m.recanatini@jbs.cam.ac.uk @marecanatini Bryan Zhang: Bryan is the Executive Director and a Co-Founder of the Cambridge Centre for Alternative Finance. He has co-authored more than 20 reports on financial innovation and regulatory innovation. b.zhang@jbs.cam.ac.uk @BryanZhangZ 7 ACKNOWLEDGMENTS We would like to thank Liu Feng and the ChainNews team for providing a Chinese version of the surveys, Miguel Klaggues from the Asociacin Bitcoin Chile for translating the surveys into Spanish, as well as Kim Cheol Hwan and Seowon Park from the Korean Blockchain Industry Promotion Association (KBIPA) for the Korean survey version. Nick Chong (Quoine) and Fiorella Velazquez (BitInka) provided helpful comments and undertook significant efforts in helping distribute the surveys. Special thanks go to Keith Bear (CCAF) and Kathryn Vagneur (CCAF) for providing invaluable feedback in terms of survey design, data analysis, and report structure, Louise Smith for the beautiful design of the report, as well as Derek Snow for his thorough review of an early draft. Our interns Hatim Hussain, Jaya Lalwani, Jinjun Liu, Thomas Eisermann, Ouafaa Hmaddi, and Sabine Damborska deserve special thanks for their tireless work and efforts in helping make this report happen. Finally, we would like to thank the entire CCAF team and Kate Belger in particular for their continuous support and assistance. We would also like to thank the following organisations for helping distribute the surveys to potential respondents in their respective countries and regions: Asociacin Bitcoin Chile, Associao Brasileira de Criptoeconomia (ABCripto), Association of Cryptocurrency Enterprises and Startups Singapore (ACCESS Singapore), Bitcoin Argentina, Chaintech, Colombia Fintech, Estonian Cryptocurrency Association, Ghana Blockchain Society, Israeli Blockchain Association, the Korean Blockchain Industry Promotion Association (KBIPA), the Bitcoin Foundation, and the Nordic Blockchain Association. 8 This research study would not have been possible without the generous support and participation from industry actors: we would like to express our gratitude to the following cryptoasset entities for contributing to this research study by completing our surveys. Some survey respondents prefer not to publicly disclose their participation. B E L E M 9 10 EXECUTIVE SUMMARY Since the publication of the first Global Cryptocurrency Benchmarking Study in April 2017, the cryptoasset ecosystem has undergone significant changes: the aggregate market capitalisation of cryptoassets skyrocketed from $30 billion to more than $800 billion at its peak in early January 2018, until coming down again to hover at around $200 billion. The surge in prices and subsequent fluctuations was accompanied by growing interest and attention from the general public and media, driving in new retail investors, speculators, and institutional investors. The industry was confronted with massive inflows of new users and funds, a situation not all actors had adequately prepared for. Growing interest from the institutional side contributed to the emergence of custom services tailored to meet the needs and requirements of this new type of demand, leading to a deeper interweaving of the industry and the incumbent financial system. Between May and July 2018, the research team collected survey data from over 180 start-ups, established companies, and individuals from 47 different countries across all major regions. The objective of the study is to provide new insights into the current state of the ecosystem and, in combination with publicly available data sources, capture major trends of the rapid market development. The analysis focuses in particular on the following four key industry segments: mining, exchange, storage, and payments. The analysis reveals six main findings: Millions of new users have entered the ecosystem, but most remain passive Total user accounts at service providers now exceed 139 million with at least 35 million identity-verified users, the latter growing nearly 4X in 2017 and doubling again in the first three quarters of 2018. Only 38% of all users can be considered active, although definitions and criteria of activity levels vary significantly across service providers. Firms are increasingly operating across segments The cross-segment expansion observed in 2017 has continued: 57% of cryptoasset service providers are now operating across at least two market segments to provide integrated services for their customers, compared to 31% in early 2017. Multi-coin support is rapidly expanding Multi-coin support has nearly doubled from 47% of all service providers in 2017 to 84% in 2018; a trend primarily driven by the emergence of common standards on some cryptoasset platforms (e.g. ERC-20 on Ethereum) that has resulted in a rapid increase in the supply of tokens. The majority of identified mining facilities use some share of renewable energy sources as part of their energy mix The study estimates that as of mid-November 2018, the top-6 proof-of-work cryptoassets collectively consume between 52 and 111 TWh of electricity per year. The mid-point of the estimate (82 TWh) is the equivalent of the total energy consumed by the entire country of Belgium but also constitutes less than 0.01% of the world's global energy production per year. A notable share of the energy consumed by these facilities is supplied by renewable energy sources in regions with excess capacity. Mining is less concentrated than commonly perceived Cryptoasset mining appears to be less concentrated geographically, in hashpower ownership, and in manufacturer options than commonly depicted: the mining map exhibits that hashing 2nd Global Cryptoasset Benchmarking Study 11 facilities and pool operators are distributed globally, with growing operations in the USA and Canada. Self-regulatory efforts reflect growing industry maturity Industry actors are pro-actively adopting measures that appear to comply with existing regulation despite not necessarily being explicitly subject to regulations. The increasing number of self-regulatory initiatives, combined with the emergence of sophisticated and professional services, reflect the growing maturity of the industry. Other notable findings include the following (ordered by section): The Cryptoasset Industry The industry has experienced substantial growth in terms of full-time equivalent (FTE) employees: 2017 year-on-year growth rates reached 164%, driven primarily by the exchange and storage segments. Firm size has also increased significantly: the average firm now employs a median number of 20 staff, up from five employees in 2016. While 21% of surveyed firms have their legal HQ in a different country than their operational HQ, only 7% have their legal HQ in a different geographic region, suggesting that while organisations may be willing to locate to nearby countries to exploit regulatory arbitrage, many are not willing to move too far afield. Global Usage Individuals constitute the largest share of the user base (primarily served by exchanges and multi-segment firms); payment service providers and storage providers have the highest share of business users among service providers (26% and 32%, respectively). Firms predominantly serve customers based in the region where they have their operational HQ. Both on-chain and off-chain transaction volumes have significantly increased in 2017; behaviours consistent with speculation and long-term investment still account for the vast majority of cryptoasset usage. The share of high-value transactions (i.e. above $1,000) for cross-border payments processed off-chain rose from 34% in 2016 to 46% in 2017, a trend that is mirrored by on- chain transactions as well. While Bitcoin's median on-chain transaction size has consistently grown since 2016, other cryptoasset systems have declining median amounts per transaction. Gateways and Economic Connections The cryptoasset ecosystem is becoming more connected to traditional finance due to the emergence and growth of gateways bridging both systems, as well as growing regulatory clarity. The relatively small size of the industry in the global financial market poses no systemic risk at this time. Fiat-to-cryptoasset (and vice-versa) trades are allowed on some exchanges and payment platforms, but not allowed on others. For fiat-supporting exchanges, these fiat-to- cryptoasset trades make up the majority of trading volumes, demonstrating continuous in- and outflows from the cryptoasset ecosystem to the incumbent financial system and the real economy. Bank wires dominate supported methods for both deposits and withdrawals; the use of physical cash is more popular in Asia-Pacific than in other world regions. EXECUTIVE SUMMARY 12 Service providers support a greater number of deposit options than withdrawal options, suggesting that entering the ecosystem is generally easier than exiting. 69% of surveyed payment service providers have existing relationships with established traditional payment networks, but difficulties of entering and maintaining good banking relationships remain a primary concern, particularly for exchanges. Storage and Custody Segment Custody of cryptoassets is diverse: 62% of large entities retain control over customer funds compared to only 30% of small firms. Similarly, firms operating across multiple segments tend to take user funds into custody more often than companies specialised in one segment. Two-thirds of specialised custodial exchanges do not have a refund procedure in the case of customer funds getting lost or stolen. The share of funds held in cold storage has slightly decreased over 2017 to enable quick on- demand access, but is still above 80% of all funds. Regulations and Compliance Cryptoasset service providers are fostering their compliance efforts, even when not explicitly subject to regulatory oversight: 37% of cryptoasset-only service providers have an in-house compliance team and more than half perform KYC/AML checks. While an average of 14% of KYC/AML checks result in service providers not opening new accounts or closing existing accounts, some firms claim figures between 50% and 80% - well above comparable traditional finance benchmarks. The majority of surveyed companies rely on traditional services for third-party support in conducting KYC/AML checks rather than specialised blockchain analytics providers. Only 5% of surveyed cryptoasset-only service providers hold an operating license for their jurisdiction, as opposed to 39% of fiat-supporting entities. However, 30% of cryptoasset- only service providers are planning to apply for a license or register with local authorities, which reflects the industry's willingness to proactively engage with compliance. There are active efforts at industry self-regulation, with most of entities collaborating with regulators and policymakers to address regulatory issues. Changes in the regulatory environment have a measurable impact on operations: 38% of fiat-supporting service providers have closed a location as a result of regulatory actions. However, overall changes in the regulatory environment appear to have a greater impact on encouraging location openings rather than causing closures. IT Security With more than $1.5 billion stolen from cryptoasset exchanges and storage providers alone to date, IT security has become a crucial operational aspect: specialised storage providers take the highest security precautions of all surveyed firms and dedicate the largest headcount and budget share to IT security of all firms. Providing regular training programmes for staff has become a common industry standard as a substantial number of breaches have been caused by employee wrongdoing and/or negligence. We observe a lack of transparency on both external and internal security audits: more than 80% of firms do not publicly share information about security audits, indicating a general unwillingness to divulge security-critical information. 2nd Global Cryptoasset Benchmarking Study 13 Mining Segment Miners' concerns about the three main types of mining concentration (control over hashpower, geographic distribution of hashpower, and the geographic distribution of hardware manufacturing) have grown in 2017. China remains in the top-3 countries to host mining farms; but the USA and Canada have witnessed a rapid growth of mining farm openings over the past year, often associated with the availability of cheap hydroelectric power. Access to high-volume and low-cost electricity as well as stable political and friendly regulatory environments are the major determining factors for hashers to choose an operational location. Over half of identified mining facilities, weighted by megawatts of electricity consumed, have some share of renewable energy as part of their total energy mix. An increasing number of hashing facilities are moving to regions with abundant low-cost electricity generated by hydroelectric power. Whilst many miners acknowledge the issue of environmental impact of PoW, most would not advocate for switching to a new, less resource-intensive consensus algorithm. The total number and geographic distribution of mining pools greatly varies from one cryptoasset to another. While a third of surveyed pools are fully controlled by a single person, past events show that low switching costs keep a check on operator behaviour. A small share of pool members provides the majority of total pool hashpower: on average, the top-10% of users contribute 68% of the pool's hashrate (top-1% contributes one third of pool hashpower). ASIC mining hardware manufacturing is dominated by a few producers; Ethash, SHA-256 and Equihash are the most supported mining algorithms. Future Outlook The trend towards increased multi-coin support is likely to continue: all single-coin storage providers plan to support more cryptoassets in the near future. Innovations in trust-minimised off-chain payment networks ("layer-2 solutions" such as Bitcoin's Lightning Network) are thought to have the largest impact on service providers' business models and operations. Storage providers and multi-segment firms see stablecoins as a business-enhancing opportunity, whereas non-fungible tokens (e.g. digital collectibles such as game items) are generally thought to have a limited impact in the coming 12 months. METHODOLOGY 14 METHODOLOGY The Cambridge Centre for Alternative Finance carried out two online surveys between May and July 2018 via secure web-based questionnaires. The Cryptoasset Service Providers Survey was directed at organisations operating in one or more segments of the cryptoasset industry as defined by our taxonomy (specifically exchange, storage and payments), whereas the Cryptoasset Mining Survey targeted both organisations and individuals involved in mining activities.1 The research team used various channels to disseminate the surveys globally in order to gather a representative sample of the industry geographic dispersion. Both surveys were available in English, Chinese, Spanish, and Korean. Surveys were distributed directly via email invitations to industry contacts, as well as indirectly by sharing public links on social networks (e.g. Twitter, LinkedIn) and Internet forums (e.g. Reddit, Bitcointalk). The research team also partnered with several national cryptoasset associations to advance survey dissemination locally. The collected data was encrypted and safely stored, accessible only to the authors of this study. All individual company-specific data was anonymised and analysed in aggregate by industry segment, organisation size, supported assets, custody types, and region. Data was collected from more than 180 entities globally across 47 countries For cases in which currently active major companies did not contribute to our study, the dataset was supplemented with additional desktop research and web scraping using commonly applied methodologies. Furthermore, publicly available data from a variety of sources was used to complement survey data. In total, survey data was collected from more than 180 entities across 47 countries and five world regions: 127 firms participated in the Cryptoasset Service Providers Survey and 57 entities (22 organisations and 35 individuals) completed the Cryptoasset Mining Survey.2 Follow-up phone calls or emails were used to clarify survey responses if needed, with further quality assurance provided by comparing results to available public data if feasible. We estimate that our benchmarking study captures more than 75% of the global economic activity in the four cryptoasset industry segments covered in this report Figure 1 provides a breakdown of survey participants by geographic region and firm age for each dataset. Both samples reflect the global nature of the industry and incorporate a mix of new entrants and incumbent firms. It is worth noting that the Bitcoin white paper was posted online just 10 years ago, with the first large Bitcoin businesses established only 8 years ago: any firm 5 years or older has been in existence for nearly the entirety of the life of the cryptoasset industry. 1 Other segments of the industry (e.g. Initial Coin Offerings/ICOs) are not covered by this analysis. All data points presented in the following pages will be based on survey data, unless explicitly stated otherwise. 2 This represents an increase of 36 firms relative to the 2017 benchmarking survey. While the survey sample represents less than 25% of all identified entities in the four segments, we estimate that the study captures 75% of economic activity in the industry. 2nd Global Cryptoasset Benchmarking Study 15 Figure 1: The organisations in this study sample represent both industry veterans and new entrants from around the world Note: individual miners have been removed from the firm age calculation in the mining sample. European companies dominate the service provider study sample, while individuals and mining organisations based in Asia-Pacific take 40% of the mining study sample. Relative to last year, the survey received more responses from each region, with firms from South America as well as the Middle East and Africa (MEA) representing a small but growing share of respondents in both mining and service providers.3 Some respondents expressed their reluctance to participate in the study because of changes in their immediate regulatory environment. 3 We only provide geographic breakdown of results if it does not compromise survey anonymity. Geographic Distribution Firm Age Service Provider Study Sample Asia Pacific Europe North America Middle East and Africa South America New entrants 1 year 3 years 2 years 4 years 5+ years 9% 17% 6% 43% 24% Mining Study Sample 12% 21% 2% 25% 40% 13% 14% 21% 22% 24% 7% 7% 27% 7% 7% 13% 40% METHODOLOGY 16 Classification Terminology: Large firms: entities with 40 or more full-time equivalent employees.4 Cryptoasset-only firms: entities that exclusively handle cryptoassets. Fiat-supporting firms: entities that handle both cryptoassets and fiat currencies. Multi-segment firms: entities that operate in multiple industry segments. Custodians: entities that keep customer funds in custody. Non-custodians: entities that do not keep control of customer funds. 4 An exception has been made for mining organisations, where FTE size is a less important indicator of relative economic influence and position within the segment. Large and small miners are differentiated based on considerations of their hashpower, importance to the ecosystem, or reputational prominence. 2nd Global Cryptoasset Benchmarking Study 17 SETTING THE SCENE Focus on the Data Layer The recently published study Distributed Ledger Technology Systems: A Conceptual Framework laid the foundation for a comprehensive framework and terminology for the cryptoasset, blockchain and distributed ledger technology (DLT) fields.5 It introduces a conceptual framework that divides a given DLT system into a set of three layers: protocol, network, and data. The primary focus of this study will be on the intermediaries (service providers and miners) that interact with the data layer.6 This includes cryptocurrencies that play an essential role in the incentive design of their respective DLT system as well as tokens that grant their holder with the right to access specific functionalities of applications runnings on an existing DLT system. From Cryptocurrencies to Cryptoassets The astute reader may have noticed that this year's edition of the study uses the term cryptoasset rather than cryptocurrency in the title. 2017 has seen a tremendous explosion in the number of tokens that have been issued on top of existing platforms rather than coming with their own, custom distributed ledger. This trend requires expanding the vocabulary to move the discussion from cryptocurrencies to the broader term of cryptoassets, which appears to have become the commonly-accepted umbrella term when referring to the ensemble of (public) blockchain-based tokens, including cryptocurrencies. The study will provide an empirical analysis of the four key cryptoasset industry segments (mining, exchange, storage, and payments). The report will only sporadically touch on the underlying protocol and network layers. The Year in Review During 2017, the total cryptoasset market capitalisation climbed from $18 billion in January to a staggering $600 billion in December, raising questions about the cryptoasset market as a whole being a giant bubble.7 The desire to be an early investor in "the next Bitcoin" further fueled speculative investment. However, prices across the entire cryptoasset ecosystem started to tumble in January 2018, moving downwards uniformly across all cryptoassets. Despite a few rebounds in early 2018, the price decline has continued throughout the year and resulted in the evaporation of more than $600 billion of market capitalisation.8 5 The study, authored by an interdisciplinary team of academics and industry experts, was published in September 2018: Rauchs, M., Glidden, A., Gordon, B., Pieters, G., Recanatini, M., Rostand, F., Vagneur, K., and Zhang, B. (2018) Distributed Ledger Technology Systems: A Conceptual Framework. Available at: https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/ publications/distributed-ledger-technology-systems/ [Accessed: 02 December 2018]. 6 The data layer covers the nature and meaning of the final records produced by the DLT system. In the case of open, public, and permissionless systems, these records primarily refer to the creation, transfer, and "destruction" of native cryptoassets. 7 The term "market bubble" generally refers to a situation where assets are traded at prices that substantially exceed their fundamental value. In the case of cryptoassets, the definition of a fundamental value is both difficult and controversial to define and determine. 8 Market capitalisation as a measure of network value is incomplete and relatively easy to manipulate. It thus bears the question how much of the $600 billion in lost market capitalisation had been "real" gains in the first place. SETTING THE SCENE 18 The rapid increase in Bitcoin prices spilled over to other cryptoassets and brought both sustained media attention and new speculative investors (retail and institutional). The entry of traditional financial services firms into the cryptoasset market and new offerings such as Bitcoin futures, specialised custody solutions, and dedicated cryptoasset hedge funds further fuelled the expansion of the industry. However, this also brought with it increased regulatory attention. Tokens became more popular in the ecosystem as well, primarily driven by the wide adoption of the ERC-20 standard on the Ethereum network and the resulting proliferation of Initial Coin Offerings (ICOs). This led to a boom in token-based fundraising and a flurry of ICO activities globally. Blockchain forks9 also became more common in 2017, further increasing the number of offerings in the cryptoasset ecosystem by splitting existing coins into separate cryptoassets.10 The increase in interest and subsequent usage brought into the foreground limitations of base layer scaling and led to the launch of so-called "layer-2 solutions", such as the eagerly-awaited Lightning Network on Bitcoin.11 These developments have left a mark on industry actors: according to data collected from survey participants in both 2017 and 2018, their views on various topics have changed considerably. Particularly operational risks are perceived to have significantly increased: exchange operators consider all listed risk factors more urgent in 2018 than the year before, whereas miners also tend to be faced with increasing challenges (Tables 6 and 9 in Appendix). 9 A hard fork constitutes a controversial change to the protocol rules of a DLT system that causes the network to split into two separate systems, each having their own cryptoasset. 10 Bitcoin alone had at least eleven known hard forks in 2017: Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, Super Bitcoin, Bitcoin Platinum, Lightning Bitcoin, Bitcoin God, Bitcoin Uranium, Bitcoin Cash Plus, Bitcoin Silver, and Bitcoin Atom. Most of these forks have seen negligible activity and adoption. 11 During the height of the boom, the Bitcoin blockchain experienced significant delays in processing transactions, with average fees rising to levels above $50. Similarly, the Ethereum blockchain was clogged for a few days because of a single gaming application that suddenly became popular (CryptoKitties). Layer-2 solutions refer to a variety of techniques that aim to materially increase transaction speed and throughput as well as substantially decrease transaction costs by moving payments off-chain in a trust- minimised manner. 2nd Global Cryptoasset Benchmarking Study 19 SECTION 1: THE CRYPTOASSET INDUSTRY 1.1 Segments Industry Structure In the ten years since the publication of the Bitcoin whitepaper, an entire industry has evolved around cryptoasset systems to build and maintain basic infrastructure as well as to facilitate the use of the platforms and their assets. While there are several smaller segments comprising a great variety of additional services such as blockchain analytics, data, and ICO services, this study will limit its focus to four key industry segments: mining, storage, exchange, and payments (Figure 2). Figure 2: The cryptoasset industry can be broken down into four key segments Note: firms can operate in multiple segments. Key Cryptoasset Industry Segments Exchange Storage Mining Providing a platform for the exchange of one cryptoasset for another asset Share of service providers providing direct services Enabling the secure management of wallets storing cryptoassets Receiving newly minted cryptoasset units as a reward for processing transactions on the network Facilitating the use of cryptoassets for all types of payments 61% 72% Payments 49% SECTION 1: THE CRYPTOASSET INDUSTRY 20 The study further distinguishes between direct and outsourced services. Most entities are providing direct services in the exchange segment (72%), followed by storage (61%) and payments (49%) segment. In some cases, service providers partner with a third party to outsource specific activities often those that belong to a different segment. For instance, a storage provider may decide to partner with a third- party exchange to offer in-wallet purchases and sales of cryptoassets. In such instance, the third party is responsible for providing the exchange services and consequently for abiding by applicable regulations as well. Among respondents, 12% of exchanges, 17% of storage providers, and 23% of payment service providers are contracting out to an external party. The remainder of the report focuses on entities only providing direct services. Mining Segment The mining segment comprises agents performing specific operations for the processing of public blockchain transactions (Figure 3). During this process, new units of a specific cryptoasset can be created. Figure 3: Miners operate across a sophisticated value chain of distinct activities The majority of mining organisations tend to specialise in a specific activity (46% of small miners and 56% of large miners). In contrast, a small number of large firms have pursued a continuous vertical integration strategy that covers the entire value chain. Large firms tend to be older, whereas the majority of individuals and half of small miners in the sample are new entrants. Note: Section 7 covers the cryptoasset mining segment in greater detail. The Mining Value Chain Mining Hardware Manufacturers Entities designing and building specialised mining equipment Proprietary Mining Miners operating mining equipment on their own behalf Hashing Process of running mining equipment to generate hashes for finding a valid proof-of-work Cloud Mining Services Services renting out hashpower generated by own equipment to customers Pool Operators Service combining computational resources from multiple hashers and distributing rewards Remote Hosting Services Services hosting and maintaining customer-owned mining equipment 2nd Global Cryptoasset Benchmarking Study 21 Storage Segment Cryptoassets can be moved by signing transactions using private keys these keys are stored using wallet softwares. Initially, wallets were simple software programs handling key management, but they have evolved over time to support a variety of technical and commercial services. Many solutions provide an easy-to-use interface for the end-user that abstracts away the complexity of key management. Figure 4: Mobile wallets remain the most supported format; web wallet support has significantly increased Figure 4 shows the evolution of wallet options between 2017 and the second quarter of 2018. Mobile and web wallets are the most widely offered storage formats, though cold-storage vault services have gained in popularity in late 2017 with the influx of institutional investors, such as hedge funds. No storage format has seen a decrease in support in 2018, indicating that the various forms of storage options are not yet cannibalising each other. Large storage providers support an average of three of the above types, compared to an average of two types supported by small wallet providers. Storage-only service providers are more likely to specialise in a particular activity, as opposed to multi-segment entities that often support multiple wallet formats. Note: more detailed information on cryptoasset storage and custody is available in Section 4. Mobile Wallets Desktop Wallets Web Wallets Tablet Wallets Vault Services Hardware Wallets Mobile wallets are smartphone applications that store cryptoassets on mobile devices. Web wallets are online applications that can be accessed from any connected device via a browser. Desktop wallets are key management software programmes that run locally on a computer. Tablet wallets are applications that enable users to store cryptoassets on tablets. Vault services provide sophisticated key management and custody solutions combining multiple layers of security. Hardware wallets are small devices that securely store private keys without exposing them to connected machines. Share of storage providers supporting the listed formats 2018 2017 65% 38% 40% 24% 23% 62% 53% 42% 31% 31% 24% SECTION 1: THE CRYPTOASSET INDUSTRY 22 Exchange Segment Exchanges serve as on-off ramps for users to buy and sell cryptoassets - either in exchange for fiat currency ("fiat-supporting"), another cryptoasset ("cryptoasset-only"), or other assets such as gold. There are a variety of activities in the exchange segment that facilitate trade in different ways. Figure 5: Brokerage services, order-book exchanges, and over-the-counter (OTC) trading desks are the three major activities performed in the exchange segment. Figure 5 shows that brokerage services, order-book exchanges, and OTC desks are offered by almost half of all exchanges, with OTC desks greatly increasing in popularity since 2017. Exchanges exclusively engages in a single activity are prim

https://techcelerate.ventures

Helping to raise Series A investment for tech companies.

Since the publication of the first Global Cryptocurrency Benchmarking Study in April 2017, the cryptoasset ecosystem has undergone significant changes: the aggregate market capitalisation of cryptoassets skyrocketed from $30 billion to more than $800 billion at its peak in early January 2018, until coming down again to hover at around $200 billion.

About Techcelerate Ventures

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.

×

Modal Header

Modal body