Digital Currencies

Paolo Tasca

Deutsche Bundesbank1 CFS, Goethe University London School of Economics University College London ECUREX Research

SUERF/Liberales Institut/University of Zurich CASH ON TRIAL

November 5, 2015

1The statements reﬂect the personal views of the speaker and do not necessarily coincide with the position of the Deutsche Bundesbank. Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 1 / 44 1 Bitcoin Protocol. Nuts and Bolts

2 Bitcoin as Payment Network

3 Bitcoin as Currency

4 Groups of Interest. Investors

5 Distribution of Income and Wealth

6 Take-home Message

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 2 / 44 What are Digital Currencies ? Satoshi Nakamoto’s paper “Bitcoin: A Peer-to-Peer Electronic Cash System” (http://nakamotoinstitute.org/) Based on decentralised/distributed peer-validated time-stamped ledgers (instead of trust-based centralised ledgers) publicly/privatelya auditable. Uses cryptography to verify indentities/transactions, and to expand the monetary base at a constant pace.

aEg., Ripple, Hyperledger.

Combination between distributed ledger technology and cryptography: BLOCKCHAIN TECHNOLOGY

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 3 / 44 Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 4 / 44 What are Digital Currencies ? Digital Currencies are money expressed as a string of bits sent as a message in a network where nodes verify the authenticity of the message via diﬀerent mechanisms (e.g., PoW, PoS, PoB). A digital currency is not only money: payment system. ...and something more. Digital Currencies diﬀer among each others by: Consensus protocol (synchronousa or asynchronousb). Rewarding mechanisms (money supply mechanism)

aSuch as Hyperledger. bSuch as Bitcoin.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 5 / 44 Why Blockchain technology is important ? It allows for a trustworthy record of transactions among anonymous in all those cases where the following operational structures are in place: intermediation; clearing and settlement; record system; rating or voting system; databases; distributed storage, authentication, anonymisation of private information; rewarding and punishing-incentive schemes; transaction traceability schemes; refereeing, arbitration or notarization.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 6 / 44 How the Bitcoin protocol works ?

Money as a string of bits sent as a message in a network that veriﬁes the authenticity of the message via a proof-of-work / proof-of-stake mechanism.

1 Alice (A) want to give to Bob (B) one BTC (BTC). A will: 1 write a message: “I, A, am giving B one BTC with serial number 123456”; 2 sign the message with a private cryptographic key;

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 7 / 44 Figure: Generation of BTC address

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 8 / 44 Private key, Signature, Public Key K is used to receive BTCs. k is used to sign transactions to spend BTCs. The signature is diﬀerent each time, but created from the same k. Ownership and control over k is the root of user control over all funds associated with the corresponding BTC address. Mathematical relationship between K and k that allows k to be used to generate signatures on messages. This signature can be validated against K without revealing k. Through the presentation of the K and signature everyone in the network can verify and accept the transaction as valid, conﬁrming that the person transferring the BTCs owned them at the time of the transfer.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 9 / 44 Figure: Digital Signature.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 10 / 44 Problem: We need a trusted source of serial numbers generator Solution: Every node in the network collectively composes a “decentralised” bank that book keeps a unique public ledger called blockchaina by: provides serial numbers for BTCs; keeps track of who has which BTCs; veriﬁes that transactions really are legitimate. register in the ledger the passages of messages between users.

aEvery node with a desktop BTC client has an updated copy of the blockchain in its computer.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 11 / 44 Figure: The blockchain is a decentralised Ledger that works as Cash-ﬂow Balance instead of an account Balance. The blockchain contains all the history of all transactions (time-stamped) ever occurred in the Bitcoin network.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 12 / 44 2 B – with his copy of the blockchain – does a sanity check that the BTC with serial number 123456 belongs indeed to A; 3 B will broadcast the signed string of bits to the entire network. 4 Other nodes in the network will collectively verify whether A holds one BTC with serial number 123456. 4.1 David (D) receives the message “I, A, am giving B one BTC with serial number 123456” and queue it together with other messages recently received that must to be digested (pending transactions of the last 10 mins not yet approved by the network). Together they form a transaction block. 4.2 With his copy of the blockchain and the public keys, D can verify that each transaction in his block is valid. 4.3 D must solve an NP-hard computational puzzle before to broadcast to the network the validity of the transactions: Proof-of-work principle.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 13 / 44 Proof-of-work. Mining is a competition to approve transactions D needs to compute new hash values based on the combination of: the previous hash value; the new transaction block; a nonce. such that the new hash value start with a given number ≤ Target. The Target is automatically adjusted to ensure that a BTC block takes, on average, about ten minutes to validate.

A miners chance of winning the competition is roughly equal to the proportion of the total computing power that they control. Therefore, speciﬁc hardware has been produced.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 14 / 44 Figure: Any transaction of X BTCs from A to B must refer to previous transactions (Inputs) with which A received at least X BTCs. The veriﬁcation process checks indeed if the inputs allow A to transfer X BTCs to B.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 15 / 44 5 If D ﬁnds the suitable nonce, he will broadcast the message “Yes, A owns BTC 123456, it can now be transferred to B” together with the other transactions in the transaction block and the nonce (s.t. the network can check-test). 6 Everyone updates their blockchain to show that BTC 123456 now belongs to B, and the transaction is complete. 7 each transaction block contains a “coinbase” transaction that pays 25 BTCs (as for now) to the winning-miner to a newly address created on D name.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 16 / 44 Bitcoin as Payment Network. Network Expansion

The average amount transferred per Bitcoin transaction is larger than in any other major payment network. During the period 2011–2015, the average amount (in USD equivalent) per transaction constantly increased, and remained larger than in the major payment networks such as Visa, Mastercard, Discover, or Western Union.

The Bitcoin network is mostly used to remit money from user to user.2

2Studies show that the amount migrants send per transaction typically ranges between USD 100 and USD 1,000 for international remittances (e.g., Sander C., 2003); Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 17 / 44 Bitcoin as Payment Network. Network Expansion

4 Nr. of Transactions 2 Transaction Volume (billion USD) 10 10 Visa MasterCard Discover 102 Western Union 100 Bitcoin

100 10−2

−2 −4 Visa 10 10 MasterCard Discover Western Union −4 −6 Bitcoin 10 10

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15

Figure: Comparison between diﬀerent payment networks. Left: Average (log) number of daily transactions. Right: Average (log) amount of daily transactions in USD. Data source: Bitcoin blockchain, VISA, MasterCard, Discover, Western Union performance reports. Period: 1Q2011 to 1Q2015. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 18 / 44 Bitcoin as Payment Network. Network Expansion

Year VISA MasterCard Discover Western Union Bitcoin (Vol.) (Tx.) (Vol.) (Tx.) (Vol.) (Tx.) (Vol.) (Tx.) (Vol.) (Tx.) 1Q11 15,153.8 198.3 8,011.0 65.6 746.5 14.7 208.8 0.6 0.04 0.002 2Q11 16,604.4 213.2 8,934.1 72.5 787.0 15.7 226.4 0.62 1.6 0.006 3Q11 17,033.0 217.7 9,285.7 77.1 787.0 15.4 231.9 0.63 0.92 0.008 4Q11 17,450.5 223.6 9,505.5 84.4 761.3 15.1 226.4 0.65 2.1 0.006 1Q12 16,934.1 215.7 9,329.7 84.8 804.3 15.8 214.3 0.62 0.7 0.007 2Q12 17,252.7 218.7 9,780.2 93.8 861.1 17.5 220.9 0.64 1.04 0.021 3Q12 17,582.4 225.3 10,087.9 95.4 860.9 17.6 216.5 0.63 2.47 0.032 4Q12 18,648.4 236.8 10,835.2 101.3 840.1 16.8 219.8 0.64 2.45 0.033 1Q13 18,120.9 227.9 10,406.6 95.1 819.2 16.1 207.7 0.61 8.12 0.052 2Q13 19,109.9 245.6 11,087.9 104.1 856.1 17.0 225.3 0.66 26.2 0.053 3Q13 19,175.8 252.1 11,494.5 109.9 850.5 17.1 231.9 0.69 19.3 0.050 4Q13 20,197.8 259.9 12,142.9 114.0 883.8 17.2 236.3 0.71 108.65 0.061 1Q14 19,011.0 249.9 11,483.5 108.2 850.4 16.5 223.1 0.66 91.01 0.063 2Q14 20,274.7 269.6 12,351.6 116.6 892.2 17.6 239.6 0.70 52.35 0.063 3Q14 20,703.3 275.9 12,714.3 120.5 881.0 17.5 242.9 0.72 51.07 0.068 4Q14 20,879.1 285.4 12,879.1 127.1 912.0 17.7 233.0 0.72 60.1 0.084 1Q15 19,263.74 275.6 11,681.32 121.3 852.32 16.3 214.29 0.68 48.80 0.094

Table: Volume in million USD (Vol.) and millions of transactions (Tx).

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 19 / 44 Bitcoin as Payment Network. Network Expansion

Average Amount per Transaction (USD) 2000 Bitcoin Western Union MasterCard 1500 Visa Discover

1000

500

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

Figure: Comparison between diﬀerent payment networks. Average daily USD amount per transaction from 1Q2011 to 1Q2015. Data source: Bitcoin blockchain, VISA, MasterCard, Discover, Western Union performance reports. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 20 / 44 Bitcoin as Currency. Network Expansion

The relative capitalisation of Bitcoin with regard to other digital currencies is receding in favour of Ripples. Until mid-2014, Bitcoin dominated the digital currency market by covering up to 95% of its total volume. Since the 2nd part of 2014, the Bitcoin dominant position has been eroded by Ripple, which now covers about 10% of the total market capitalisation. Even though Bitcoin remains dominant on the digital currency market, the relative currency strength of Bitcoin has decreased – on average –, compared to that of the other (almost) existing 500 digital currencies.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 21 / 44 Bitcoin as Currency. Network Expansion

Relative Market Cap 100% % Dogecoin 90% % Dash % Litecoin 80% % Ripple 70% % Bitcoin 60% 50% 40% 30% 20% 10%

01/11 07/11 01/12 07/12 01/13 07/13 01/14 07/14 01/15 07/15

Figure: Relative market capitalisation of Bitcoin, Ripple, Litecoin, Dash, Dogecoin. Data source : Coinmarketcap. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 22 / 44 Bitcoin as Currency. Currency Competition

Relative Currency Strength 400 BTCX 350 LTCX XRPX 300

250

200

150

100

0 01/14 04/14 07/14 10/14 01/15 04/15 07/15

Figure: Comparison between relative index strengths. Ba= 100 on 01.01.2014 (BTCX, LTCX, XRPX). Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 23 / 44 Bitcoin as Currency. Currency Competition BTCX: rel. strength of BTC wrt LTC and XRP, weighted by: (1) their respective rel. market cap. expressed in USD; (2) the inverse of the BTC exchange rate volatility. LTCX: rel. strength of LTC wrt both BTC and XRP, weighted by: (1) their respective rel. market cap. expressed in USD; (2) the inverse of the LTC exchange rate volatility. XRP: rel. strength of XRP wrt both BTC and LTC, weighted by: (1) their respective rel. market cap. expressed in USD; (2) the inverse of the XRP exchange rate volatility.

Currency competition expressed in currency strength indices BTC/LTC BTC/XRP BTCX := ∆ × Exp Log (W ) + Log (1 − W ) BTC σ (BTC/LTC) BTC σ (BTC/XRP) BTC LTC/BTC LTC/XRP LTCX := ∆ × Exp Log (W ) + Log (1 − W ) LTC σ (LTC/BTC) LTC σ (LTC/XRP) LTC XRP/BTC XRP/LTC XRPX := ∆ × Exp Log (W ) + Log (1 − W ) XRP σ (XRP/BTC) XRP σ (XRP/LTC) XRP

where: ωLTC ωBTC ωBTC WBTC = ; WLTC = ; WXRP = ; ωLTC + ωXRP ωBTC + ωXRP ωBTC + ωLTC

∆BTC , ∆LTC and ∆XRP are normalisation factors;

ωBTC , ωLTC , ωXRP : market capitalisation of BTC, LTC and XRP expressed in USD.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 24 / 44 Groups of Interest. Investors

Bitcoin startups raised almost USD 1 billion in three years with an annual investment growth rate of about 150% Capital investments in Bitcoin-related startups is a recent trend that started in 1Q 2012. Since 1Q 2012, the Bitcoin industry represents the fastest growing sector for capital investment. Within the Bitcoin sector, the Mining and Payment & Remittance industries drove the funding race. 21 Inc alone covered over half of the capital raised by the Mining industry and Coinbase one third of the capital raised by the whole Payment & Remittance industry.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 25 / 44 Groups of Interest. Investors

Relative Share of Dollars Raised

Bitcoin Photo Sharing Physical Storage Space Travel Transportation Hospitality Lending Food & Beverages Health Insurance Travel Human Resources Crowdfunding Banking Drones Classifieds 0 1% 2% 3% 4% 5% 6% 7%

Figure: Relative Capital investment into diﬀerent startup businesses during the period mid-2012 till mid-2015. Data source: Mattermark. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 26 / 44 Groups of Interest. Investors

Growth Rate of Startup Investment

Figure: Relative rate of growth of capital investment into diﬀerent startup businesses during the period mid-2012 till mid-2015. Data source: Mattermark. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 27 / 44 Groups of Interest. Investors

Funding Scale (2012−2015) 1 10 >10 million 1~10 million 0.8 0.5~1 million 8 0.1~0.5 million <0.1 million 0.6 6

0.4 4

0.2 2 % of Deals with Different Funding Scale 0 0 Average Funding Amount (million USD)

2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1

Figure: Bar chart: Percentage of deals in diﬀerent funding scales, from Q1/2012 to Q1/2015. Line chart: Average funding amount per deal in each quarter. Data source: Bitangel, Cbinsight, Coinﬁlter, Coindesk, Crunchbase. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 28 / 44 Groups of Interest. Investors

Capital Market Payment and Financial Blockchain Mining Miscellaneous Remittance Services Application Industry Exchange Payment Accounting Smart Contracts Mining Solutions Bitcoin Faucet Derivatives Remittance Security Blockchain API Mining Pool Tipping Commodity Wallet ATM Messaging Institutional Trading Market and Crowdfunding and Data Analysis Crypto Equity

Table: Classiﬁcation of business categories in the Bitcoin industry.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 29 / 44 Groups of Interest. Investors

Number of Deals Quarterly Funding Amount for Bitcoin Startups 35 250 Payment & Remittances Payment & Remittances 30 Mining Industry Mining Industry Capital Market 200 Capital Market Blockchain Application Blockchain Application 25 Financial Service Financial Service Miscellaneous Miscellaneous 20 150

15 100 (million USD) 10 50 5

0 0

2012 2012Q1 Q22012 2013Q3 Q42013 Q12013 Q22013 2013Q3 Q42014 Q12014 Q22014 Q32014 Q42015 Q1 2012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q12014 Q22014 Q32014 Q42015 Q1

Figure: Left: Quarterly number of deals for startups in different Bitcoin industries. Right: Quarterly funding amount for startups in different Bitcoin industries. Data source: Bitangel, Cbinsight, Coinfilter, Coindesk, Crunchbase. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 30 / 44 Groups of Interest. Investors

Number of Deals in Each Funding Scale (2012−2015) 80 Miscellaneous Blockchain Application 60 Mining Industry Financial Service Capital Market 40 Payment & Remittances

Number of Deals 20

<0.1 million >10 million 0.5−1 million 1−10 million 0.1−0.5 million

Figure: Number of deals in each funding scale (Q1/2012 to Q1/2015). Deals in each funding scale are further divided into business categories. Data source: Bitangel, Cbinsight, Coinﬁlter, Coindesk, Crunchbase. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 31 / 44 Groups of Interest. Investors

Capital Market Payment & Remittances Capital Market Payment & Remittances Bitstamp 8% Coinbase 18%Bitstamp 8% 3% Coinbase 18% OKCoin 3% 4% Xapo OKCoin 4% Xapo 33% Huobi 4% 33% 33% BitPay 33% Huobi 4% BitPay BTCJam BTCJam Blockchain Blockchain 8% 10% Payward10% Payward 8% Bitnet TechnologiesBitnet Technologies Mirror Circle Intenet Financial Mirror Circle Intenet Financial BitGold BitGold BitGo 8% 8% BitGo BTC China BTC China BitReserve BitReserve 9% 9% 3% 3% Korbit Korbit 9% 12% Ripple12% Labs Ripple Labs 9% 4% 4% 7% Others7% Others 10% 10% Others Others 5% 5% 5% 6% 5% 6%

Mining Industry Blockchain ApplicationBlockchain Application 3% Mining Industry 2% 4% 3% 21 Inc 4% 2% Blockstream 5% 4% 21 Inc 5% 4% Blockstream 5% BitFury 5% Chain BitFury 6% Chain KnCMiner 6% PeerNova 14% KnCMiner 36% PeerNova 14% Spondoolies−Tech Gem36% CoinSeed Spondoolies−Tech BlockCypher Gem Others CoinSeed Colu BlockCypher 55% Others Others Colu 55% 23% 23% Others 19% 19% 23% 23% Figure: Funding distribution among startups within main categories (Q1/2012 – Q1/2015). Data source: Bitangel, Cbinsight, Coinﬁlter, Coindesk, Crunchbase. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 32 / 44 Distribution of Income and Wealth.

The wealth distribution in the Bitcoin ecosystem is highly unequal,and this inequality is growing. The inequality of the distribution of Bitcoins amongst addresses, summarised by the Gini coeﬃcient grew from 0.09 in 2010 to 0.99 in 2015. During the period 2009-2015, the top 100 richest addresses kept a constant relative wealth, totalling about 20% of the total value of the Bitcoin economy. The Bitcoin mining market is under control by 5 to 7 major mining pools. During the period 2013-2015, the cumulative market share of the largest 10 pools relative to the total market hovered in the 70% – 80% range.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 33 / 44 Distribution of Income and Wealth. Users

! !

Figure: Lorenz Curve and Gini Coeﬃcient for the Bitcoin Economy. Percentile of addresses sorted by wealth wrt to the percentile of the wealth own.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 34 / 44 Distribution of Income and Wealth. Users

! !

Figure: Lorenz Curve and Gini Coeﬃcient for the Bitcoin Economy. Percentile of addresses sorted by wealth wrt to the percentile of the wealth own.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 35 / 44 Distribution of Income and Wealth. Users

! !

Figure: Lorenz Curve and Gini Coeﬃcient for the Bitcoin Economy. Percentile of addresses sorted by wealth wrt to the percentile of the wealth own.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 36 / 44 Distribution of Income and Wealth. Users

The Gini coeﬃcient (G) is an inequality index of income or wealth.3

G can be calculated from unordered size data as half of the Relative Mean Diﬀerence (RMD), which is the average absolute diﬀerence between every possible pair of values, divided by the mean size µ,

n n RMD MD 1 X X G = with : RMD = , MD = |x − x | 2 µ n2 i j i=1 j=1 G=0: every person receives the same income; G=1: theoretical value for n → ∞ where a single person receives 100% of the total income and the remaining people receive none

xi : income or wealth of person i. n: population size.

3Gini C., Variabilita’ e mutabilita’, 1912, reprinted in Memorie di metodologica statistica (Ed. Pizetti E, Salvemini, T). Rome: Libreria Eredi Virgilio Veschi 1955. Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 37 / 44 Distribution of Income and Wealth. Users The Lorenz curve can be represented by a function L(F ) where: F is the cumulative portion of the population represented by the horizontal axis; L is the cumulative portion of the total wealth or income represented by the vertical axis.

For a discrete probability function f (y), let yi , i = 1, .., n, be the points with non-zero probabilities indexed in increasing order (yi < yi+1). The Lorenz curve is the continuous piecewise linear function connecting the points (Fi , Li ), i = 0, ..., n, where F0 = 0, L0 = 0, and for i = 1, ..., n:

i X Fi = f (yj ) j=1 i Si X Li = with Si = f (yj )yj Sn j=1

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 38 / 44 Distribution of Income and Wealth. Users

Wealth Distribution of Top 500 Richest Addresses Percent of Bitcoins Owned by Richest Addresses 100% 300 Top 500 2010 90% Top 100 2011 250 2012 80% 2013 2014 70% 200 60% 50% 150

40% Frequency 100 30%

20% 50 10% 0 1 2 3 4 5 10 50 100 150 01.09 04.10 12.10 10.11 09.12 08.13 05.14 03.15 Magnitude (thousand Bitcoin)

Figure: Left: Relative wealth of the top 100 and 500 richest Bitcoin addresses. Right: Wealth distribution among the top 500 richest Bitcoin addresses (with x-axis log-transformed). Data source: Bitcoin blockchain. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 39 / 44 Distribution of Income and Wealth. Users

BetcoinDice

BitYes

ASICMiner SatoshiDice Bter

BTCGuild

Btc38 SealsWithClubs

AnxPro Bitcoinica

MyBitcoin Btcst BitZino

mining.bitcoin

BitZillions

Just-Dice DeepBit ChBtc MPEx MtGox BTCChina Bitcoin-24 Evolution VirWoX SilkRoad2 Cavirtex BitcoinFog Agora Cex Instawallet BTC-e 796 GHash SilkRoad LocalBitcoins Huobi CampBX Kraken Cryptsy

Bitcoin BitVC KnCMiner OKCoin

BitPay Bitstamp Bitfinex

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ.Xapo of Zurich November 5, 2015 40 / 44 Distribution of Income and Wealth. Users

Bitcoinica Btcst

Just-Dice BitPay GHash MPEx SatoshiDice

MtGox Xapo

BitcoinFog Instawallet Agora Bitstamp LocalBitcoins SilkRoad

Bitcoin Bitfinex BTC-e

OKCoin Huobi

BitVC

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 41 / 44 Distribution of Income and Wealth. Users

Income Distribution for All Clusters (bin size: 100BTC) 5 10

4 Power Law Function: 10 y = (2.0133e+05) * x−1.2038 MSE: 1794790.7437 2 3 R : 0.89329 10

2 Frequency 10

1 10

100BTC 1000BTC 10000BTC 100000BTC

Figure: Income distribution for all clusters. Data source: Bitcoin Core parsed from the 3rd of January 2009 until the 8th of May 2015. Total nr. addresses: 75,191,953. Total nr. clusters (contains at least addresses): 30,708,660 (9,847,999 ≥ 2 nodes) and 4,810,342 with non-zero balance. Total TXs between clusters: 88,950,021. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 42 / 44 Distribution of Income and Wealth. Miners

Ditrib. of Mining Pools per Nr. of Blocks Mined Market Share of Top 5/10 Mining Pools

20 100% 2013 Top 10 Top 5 2014 90% 15 80%

10 70%

5 60%

50% 0

~500 40% ~2500 ~4500 ~6500 ~8500 01/13 07/13 01/14 07/14 01/15 ~10500~12500~14500~16500 Figure: Left: Distribution of mining pools per number of blocks. Right: Market share of top 5 and 10 mining pools. Data source: Blocktrail. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 43 / 44 Distribution of Income and Wealth. Miners Ghash.IO hashing power was close to “51% attack” for several times.

Distribution of Transaction Fee in Each Diffeculty Level 100% Unknown Others BTCChina Pool 80% P2Pool.org DeepBit Ozcoin CloudHashing 60% KNCMiner Bitfury AntPool EclipseMC 40% ASICMiner BitMinter 50BTC Slush Eligius 20% DiscusFish / F2Pool BTC Guild GHash.IO

01/13 05/13 09/13 12/13 04/14 08/14 12/14

Figure: Top 17 mining pools (out of 40) per relative amount of fees earned. In each diﬃculty level, transaction fees collected by each mining pool are summed up and compared to the total fees earned and collected by the market. Period: From January 2013 to February 2015. Data source: Blocktrail. Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 44 / 44 Distribution of Income and Wealth. Miners

Mining Market Share among Countries (by number of blocks) 2000 Unknown USA Global 1500 Europe China

1000

500 2016 Blocks in Each Difficulty Level 0 01/13 05/13 09/13 12/13 04/14 08/14 12/14

Figure: Top mining activity per country. Mining pools are classified per country of operation. Many mining pools operate in different countries (e.g, BTC Guild and BitMinter run their mining operation in both USA and Europe), so they are classified as “Global”. Period: from January 2013 to February 2015. Data source: Blocktrail, Bitcoin Wiki (comparison of mining pools). Internal calculation.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 45 / 44 Take-Home Message

1 The average amount transferred per Bitcoin transaction is larger than in any other major payment network. 2 The relative capitalisation of Bitcoin with regard to other digital currencies is receding in favour of Ripple’s. 3 China is the largest country in the world per: (1) number of active Bitcoin clients; (2) mining capacity; (3) volume of Bitcoins exchanged via electronic trading platforms. 4 Bitcoin startups raised almost USD 1 billion in three years with an annual investment growth rate of about 150%. 5 In Jan. 2015 the Bitcoin volume exchanged on electronic trading platforms reached 50% of the total number of Bitcoins ever mined at that time. 6 During the year 2014, the transaction costs in digital currencies dropped significantly. 7 The year 2014 saw fewer incidences and less arbitrage opportunities than the previous years. In effect, the digital currency market is becoming more efficient. 8 The wealth distribution in the Bitcoin ecosystem is highly unequal, and this inequality is growing. 9 The Mining industry is consolidating as an oligopoly.

Paolo Tasca (BBK) SUERF/Liberales Institut/Univ. of Zurich November 5, 2015 46 / 44