market segment framework is developed and applied to a longitudinal dataset of ...... For example, some exchanges with powerful trading engines.
CRYPTOCURRENCIES MEETING BUSINESS ECOSYSTEMS: THE CASE OF BITCOIN
by Michel Rauchs
Master in International Business (MIB) Grenoble Ecole de Management 2014-2016
Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Science In the Grenoble Graduate School of Business Grenoble Ecole de Management
© Michel Rauchs 2016 Grenoble Ecole de Management Fall 2016
Abstract Bitcoin, a decentralised cryptocurrency system conceived by a mysterious person or group of people using the pseudonym “Satoshi Nakamoto”, promises to revolutionise the way that we think about money and the transfer of value in general. After a quiet launch in 2009, it has evolved several years later into a multi-billion dollar industry and has inspired the creation of hundreds of similar cryptocurrency systems. However, little research has been undertaken so far to study the vibrant business ecosystems that form around these decentralised networks. The aim of this project is thus to explore the emergence of the Bitcoin business ecosystem and its evolving structure using a data-driven approach, and identify the factors that drive this evolution. For this purpose, a theoretical market segment framework is developed and applied to a longitudinal dataset of 514 companies and projects that was specifically built for this project. Using a visualisation approach, the business ecosystem is mapped in terms of the affiliations of entities to market segments over a time window from 2010-2015 in order to visually analyse how the structure evolves. The key findings and observations are presented and several factors influencing the evolution of the business ecosystem are identified. Finally, the results are discussed in relation to the existing theory. The project provides the first comprehensive and data-driven analysis of the Bitcoin business ecosystem and offers interesting insights into its structure and evolution. Moreover, it contributes to the understanding of the factors that drive this evolution and provides a unique dataset that can be used for further research.
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Preface Having been interested for a long time in the inner workings of the financial system and the concept of money, I came across Bitcoin in early 2015 and was immediately fascinated by the prospect of what a decentralised stateless currency could achieve. In the middle of the emerging hype around “blockchain technology”, I had a lot to catch up with and dove right away into the large depository of knowledge that had already been formed by the Bitcoin community and other cryptocurrency advocates. It took me several months to grasp the basics, and many more to cut through the large amount of smoke grenades and unsubstantial claims made by consultants and “blockchain experts” that seemed to make sense though at first glance. Nevertheless, I slowly realised the beauty of the system that Satoshi had designed way back when I was still in high school and was thrilled by the endless possibilities that the network enabled. When the time came for choosing a topic for my Master’s thesis, I saw the opportunity of spending a whole year full-time on Bitcoin and related systems. After consulting with my tutor, we decided to focus on the Bitcoin business ecosystem, and I set out to build a database of bitcoin-related companies and projects. The timeconsuming research process offered me the fantastic possibility to dive into all sorts of aspects regarding Bitcoin and other cryptocurrencies, to attend conferences and meet-ups and to connect with a lot of wonderful people. The result of that year is a dataset of 514 companies and projects over a time window from 2010-2015, which I plan to make freely available for anyone interested in using the data for whatever purpose. This is my small contribution to the open-
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source community that has taught me many valuable lessons and inspired me to continue with this path in the future. I would first like to express my gratitude to Kary Bheemaiah for being the first to introduce me to Bitcoin, for many interesting follow-up discussions and for providing valuable advice and assistance. Next, I would like to thank my tutor Federico Pigni, who helped me guide through the particularities of academia and suggested to focus the analysis on the ecosystem level. Marco Tonellato deserves also to get praised for his admirable patience and willingness to help me getting introduced to network visualisation. Of course, I cannot thank enough my parents who have always supported me in everything I do. I would also like to thank the Bitcoin community and all the individuals I had the pleasure to meet in this space, you did a fantastic job. Moreover, I’m grateful for all the people that have supported me during my journey in one or another way. Finally, I want to thank Satoshi Nakamoto for designing one of the most revolutionary systems in the last decades that has the potential to shape the future in ways we still cannot imagine.
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Table of Contents CHAPTER 1: INTRODUCTION ................................................................................................................. 1 1.1 CONTEXT .................................................................................................................................................................. 1 1.2 DECENTRALISED CRYPTOCURRENCY SYSTEMS .................................................................................................. 2 1.3 RESEARCH PROBLEM .............................................................................................................................................. 2 1.4 STRUCTURE .............................................................................................................................................................. 3 1.5 SIGNIFICANCE .......................................................................................................................................................... 4 CHAPTER 2: BITCOIN ............................................................................................................................... 6 2.1 CONCEPT .................................................................................................................................................................. 6 2.2 MECHANICS ............................................................................................................................................................. 7 2.2.1 How does it work? ........................................................................................................................................... 7 2.2.2 Nakamoto consensus ..................................................................................................................................... 9 2.3 BITCOIN SOFTWARE ............................................................................................................................................. 10 2.3.1 Bitcoin Core ...................................................................................................................................................... 10 2.3.2 Core developers .............................................................................................................................................. 11 2.3.3 Developer funding ......................................................................................................................................... 12 2.4 VALUE PROPOSITION(S) ...................................................................................................................................... 12 2.4.1 Decentralised digital cash ......................................................................................................................... 13 2.4.2 P2P payment network ................................................................................................................................. 14 2.4.3 New asset class ............................................................................................................................................... 15 2.4.4 Immutable time-stamped file system .................................................................................................... 15 2.4.5 Implications ..................................................................................................................................................... 16 CHAPTER 3: LITERATURE REVIEW ................................................................................................... 18 3.1 BUSINESS ECOSYSTEMS ........................................................................................................................................ 18 3.1.1 Concept .............................................................................................................................................................. 18 3.1.2 Definition and characteristics ................................................................................................................. 19 3.1.3 Technology platforms .................................................................................................................................. 20 3.2 ECOSYSTEM TRAJECTORIES ................................................................................................................................. 23 3.2.1 Factors ................................................................................................................................................................ 23 3.2.2 Frameworks and approaches ................................................................................................................... 24 3.3 BITCOIN AND CRYPTOCURRENCIES .................................................................................................................... 26 3.4 RESEARCH GAP ...................................................................................................................................................... 28 CHAPTER 4: METHODOLOGY .............................................................................................................. 30 4.1 BOUNDARY SPECIFICATION ................................................................................................................................. 30 4.1.1 The Bitcoin ecosystem ................................................................................................................................. 30 4.1.2 The Bitcoin business ecosystem ............................................................................................................... 33 4.2 DATA COLLECTION ............................................................................................................................................... 35 4.2.1 Identification of relevant entities ........................................................................................................... 35 4.2.2 Type of data collected .................................................................................................................................. 36 4.2.3 Data sources .................................................................................................................................................... 37 4.2.4 Resulting dataset ........................................................................................................................................... 38 4.3 MARKET SEGMENT FRAMEWORK ...................................................................................................................... 38 4.3.1 Categories of subindustries ....................................................................................................................... 38 4.3.2 Development of framework ...................................................................................................................... 39 4.3.3 Framework ....................................................................................................................................................... 40 4.4 DESIGN .................................................................................................................................................................... 43 4.4.1 Visualisation approach ............................................................................................................................... 43 4.4.2 Computation of network graphs ............................................................................................................. 44
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CHAPTER 5: FINDINGS ........................................................................................................................... 47 5.1 SUMMARY STATISTICS ......................................................................................................................................... 47 5.2 NETWORK VISUALISATION .................................................................................................................................. 48 5.2.1 Bitcoin business ecosystem 2010 ............................................................................................................ 49 5.2.2 Bitcoin business ecosystem 2011 ............................................................................................................ 51 5.2.3 Bitcoin business ecosystem 2012 ............................................................................................................ 54 5.2.4 Bitcoin business ecosystem 2013 ............................................................................................................ 57 5.2.5 Bitcoin business ecosystem 2014 ............................................................................................................ 60 5.2.6 Bitcoin business ecosystem 2015 ............................................................................................................ 63 5.3 KEY FINDINGS ........................................................................................................................................................ 64 5.3.1 Diversity ............................................................................................................................................................. 64 5.3.2 Diversification ................................................................................................................................................. 67 5.3.3 Funding patterns ........................................................................................................................................... 70 5.3.4 Entries and exits ............................................................................................................................................. 73 5.3.5 M&A, pivots and rebranding ..................................................................................................................... 76 CHAPTER 6: ANALYSIS AND DISCUSSION ........................................................................................ 80 6.1 ANALYSIS ................................................................................................................................................................ 80 6.1.1 Factors driving the emergence and evolution of market segments ........................................ 80 6.2.1 Factors impacting the evolution of the overall ecosystem .......................................................... 86 6.2 DISCUSSION ............................................................................................................................................................ 93 CHAPTER 7: CONCLUSION .................................................................................................................... 98 7.1 SUMMARY ............................................................................................................................................................... 98 7.2 IMPLICATIONS .................................................................................................................................................... 100 7.2.1 Theoretical implications: ........................................................................................................................ 100 7.2.2 Managerial implications ......................................................................................................................... 101 7.3 LIMITATIONS AND FUTURE RESEARCH .......................................................................................................... 102 7.3.1 Limitations .................................................................................................................................................... 102 7.3.2 Future research ........................................................................................................................................... 103 BIBLIOGRAPHY: ................................................................................................... 104 APPENDIX A: MARKET SEGMENT EMERGENCE AND EVOLUTION ............ 118 APPENDIX B: SUB-GRAPH FIGURE 2013 ............................................................... 120 APPENDIX C: SUB-GRAPH FIGURE 2014 ............................................................... 121 APPENDIX D: SUB-GRAPH FIGURE 2015 ............................................................... 122
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Chapter 1: Introduction 1.1 Context In the aftermath of the financial crisis of 2007/2008 and the subsequent economic recession, many have voiced critics and concerns about the state of the financial system, which was in large parts responsible for the financial and economic downturn. As a result, new start-ups have popped up that apply technology to traditional financial services and unbundle the offerings of traditional banking. This has led to the emergence of the so-called FinTech (Financial Technology) ecosystem, an alternative within the traditional financial services industry that offers complementary services and/or disrupt existing processes in fields ranging from insurance and everyday banking to wealth management and capital raising. Especially the traditional value transfer system, which is built on automated clearing houses and intermediary banks, is prone to rapid changes with the emergence of alternative payment schemes. While most new entrants focus on improving the customer and merchant experience and “leaving the underlying payments infrastructure undisrupted” (WEF, 2015: p.28), there is a variety of nascent “non-traditional payment schemes” (WEF, 2015: p.43) that rely on alternative infrastructure to deliver payments.
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1.2 Decentralised cryptocurrency systems Within the growing FinTech ecosystem, a new subsystem of “decentralised virtual currency schemes” (ECB, 2012) has emerged that enable alternative payment channels and instruments outside of the traditional financial system and legacy infrastructure. A unique feature of these systems is the creation of an internal token system fuelling the integrated payment network, whose units can be used as digital currency or money. Unlike other virtual currencies, however, there is no central authority issuing the currency and verifying transactions. Instead, this is all accomplished by a clever combination of a P2P (peer-to-peer) network, cryptography and economic incentive structures that encourage honest behaviour. As a result, there is no formal platform owner or dominator, a necessary requirement for a system enabling a decentralised digital currency. These systems are based on open-source software and usually assemble a diverse community of developers, entrepreneurs and other stakeholders who jointly maintain
and
develop
the
core
platform,
upon
which
complementary
infrastructure, applications, products and services are built. As a consequence, there are entire business ecosystems that emerge around these decentralised platforms.
1.3 Research problem However, little is known so far about the characteristics and evolution of the business ecosystems forming around decentralised cryptocurrency systems. We believe the evolutionary trajectories to be different from other digital 2
business ecosystems due to the unique nature of their value propositions and the absence of a platform owner or dominator. They effectively constitute a new type of platform-based business ecosystems that have not yet been thoroughly studied in the literature. To fill this gap, this study attempts to explore how an entire business ecosystem is emerging around such platforms, how its structure is evolving over time and what factors drive this evolution. For this purpose, we focus the study on Bitcoin, the first and largest of these decentralised cryptocurrency systems. Bitcoin, first described in 2008 and launched in January 2009, has attracted a large and thriving ecosystem of entrepreneurs, developers and users around its platform since its inception and remains the most popular decentralised cryptocurrency system.
1.4 Structure The remainder of the paper is organised as follows. In Chapter 2, we describe the concept and mechanics of Bitcoin and give further reading advice. We then discuss the value propositions that the Bitcoin platform offers and how they differ from traditional financial services platforms. Chapter 3 introduces the concept of business ecosystems and presents an overview of the literature regarding business ecosystems, technology platforms and their evolutionary trajectories before addressing the research gap. Chapter 4 defines the boundaries of the study, describes the data collection process and introduces a theoretical framework that groups the diverse product and service offerings into market segments. Subsequently, the methodology used for transforming the raw data
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into bipartite network graphs is depicted. In Chapter 5, the key statistics of the dataset analysis are summarised, the resulting network graphs from 2010-2015 are presented and briefly commented, and the key findings, observations and trends are highlighted. Chapter 6 attempts to determine the factors that drive this evolution and have an influence on the overall business ecosystem. The findings are then discussed and being related to the existing theory. In Chapter 7, the implications and limitations of the study are presented and exciting new research avenues are suggested.
1.5 Significance We believe that this study contributes to the understanding of the emergence and evolution of platform-based business ecosystems in general, and specifically to business ecosystems forming around decentralised cryptocurrency systems, which offer a unique value proposition that touches a fundamental concept of human society and civilisation - money. To our knowledge, this is the first comprehensive study on the Bitcoin business ecosystem, based on a unique longitudinal dataset specifically built for the purpose of this project. Bitcoin represents one of the most exciting revolutions in technology and money in recent decades, and we consider it to be worthwhile studying the economic community that has formed around this system, which exhibits a market capitalisation of over $9 billion1 as of August 2016.
1
Retrieved from: https://coinmarketcap.com/ [Accessed: August 30, 2016]. 4
The findings can help entrepreneurs and investors get a better understanding of the Bitcoin business ecosystem structure and its evolutionary patterns to identify interesting business opportunities. Furthermore, the analysis of the driving factors influencing the business ecosystem may be of interest to regulators and government agencies in their attempt to create a coherent regulatory and legal environment that does not stifle innovation. Finally, academics can use the theoretical framework and apply it to other decentralised cryptocurrency systems to test its validity. Similarly, they can use the freely available dataset for undertaking further research on the Bitcoin business ecosystem.
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Chapter 2: Bitcoin 2.1 Concept Bitcoin was first described in October 2008 in a self-published white paper on a cryptographic mailing list by an anonymous person or group of people under the name of “Satoshi Nakamoto”. The founder(s) described it as a system enabling a “purely peer-to-peer version of electronic cash” that allows two parties to send online payments to each other without having to go through a centralised institution (Nakamoto, 2008: p.1). The European Central Bank (2015: p.25) refers to Bitcoin as the first “decentralised virtual currency scheme”2, a term that includes both the underlying value transfer system (payment network) as well as the native token or currency (bitcoin3) needed to fuel the system. Bitcoin thus is a “new form of currency” (Ali, Barrdear, Clews & Southgate, 2014b: p.276) combined with an innovative payment system that together provide a censorship-resistant because decentralised way of sending online payments without having to rely on a central authority. Given the complexities of the different components that act together to make the system work, we tend to favour the definition of Bitcoin as “a collection of concepts and technologies that form the basis of a digital money ecosystem” (Antonopoulos, 2015: p.1).
The Bank of England uses the term “digital currency schemes” and defines it as a combination of new decentralised payment systems and new currencies. (Ali, Barrdear, Clews & Southgate, 2014a). 3 Bitcoin with uppercase “B” generally refers to the protocol and system, while bitcoin with lowercase “b” refers to the currency unit. 2
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Indeed, Bitcoin draws upon on a combination of concepts from various disciplines ranging from cryptography (among others public key cryptography, digital signatures and cryptographic hash functions4) to economics (game-theoretic analyses of incentive structures and monetary theory) and P2P networking. The Bitcoin system consists of a P2P network allowing participants to connect to and communicate with each other, a protocol that sets the rules of the network and the consensus mechanism, and a distributed ledger called the blockchain that records all transactions happening in the network and that is shared among all participants.
2.2 Mechanics There are a number of excellent books and articles exploring the inner workings of the Bitcoin network in detail for a more technical (Antonopoulos, 2015; Bonneau et al., 2015) as well as non-technical audience (Böhme, Christin, Edelman & Moore, 2015, Narayanan, Bonneau, Felten, Miller & Goldfeder, 2016). Therefore, we are only going to briefly describe the basic functioning of the system.
2.2.1 How does it work? When a user wants to initiate a transaction, he digitally signs with his private key a message referencing the unspent transaction outputs (UTXO) from A cryptographic hash function is a mathematical algorithm that transforms an input of arbitrary size (called the message) into a bit-string of fixed size (called a hash or digest). It is a one-way function in the sense that it is trivial to compute the same output given the input, but infeasible to determine the input given the output. 4
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a previous transaction that he wants to spend, and indicates the recipient’s public address and the amount of value that shall be transferred. The combination of public and private key acts as a unique identifier of users and removes the need for a central authority to assign accounts and identities. This transaction is then broadcasted and propagated via the P2P network to all full nodes. In order to compensate for the absence of a central authority to prevent double-spends, all full nodes keep a complete copy of the global ledger so that they can independently verify that the funds have not yet been spent. Special nodes called miners then take this unconfirmed transaction and group it together with other unconfirmed transactions in a candidate block. The miners, competing with each other to produce the next valid block, engage in a computational race contest that consists essentially of finding a special number called nonce that produces a hash value that is below a predefined threshold. The miner who manages to first “solve” the puzzle immediately submits the block including the proof-of-work (PoW) to the rest of network, which accepts the block as valid if it meets the requirements. All miners then begin searching for a new block that will reference the previously found valid block. As a result, a new data structure - the blockchain - is created consisting of a chain of cryptographically linked blocks. The cryptographic puzzle that miners most solve is designed in a way that on average, every ten minutes a block is found. In some cases, two or more different miners may find a valid block at approximately the same time, which causes the blockchain to split into two or more forks. This situation, however, is usually quickly resolved after a few blocks since the longest chain, i.e. the chain containing the largest amount of
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computational power5 is considered to be the valid one. Full nodes on the network thus maintain a shared state of the global ledger that everybody agrees upon by independently re-computing the whole history of transactions starting from the genesis block, the first block mined to launch the network. Miners are incentivised to provide costly resources by being rewarded with a specific amount of newly minted bitcoins in addition to the transaction fees in case they find a valid block that gets accepted by the network. This solution ensures that the issuance of new tokens and the verification of transactions can take place in a decentralised way without a central party overseeing the process.
2.2.2 Nakamoto consensus The core innovation of Bitcoin is not the novel data structure of chained blocks, but the so-called Nakamoto Consensus that ensures mutually untrusted parties to reach consensus over the state of the Bitcoin blockchain. It is seen as an elegant circumvention of the Byzantine General’s problem6 in computer science through the use of a clever economic incentive structure. The consensus protocol incentivises miners to behave honestly by making it “more profitable for miners to play by the rules […] than to undermine the system and the validity of [their] own wealth” (Nakamoto, 2008: p.4). This incentive compatibility property (Bonneau et al., 2015: p.110) states that the system will be stable as long as the majority of miners follow their own economic interest, which is to maximise revenues. Hence, an attacker with the majority of hashing power will in theory Corresponds usually to the chain with the most blocks, but not always. A problem first described in 1982 by Lamport, Shostak and Pease, that deals with the challenges of achieving consensus in a distributed computer system in which participants do not trust each other. 5 6
9
be more inclined not to abuse his power to double-spend his own payment and thereby destroying the value of the system, but rather use his dominant position to mine a large amount of bitcoins and make a profit.
2.3 Bitcoin software 2.3.1 Bitcoin Core Bitcoin Core is the reference client for the Bitcoin network and specifies the rules of the protocol. It is based on the original software written and released to the public by Satoshi Nakamoto in January 2009 under the MIT license. Since Bitcoin Core is free and open-source software (FOSS), anyone can submit changes via "pull requests" to the source code, or directly fork the project that is hosted on GitHub7. As a result, there are several alternative client implementations and hundreds of forks that have become altcoins, with the majority being mere copies of Bitcoin that only alter some parameters8. As Böhme et al. (2015: p.219) put it, “Bitcoin lacks a governance structure other than its underlying software”. However, since there is no formal protocol specification other than the implementation by the reference client, and the latter remains the most widely used Bitcoin software, all alternative client implementations must closely follow the rule-defining aspects of the Bitcoin Core software to ensure compatibility with the Bitcoin network and avoid forking the blockchain. Available at: https://github.com/bitcoin/bitcoin. There are also a number of altcoins that are not simple copies from the Bitcoin source code, but written from scratch with in some cases very different properties. An example is the privacyfocused cryptocurrency Monero. 7 8
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2.3.2 Core developers When the anonymous founder Satoshi Nakamoto surprisingly disappeared in mid-2010, he handed over the commit access to the GitHub repository to Gavin Andresen. Since then, hundreds of volunteering developers have contributed to the maintenance, development and review of the source code, but only a small number of developers have direct commit access. Over time, these developers have become known under the term core developers, although they are rather a group of loosely connected individuals than a united developer team. This is shown by the fact that they first met in person in May 2013 at a Bitcoin conference in Silicon Valley (Popper, 2015a: p.214-215). There is no formal governance structure (Bonneau et al., 2015), but there are mechanisms such as the Bitcoin Improvement Proposal (BIP) process among others to suggest formal proposals to make substantial changes to the protocol that are discussed within the community. While the core developers in theory have the ultimate power of decision, in practice they have to consider the views of the wider community if they do not want to risk a hard fork in case the community does not approve their actions. With the recent block size debate, a number of alternative clients altering some fundamental parts of the protocol have emerged, but none of them so far has managed to receive substantial support, cementing Bitcoin Core’s position as the indisputable market leader. Nevertheless, there have been increased efforts to develop a more open and consistent communication policy by the lead developers to avoid a similar situation in the future.
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2.3.3 Developer funding The protocol development has first been done on a voluntary basis in the first years and contributors were dependent on donations from other participants. In 2012, the non-profit Bitcoin Foundation was founded to fund some of the core developers by raising donations of participating firms of the Bitcoin ecosystem. However, with the foundation getting into trouble and heading towards bankruptcy, the MIT Media Lab’s Digital Currency Initiative began paying the salaries of three core developers funded by corporate sponsorship (Van Wirdum, 2015). In addition, the private venture capital (VC)funded company Blockstream was founded to employ a number of core developers to work full-time on the software maintenance and development of additional functionalities.
2.4 Value proposition(s) Since Bitcoin does not rely on a trusted central authority, it exhibits two key properties that constitute the foundation of its value proposition: censorshipresistance in the sense that nobody can prevent someone from participating in the network and effectively censoring specific transactions; and the irreversibility of transactions which ensures that once a transaction has been validated and sufficiently confirmed9, it cannot be reversed. The Bitcoin network is thus
It is generally assumed that a transaction that received six or more confirmations (i.e. six or more blocks have been mined on top of the block containing the transaction and accepted by the network) is safe from being reversed. 9
12
considered to be neutral, which enables a value proposition that can essentially be broken down into four parts.
2.4.1 Decentralised digital cash The native tokens10 rewarded to miners for finding valid blocks can be used as digital cash. The novelty about this digital cash is that it is not issued by a central authority and the transactions are not validated by a trusted third party, which makes it censorship-resistant because of the system’s decentralised nature. As a non-sovereign and stateless currency, it is not subject to monetary policy determined by a central bank and thus the risk of being inflated, but has a clear inflation schedule defined by the protocol itself that states that there will only ever be a maximum of 21 million bitcoins11. Moreover, its global and borderless nature removes the need for exchanging currency at each border, and makes it an excellent choice for online purchases since it can be considered to be a “native” currency to the Internet, reducing friction for e-commerce. In addition to enabling merchants to reach a wider audience, the irreversibility of transactions eliminate the risk of chargebacks. The fact that ownership of a bitcoin is determined by the possession of the private key encourages users to “be [their] own bank”12 and avoid the necessity to trust intermediaries and third parties with their money. This also removes the In fact, there are no “tokens” that live on the blockchain, but so-called unspent transaction outputs (UTXOs), which are essentially entries in the global ledger that are locked in a special script tied to a specific public key. However, for the sake of simplicity, we do not go into further detail in this study and use the term digital token as synonym for UTXO throughout the paper. 11 In theory, however, this limit could be lifted via a soft or hard fork, although this would require overwhelming social consensus, which is very unlikely to happen. 12 The phrase “Be your own bank” has been a popular slogan to highlight the benefits of Bitcoin for empowering users by eliminating the need for intermediaries and the reliance on third parties. 10
13
need for users to identify themselves with personal information and adds a certain degree of anonymity.13 Finally, bitcoins can serve as a way of improving financial inclusion for the unbanked and let them participate in the global economy by providing them with an alternative “bank account”.
2.4.2 P2P payment network The Bitcoin network has also an integrated payment system that propagates and verifies transactions in a P2P fashion and records validated transactions in the global ledger. It can be used as a cheap and rapid way to transfer funds from one part of the world to another: on average, a transaction with sufficient fees will be included in a block within ten minutes, which drastically improves on traditional bank transfers, and provides near-instant settlement. Since the launch of the Bitcoin network in January 2009 with the mining of the genesis block14, the transaction fees have been consistently low because they get subsidised by the issuance of new currency units for each new valid block that is found.15 The P2P structure of the network makes it more robust and resilient because there is no single point of failure: it operates 24/7, 365 days a year, and does not have bank holidays. An additional important feature is that the use of public key cryptography removes the need for
However, Bitcoin is more accurately described as pseudonymous, because the public nature of the global ledger recording every transaction that ever occurred often enables to link public addresses to user identities (Reid & Harrigan, 2013) 14 The genesis block constitutes the first block in a blockchain and is usually hardcoded into the software. 15 Hence, Bitcoin carries the promise of very low transaction fees, which so far has been proven true. However, with the amount of newly generated coins per block being halved approximately every four years, they are expected to increase over time (Ali et al., 2014b). 13
14
confidential data such as personal identity information and credit card numbers to be stored on insecure servers.
2.4.3 New asset class As the world’s first digital bearer asset, bitcoin is often termed “digital gold” in allusion to the common properties it shares with gold. Both have a fixed supply and are thus scarce, which makes them a priori a good store of value. In certain aspects, bitcoin even improves on gold: it can be transferred worldwide in a very short time at almost no cost, it is a lot cheaper and easier to store, and it is more easily divisible than gold. As a result, bitcoin is considered to be the first of its kind of a new asset class (Burniske & White, 2016) that provides considerable return and diversification benefits to any portfolio thanks to its almost non-existent correlation to other major asset classes (Brière, Oosterlink & Szafarz, 2013; Burniske & White, 2016). Hence, bitcoin can also constitute a speculative digital asset and alternative investment vehicle.
2.4.4 Immutable time-stamped file system Thanks to its censorship-resistance and the ability to encode specific metadata in transactions, Bitcoin can be used as a global append-only data store that enables the creation of non-currency applications16. These can include among others proving the existence and authenticity of data at a certain point in time by adding timestamped hashes of the data to bitcoin transactions, which
For the rest of this paper, the term non-currency (or non-monetary) applications will be used to determine the specific use cases that relate to this aspect of Bitcoin’s value proposition. 16
15
can easily be verified by any interested party that has access to the original data. Similarly, particular states from other databases or data layers can periodically be hashed and anchored in the Bitcoin blockchain for accountability and verification purposes, enabling to determine the last valid version of a specific state. Another possibility is to add specific metadata to bitcoin transactions either via the OP_RETURN opcode or directly encoded in transaction outputs that add secondary meaning that can be understood by clients of a meta-protocol. These specially formatted bitcoin transactions enable the creation of an overlay network on top of Bitcoin. The meta-protocol specifying the overlay network will benefit from Bitcoin’s security while at the same time enable new functionalities that would not be possible on the base layer, thereby opening up endless possibilities for the creation of new complex systems and applications.
2.4.5 Implications The three first aspects enable what can be called currency or monetary applications. These refer to Bitcoin as a new and unique way of creating, holding, storing, and transferring money on the Internet17. In contrast, the fourth aspect enables non-currency or non-monetary applications that go beyond the concept of money and use Bitcoin as a distributed immutable data store. Interestingly, the latter use case has only been discovered after the network had already been running for years.
“Money over IP”: Tweet from Roger Ver (2012, May 24). Retrieved from: https://twitter.com/rogerkver/status/205622508089647104 17
16
Although currently all four aspects are possible and also being actively used, there are some considerations regarding the scaling of the system and the compatibility of the four facets. While both currency and non-currency applications generally can co-exist together, an increased use of Bitcoin as a data store in the future might bloat the blockchain and add to scalability issues. However, this is similarly true for Bitcoin being increasingly used as a payment network: the arbitrary 1 MB (megabyte) block size limit is considered too small to accommodate a significant surge in transactions. This has resulted in a fierce debate within the community over whether the block size should be increased or not. In addition, there is a conflict between the aspects described in section 2.4.1 and 2.4.3: the deflationary nature of Bitcoin encourages the hoarding of bitcoins rather than the use as a medium of exchange, which poses major impediments to it being used as a currency.
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Chapter 3: Literature Review 3.1 Business ecosystems 3.1.1 Concept The concept of business ecosystems has emerged in the early 90s (Moore, 1993) to provide a more comprehensive framework to analyse economic communities composed of interconnected organisations (Basole, 2011). It is similar to the concept of value networks (Allee, 2000; Peppard & Rylander, 2006), but differs in that it takes a systems perspective to take into account the whole ecosystem instead of taking the perspective of a focal firm. It has been examined from various perspectives (Muegge, 2011) and draws upon a variety of different analogies which all emphasise different aspects of an ecosystem (Peltoniemi and Vuori, 2004). The most common analogy is a metaphor derived from the concept of biological ecosystems in which a diverse set of “species” occupy specific roles in a particular “environment” and form a complex network of symbiotic relationships that ensure the stability and robustness of said ecosystem. Both types of ecosystems consist of “a large number of loosely interconnected participants” that share the same fate due to their reciprocal dependence on each other (Iansiti and Levien, 2004: p.8). Business ecosystems “share some fundamental properties” with natural ecosystems in the sense that both are “complex adaptive systems” that follow specific laws (Lewin and Regine, 1999: p.198-199). Business ecosystems also display key phenomenas that are observed
in
nature,
such
as
competition,
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specialisation,
co-operation,
exploitation, learning and growth (Rothschild, 1990). However, the main differences between the two concepts are the ability of business ecosystem members to make conscious decisions (Moore, 1996: p.18), the competition over possible new members and the focus on delivering innovation rather than purely survival (Iansiti and Levien, 2004).
3.1.2 Definition and characteristics Moore (1998: p.168) defines a business ecosystem as an “extended system of mutually supportive organisations” that include companies as well as customers, suppliers and other stakeholders ranging from governmental institutions and trade associations to labour unions and universities. According to Peltoniemi (2006: p.12), a business ecosystem is a “dynamic structure that evolves and develops in time”, and in which a population of organisations influence each other (Peltoniemi and Vuori, 2004: p.13). It can also be thought of a “network of interdependent niches” that are populated by organisations (Moore, 2006: p.34). The principal distinctive feature is the interconnectedness of the ecosystem members, which entails that changes in the “landscape” of one firm provoke changes in the “landscape” of other participant companies (Lewin and Regine, 1999: p.207). Key characteristics of business ecosystems include the notions of coevolution, self-organisation and emergence, which help it to adapt to changes in the external environment (Peltoniemi and Vuori: 2004). Smith and Stacey (1997) describe emergence as a process emerging from interconnected actors in which actions from individual actors can lead to unexpected and unpredictable
19
outcomes at the ecosystem level. Competition and cooperation in an ecosystem are
two
complementary
forces
in
the
interactions
between
ecosystem
participants (Iansiti and Levien, 2004: p.35; Merry, 1995: p.175). This interconnectedness leads to feedback loops on the micro-level, which coupled with conscious choices made by firms based on limited knowledge result in unanticipated
outcomes
at
the
macro-level
(Peltoniemi,
2006:
p.18).
Collaboration between members (Moore, 2006) is a fundamental characteristic, especially in high-growth, technology-intensive industries (Chesbrough, 2006). Iansiti and Levien (2004) consider fragmentation within the ecosystem itself to be a feature. Hearn and Pace (2006) underline the shifts in the conceptualisation of value creation and speak of “value-creating ecologies” in which the customers become co-creators of value.
3.1.3 Technology platforms In recent years, a growing number of researchers has focused on the role of technology platforms in building a business ecosystem. In this paper, we are focusing on the business ecosystem concept as “an industry structure anchored around a technology platform” (Muegge, 2011: p.7). Tiwani, Konsynski and Bush (2010: p.675-677) note that the emergence of software-based platforms has led to the rise of “platform-centric ecosystems”, which are a collection of the platform and the modules connected to it. Platforms generally are multi-sided markets that bring together two or more distinct but interacting “sides”. (Armstrong, 2006; Rochet & Tirole, 2003): the platform is only of value for one “side” if the other side is also present, which
20
makes the platform subject to network effects (Gawer, 2009a: p.2). Evans (2009) shows that multi-sided platforms need to attract enough users on each side in order to achieve sustainable growth and create enough value for each group of users. Gawer and Cusumano (2014) distinguish between internal or companyspecific platforms and external or industry-wide platforms. Industry platforms are “products, services, or technologies developed by one or more firms” which constitute building blocks serving as foundation upon which other firms can create complementary products, services and technologies (Gawer, 2009b: p.54). These complementary assets refer to what Amit and Zott (2001) call "complementarities". Baldwin and Woodard (2009: p.19) argue that all platforms are fundamentally composed of a “set of core components” that are stable and rarely change, a “complementary set of ‘peripheral’ components that are variable and can be changed, as well as the interfaces between them. This allows a platform and its surrounding services and applications to continually evolve without having to fundamentally change the building blocks. Industry platforms thus tend to get more valuable the more innovation is happening on the complements (Gawer, 2009b). Similarly, Suarez and Cusumano (2009) highlight the important role that services play in a platform-based ecosystem in the creation of indirect network effects, value added and customer experience. Most research has concentrated on ecosystems based on platforms that are owned, controlled and/or dominated by a single company or a small set of companies that are referred to as “platform leaders” (Gawer & Cusumano, 2002, 2008) or “keystone firms” (Iansiti & Levien, 2004). Boudreau and Hagiu (2009)
21
compare the leaders of such multi-sided platforms to public interest regulators and highlight their regulatory role in the governance of the platform. Schilling (2009) discusses the trade-offs for platform leaders between opening up and protecting their technology platform, and Eisenmann, Parker and Van Alstyne (2009) provide a set of strategies serving as guidelines for managers to decide whether to open or close mature platforms. However, with the rise of open-source software (Raymond, 1999) new dynamics emerge in an environment where there is no formal platform or ecosystem leader, but an open community governing the ecosystem. Muegge (2011) separates the business ecosystem from the developer community to analyse community-driven platforms, and argues that the meritocratic developer community is the “locus of value creation” while the business ecosystem is the “locus of innovation commercialisation and value capture”, with the platform sitting
in
between
(Muegge,
2011:
p.5).
Some
papers
focus
on
the
commercialisation of open-source software (Morgan, Feller & Finnegan, 2013) and the economic motives behind companies contributing to open-source projects (Riehle, 2007). Most research deals with the advantages and disadvantages of open-source and proprietary software business models (Helander & Rissanen, 2005; Krishnamurthy, 2005).
22
3.2 Ecosystem trajectories 3.2.1 Factors Mäkinen and Dedehayir (2012) review the literature to determine the most common factors influencing the evolution of platform-based business ecosystems. They can be divided into exogenous factors (changes in social and economic environments, technological changes and competing ecosystems) and endogenous factors (platform architecture and governance, co-evolutionary processes). Similarly, Tiwani et al. (2010: p.675) assume that “the co-evolution of the design, governance and environmental dynamics” have an effect on the evolution of an ecosystem. Iansiti and Levien (2004) assert that productivity, robustness and the ability to create niches are the main success factors of business ecosystems. The diversity of organisations within an ecosystem adds to the platform functionality and resilience (Iansiti and Richards, 2006). Heikkilä and Kuivaniemi (2012) suggest to consider the “clockspeed” of six different sub-ecosystems (technological change, research insights, changes in customer demands, competition/coopetition, social environment, and legal and policy environment) to analyse the expansion of a business ecosystem. Um, Yoo and Wattal (2015) observe that the changing combination of existing digital components is a driving factor in the change of the topological structure of a digital ecosystem. Liu, Kauffman and Ma (2015) report that competition, cooperation and regulation have jointly shaped the evolution of the mobile payments technology ecosystem and illustrate each factor with key events. They make the difference between innovation-spurring
23
and innovation-stalling competition, and analyse the role of regulatory force in either accelerating or delaying innovation.
3.2.2 Frameworks and approaches Although there exists a variety of theoretical frameworks to model and analyse a particular business ecosystem in depth (Tian et al., 2008, Battistella, Colucci, De Toni & Nonino, 2013; Rong, Hu, Lin, Shi & Guo, 2015), there is a lack of models to specifically study the evolution of business ecosystems. Moore (1993) presents a 4-stages framework for the lifecycle of a business ecosystem: At the birth phase, firms are busy defining the new value proposition around a new “seed innovation”. At the expansion phase, companies scale up and attempt to get maximum market coverage, while at the leadership stage, the ecosystem reaches stability and high profitability. At the final phase, rising new ecosystems and innovations threaten the existing ecosystem structure and force it to either renew itself or to die. Moore (2006) also suggests a framework to assess the funding patterns in four stages of maturity of an ecosystem. The first stage is characterised by highly chaotic behaviour and funding provided mainly by the founders themselves. At the second stage, companies have defined their value proposition and need growth capital to expand. At the third stage, private investors have typically exited when centrally positioned firms with strong economies of scale become very profitable. At the final stage, growth is slowing down: companies attempt to increase their share of the total ecosystem profits at the expense of other firms, and there are cases of market power abuse and consolidation. However, both of these frameworks do mainly apply to more
24
traditional
brick-and-mortar
business
ecosystems
and
less
to
software
ecosystems. Adomavicius, Bockstedt, Gupta & Kauffman. (2008) propose a model to understand the role of technological change in the evolution of technology ecosystems. They define 3 specific roles that technology can play in an ecosystem (component role, product and application role as well as the support and infrastructure role), whose complex interactions and interplays shape the evolution of the ecosystem. Another model for determining the technological change driving the ecosystem evolution includes the “clockspeed measure” (Mäkinen and Dedehayir, 2013), an approach that takes into consideration the dynamics of the various subindustries that are essential for the provision of services in the main business ecosystem. Jansen (2014) proposes a framework to measure the health of open-source ecosystems, which, however, is more focused on the developer community than on the economic actors. Given the lack of sound analytical frameworks, the evolution of an ecosystem has often been studied by analysing the inter-firm relationships in a specific ecosystem to depict the dynamics of the underlying structure (Iyer, Lee & Venkatram, 2006; Basole & Karla, 2011) and explain changes in the network structure with changes of strategic positions and roles of focal firms (Iyer et al., 2006). Similarly, Iansiti and Levien’s (2004) framework of the four roles that exist in a business ecosystem could in theory be used to describe the evolution of the ecosystem structure by analysing the changing roles of a focal firm.
25
3.3 Bitcoin and cryptocurrencies Academic publications containing the keyword “Bitcoin” have increased exponentially since 2011 (Brenig, Schwarz & Rückeshäuser, 2016: p.10), demonstrating a growing interest from researchers in the economic, legal and technical aspects of the cryptocurrency system. In a systematic literature review analysing cryptocurrencies and Bitcoin from an information system (IS) perspective, Morisse (2015) finds that the vast majority of papers relate to Bitcoin, and that research focuses on 3 different layers: protocol, network and ecosystem. Various researchers have identified potential attack vectors against the system and its incentive structures (Kroll, Davey & Felten, 2013), showing that in theory an attack could be successfully executed with less than 51% of hashing power (Eyal & Sirer, 2014) and highlighting miner strategies for profit maximisation (Eyal, 2015; Sapirshtein, Sompolinsky & Zohar, 2016). In practice, however, none of these attacks has been formally documented so far, which suggests that the system’s incentive design is working as intended. A variety of papers also thoroughly analyse network properties and offer suggestions for improving various parts of the system (Barber, Boyen, Shi & Uzun, 2012; Decker & Wattenhofer, 2013; Gervais, Karame, Capkun & Capkun, 2014). Other papers have analysed the transaction flows in the Bitcoin network (Ron & Shamir, 2013) and demonstrated that bitcoin transactions are not anonymous as wrongly assumed by many (Meiklejohn et al., 2013, Androulaki, Karame, Roeschlin, Scherer & Capkun, 2013, Reid & Harrigan, 2013).
26
A number of papers investigate if bitcoin is rather a currency or a speculative asset (Surda, 2012), and mostly agree that it currently acts more like an alternative investment vehicle than a functioning currency ((Yermack, 2013; Glaser, Zimmerman, Haferkorn, Weber & Siering, 2014). Luther (2013) concludes that cryptocurrencies will likely not gain mainstream acceptance if there is no explicit government support and/or considerable monetary instability. Although Morisse (2015) finds that most research has focused on the “ecosystem layer”, the majority of these papers consist of basic introductions the technical, economic, legal and social aspects of Bitcoin (Grinberg, 2012; Trautman, 2014), its main actors (Cusumano, 2014) and the regulatory and legal status (Kaplanov, 2012; Brito & Castillo, 2013, De Filippi, 2014). Nevertheless, there are a small number of papers that focus more specifically on business aspects involving bitcoin. White (2015) discusses the market for cryptocurrencies and compares Bitcoin to other cryptocurrencies. Taylor (2013) provides a comprehensive summary of the emergence and evolution of the mining industry and highlights the role of rapid innovations in the development of mining hardware. Moore and Christin (2013) study the risk that centralised exchanges pose to their customers, and highlight the high failure rate of these new intermediaries. Moreover, Soska and Christin (2015) analyse the evolution of a sample of online anonymous marketplaces using bitcoin and Christin (2013) provides a comprehensive measurement analysis of the largest darknet marketplace Silk Road. Kazan, Tan and Lim (2015) develop a unified theoretical framework to investigate the business models of cryptocurrency companies and apply in in 27
several case studies to companies active in the Bitcoin ecosystem. Using Moore’s (2014) technology adoption life cycle - an adaptation of Rogers’ (1962) diffusion model of innovation, Wolfson (2015) analyses Bitcoin’s early market. He suggests that Bitcoin “has moved through the innovation stage” (Wolfson, 2015: p. 210) in 2013 and early 2014. He makes the difference between the core developers and early entrepreneurs, who he ranks among the innovators, and the early adopters who he describes as less technologists.
3.4 Research gap While business and management literature has mainly focused on the role and evolution of privately owned or controlled technology platforms and their emergence, there is a lack of research regarding business ecosystems formed around open platforms that are not dominated by a single entity. Although there has been a growing body of research about decentralised cryptocurrencies and Bitcoin in particular, only a small number of papers have examined the business ecosystem itself that has formed around these systems. These studies, however, are merely of introductory nature and lack a data-driven approach. Hence, we aim at exploring the emergence and the development of a business ecosystem that has formed around a decentralised cryptocurrency system, because we believe that the absence of a platform owner and the decentralised nature of the core infrastructure will yield interesting findings that are likely to differ in some instances from the evolutionary trajectories of other platform-based business ecosystems. Furthermore, given that cryptocurrency
28
systems provide a unique set of compelling value propositions which set them apart from other business ecosystems, the findings are expected to be different from traditional business ecosystem research. We focus our research on Bitcoin, because it has several advantages compared to other similar cryptocurrency systems from a research perspective: it was the first digital currency introducing the concept of decentralised cryptocurrencies to the world in 2008, and has the largest market capitalisation and user base of all decentralised digital currencies. As Velde (2013: p.317) asserts, “[Bitcoin] has a status of quasi-monopoly in the realm of digital currencies by virtue of its first-mover advantage”. As a result it has received most media coverage and various aspects of the system are well documented: as a consequence, most data available regarding cryptocurrency systems is related to Bitcoin. In addition, it constitutes the most powerful distributed computing network on earth in terms of computational power, after having largely exceeded already in mid-2013 the combined processing strength of the world's top 500 most powerful supercomputers (Cowley, 2013). As previously stated, there is no dominant actor or entity to the platform that has supreme power. Instead, there is a complex balance of power between core developers, miners, the economic majority and the wider community. We believe that by visualising the emergence and evolution of the Bitcoin business ecosystem and its components over time using a longitudinal dataset, we can address the knowledge gap that exists with regard to the formation of economic communities around decentralised cryptocurrency systems.
29
Chapter 4: Methodology 4.1 Boundary specification In order to define the boundaries of the study, we first describe the different components of the Bitcoin ecosystem and subsequently limit the study to a specific part of the overall ecosystem.
4.1.1 The Bitcoin ecosystem The Bitcoin ecosystem can essentially be broken down into three parts that are occupied by different types of actors: 1.
Developers maintaining the Bitcoin protocol, network and consensus system
2.
Firms and projects building complementary applications and services
3.
Other stakeholders of the network
4.1.1.1 Developers The Bitcoin protocol, network and consensus system constitute the core infrastructure and backbone of the whole ecosystem. They can be considered as the set of core components of the open Bitcoin platform that serve as technological building blocks for other applications and services to be built upon. As for now, the core developers are working on reviewing, maintaining and extending the source code of the reference client Bitcoin Core, which essentially defines the protocol and the system rules.
30
4.1.1.2 Firms and projects The companies and projects are responsible for building complementary infrastructure, applications and services that are based upon the foundation that the technological building blocks provide. They can be labelled as a set of “peripheral” components to the platform that are variable and create additional value to the core Bitcoin platform, “often by decreasing the associated costs or risks of adoption and use” (Muegge, 2011: p.5). These complementary assets extend Bitcoin's functionalities and thereby increase the value of the platform itself: they either add new functionalities to the system that are not initially available, or offer services that render the use of already existing functionalities of the system more convenient and easy. (Brenig et al., 2016).
Similarly,
Cusumano (2014: p.23) notes that Bitcoin as a new technology and platform in early stages requires "an ecosystem of complimentary products and services to make the technology truly easy to use". This reflects Adner's (2006) view that disrupting technologies need complementary and supporting elements and innovations to attract users. It is worth adding that complementary services do not necessarily need to be software-based and extend the platform’s functionalities, but do also add value to the platform in the form of supporting services. The actors providing all these types of complementary assets and services constitute the Bitcoin business ecosystem.
31
4.1.1.3 Other stakeholders In addition to the developers and economic actors18, there are several other stakeholders that play a role in the Bitcoin ecosystem in one or the other way. For instance, VC firms are funding Bitcoin start-ups and provide valuable mentoring and guidance through incubators and accelerators, researchers from universities are examining and testing the protocol and looking for weaknesses and suggesting improvements, and governments and regulators are inspecting the political, legal and regulatory implications of Bitcoin and attempt to adapt the regulatory environment. Most importantly, the various users of the digital asset - merchants, consumers and speculators among others - are essential contributors to the ecosystem by effectively using the system’s token.
4.1.1.4 Network effects The interplay of these "types" of actors and their respective contributions make Bitcoin an industry-wide technology platform providing a variety of complimentary functionalities, resulting in positive network effects: the more users join the platform, the more developers will engage in the maintenance and development of the software and the more businesses will launch new applications and services, thereby enhancing the platform’s functionalities. As a result, the increased range of products and services surrounding the platform encourages user adoption. As more users are attracted, more stakeholders join the platform, resulting in a “positive feedback loop” and the ecosystem
One could argue that miners represent a specific type of actors apart from the others because they are essential for transaction verification purposes and the security of the network. However, since their operations constitute a commercial activity in the sense that they get a monetary reward, we assume them to be part of the Bitcoin business ecosystem. 18
32
eventually crossing the “tipping point” (Gawer, 2009a: p.2-3), i.e. assembling the majority of users, developers and entrepreneurs on that specific platform.19
4.1.2 The Bitcoin business ecosystem For the purpose of this study, we are only going to focus on the Bitcoin business ecosystem. The goal is not to exclude the important role that other stakeholders play, but to limit the study to primarily explore the business opportunities that have formed around the open platform. As a result, we do not include the core developers and other stakeholders as subjects, but do recognise the role they play in the overall ecosystem in the analysis.
4.1.2.1 Definition We define the Bitcoin business ecosystem as the set of companies and projects that build complementary infrastructure, applications, products and services on top of and around the open technological building blocks to extend the core Bitcoin platform's functionalities, thereby creating additional value for the end-user.
4.1.2.2 Inclusion criteria In order to determine if an entity is part of the business ecosystem and thus eligible to be included in the dataset, we apply two specific inclusion criteria:
For an in-depth discussion of the various network effects in “crypto systems”, consult the following blog post: Buterin, V. (2014, November 20). On Bitcoin maximalism, and currency and platform effects. Available at https://blog.ethereum.org/2014/11/20/bitcoin-maximalism-currency-platformnetwork-effects/. 19
33
1. The core activities and operations of the entity need to be related to Bitcoin in at least one of the four following ways: a. Use of the digital currency or asset bitcoin b. Use of the integrated payment network c. Use of the underlying data structure for non-currency/nonmonetary applications d. Provision of supporting services to enhance the value of using the platform 2. The services will either allow for commercial exploitation by the service provider or another party - although there is no requirement to specifically do so - or create new business opportunities that other parties can benefit from.
The first criterion does not include entities that use bitcoin as one of several payment methods (except if other cryptocurrencies), nor ledger-agnostic blockchain platforms that offer Bitcoin functionalities as an option among many others. However, it allows for the inclusion of entities that do not directly use the system’s components, but provide complementary supporting services to the ecosystem. An example of this would be data providers and media outlets that specifically focus on Bitcoin. The second criterion enables the inclusion of non-profit organisations and projects that provide essential applications and services to the Bitcoin ecosystem, but do not intend to make a profit. Similarly, it includes entities that actively
34
promote the platform and thereby create a favourable business environment for other entities. Bitcoin advocacy groups constitute a good example of this.
4.2 Data collection The study is based on a unique dataset that was created specifically for the purpose of this paper. It relies on a variety of publicly available data sources to retrieve relevant data.
4.2.1 Identification of relevant entities First, we needed to identify relevant entities meeting the inclusion criteria. This was mostly done by examining existing databases and lists of funded Bitcoin start-ups provided by venture capitalist firms20 and media sites21. However, since these lists only included firms that successfully raised venture capital (VC) funding, we further consulted two other lists provided by start-up platform AngelList22 and venture capitalist William Mougayar23 that also include projects and start-ups that have not received funding. In addition, we used Google's search engine with the key terms “Bitcoin companies”, “Bitcoin start-
Blockchain Ecosystem Database by OutlierVentures.io. Available at: http://www.blockchainangels.eu/startups/charts/. - Bitcoin Database by Creandum. Available at: https://docs.google.com/spreadsheets/d1iVmW45HVN499cW1DEDs8LFgOZiRgYy2dK2GYsQ5kEU/edit?pref=2&pli=1#gid=0. - Our Network by Digital Currency Group. Available at: http://dcg.co/network/. 21 - Bitcoin* Venture Capital by CoinDesk. Available at: http://www.coindesk.com/bitcoin-venturecapital/. - Bitcoin* Funding Rounds by CoinFilter. Available at: http://www.coinfilter.com/bitcoinfunding/. *includes firms that do not meet the inclusion criteria specified in this study. 22 Cryptocurrency Startups. Available at: https://angel.co/cryptocurrency-2. 23 Crypto-technology Landscape. Available at: http://crypto.silk.co/. 20
35
ups”, “Bitcoin firms” and “Bitcoin projects” which yielded some news articles and special websites containing lists of specific projects and firms related to a particular sector or sharing similar characteristics.24
4.2.2 Type of data collected Next, for each identified entity the data highlighted in table 1 was collected for each entity if applicable and organised in a simple Microsoft Excel spread sheet. Table 1: Type of data collected Variable Foundation date Launch date of each service/product Exit date Exit reason Funding (+date) Rebranding (+ date) Mergers and acquisitions (+ date) Partial/complete pivot (+ date)
Comment Approximate date of foundation of the entity (not necessarily date of legal incorporation). Usually official launch date of product/service, in some cases also the beta launch. Approximate date of the entity leaving the ecosystem. Reason of the entity leaving the ecosystem (also includes pivots away from Bitcoin). Refers to raising capital without issuing debt; can include VC funding, crowdfunding, state grants, etc. When a company or project changes its name. All firms involved in a merger and/or acquisition. Project or firm that stops meeting the inclusion criteria after changing service offerings (can be partial in the sense that they keep Bitcoin-related services, but begin offering services unrelated to Bitcoin).
Examples include 29 Bitcoin wallets that are supercharging cryptocurrency by the Let’s Talk Payments blog (2016, February 19. Available at: https://letstalkpayments.com/29-bitcoin-walletsthat-are-supercharging-cryptocurrency/) and 36 bitcoin exchanges that are no longer with us by the news site Brave New Coin (2015, October 23. Available at: http://bravenewcoin.com/news/36bitcoin-exchanges-that-are-no-longer-with-us/). 24
36
4.2.3 Data sources Given that the Bitcoin business ecosystem has only emerged in recent years, there is no open or proprietary database containing detailed operational and financial data for Bitcoin firms so far, to our knowledge. Hence, we had to scrutinise a variety of different public - and sometimes unconventional - data sources available on the Internet. The most valuable sources turned out to be the two main Bitcoin discussion forums, consisting of the official Bitcoin Forum bitcointalk.org, where most new projects and launches have been announced, discussed and their development been updated, as well as the r/bitcoin thread on reddit.com, where users report and comment on current and past events. Other important sources included official company and project websites, blogs and press releases as well as archival records from cryptocurrency-specific media sites such as CoinDesk and Bitcoin Magazine, but also traditional news sites such as Bloomberg and Reuters. However, because the aforementioned services often started reporting or even being founded after 2012 and 2013, and a number of entities had already disappeared before the beginning of this research, we had to rely in many instances on the (remaining) social media presence of entities: this included examining Twitter feeds, Facebook pages, LinkedIn accounts and Crunchbase profiles. In some cases, firms and projects also had their own page with further information about foundation and product and service offerings on the Bitcoin Wiki25 and if more recently founded also on Wikipedia. If possible, the data collected from one source was cross-checked with other sources to verify the
25
Available at: https://en.bitcoin.it/wiki/Main_Page 37
accuracy of the data. However, this proved to be difficult because in some cases, it was often complicated to even find a single data source.
4.2.4 Resulting dataset The resulting dataset includes 514 companies and projects of the Bitcoin business ecosystem over the period from 2010-2015. This time frame was specifically chosen because we could not identify an entity meeting the inclusion criteria prior to 2010. Although there have been some attempts to build a general database of Bitcoin companies and projects, most of them only focus on funded start-ups, do not make a difference between Bitcoin and “Blockchain” entities and do not provide temporal data to analyse evolutionary patterns. To our knowledge, this is the first comprehensive longitudinal dataset of Bitcoin entities and their respective operations and activities.
4.3 Market segment framework 4.3.1 Categories of subindustries In order to depict the structure of the Bitcoin business ecosystem and analyse the evolutionary patterns, there is a need to have a clear definition of the ecosystem’s subindustries or what we term market segments. These are essentially categories of similar products and services that together form what can be considered a subindustry of the Bitcoin business ecosystem. However, as Basole, Russel, Huhtamäki & Rubens (2012) note, the selection and assignment of firms to market segments constitutes a challenge, because despite the 38
existence of a variety of industry classifications, they often differ across different datasets. This is especially true for the Bitcoin business ecosystem, where every news site and industry expert tend to have diverging definitions and terms of subindustry categories that often overlap.
4.3.2 Development of framework To counter this, we attempted to develop a consistent framework to group the diversity of products and services in the Bitcoin business ecosystem into welldefined, mutually exclusive market segments. This proved to be more difficult than expected, because some product and service types are often very similar and the lines between some market segments are blurred. Nevertheless, given the limitations of existing categorisation attempts, this step was necessary for the further development of this study. Initially, a basic framework based on a combination of the categorisation schemes used for the OutlierVentures.io and Creandum databases as well as a more general blockchain ecosystem framework by William Mougayar26 served as starting point. In an iterative process, the product and service offerings of each new entity added to the dataset were scrutinised and compared with the initial framework. As more entities with different offerings were added, new patterns did slowly arise and the framework was gradually updated according to these patterns observed during the research process. The updated version of the
Available at: http://startupmanagement.org/wp-content/uploads/2015/12/Blockchain-inFinancial-Services-Landscape.pdf. 26
39
framework was then again tested with entities previously added to the dataset to ensure consistency.
4.3.3 Framework The resulting framework consists of 22 different market segments and is presented in table 2. Some market segment names have been truncated to ensure better readability of labels in the following network graph. We believe this framework to provide an adequate categorisation of all existing products and services in the Bitcoin business ecosystem. Naturally, there are some trade-offs that need to be done to accommodate the diversity of offerings and still provide an accurate scheme for assigning activities to market segments without having an over complex and large framework. For instance, the “other services” segment was added to include all products and services that could not clearly be assigned to another market segment and would require the creation of a special segment specific to them. Similarly, some market segments are closely linked together and in some instances could be merged, but are ultimately kept separate to better differentiate between the offerings of competing firms. For example, some exchanges with powerful trading engines are not classified as trading platforms if they lack advanced trading functionalities such as leveraged trading. Nevertheless, this framework is considered to be sufficient for our purpose.
40
Table 2: Market Segment Framework
Included Services
Manufacturers and operators
Description Bitcoin Automated Telling Machines
Buy/sell services of bitcoins directly, OTC money exchange, redeemable gift cards, physical bitcoins
Market Segment Buy and/or sell bitcoins at fixed price + mark-up
Meta-protocols, sidechains, blockchain anchoring, smart contracts overlays
ATM
Services building non-currency applications on top of Bitcoin using special purpose data layers
Brokerage Services (BrokServ) Blockchain Innovations (BCInnov)
Services focusing on the application of regulations
All products and services related to the verification of transactions on the Bitcoin network Services enhancing the privacy of transactions
Small-value payments
Services related to gambling and betting All services related to investment, including P2P lending platforms Platform where buyers and sellers trade goods exclusively for bitcoins Services related to communication outlets
Providers of additional financial services
Order-book based marketplaces for exchanging bitcoins for other currencies
Services providing specific software solutions
C2C and B2B payments, remittances
Mining hardware manufacturers, mining pools, datacenter and cloud mining providers Mixers and tumblers
Tipping platforms, paywalls for content providers
Online casinos, betting websites, prediction markets Stock exchanges, crowdfunding platforms, investment funds, trading bots, P2P lending platforms, Darknet black markets, legal marketplaces trading any goods/services News, blogs, educational websites, publishing
Savings accounts, insurance, hedged accounts, debit cards, bill payment services
Centralised and P2P exchanges/marketplaces
Developer Platforms, APIs, special software tools
KYC and AML checks, blockchain screening, legal advisory services Blockchain explorers, statistics and analytics, market data, directories
Internal platforms for money transfer
Services providing data and analytics
Compliance Data Services (DataServ) Developer Tools (DevTools) Exchange Financial Services (FinServ) Gambling Investment Marketplace Media Micropayments (MicroPaym) Mining Mixing Money Transfer Platform (MTP)
41
Description
Proof-of-Existence, registering and tracking
Table 2: Market Segment Framework (contd.) Market Segment Services using the tamper-resistant ledger for verifying the existence and authenticity of data
Bitcoin advisory services, consulting, & training, oracles, proofof-reserve, rating/reputation/identity platforms, full node manufacturer
Included Services
Notary Services (NotaryServ) All products and services that do not fit in one of the other categories
Proxy-buyer services, bitcoin-only online shops, shopping plugins
Other Services (OtherServ)
Services facilitating the spending of bitcoins
Derivatives platforms, margin trading, sophisticated trading engine
Merchant service for instantly converting earnings in bitcoin back to fiat money
More sophisticated trading engines and additional trading services
Wallets hosted by users, hosted/custodial wallets, vaults
Custody of funds is not indicated
Services storing bitcoins on behalf of customers
Payment Processor (PaymPro) Shopping Trading Platform (TradPlat) Wallet
•
Exchanges and Brokerage Services are usually not classified as wallets, except if advertised and/or downloadable for non-customers
Comments:
•
Purely money transfer platforms not categorised as wallets; similarly, most wallets not classified as MTPs although in theory they could
Although most firms do provide APIs, only the companies with the most used and popular APIs have been assigned to the Developer Tools
enable this
•
•
segment
42
4.4 Design 4.4.1 Visualisation approach For the purpose of this study, we use a visualisation approach, which provides a good tool “for purposes of exploration, discovery, and sense-making” of abstract data structures (Basole et al., 2011: p.314). Visualisation has increasingly become popular as a strategic tool in the business research literature for analysing the structure of company networks (Basole, 2009; Vaz et al., 2013). Most research has focused on the study of inter-firm collaboration networks and the formation of alliances (Venkatraman & Lee, 2004; Lomi & Pattison, 2006; Schilling & Phelps, 2007; Rosenkopf & Padula, 2008; Basole, 2016). Visualisation is also often employed to identify key actors and determine their strategic position within a specific ecosystem (Jiang et al, 2016), and to compare the network structure across different industries (Rosenkopf & Schilling, 2007). Since the Bitcoin business ecosystem is still a nascent sector, it is practically impossible to get yearly data on revenues and market share for each market segment, let alone each entity. What’s more, there is no consistent record of inter-firm relationships and partnerships. As a result, we map the structure and dynamics of the business ecosystem not in terms of market share or size of each industry, but by depicting the affiliations of each company to specific market segments over time. The resulting network graph for each year is hence determined by relationships between entities and market segments, with the
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relationship consisting of the affiliation of an entity to a segment. Hence, we measure the change in structure of the Bitcoin business ecosystem as the changes in the number of market segments, the number of entities, and the number of affiliations of an entity to a market segment.
4.4.2 Computation of network graphs For each year of the analysis time frame, a binary adjacency matrix was constructed with all the existing entities of that year, indicating if an entity was operating in a specific market segment (1) or not (0). In addition, a categorical variable was introduced to determine the status of the entity. Table 3 shows the six different possible statuses, each represented by a different colour.
Table 3: Colour codes Status
Colour Code
New entrant and active
Green
New entrant but inactive
Grey
Entity is founded and launches the same year Entity is founded but does not launch the same year Entity is founded and launches, but also leaves the ecosystem the same year
New entrant, active and exit Orange Established and active Established but inactive Established/active but exit
Comment
Blue
Entity has been previously founded and is active
Yellow
Entity has been previously founded, but still is not active
Red
Entity has been previously founded and is active, but leaves the ecosystem
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We then imported the adjacency matrix for each year as “csv” file into R. R27 is an open-source software environment and programming language widely used for statistical analysis and graph computing. Custom scripts were written to compute the network graph of each year and complementary statistics from the dataset. We opted for the use of the Fruchterman-Reingold algorithm, a popular force-directed layout algorithm commonly used for drawing undirected graphs (Fruchterman & Reingold, 1991). The affiliation network results in an undirected bipartite network graph because it contains two types of nodes (vertices): entities are represented by circles, and market segments are represented by black squares. Since the relationship between the two types of nodes is determined by the affiliation of an entity to a market segment, the links (edges) between the nodes on the network graph are undirected. The size of the nodes representing entities, in the absence of reliable and available operational business data, is proportional to the number of market segments they are affiliated with (vertex degree): the more market segments an entity is operating in, the bigger its node. Hence, bigger nodes represent entities that are more diversified in the sense that they are operating in more segments. The size of the nodes representing the market segments are kept constant on purpose to avoid any confusion regarding a possible interpretation of industry size. For each year, a graph was created to visually show the evolution of the business ecosystem structure in terms of entities and their affiliation with market segments. As such, the use of popular tools and network measures from 27
The software can be found at: https://www.r-project.org/. 45
social network analysis is not very useful in this case because the links only represent affiliations to market segments instead of inter-firm relationships. However, the visual representation of the business ecosystem structure does enable to explore the emergence and evolution of market segments, the lifecycle of companies and the evolution of their product and service offerings. For modelling purposes, the most recent company or project name was used throughout the whole analysis to avoid confusion in case of name changes. Similarly, entities with multiple different brands and product names were labelled with the company name, while entities with a company name completely diverging from their only product or service brand were labelled with the brand name
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Chapter 5: Findings 5.1 Summary statistics Table 2 offers an overview of the summary statistics obtained from the dataset to get a first impression of the development of the Bitcoin business ecosystem.
Cumulative Funding (in US$ million)
Funding (in US$ million)
Rebranding
Partial Pivots
Complete Pivots
Mergers
Acquisitions
Number of entities**
Exits*
Year
Foundations
Table 4: Overview of summary statistics
2010
8
0
8
0
0
0
0
0
0
0
2011
47
2
55
1
0
0
0
1
0
0
2012
37
5
90
0
0
0
0
1
2.1
2.1
2013
181
20
266
5***
1
0
0
1
93.3
95.4
2014
196
27
442
11
1
3
1
13
369
464.4
2015
45
41
460
13
1
5
6
12
448.4****
912.8
Total
514
95
30
3
8
7
28
912.8
Notes: * This variable includes companies that have completely pivoted away from Bitcoin, but does not include companies that have been acquired by or have merged with other firms. ** This variable indicates the total number of entities that have existed in the respective year, including the entities that exit or get acquired/merged later in the year. *** Newly founded Satoshi Citadel Industries integrates Slush Pool and Coinmap, two services previously operated by co-founders. ****Complete $116m funding round of 21 Inc. announced in Q1 2015, but probably aggregation of previous rounds having occurred over the previous 18 months.
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The data clearly shows that the business ecosystem has been growing continuously since its inception in 2010 from a modest eight entities to well over 400 companies and projects in 2015. There have been several mergers and acquisitions as well as pivots and rebranding attempts. The amount of funding has literally skyrocketed since the first influx in 2012, as have the number of entities joining the business ecosystem in 2013 and 2014. In the following two sections, we will go into more detail regarding each variable and provide a comprehensive overview of the findings.
5.2 Network visualisation In this section, we present the network graphs obtained from the dataset and briefly comment each year to highlight the main developments and put them into context.
Note: The following network graphs are unfortunately not in the highest resolution due to the formatting limits of the present paper. Interested readers should feel free to contact the author for receiving a PDF copy of the network graphs that allows for zoom-ins without compromising on quality.
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5.2.1 Bitcoin business ecosystem 2010
Figure 1: Network graph 2010 One year after the release of version 0.1 of the Bitcoin Core software client, the first small businesses and projects started to emerge. After relative small growth in the number of downloads and active users, a small paragraph featuring Bitcoin on Slashdot28 in July triggered an explosion of new users downloading the software and joining the communication channels. This caused
Slashdot is a news website for tech-savvy people (www.slashdot.org). The paragraph, written by Finnish Computer Science student and early Bitcoin Core collaborator Martti Malmi, was part of a small marketing “campaign” initiated by the project’s early contributors to attract more attention. 28
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an increase in the network’s hash rate and the mining difficulty29, making it difficult for individual users to get bitcoins through mining. As a result, the first mining pools were founded to “pool” their members’ resources and smoothen the pay-out. Additionally, exchanges were set up that let users trade bitcoins for U.S. dollars and vice versa between themselves. These early exchanges provided barely more than a simple order book and escrow services, and processed deposits and withdrawals in fiat currency through the owners’ personal bank accounts. In addition, the first wallet service were launched to provide users a convenient way of storing their bitcoins online in a web wallet, removing the need for syncing with the network upon each launch of Bitcoin Core and storing the entire blockchain.30 Interestingly, BitLaundry, a mixing service for privacyconscious users was launched to blend coins in order to obfuscate their provenance. WeUseCoins, a website providing educational content about Bitcoin, emerged to make the concept of Bitcoin more accessible to interested outsiders (Media).
The increased use of more powerful Graphics Processing Units (GPUs) instead of CPUs also contributed to an increase in the hash rate and ultimately the mining difficulty. 30 The reference client Bitcoin Core comes with an integrated wallet. Because it is a full node, however, it requires the user to download the entire blockchain for verification purposes and syncing with the network to get the latest blocks until any transaction can be made. 29
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5.2.2 Bitcoin business ecosystem 2011
Figure 2: Network graph 2011 In 2011, the business ecosystem had already remarkably grown into a more diverse set of service offerings: 47 new firms and projects were founded, and eight new market segments did emerge. With the creation of the online darknet marketplace Silk Road, bitcoin became for the first time a real medium of exchange, attracting many new users mainly looking for buying drugs on the Internet. Moreover, a variety of new offerings emerged to provide ways to spend bitcoin, among others online casinos
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(gambling) and e-commerce websites (shopping). In order to further boost bitcoin usage and acceptance, payment processors were formed to make it trivial for merchants to accept bitcoins by instantly converting received bitcoin payments into fiat currency. The constantly growing demand for acquiring bitcoins led to the creation of brokerage services providers, who aim at rendering the buying/selling process more convenient and easier for mainstream users. Similarly, the number of exchanges skyrocketed, making it the largest market segment in terms of active companies. Many new exchanges started focusing on local markets by offering trading pairs with local fiat currencies31 and differentiating themselves through their deposit and withdrawal options. With the market price reaching parity with the U.S. Dollar in February and the subsequent price rally and crash, traders and speculators started to enter the ecosystem in order to benefit from bitcoin’s high volatility. This gave rise to more professional trading platforms offered by some exchanges, and resulted in the creation of market data site Bitcoinity (data service provider) to provide supporting services to the still small business ecosystem. Moreover, newly founded GLBSE launched the first stock exchange listing bitcoin-denominated stocks and bonds (investment), although it was started rather as a “fun cool project” by its cofounder
32than
a serious business. This
Examples include among others Britcoin (GBP), Bitmarket.eu (EUR and others), Bitomat (Polish Zloty) and Bitcoin Brasil (Brasilian Real). 32 James McCarthy in an interview with Vitalik Buterin from Bitcoin Magazine (October 15, 2012). Available at https://bitcoinmagazine.com/articles/interview-with-glbses-nefario1350319173. 31
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applied to most of the projects and firms involved at that time, an observation that will be further elaborated in the analysis chapter. The discovery of the benefits gained by using Field Programmable Gate Arrays (FGPAs) for mining further increased competition among miners and drove the creation of new mining pools and firms specialising in the manufacturing of mining hardware. New wallet providers also entered the ecosystem to provide alternative storage options. Many of them took full custody of user funds to avoid less tech-savvy users having to bother with key management. For the first time, businesses did start diversifying their offerings and entering new market segments: Blockchain.info was expanding their wallet service to provide data on the status of the network as well as a block explorer, while BTCC (then BTC China) started offering consumer wallets in addition to its exchange. Similarly, for the first time companies did not directly launch the same year they were founded: this applied to exchanges and trading platforms Kraken and Mirror as well as mining firm Butterfly Labs that was working on the development of new mining equipment. The business ecosystem also witnessed the first casualties with wallet provider MyBitcoin being hacked and customer funds stolen as well as the firstever bitcoin exchange Bitcoin Market being forced to shut down after PayPal had blocked their account.
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5.2.3 Bitcoin business ecosystem 2012
Figure 3: Network graph 2012 Although the number of new entrants decreased from 47 to 37 firms and projects compared to the previous year, 2012 saw the emergence of five new market segments and a variety of innovation within existing segments. Blockchain.info started offering their API to other firms to build applications with (developer tools), while BitInstant and newly founded Bitcurex began providing the first bitcoin debit cards (financial services). For the first time, two newly founded projects in development sought to harness the
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Bitcoin blockchain’s potential as an immutable, timestamped data store: Proof of Existence started working on enabling users to certify the existence and legitimacy of documents using the blockchain (notary services), whereas the project Omni Layer (then Mastercoin) was building a meta-protocol on top of Bitcoin33 enabling users to create and release their own assets and cryptocurrencies
(blockchain
innovations).
Remarkably,
the
business
ecosystem welcomed its first advocacy group with the creation of the Bitcoin Foundation (other services), acting as a public spokesman for Bitcoin and the business ecosystem. A lot of new developments also happened within existing market segments. The business ecosystem got its first printed news magazine with the foundation and launch of Bitcoin Magazine and benefitted from the entrance of many new exchanges and brokerage service providers that offered alternatives to existing services. Some of the brokers also began offering their customers a consumer wallet to provide a better customer experience. Newly founded Bitbox became the first exchange to also provide payment processing services for merchants. Increasing interest from the broader financial system and the inability for large investors to easily participate in the price speculation led to the emergence of bitcoin-focused investment funds and the foundation of an institutional exchange and trading platform (itBit, still in development at that time). Similarly, lending platform BTCjam and alternative stock exchanges and crowdfunding platforms The idea of using small subunits of bitcoins to represent existing assets that can then be traded on the Bitcoin blockchain has been first raised in early 2012 on the Bitcoin forum (User phelix on March 1, 2012, available at https://bitcointalk.org/index.php?topic=66868.0) and has gained attention under the name “Coloured Coins”. Systems such as Omni and Counterparty, however, use a different mechanism to create and release new assets. There exist currently several implementations of coloured coins. 33
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were established to expand the ecosystem’s offer in terms of investment opportunities. The launch of SatoshiDice, a provably-fair gambling site, further increased user adoption and triggered an explosion of the number of transactions on the Bitcoin blockchain. The business ecosystem had to mourn further casualties in 2012: two exchanges needed to shut down after being hacked (Bitcoinica) and losing customer funds through speculation (Bitmarket.eu). Moreover, stock exchange GLBSE pre-emptively shut down due to concerns on the legality of its operations.
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5.2.4 Bitcoin business ecosystem 2013
Figure 4: Network graph 2013 2013 marked a pivotal year for the business ecosystem: in early 2013, Bitcoin’s market capitalisation hit $1 billion for the first time before experiencing a tremendous price rally shooting the price above $1’000 per coin in December. A staggering 181 new projects and firms entered the ecosystem, and a total of five new market segments emerged. The explosion in the market capitalisation and increased media coverage soon attracted increasing scrutiny from regulators and authorities, and put
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pressure on bitcoin companies dealing with fiat currency and holding customer funds to comply with existing KYC (Know your customer) and AML (Anti-money laundering) regulations, requiring them to do rigorous background checks of their customers. As a result, specialised blockchain intelligence and compliance firms emerged to help businesses with identity verification processes, flag suspicious activities and provide legal advisory services (compliance). A new industry emerged to increase user adoption by providing a simple and tangible way to acquire bitcoins (ATM). Bitcoin ATM manufacturers and operators teamed up to build physical ATM networks all over the world. Moreover, some began revisiting Bitcoin’s potential as cheap and reliable payment system, and started building internal money transfer platforms to offer customers instantaneous off-chain payments. Similarly, so-called “rebittance34” firms did arise to build bitcoin-based remittance platforms in emerging countries to compete with existing international money transfer providers. Furthermore, newly founded firm ChangeTip unveiled a tipping platform powered by bitcoin micropayments and Bitwall launched a paywall for accessing quality content via bitcoin micro-transactions (micropayments). F
A variety of distinct services
ranging started to emerge that do not fit a particular category, and are thus grouped together for simplicity in the “other services” market segment. In 2013, those services included consulting and training providers, the development of rating, identity and reputation platforms as well as the inception of oracle services acting as trusted providers of information of the state of the outside world to smart contracts living on the blockchain. According to the dataset, the
34
A portmanteau word combining “remittance” and “bit(coin)”. 58
first exchanges, brokerage services and payment processors started offering other cryptocurrencies in addition to bitcoin, partly out of market demand for trading other popular cryptocurrencies, but in some cases also to bypass laws and regulations applying to fiat currencies by only processing cryptocurrencies. The media and data services industries were rapidly growing, providing decisionsupporting information and expanding media coverage about the ecosystem and its participants. The shopping and gambling segments were also quickly expanding with the entrance of bitcoin-only shops and proxy-buyer services as well as betting websites, providing even more places for users to spend bitcoins. The mining sector also massively grew following the drastic increase of the market price.
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5.2.5 Bitcoin business ecosystem 2014
Figure 5: Network graph 2014 In 2014, a record number of 196 new entities joined the Bitcoin business ecosystem, whose structure in terms of market segments did not change anymore: there were no new market segments emerging, but therefore a lot of optimisation and innovation within the market segments. For instance, OpenBazaar started being developed to become a decentralised marketplace entirely powered by bitcoin, prediction markets in the gambling segment aimed at revolutionising the way people make predictions on certain statements or
60
events through what can be called event derivatives, and firms like Elliptic launched insurance services to add consumer protection mechanisms for their customers. A growing number of special software firms did specialise in providing software solutions for accounting or legal purposes, white-label exchanges and mining configurations, to only name a few. Similarly, the first hardware wallets were being released to make secure key management trivial for professionals as well as inexperienced users. Moreover, with the Bitcoin Foundation struggling, newly founded advocacy group Coin Center attempted to taking over that role and address policy issues regarding cryptocurrencies, starting a dialogue with regulatory authorities to proactively promote favourable regulation. The foundation of Blockstream also marked a difference in that it was the first time that a company formally employs core developers to focus on the protocol development. Nearly all market segments did grow rapidly: several new projects began focusing on the fourth aspect of the value proposition by building additional networks on top of the core platform, and the use of Bitcoin as a cheap payment system become more popular. Additionally, the rise of developer platforms providing interfaces to the backbone protocol and other applications providing similar middleware services facilitated the development of applications by other companies and drastically reduced time, costs and complexity. We can also observe that firms started increasingly pursuing diversification strategies. However, the business ecosystem also experienced its largest challenge up to then in early 2014 when one of the first and largest exchanges Mt. Gox went bankrupt following a continuous theft that went unnoticed for some years and
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resulted in the loss of over 650’000 bitcoins. This key event let the business ecosystem fall into a state of shock and attracted lots of negative media attention, which severely tarnished Bitcoin’s image and public standing. The shutdown added further downward pressure to bitcoin’s market price, which had already been falling since the end of 2013. Nevertheless, this event also raised awareness among companies, developers and users that more efforts should be put into building secure infrastructure and improving key management services. Moreover, a number of both established and newly founded exchanges set out to restore confidence in the system by providing more reliable alternatives and not compromising on security and customer support.
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5.2.6 Bitcoin business ecosystem 2015
Figure 6: Network graph 2015 For 2015, the dataset indicates a slowdown in the number of new entrants and massive growth in the number of exits. The business ecosystem was slowly maturing, and a growing number of firms were forced to shut down due to unsatisfied profit expectations, low growth and lagging user adoption. Similarly, the emerging “blockchain hype” that started in 2014 further amplified and caused several companies to pivot away from Bitcoin. Nevertheless, the business ecosystem was growing in absolute terms regarding the number of entities and
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the wide variety of products and services within the existing market segments. Micropayments, notary services and ATM exhibited the largest relative growth of all market segments. The majority of active entities had already been established and some began further diversifying their offerings. We can observe that there are a growing number of entities exiting the business ecosystem for various reasons that will be explained in the following section.
5.3 Key findings In this section, we are going to highlight the key findings that can be observed from the analysis of the dataset and the network visualisation.
5.3.1 Diversity The Bitcoin business ecosystem has evolved from a small community formed around an experimental decentralised digital currency and payment system into a large sector composed of distinct, but complementary subindustries that offer a wide variety of products and services, that has expanded beyond simple financial services. A staggering 22 different market segments have emerged over the last 6 years, creating a diversity of service offerings ranging from currency and payment applications to middleware and supporting services as well as non-currency applications. Some applications are built to add further capabilities to the core platform, while other services are emerging to offer end-users a variety of channels to easily access the platform and enhance the convenience of using the additional functionalities. The goal is to make it
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look simple on the surface for end-users so that they do not have to bother with the complex technology that sits underneath35 While the majority of applications and services are replicated or derived from existing traditional industries but specifically tailored to Bitcoin36, there are also several new services and applications enabled by the platform that have not existed before in any established industry.37 Appendix A summarises the date of emergence of each market segment in chronological order and the nature of its respective first product or service. Furthermore, it shows the total number of firms and projects operating in each specific segment per year, with the number in brackets representing the number of companies that have not launched operations yet The findings demonstrate that services related to the acquisition and sale of bitcoins have been operating since the early days in 2010, quickly followed by the emergence of services that allow the spending and trading of bitcoins in 2011. In 2012, we witness the arrival of segments focusing on the first non-currency applications as well as the first API platform for other developers. Moreover, Bitcoin gets its first advocacy group and formal sponsor of core developers. 2013 marks the final year of the formation of new market segments with the emergence of bitcoin ATM networks, compliance services, micropayment applications and money transfer platforms. During the two following years, there
A result of this, however, is the reintroduction of centralised intermediaries that hold custody of customer funds, something that Bitcoin was specifically attempting to eliminate. 36 This applies for example to supporting services such as data providers, news outlets, consulting and advisory firms, as well as currency applications such as payment platforms, exchanges, investment vehicles, financial services and brokerage services. 37 This concerns market segments such as the mining industry, mixing services and blockchain innovations. 35
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are no new segments emerging in the ecosystem, but there is growing diversity with the rise of new distinctive product and services within and across the existing market segments. The Bitcoin business ecosystem has evolved into a sort of internal economy that coexists parallel with the “outside/real economy” and is connected to the latter by gateways such as exchanges, brokerage services and payment processors. Hence, it could be self-sustainable in theory, although because of the mostly speculative use of the underlying tokens rather than the use as a currency, it is too dependent on gateways that act as a bridge to the outside world. The results also illustrate that there are some market segments that are more densely populated than others: we can observe that Exchange is the largest market segment for each year in terms of number of firms, followed by Wallet, Brokerage Services and Payment Processor. Interestingly, with exception of the wallet providers, these are all services that act as gateways connecting the “bitcoin economy” to the “outside economy”, demonstrating the importance of entry and exit points to the Bitcoin business ecosystem. Trading Platform, Data Services and ATM (including both Bitcoin ATM manufacturers and operators) have also massively grown over the last years in terms of number of firms, as have Money Transfer Platform, Financial Services and Developer Tools.
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5.3.2 Diversification 5.3.2.1 Overview
Figure 7: Vertex degrees of entities Figure 7 presents the degree distribution of the entities in the Bitcoin business ecosystem for each year. It represents the number of market segments that entities are affiliated to. The figure reveals that the vast majority of businesses are operating in a single market segment during the time of analysis. In the early stages of the business ecosystem, most entities have focused on a single market segment or have served customers in two closely related segments. However, we can observe a trend towards diversification emerge in 2012/2013 and continue accelerating over the next years.
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In 2013, a total of seven companies are active in four market segments, although four of them have not launched yet. In 2014, the number of companies operating in at least four market segments has already grown to 20, of which two firms are even competing in seven market segments, one in six segments and four firms in five subindustries. This trend is accelerating in 2015, with Coinbase and BTCC being the most diversified companies operating in a total of eight different market segments.
5.3.2.2 Related vs. unrelated diversification When taking a look at the different network graphs, we can observe that there some market segments that are more isolated in the sense that companies active in those industries, with some rare exceptions, tend not to diversify but rather specialise in their respective niche. This is the case especially for Marketplace, Gambling and Mixing Services, but also for non-currency applications Blockchain Innovations and Notary Services. There are also a number of market segments that are closely related to each other, and thus tend to be populated by the same company: most exchanges have started to offer sophisticated trading platforms, many media as well as compliance firms also provide data services, and wallet service providers often offer brokerage services. Related diversification is the most common form in the Bitcoin business ecosystem, although there are some notable exceptions that expand their product palette by providing entirely different services from their core activities (unrelated diversification).
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5.3.2.3 Patterns Appendices B, C and D feature three sub-graphs of the Bitcoin business ecosystem network graphs from 2013 to 2015 that highlight entities that are affiliated with at least four different market segments. An interesting observation is that there seems to be a concentration around a few specific market segments: the most diversified firms tend to be mostly active in the Wallet, Brokerage Services, Exchange, Payment Processor, Money Transfer Platform and Financial Services industries. This is equally true for companies operating in more than two market segments. This suggests that there are some key market segments that are especially attractive for companies to enter and/or constitute an indispensable complementary service offering for their customers. Indeed, when analysing the diversification strategies from individual firms, we notice that there are a set of companies that provide a full service model aimed at offering a comprehensive customer experience by combining convenient purchases and sales of bitcoin, secure storage, customer protection features and easy payments. This model also usually includes trading infrastructure and merchant services in an attempt to establish a universal “goto” internal platform that offers users nearly all functionalities within the company platform itself. We can also see that a small number of firms pursue the strategy of vertical integration by engaging in mining operations themselves in addition to providing a variety of other services: this ensures frequent revenues in bitcoin if they have sufficient hashing power in order to subsidise and fund their other offerings.
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5.3.3 Funding patterns Note: The term “funding” in this paper refers to any raise of capital that is not financed by debt: this can include VC funding, crowdfunding rounds, state grants and personal funding (if figures have been made public). The vast majority of funding, however, emanates from VC firms. The numbers per year represent the minimum amount of funding that the business ecosystem has received, because there are a considerable number of funding rounds with undisclosed amounts.
5.3.3.1 Overview per year
Figure 8: Funding In the first two years, projects and firms had to rely on internal funding for financing their operations, although there are no figures available to quantify the amount. This changed in 2012, when the first VC money entered the Bitcoin business ecosystem: BitInstant and Coinbase received $2.1 million, and wallet service Armory did a successful but limited crowdfunding of $2611.
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In 2013, total funding had grown to at least $93 million shared between 38 firms. In addition, the meta-protocol project Omni Layer (then Mastercoin Project) performed a successful token sale through crowdfunding valued at some $500’000. Coinbase secured a whopping $31.6 million after adding money transfer and API developer platforms to their offerings, followed by the exchange Bitstamp ($10m) and newly founded but not yet launched Circle ($9m) and 21 Inc. ($5.05m). A number of new institutional exchanges also receive funding to build secure and reliable alternatives to market leader Mt. Gox and to facilitate access for institutional investors. In 2014, a staggering amount of almost $369 million was distributed among a record number of 96 firms, with seven companies receiving additional funding but not disclosing the amounts. Mining firm BitFury and secure vault provider Xapo both raised $40 million each, followed by Blockchain.info ($30.5m) and BitPay ($30m). In 2015, the total amount of funding received by 69 companies increased to over $448m, with 13 additional firms not disclosing the amounts raised. 21 Inc. managed to get a record amount of $116 million, although it appears that this number is an accumulation of several founding rounds that have taken place over one year and a half. Coinbase comes next in what can be described as the largest funding round ever occurred in the Bitcoin business system ($75m), quickly followed by the consumer platform Circle who raised $30 million in addition to previous funding rounds.
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5.3.3.2 Patterns We can observe that VC funding has literally exploded in 2013 and the subsequent years after first entering the business ecosystem in 2012. While most funding in the beginning has gone to a minority of firms, a rising number of companies has secured growth capital in 2014 and 2015. Nevertheless, the results clearly show that there is only a limited number of firms that have continuously received funding over the years, often in several rounds. This suggests that companies that raised considerable amounts in the past are likely to engage in subsequent funding rounds. Although it is difficult to attribute funding to specific market segments since many firms are active in more than one, we notice that the majority of funding has flowed to firms that are providing integrated consumer and merchant services (money transfer platforms, brokerage services, wallets, payment processors) as well as gateways and mining hardware manufacturers. In 2014 and 2015, developer platforms are also raising significant amounts, which shows the growing importance of middleware services. The findings suggest that funding needs differ among entities, and that they increase with the business ecosystem maturing. Supporting services have not raised significant amounts so far, which might be due to their less capitalintensive nature.
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5.3.4 Entries and exits 5.3.4.1 Overview
Figure 9: Entries and Exits Over the years, a growing number of projects and companies have exited the Bitcoin business ecosystem for a variety of different reasons. In 2011, only two companies were shutting down, compared to a staggering 41 firms in 2015 . The exit ratio38 has indeed grown from 5.62% in 2012 to 7.55% in 2013, before going down to 6.26% in 2014. In 2015, it has risen again to a record of 9.47%, mostly because of companies failing to get enough traction. Nevertheless, this has largely been compensated by the entrance of new projects and firms, resulting in an overall growth of the total number of companies per year in the business ecosystem. While exchanges have been by far the industry most impacted by departures, followed by wallets and mining firms, almost every market segment has experienced the death of at least one company.
38
Exit ratio = (Exits per year)/[Number of companies (active and inactive) per year] 73
5.3.4.2 Main exit reasons In the first years, the difficulty for many bitcoin companies to secure banking relationships has been one of the main reasons for firms to shut down activities. This has mainly applied to exchanges and brokerage services that were dealing with fiat currency without having the necessary licenses and/or accurately doing KYC/AML checks. Similarly, regulatory issues regarding the legality of certain services have caused projects such as bitcoin-powered stock exchanges to shut down in anticipation. The seizure of darknet black markets and the arrest of the operators by the FBI have also led to the disappearance of certain services. Security breaches and hacks of exchanges and custodial wallets leading to the loss of customer funds and subsequent forced bankruptcy have also been very common, although there seems to be a tendency in recent years for companies to be able to absorb the losses incurred and resume operations instead of closing. These attacks consist mostly of server breaches and account takeover of cloud hosting services, social engineering and insider attacks, as well as the exploitation of software vulnerabilities in the systems of the concerned companies. In addition, some services have been reported to defraud customers, either through running Ponzi schemes and/or initiating exit scams, thereby running off with customer funds. The absolute number of scams and security breaches remains more or less stable over time, suggesting that there has been a reduction in relative terms.
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Some projects have been paused or shut down following the departure of the founders and lead developers, while a growing number of companies in the last two years have been forced to shut down due to a lack of interest in their services and the inability to achieve profitability and secure funding. In 2014 and 2015, some mining hardware manufacturers were filing for bankruptcy for their incapacity of delivering pre-ordered mining rigs on time. During the same time period, a growing number of companies have left the Bitcoin business ecosystem by pivoting towards “blockchain-based” solutions that do not require the use of bitcoin.
5.3.4.3 Observations and patterns An interesting observation is that companies that are active in at least four market segments generally do not leave the business ecosystem: only a single firm (CoinJelly) terminates operations in 2014 after being active in four market segments without indicating a formal reason. This suggests that more diversified firms seem to have a better strategic position and are more likely to withstand endogenous and exogenous shocks, thereby also reducing the likelihood of giving up their strategic position by pivoting. When observing the entry patterns of new projects and companies, it becomes apparent that most businesses launch operations the same year that they are founded. In 2011, we can see the first two companies that do not launch directly, but prefer taking time for further development. This trend is growing in subsequent years, although the vast majority still launches as soon as possible, which in most cases means the same year as they were founded. An interesting
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observation is that there are also existing companies already established in different ecosystems that join the Bitcoin business ecosystem by offering bitcoinrelated services in addition to their core operations. This is mostly undertaken by the foundation of a separate entity dedicated to Bitcoin and owned by the parent company, but in some cases the firms also entirely tie their value proposition to the Bitcoin platform and drop unrelated activities.
5.3.5 M&A, pivots and rebranding 5.3.5.1 Mergers and acquisitions
Figure 10: Mergers and Acquisitions The Bitcoin business ecosystem has also seen a number of mergers and acquisitions. The first-ever acquisition in the business ecosystem was rather born out of a emergency situation: newly founded Polish exchange Bitomat lost access to its wallet containing 17’000 bitcoins of customer funds and needed to be acquired by the leading exchange Mt. Gox. In contrast, subsequent acquisitions starting in 2013 were undertaken for business motives such as expanding a firm’s product palette, increasing market share in a specific segment and/or 76
eliminating competitors. The number of acquisitions has risen from five in 2013 to 11 in 2014 and even 13 in 2015, with brokerage service provider and payment processor Coinify holding the record with a total of three acquisitions. The findings do indicate that acquisitions are not specific to a particular market segment, but happen throughout a variety of subindustries. According to the dataset, there has only been one merger per year in the business ecosystem since 2013. Two of the three total mergers have been related to mining firms, effectively combining hardware manufacturing with datacenter and cloud mining infrastructure.
5.3.5.2 Pivots
Figure 11: Pivots Increased popularity of non-currency applications in 2014/2015 and growing interest from financial institutions in the accompanying technology39 (Popper, 2015b) have resulted in a “blockchain without bitcoin” hype and have caused several companies to cease operations and concentrate on non-bitcoin related
39
Often termed “blockchain technology” by outsiders to the Bitcoin space. 77
activities. Some firms have undertaken partial pivots, i.e. expanded services to incorporate activities not based on the Bitcoin platform while still providing bitcoin-related services. Other companies have realised complete pivots by leaving the Bitcoin business ecosystem and migrating to other platforms40. There are also a small number of firms that have pivoted within the ecosystem, effectively completely switching to segments that were not related to previously offered, now dropped services. There are reasons to believe that lagging user adoption and inflated expectations from investors and entrepreneurs alike have a negative impact on the profitability and growth expectations of a number of bitcoin companies, causing them to focus on other markets. Similar as for the exits, the results indicate that entities that are more diversified are less likely to pivot.
5.3.5.3 Rebranding
Figure 12: Rebranding
This is done either by using a different blockchain as base layer/foundation, or by building their own blockchain-like data structure. 40
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Similarly, a growing number of firms have opted for rebranding in the last two years, with some minor exceptions in the years before. The main reason has been the elimination of specific pre- and suffixes41 to appear more serious and to disguise the underlying technology powering the applications and services in an attempt to increase mainstream user adoption by simplifying the understanding of the services. Similarly as for the acquisitions, there is no particular market segment that is more subject to rebranding initiatives than others, although one could argue that they are more likely to apply to companies providing services to mainstream consumers.
Figure 13: Pivots and Rebranding
When combining the number of pivots and rebranding in a single figure (see figure 13), we can observe that 2013 marks a turning point for the Bitcoin business ecosystem: a number of entities attempt to reposition themselves either by changing their brand characteristics and/or pursuing other activities not directly related to Bitcoin. This trend is accelerating in 2014 and 2015, which suggests that the business ecosystem is slowly maturing. 41
E.g. “bit”, “coin”. 79
Chapter 6: Analysis and Discussion 6.1 Analysis In this section, we will first present the main factors that have a direct influence on how market segments form and evolve. Some of these factors do also apply to the ecosystem as a whole, but primarily concern specific market segments. We then identify the change drivers that influence the business ecosystem at a macro level and thus have an effect on all market segments.
6.1.1 Factors driving the emergence and evolution of market segments 6.1.1.1 Changes in market needs The main raison d’être of any firm is to cater for a need that arises in the market by providing solutions that fulfil those needs. Hence, changes in market needs have unsurprisingly been the main driver in the emergence of new market segments, products and services, and their evolution over time in the Bitcoin business ecosystem. User needs and wishes create a certain market demand, which in turn is met by newly formed and/or established entities who build solutions and fill the gap. In the Bitcoin business ecosystem, this is best illustrated by for instance the successive emergence of more convenient services for the acquisition and sale of bitcoins, the creation of powerful trading infrastructure, the appearance of wallet providers tackling the issues of secure
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key management, as well as the rise of developer tools and platforms facilitating interaction with the protocol and other applications. These applications and services, among many others, did emerge after the market expressed demand for solving a particular issue.
6.1.1.2 Regulatory forces Regulatory forces play a very important role in the Bitcoin business ecosystem due to the unique nature of its main value proposition that promises to alter a fundamental concept of human society: digital cash that is censorshipresistant because it is not controlled by a state or licensed company. In the early stages, the emerging Bitcoin economy received little attention from authorities and regulators, mainly because of its small size and trivial relevance. Frequent occurrences of scams and fraud schemes in an early grey legal environment without regulation and consumer protection led the ecosystem actors to address these problems and self-regulate themselves by adopting standard security practices, warning about scams and frauds in the main communication forums, and building services specifically tailored to address these issues. This self-organisation worked remarkably well considering the context of value exchange with unknown strangers on the Internet using an obscure digital currency. With the rise of online black markets, however, regulators and authorities increasingly raised concerns over the illicit use cases of bitcoin and advocated for the application of existing financial regulation to ecosystem participants.
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As a result, the ecosystem basically split in two parts: On the one side, there is the unregulated economy composed of services in which the lack of regulation and pseudonymity are considered to be features and part of their value proposition. This mainly applies to specific industries such as mixing services, online black markets, gambling sites, but also to particular actors from other industries, which differentiate themselves by offering services without prior KYC (Know your customer) and AML (Anti-money laundering) checks42, often at a premium for increased privacy. This part of the business ecosystem is still self-organising and to a greater or lesser extent self-regulating as it was before. On the other side, there is an emerging regulated economy that consists of usually formally incorporated firms who adapt to the new regulatory environment. These firms are mostly operating in market segments serving consumer needs, which are subject to strict rules. The regulatory requirements contribute to the emergence of new market segments such as compliance firms, and the rise of software companies providing specialised accounting and tax reporting
software,
but
also
the
appearance
of
legal
consulting
and
cryptocurrency-only exchanges that bypass money transmitting laws by avoiding dealing with fiat currencies. This part is dominated by the adaptation to the existing regulatory environment.
Hence, we witness both regulation-delayed
and ironically regulation-driven innovation as a result: some market segments are
over
proportionately
concerned
by
complying
with
time-consuming
regulatory requirements and costly applications for licenses, while other market segments either emerge or thrive as a consequence of the increasing regulatory
42
An example would be the exchange BTC-e and P2P marketplace LocalBitcoins. 82
burdens. Unsurprisingly, the results show that complying with regulation is a prerequisite for receiving VC funding.
6.1.1.3 Evolution of value proposition The different value propositions enabled by the platform highlighted in section 2.4 provide the basis for the creation of value-adding niches. The analysis shows that at different stages of the evolution, companies have focused building products and services based on a specific value proposition, which has evolved over time. In the beginning, all services were related to the use of Bitcoin as a digital currency. The focus was then expanded to promote the use of Bitcoin as a digital asset for speculation, trading and investment, resulting in the creation of sophisticated trading platforms, investment vehicles and vaults for secure storage. Soon enough, some individuals discovered that the immutable nature of the underlying blockchain could be used to build complex meta-protocols and overlay networks on top of Bitcoin, as well as serving as a mechanism for distributed proof-of-existence. This led to the emergence of new market segments focusing on non-currency applications. Finally, the use of Bitcoin as a cheap and rapid payment system was “rediscovered” and gave rise to internal money transfer platforms, remittances services and micropayment systems. The available evidence suggests that over time, firms and market segments have put the focus on different aspects of Bitcoin’s value proposition when building products and services. Most of these aspects such as currency, payment system and digital asset are closely related to each other (currency applications),
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but differ in scope and infrastructure needs. The “perceived” nature of Bitcoin by users and network participants is constantly evolving, and so are the applications and services built around the platform.
6.1.1.4 Low barriers to entry The open nature of the FOSS-based Bitcoin platform enables easy participation in the network by simply downloading a software client. At early stages, the barriers were low for literally all market segment: all that was required to start a project or business was a minimum technical understanding of the system and limited programming skills. This made it trivial for anyone interested to start a business, translating into a large number of new entrants and the emergence of various niche industries. The lack of mature and adequate infrastructure and the often-horrible customer support might have been a consequence of these low barriers to entry. Over time, though, the barriers to entry did increase for most market segments, although the reasons differ: hardware manufacturers (for example mining rigs and ATMs) required intensive capital investments, while other market segments were already populated and served by a considerable number of companies with reputation and functioning infrastructure, making it more difficult for new entrants to establish themselves. On the other hand, however, the emergence of developer platforms and other middleware solutions have reduced the barriers to entry to certain industries by removing the need to build a service infrastructure from scratch. Hence, depending on the segment one wishes to build a business in, the barriers can be
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low or high, although they tend to have increased in general over the last years mainly due to the large number of established companies that are well funded.
6.1.1.5 Technological changes/advances Technological advances have also been a driving factor in the evolution of certain market segments. The structure of the mining industry has been completely reshaped with the successive introduction of more powerful mining hardware following breakthroughs in the development of microchips. This has resulted in the creation of enormous data centres and mining farms controlled and operated by a small number of influential firms43. Frequent innovations on the protocol and network level, the crucial building blocks of the Bitcoin platform, require certain service providers to adapt: wallet providers for instance compete with each other for implementing new BIPs such as for example providing the functionality of multi-signature44 and HD (hierarchically deterministic) wallets. Firms are expected by the market to adapt to changes and alter their infrastructure to stay competitive: those who do not adapt will be left behind and lose market share. Although technological changes at the protocol level concern all entities regardless of their affiliations, some market segments are more affected than others. This applies especially to segments that deal directly with the protocol and/or offer interfaces to the technological building blocks. This raises the question if Bitcoin can still be considered a decentralised system if the majority of mining power is concentrated in the hands of a few. Nevertheless, the designed incentive structure seems to work well because there have not been attempts so far of influential miners to abuse their dominant position. 44 Multi-Signature refers to a bitcoin transaction that requires M-of-N private keys to be authorised, with M
