Crypto Currencies – a Case Study

Crypto Currencies

Crypto Currencies – A Case Study

Julien Hawle

Research Assignment

University of Liechtenstein Graduate Studies Program: MSc Entrepreneurship Module: Research Assignment

Date of submission: 31.07.2018 Crypto Currencies

______Abstract Crypto currencies and Bitcoin are just two of the buzzwords that are all over the news in recent times. The huge media attention crypto currencies have gotten in the recent times is just one reason why it has reached its current popularity. What are these crypto currencies and what exactly is Ethereum and Monero. With the current academic research falling short in answers in regard to crypto currencies this case study will, on the one hand, investigate crypto currencies and what they exactly are. For this, the three crypto currencies Bitcoin, Ether (the native crypto currency of Ethereum) and Monero will be investigated. The technical foundation, their individual blockchain protocols and the continuous growth in the adoption are presented and analyzed. Furthermore, the events that led to the current position of these three crypto currencies are shown in a chronological way in order to give the reader a clear understanding of what crypto currencies are and for what use cases they are currently used. On the other hand, the economic impact of crypto currencies has not gained much attention from scholars and therefore this research paper will investigate the economic impact of the three selected crypto currencies. Moreover, the economic impact will be shown by analyzing the mining- and exchange industry, the use of crypto currencies for payments, ICO’s as well as crypto currency as a new asset class. Keywords: Crypto currencies, Bitcoin, Ethereum, Monero, Economic Impact, Blockchain, ICO, Min- ing, Exchanges, Asset Class, Blockchain Payments ______

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Table of content 1 Introduction 2 2 Literature Review 3 2.1 Blockchain 3 2.2 Crypto Currencies 4 2.3 Bitcoin, Ethereum, Monero and their underlying Blockchain Technology 7 2.4 Bitcoin’s Blockchain 7 2.5 Ethereum’s Blockchain 8 2.6 Monero’s Blockchain 10 3 Methodology 12 4 Case Study Bitcoin 13 4.1 Bitcoin 2009 – 2013 13 4.2 Bitcoin 2014 – 2017 15 4.3 Bitcoin Use Cases 21 5 Case Study Ethereum 23 5.1 Ethereum 2015 – 2017 23 5.2 Ethereum Use Cases 26 6 Case Study Monero 29 6.1 Monero 2014 – 2017 29 6.2 Monero Use Cases 32 7 The Economic Impact of Bitcoin, Ethereum and Monero 35 8 Discussion and Conclusion 40 8.1 Discussion 40 8.2 Conclusion 41 8.3 Limitations 42 8.4 Recommendations for Further Research 42 9 References 44 Affidavit 54

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1 Introduction Crypto currencies and Bitcoin are just two of the buzzwords that are all over the news in recent times. The huge media attention crypto currencies have gotten in the recent time is just one reason why it has reached its current popularity. The crypto currency Bitcoin (Nakamoto, 2008) was created in 2009 but most people were not aware of its existence. Now that new exchanges are coming up that make the trade of Fiat money to crypto currencies relatively easy and the news has spread through social media it seems that everybody knows what crypto currencies are (Guzman, 2018, p. 2). It is widely unknown that there are more than 1.500 different crypto currencies that can be traded on different exchanges (Coinmarketcap, 2018e). The total market capitalization of all crypto currency has risen within one year from $83 billion in June 2017 to approximately $300 billion by June 2018 (Coinmarketcap, 2018g). This enormous increase in market capitalization was one of the main reasons why crypto currencies got a lot of media attention. The underlying technology of crypto currencies is the blockchain and they are only one field of application for this technology. With the adoption of blockchain technology, it is possible to use the products build on top of the blockchain. These are namely crypto currencies and similar value-exchange mechanisms that have the potential to change the way we transact on a day to day basis (Guzman, 2018, p. 2). At the same time, such an increase in media attention and market capitalization has an effect on people and the real economy. This can be seen in companies that are publicly traded. Making a decision towards blockchain their share price increases. Longfin Corp. stock price rose over 2000% in one week after it announced that it had bought a company that empowers global micro-lending solution using the blockchain technology (Sen, 2017, p. 1). All this hype around crypto currencies has a reason. Using them as a mean of payment can result in advantages compared to Fiat money. When transferring, a for example, $1 million from New York to Zürich using a bank, the transaction costs would be high, and it would take long for the transfer to be completed. If doing the same transaction using crypto currencies the transaction costs would be a fraction of that of the banks and the transfer would be completed within one hour. These are just two examples of the advantages crypto currencies have compared to Fiat currencies (Claudiogib, 2018, pp. 1-2). With that kind of impact on the economy, it is time to take a closer look at the topic of crypto currencies and their economic impact as well as their impact on its users. The current research in this field is focused on a very technical perspective. Areas like the usability, privacy issue, and security concerns are the main focus of researchers (Yli-Huumo, Ko, Choi, Park, & Smolander, 2016, p. 10). The economic impact of crypto currency worldwide has not been given much attention and therefore this research paper has the aim to shed some light on the buzzword crypto currency and show on the one hand how they emerged and what use cases they have and on the other hand what impact such a fast increase in market capitalization and adoption has on the economy. In order to assess the economic impact, the crypto currencies Bitcoin, Ethereum, and Monero were chosen to be used in this research paper.

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2 Literature Review This section is used to show what existing literature is available today. Furthermore, this chapter will be used to explain the technology and show the aspects of the different blockchains. In the first part, the blockchain technology will be analyzed, followed by cryptocurrencies in general and their underlying technology.

2.1 Blockchain „A blockchain is a chain of blocks of information that registers transactions; of cause, there is a stringent set of rules that govern how to verify the validity of the blocks and make certain that the blocks will not be altered or disappear” (Zhao, Fan, & Yan, 2016, p. 1). Centralized financial institutions like banks are using a centralized transaction ledger (from now on referred to as ledger), where all transactions of a certain bank are recorded. Normally, each bank has its own ledger and when a transaction is made from one to another bank it has to be recorded in both ledgers. A blockchain is exactly the same with one major difference, it is stored decentralized. This means that many participants in a network, individuals or institutions are using the same ledger and every participant has the possibility to host the blockchain ledger. This results in hundreds of copies of the ledger stored all over the world. In order for all ledgers to have the latest and correct version, a blockchain ledger host (node) has to be connected to the Internet 24/7. When being connected the ledger will automatically update itself to the newest version that includes all transactions that have ever occurred on the network. Because of this blockchain ledger, trusted third parties that process, validate, safeguard and preserve electronic transactions can be substituted through blockchain ledgers (Dinu, 2014, pp. 9-14). The next paragraph will briefly describe how a blockchain works technically. Blockchain uses a cryptographic proof mechanism for two parties that are willing to execute a transaction using the Internet. In order for the transaction being protected, digital signatures are deployed. These digital signatures include a public- and a private key. Each transaction is sent to the public key of the receiver and is signed by the sender with his private key. These two keys can be compared to a bank account. The public key would represent the bank accounts IBAN, the private key would be the pin code to access your bank account and use the funds. One problem is that all transactions using the blockchain do not come in order in which they were originally generated and therefore a system was developed that prevents double spending of funds. The blockchain bundles a number of transactions into one block. Each and every block is cryptographically and linearly linked to the previous block by including the hash of that block. Since there are hundreds of copies of the blockchain ledger and hundreds of transactions a minute the question occurs, what block should be the next one in the blockchain? The process will be explained by using the Bitcoin blockchain as an example. The Bitcoin blockchain solves this problem by including a mathematical puzzle. Only the block that can prove it includes the correct answer to this specific mathematical problem will be included as the next block in the blockchain. This process is known as the validation of all transactions included in this block. For Bitcoin, the consensus algorithm is called Proof-of-Work (PoW). Miners that want to generate a block need to prove that, while using computing resources they are able to solve the mathematical puzzle. Once the puzzle is solved and 51% of the miners agree, the Bitcoin blockchain generates a new block every ten minutes and therefore the network automatically increases or decreases the difficulty of the mathematical problem so that it will take approximately ten minutes to solve one of those puzzles. The difficulty level is adjusted to the total computing resources committed to the network every two weeks. Furthermore, the network only accepts

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the longest blockchain. This increase the security of the network enormously since a fraudulent transaction, on the one hand, needs to generate a block by solving the mathematical puzzle and on the other hand, has to race against all other miners to generate all subsequent blocks in order to be accepted by the network. Trust has a raised as one of the core features that a blockchain can provide for transactions (Crosby, Pattanayak, Verma, & Kalyanaraman, 2016, pp. 9-13). Since the release of the first blockchain in 2009, researchers have identified three generations of blockchains. Those are blockchain 1.0 (digital currencies), blockchain 2.0 (digital finance) and blockchain 3.0 (digital society). It can be said that the maturity of blockchain 1.0 started from 2009 onwards, but blockchain 2.0 and 3.0 emerged around 2015 (Swan, 2015, pp. 1,9,53). It has to be noted that it will take several years for those two to create real and meaningful economic impact. By today, different fields of application for the blockchain technology have emerged. The next paragraph will briefly show some areas of application of Blockchain 1.0 – 2.0 and 3.0 (Zhao et al., 2016, p. 4). Blockchain 2.0 represents digital finance. This field includes asset management, insurance, loans, pre- dictions markets and much more. Since the blockchain is still in a very early stage of the technology maturity, these applications only partly exist yet but are under development. Smart properties like smart contracts and the connection of IoT to the blockchain can be seen as blockchain 3.0. This field of application has the widest spread, but at the same time is the least developed generation of blockchains. The company Mycelia wants to revolutionize the music industry by using smart contracts. Their plan is to program contracts that automatically take the revenue of customers listing to music and distribute it fairly to the artists, producers and other stakeholders (Heap, 2014 pp. 1-5). Another application with a huge potential, which is already partly used is governance. For example, Sierra Leone was the first country that used the blockchain technology to hold a presidential election (Polites, 2018 p. 1). Because of the blockchain system architecture, the voting process is 100% transparent and tamper proof. The smart contract feature is also used for payments that enabling automatically and event-driven payments (Zuchos, 2017, p. 2). Furthermore, identity services using blockchain are gaining popularity. With those services, everyone can attach identification documents onto the blockchain and therefore verify his or her identity without been physically present or uploading the document to all different entities every time an identification is needed. This application of blockchain can be extended to all other documents that prove ownership. Land titles, certification of ownership for cars, companies and many more can be listed as examples (Crosby et al., 2016, pp. 13-16). The most known application for blockchain is crypto currencies, which would represent 1.0 (Swan, 2015, p. 5). Over the time different types of crypto currencies have evolved, differing in privacy, transaction speed and consensus algorithm (Vejačka, 2014, pp. 75-76).

2.2 Crypto Currencies „Crypto currencies are digital alternatives to traditional government-issued paper monies. Cryptography is used to ensure that transactions are secure, to prevent users from spending the same balance more than once, and to govern the supply of digital notes in circulation. Some crypto currencies are decentralized, enabling quasi-anonymous transactions and making it difficult for governments to regulate them. Moreover, the electronic nature of crypto currencies means they are relatively easy to use across international borders” (Luther, 2016, pp. 3-4). In the year of 2008, a whitepaper by a computer programmer using the pseudonym Satoshi Nakamoto appeared on the internet with the title Bitcoin: A Peer-to- Peer Electronic Cash System (Nakamoto, 2008, p. 1). A whitepaper is a document that contains all necessary information about a solution, product or service. Its main purpose is to promote this solution

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and it can be seen as a sales and marketing document that is used before the point of sale (Investopedia, 2018 p. 1). Since then, the popularity of Bitcoin has constantly grown and its underlying technology, the blockchain has found numerous areas of applications beyond finance. Crypto currencies are created by individuals, groups or entities and not by governments like Fiat money (US-Dollar, Euro, CHF). Therefore, there are advantages and disadvantages when comparing the two types of currencies. In the next paragraph, crypto currencies and FIAT money are compared for certain attributes in order to get a clear distinction between those two. • National currencies like the US-Dollar or Euro can only be used in a limited geographic area, whereas crypto currencies can uniformly be used anywhere in the world. This gives the advantage of not having to change from one Fiat currency to another when visiting another country (Swan, 2015, p. 5). • Depending on what crypto currency is used the degree of anonymity and privacy is higher compared to Fiat money. On the one hand, this has the advantage of not being traced and having the freedom of spending like one prefers it, on the other hand, it increases the ability to do illegal transactions, launder money or even finance terrorism (Tar, 2017 p. 1). • Crypto currency transactions are completed more efficiently than Fiat transactions. Since crypto currency transactions are using the same transaction ledger the whole process is faster and the amount of work going into it is reduced, resulting in lower transaction costs. An example is that it is possible to transfer 100 million US-Dollars’ worth of Bitcoin from for, example New York to Zürich in 10 to 120 minutes. This transaction, depending on the capacity of the Bitcoin network would cost between 3-7 US-Dollars (Kreder, 2017 pp. 1-4). • Crypto currencies that are truly decentralized are censorship resistant. No government or other entity can take money away from a person without the correlating private key or prohibit him from sending transactions. • Because crypto currencies use as their underlying technology the blockchain, it replaces the need for trusted-third-parties like banks. Since governments create Fiat money, entities using it have to trust the government that the currency will be worth today the same amount as it will be tomorrow. When using decentralized crypto currencies, the need for trust is obsolete because the price will be always created by supply and demand. It needs to be noted that at the moment, because of a lot of speculative investments in crypto currencies the price volatility of crypto currencies is way higher than of Fiat currencies (Sachtachtinskagia, 2017 pp. 1-2). The presented attributes of crypto currencies indicate that they have certain advantages but at the same time disadvantages over FIAT currencies. Furthermore, crypto currencies have created a new economic market segment for different business activities. Crypto currencies disrupted the crowdfunding market by using the ICO method. There, a company that wants to raise funds for their project is giving out their own digital token, mostly using the Ethereum ERC-20 token standard, that has some kind of use case in exchange for crypto currencies like Bitcoin or Ethereum. In 2017 companies collected over $6 billion in funding using the ICO model (Coinschedule, 2018, p. 1). The word ICO is by now widely known mostly because of its recent successes and its gained popularity. Entrepreneurs don’t have to get their funding’s from business angels or venture capitalist, if they have a good idea and a supporting community, they are most likely able to get all their funding from an ICO (Bussgang, 2017, p. 1). With this amount in funding, these companies can create entirely new markets and create a new economic growth. At the same time, it is necessary to note that ICO’s and other crypto currency companies can sometimes be scams. The company Mybtgwallet.com is one example of such a company. It scammed its user by taking their private key when they tried to get their Bitcoin Gold. It resulted in users losing over $3.3

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million worth of crypto currencies (Kariuki, 2018, pp. 2-3). The ICO Magos was able to raise a total of 3.000 Ether (worth around $1,2 million). It turned out to be a scam and the project is non-existing and the people behind it have disappeared with the money (Cepka, 2017, p. 2). One of crypto currencies advantages is that the transaction costs are very low compared to other payment solutions. When using crypto currencies, it enables the user to send funds around the world for a very reasonable price. This will give people a new way of transacting as well as financial independence. Furthermore, this can also have a positive impact on companies. This enables them to reduce costs for their financial operations (Amna, 2018, pp. 1-3). At the same time, the acceptance of crypto currencies for payments is growing rapidly, there are even companies that are issuing credit cards, so users can spend their crypto currency in every store. With this adoption and acceptance of crypto currencies it has a real economic impact and at the same time an impact on the industry as well as its users (Luther, 2016, p. 559). Governments can also see crypto currencies as an opportunity for criminals and ban or impose sanctions on them in their country. Costa Rica, for example, sanctions criminals using crypto currencies and confers the elimination of their bank accounts. In general, governments are trying to figure out ways how to control the new crypto currencies especially in the regard to criminal activities (Acosta, 2018, p. 2). As shown by the research of Zhao et al. (2016) the Google trend search volume of Bitcoin peaked in 2013, following by a sharp decline till mid-2015 and then picking up to reach new time highs with an exponential growth. When comparing this to the search term blockchain, it is clearly visible that the trend search for blockchain is significantly smaller. This and the early age of the technology explains why there are either very little or highly specialized academic research in this field. Furthermore, only a little number of peoples are familiar with crypto currencies and there is no widespread knowledge about them yet (Zhao et al., 2016, pp. 2-3). The current research in this field is focused on a very technical perspective. Areas like the usability, privacy issue, and security concerns are the main focus of researchers (Yli-Huumo et al., 2016, p. 10). The economic impact of crypto currency worldwide has not been given much attention and therefore this research paper has the aim to shed some light on the buzzword crypto currency and show on the one hand how they emerged and on the other hand, what impact such a fast increase in market capitalization and adoption has on the economy. Therefore, this research paper aims to answer the research question of what impact, if any, crypto currencies have on the economy. For this, the three crypto currencies Bitcoin, Ethereum, and Monero are used. In regard to those, each of them has its own blockchain that records all transactions that were ever made. These transactions can be public view, using a blockchain explorer that can be accessed via the internet. The three crypto currencies and their blockchains differentiate themselves by using different specifica- tions and therefore offering its users different advantages and use cases. All of them use different consensus algorithms, meaning that the miners or validators have to perform different tasks in order to validate a transaction. Furthermore, the block sizes differ and therefore the number of transactions that can be processed per minute as well (Christidis & Devetsikiotis, 2016, pp. 2294-2296). This is an important factor because of the use case as global currencies. Each crypto currency, that is presented in this paper is a currency and has furthermore a specific use case. Bitcoin, for example, is considered to be a currency as well as a store of value, Ethereum with its currency the Ether a decentralized computer and Monero has a special privacy feature included that makes tracking funds currently impossible.

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2.3 Bitcoin, Ethereum, Monero and their underlying Blockchain Technology This Chapter will explain the technical differences of the three crypto currencies. Each crypto currency is running on an underlying blockchain. Depending on the features of the currency the underlying blockchain differs. Firstly, the Bitcoin blockchain will be explained followed by the Ethereum’s Blockchain and Monero’s blockchain. All blockchains need to find consensus in some way in order to validate the network’s transactions

2.4 Bitcoin’s Blockchain Bitcoin uses the consensus algorithm PoW. The actors using this algorithm are called miners. In order for them to be able to add the next block to the blockchain, they need to solve a mathematical problem. The first person that is able to solve this problem gets the right to attach the next block, if 51% of the network agree, and gets a financial reward for this task. Miners try to solve this problem by trying out different combinations. Each try is called a hash and the Bitcoin network constantly checks how much hash-power the network currently has. The hash-power of the complete network can be seen as the processing power all miners are using combined, to solve the mathematical problems. The network itself adjust the difficulty of the problems miners have to solve so that it will take them ten minutes to solve it and because of that the block time of the Bitcoin blockchain is ten minutes. The difficulty of the network adjusts roughly every two weeks. This mechanism is called automated difficulty adjustment and prevents the network of proposing to hard, or too easy problems (Konstantopoulos, 2017, p. 2). The miners that are participating in this system are constantly competing with each other to solve the problem first. The chances of the miners to find the right solution is depending on the processing power they are using to solve it. The miner that has the correct solution first, broadcasts it to all other participants and if 51% of all participants agree on that solution the network has found consensus. The PoW system is designed to return a timestamp for all transactions in an atomic operation when a correct solution was found (Becker et al., 2013, p. 135). This mining process has two purposes. On the one hand, all transactions are validated by reference to the consensus rules of the Bitcoin network. Invalid or malformed transactions are rejected based on the rules and therefore miming provides security for the network. On the other hand, with each new block that is created a certain number of new Bitcoins are created that are called block reward. They are incentivizing network users to commit their processing power to the network. The block reward per block is limited and reduces over time according to a prefixed schedule (Antonopoulos, 2014, p. 26). The security to the network is provided by the work the miners had done to mine the block. Each newly created block includes the hash of the previous block. If someone wants to reverse a transaction he has to put in all the work the miner put in that block but on top of that, he also has to put in all the work of the blocks that were created afterward. Therefore, the longer a transaction is validated the harder and more expensive it gets to reverse this transaction. At the same time, it also solves the problem of double-spending. This is the case if a certain amount of Bitcoin is spent twice. Because of the decentral nature of the network and the consensus mechanism PoW, a user can only spend his Bitcoin once (Nakamoto, 2008, p. 2). The timestamp of each transaction forms a history of all transactions. In case of competing transaction histories, that can occur in a peer-to-peer network, the user believes the chain that has the most PoW delivered and that resolves the conflict quickly. This is also because each PoW process was validated by at least 51% of the miners of the network. The network is secure as long as no individual party controls more than 51% of the networks processing power (Becker et al., 2013, p. 136). Miners have the possibility to work with other miners together by combining their processing power and therefore have a higher chance of finding the right solution first. If miners

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join forces with others, it is called a mining pool. Because of the huge amount of processing power that is required to find the right solution for the problem it is very common that Bitcoin miners are joining mining pools. The biggest mining pool today, BTC.com controls approximately 22% of the total processing power. The five biggest mining pools control more than 56% of the processing power and of the complete network (Blockchain.com, 2018a, p. 1). In the first few years, miners were able to mine using their computers central processing unit (CPU). Since more and more miners appeared in the Bitcoin network the problems got harder as well. It soon was not cost efficient enough to mine with CPU´s, miners start repurposing graphic cards (GPU) because they provided much more cost-effective hashing power. Today the most cost-effective mining is done using an application specific integrated circuit (ASIC) mining chip. These ASIC chips consist of multiple copies of the identical circuit on a very small chip, which represents the most cost-efficient technology in small units available to the users for a pro- portional price (Miller, Juels, Shi, Parno, & Katz, 2014, p. 87). For miners, the costs of running these ASIC miners is essential to their business success. It is because of this that if a miner sets up his operation he will employ hundreds if not even thousands of these ASIC miners. Some voices in the Bitcoin community argue because of the ASIC miners and the mining pools, the decentralization is not given any- more and that the Bitcoin network is becoming more and more centralized (Smith, 2018, p. 1). Bitcoin has currently a block size of 1 MB and a block time of ten minutes. Combining these numbers it shows that the Bitcoin network can process a maximum of seven transactions per second (Eyal, Gencer, Sirer, & Van Renesse, 2016, p. 45). Compared to Visa or Mastercard, who are able to process more than 10.000 transactions per second Bitcoins throughput looks like a joke. A scalability solution is urgently needed for the Bitcoin network (Vermeulen, 2017 p. 2). One proposed solution is the lightning network. It was introduced in early 2016 and proposes a solution that would allow the Bitcoin network to process more than 10.000 transactions per second. With this solution, people that would transact frequently with each other could open a payment channel for as long as they need to transact. The only transaction that is recorded on the main Bitcoin blockchain is the first and last transaction between those two individuals. Using this solution, fewer transactions need to be recorded and therefore the blockchain is lighter. The users that have an open channel can send as many transactions to each other and once they are done transacting the last balance will be recorded. This scaling solution is currently in the live test phase and the first tests were concluded successfully (Poon & Dryja, 2016, pp. 3- 4). For detailed information about the Bitcoin technology Nakamoto (2008) is referenced. At the time of writing Bitcoin (BTC) was ranked as number 1 crypto currency in regard to market cap, which was above $140 billion with a trading volume of roughly $4 billion. The price of 1 BTC is at $8.172 with a circulation supply of 17.178.612 BTC (Coinmarketcap, 2018d, p. 1). Bitcoin has a maximal supply of 21 million BTC and a new block is created every 10 minutes and 12.5 BTC are newly issued.

2.5 Ethereum’s Blockchain The second crypto currency for this paper is Ether (ETH) the crypto currency of the Ethereum blockchain. The Ethereum project was proposed by Buterin (2013) and its mission is to build a generalized technology. It can host transaction-based state machines concepts and can be seen as a blockchain infrastructure project, that wants to enable others to build decentralized applications (dApp) on it. The Ethereum blockchain is designed to provide a tightly integrated end-to-end system for blockchain developers in order to build their software on top of it. It can be described as a trustful object messaging compute framework (Wood, 2014, p. 1). When Buterin (2013) proposed the concept of Ethereum he

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included the feature of smart contracts. These smart contracts are programmable contracts that are self- executing and can be fed with real-time data or execute at a predetermined time or event. This allows for example that two unknown individuals can exchange currencies without the risk of one party cheat- ing the other. The ultimate abstraction foundational layer is the key to Ethereum´s function. It’s a built- in turning-complete programming language that enables developers to write smart contracts as well as decentralized applications. Furthermore, they are also able to create their own arbitrary rules for ownership, state transaction functions, and transaction formats. Smart contracts secure a value in a cryptographic box and it is only unlocked if prescript conditions are met (Buterin, 2013, p. 13). The Ether is designed to pay the transaction costs resulting from the Ethereum blockchain, but it quickly got accepted as a payment for initial coin offerings (ICO), products and services (Schwarz, 2018, p. 1). The main form of payment for Ether is ICO’s where projects give investors the option to purchase their project token for Ether before there are publicly traded. It can be compared to an initial public offering (IPO), but the regulations are way stricter compared to an ICO. This funding method grew so popular in 2017 that in total 913 publicly known ICO were conducted. In total all ICO´s raised more than $6 billion and on average collected $12.7 million (Kornilov; et al., 2018 p. 19). As a consensus algorithm, Ethereum uses currently also PoW but was proposing from its whitepaper on to switch to a more energy efficient consensus algorithm called proof of stake (PoS) (Buterin, 2013, p. 17). The problem a lot of users and other shareholder have with Bitcoin is the energy consumption its PoW needs to find consensus. In order to avoid this situation, Ethereum plans to switch to PoS. This consensus algorithm allows for fast validation while using a lot less energy compared to PoW. Some people argue that the Bitcoin network consumes 0.14% of the global energy consumption as well as more power than some developing nations (Tayo, 2017, pp. 1-2). The energy consumption issue was noticed by King and Nadal (2012) and he proposed a different method for finding consensus in a network. PoS uses validators (equivalent to miners in PoW) that have to stake coins that have a respective age. Once a validator stakes a certain amount of coins it will be time-stamped at what time and date he moved those coins to the current address. As soon as the staked coins are moved to another address the age of the stake starts over (King & Nadal, 2012, pp. 2-4). The stake can be compared to a security deposit. This means that the validator holds a significant stake in the network with an aging commitment along with other factors, has a higher chance to validate a block. This mechanism helps to build trust between the network and loyal validators. Validators earn in return, depending on the project parts or all the transactions fees (BitFuryGroup, 2015, pp. 6-7). The main advantages of PoS are that it does not consume large quantities of electricity and there is no need for expensive mining equipment (Ray, 2018, p. 3). The Ethereum project started out using the PoW algorithm but had always the ambition to switch this algorithm to PoS. It is important to understand that this switching is not a simple task, especially in the light that the new source code, with the name Casper, will not be compatible with the current Ethereum blockchain. This means that in order for Ethereum to switch from PoW to PoS the blockchain needs to undergo a hard fork (chain split). Furthermore, the new source code needs to be audited very thorough in order for the network not losing its security and endangering the funds stored on it. Currently, it is unknown at what exact time the Ethereum consensus algorithm will be changed (Jagati, 2018b, pp. 1-2). Another feature of the Ethereum blockchain is the smart contract. They are programmable contracts that execute under a certain condition or to a certain time. The trustless execution is the key feature of the smart contract. For example, Bob agrees to pay $500 for a desk from Alice that will be delivered in a month. For this transaction, they will use a smart contract, where Bob sends $500 in Ether to the smart contract address and Alice delivers the desk to an escrow location using a private key to access it. The

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code of the smart contract can determine if the agreed terms are met, in this case, Bob has paid, and the month is over. If the terms are met, the smart contract can execute and transfer Alice the $500 in Ether and give Bob access to the desk by transferring the private key (Song, 2018, p. 2). By today’s standards, smart contracts are still only working in a very easy way because the complexity is limited. Software developers are working on smart contracts that can manage the complete lifecycle of legal contracts. Ethereum’s smart contracts use the programming language Solidity and a wide range of developers have the skill to create smart contracts as well as decentralized applications using this programming language (Clack, Bakshi, & Braine, 2016, p. 1). For detailed information about the Ethereum technology Buterin (2013) is referenced. At the time of writing Ether was ranked as number 2 crypto currency in regard to market cap, which was $46 billion with a trading volume of roughly $1.5 billion. The price of one Ether is at $464 with a circulation supply of 100.995.943 ETH (Coinmarketcap, 2018f). Ether has no maximal supply, meaning that it is an inflationary currency compared to Bitcoin (Buterin, 2013, pp. 19-20). For the Ethereum blockchain a new block is created every 10 to 20 seconds and with it 5 ETH are newly issued (Castiglione, 2018, p. 3).

2.6 Monero’s Blockchain The third and last crypto currency that is analyzed in this paper is the privacy currency Monero (XMR). Monero was chosen for this analysis because of its privacy feature and the possible use cases that can result from it. Monero was officially launched in 2014 under the name BitMonero, which was shortly afterwards shortened to Monero. It is based on an application level cryptographic protocol called ring signature. This protocol has its primary focus on privacy. It was originally proposed by Saberhagen (2013) and publish in the research paper called Crypto Note v2.0. While utilizing this privacy protocol it is not possible for outsiders to track transactions that occurred in the Monero network (Mangal, 2017, p. 1). A ring signature is composed of different signers. An actual signer is combined with other non- signers to form a ring. Within the ring, the actual signer and non-signers are considered to be equal and valid. A one-time spender key is used by the actual signer that corresponds with an output from the sender’s address. The non-signers are drawn from the Monero blockchain and consist of past transactions. These past transactions can be viewed as decoys because they are forming part of the inputs of a transaction. For an outsider, all inputs appear equally likely to be the transactions output. By utilizing the ring signature Monero enables its users to mask all transaction in order not to be traceable. It helps the sender to mask the origin of a transaction because all inputs are indistinguishable from one another (Noether & Mackenzie, 2016, pp. 3-6). Because Monero utilizes the ring signature algorithm there must be a way to verify the transaction outputs in order to avoid the double spending problem. Monero solves this by using a key image, that is a cryptographically secure key that derives through a transaction output being spent and it attached to every ring signature. On the Monero blockchain, only one key image exists for each transaction output. Furthermore, it is not possible to trace the key images back to a specific output because of its cryptographically secure nature (Asolo, 2018, p. 2). The Monero client lets the user configure the default setting in regard to mixing processes (Möser et al., 2018, p. 144). Another feature that improves the privacy of Monero is the stealth addresses. Stealth addresses can be compared to a one-time public key address that is only valid for one transaction. This one-time public key is automatically linked with the recipience wallet. These stealth addresses are unlinkable to the original public address and any other one-time address. Additionally, only the recipient can link all the payments together. It is possible to audit this one-time public key by third-party auditors. In addition to

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the one-time public key, each wallet has a private view key as well as a private spend key. The view key can be handed out to auditors or other entities that need to see what transactions are taking place using this wallet. The private spend key can be compared to Bitcoins private key (Mangal, 2017, p. 4). Monero uses the same consensus algorithm as Bitcoin does. The PoW algorithm distinguished itself from the one Bitcoin uses in different aspects, one in particular. When the hardware firm Bitmain accounted that it will start manufacturing ASIC chips that are designed to mine Monero, the community decided to upgrade the PoW algorithm in order to be ASIC resistant. This upgrade was conducted using a hard fork. This step was done because users of Monero feared that mining centralization could become a problem once Monero could be mined using ASIC miners. The ASIC miners for Bitcoin and other blockchains using PoW are designed to especially mine utilizing the SHA256 hash algorithm. With the hard fork, the Monero PoW algorithm was changed that the ASCI miners for the SHA256 algorithm would not work (Project, 2018, p. 1;5). Another special aspect about the Monero’s blockchain is that it does not have a fixed block size. The blockchain allows for flexible sizes of blocks, which can help to handle a lot of transaction at peak times by easily adjusting the block size. Technically there is a limit on how big single block can get. Miners that produce blocks that are bigger than the median of the past 100 blocks will get a penalty. This is one step Monero takes to prevent network spam attacks. Monero is a very community driven project and had until now six hard forks. These hard forks resulted in Monero 0, Monero Original, Monero Classic, Monero-Classic, MoneroC, MoneroV and the original Monero. All versions of Monero have some adjustments to its blockchain setting in regard to privacy, scalability and security (Mangal, 2017, p. 3;5;17). For detailed information about the Monero technology Saberhagen (2012) and Saberhagen (2013) is referenced. At the time of writing Monero is ranked as the 12th largest crypto currency by market capitalization with $2 billion. Its daily trading volume is approximately $25 million with a current price of $137. Currently, there is a circulating supply of 16.264.830 XMR where the maximum supply is limited to 18.300.000 XMR (Coinmarketcap, 2018i, p. 1). Even after the maximum supply is reached the block reward will never drop below 0.3 XMR. The Inflation of Monero is calculated with 1% by the year 2022 with the nominal inflation steady at 0.3 XMR per minute. This 0.3 XMR are used to incentive miners to continuously mine Monero (Bovaird, 2017, p. 4).

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3 Methodology This research paper will use a case study approach, in order to show the emergence and slow mainstream adoption of the three selected crypto currencies. The case study research method enables the exploration and understanding of the topic of crypto currencies. This approach was chosen in order to select three different cases and examine them individually and then combine their output in order to come to a conclusion. One definition of the case study research approach is „as an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used” (Yin, 1984, p. 23). Researchers have considered the case study approach to be a robust method when a holistic and in-depth analyze is important. The case study approach has been used in different research areas, for example, Johnson (2006) in community-based problems, Gülseçen and Kubat (2006) in education and Grässel and Schirmer (2006) in sociology research. One reason why researchers apply the case study method is to overcome the limitations, which can occur within the quantitative methods (Zainal, 2007, pp. 1-2). When using a multiple case study approach, each case will be treated as an individual case and each conclusion will contribute information to the whole study. Furthermore, while carefully selecting individual cases with different use cases it will help to gain valuable insights. One advantage of the case study approach is the ability to gather data from multiple sources (Soy, 1997, p. 2). Some researchers have criticized the robustness of the case study as a research approach (Zainal, 2007, p. 3). Therefore, the selection of the right case study design is very important. For this research paper the crypto currencies Bitcoin Nakamoto (2008), Ethereum Buterin (2013) and Monero Saberhagen (2013) were carefully chosen. Each crypto currency will be analyzed for its core features and what different use case they have. More- over, the development of each crypto currency will be shown and examined to find out what led to the popularity of each crypto currency. In a next step, today’s situation is stated in order to show different selected real use cases for these crypto currencies. A very important factor to analyze is the economic impact and value of each crypto currency is generating. It is especially interesting what new innovation these crypto currencies have triggered and what economic value companies created because of these crypto currencies. All resources and information for this paper were gathered in the time from week 16 to week 31 of 2018. Because the academic sources are limited in regard to this research field additional internet sources were used. For academic papers the databases Scholar, ABI/Inform, EBSCO Business Source Premier and Science direct were used and keywords like crypto currency, Bitcoin, Ethereum, Monero, blockchain, economic impact of crypto currencies, crypto currency mining, proof-of-work, proof-of-stake, Bitcoin and banks, crypto currency asset class and many more were used to find and identify relevant literature. For the searches of internet literature google, bitcointalk.org, Reddit, and other crypto currency related forum and content provider were used to generate the needed literature. The keywords that were used to find this literature are similar to the keyword used in academic literature. Additional to these literature sources different books have been used to generate the needed information for this case study as well as podcasts. The next chapter will present the first case the crypto currency Bitcoin.

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4 Case Study Bitcoin Since the introduction of Bitcoin in 2009 it has been constantly updated and evolved to an asset class that is worth more than $140 billion by today (Coinmarketcap, 2018b, p. 1). This chapter will show the events that led up to the status that Bitcoin has reached today. First, the events between 2009 and 2013 will be shown followed by the events from 2014 till today. It is important to note that this research paper points out the most important events that lead to the development of Bitcoin as we know it today and therefore not all events ever occurred will be shown. This is also the case of Ethereum and Monero. The next section will briefly explain what an economy has formed around Bitcoin, followed by a few selected use cases.

4.1 Bitcoin 2009 – 2013 The journey of Bitcoin started long before the whitepaper of Nakamoto (2008) was published. One of the first PoW algorithm was proposed by Adam Back in an E-Mail to the Cypherpunks in March of 1997. It was called Hashcash. By August of 2008 the official Bitcoin domain bitcoin.org was registered. Less than three months after that Nakamoto (2008) released the first public version of the Bitcoin whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. The official date of the release was depending on the time zone on October 31 or November 1st of 2008 (Gwern, 2011, pp. 2-3). It is not publicly known who or what group was exactly responsible for creating Bitcoin. All communications and publication were made using the pseudonym Satoshi Nakamoto. Hal Finney was the first testers of the Bitcoin protocol. Nakamoto sends him a copy in November in order to test it and fix some early bugs (Popper, 2015, p. 10). On January 3rd, 2009 the Bitcoin protocol went live with the establishment of the genesis block. The Software version Bitcoin 0.1 was released just a few days afterward. The first ever transaction made using the Bitcoin blockchain happened on January 12th, 2009. The transaction was made by Nakamoto and he sends Finney 10 BTC (Blockchain.com, 2018b, p. 1). A very important event was the first BTC-USD exchange rate, which was first posted by New Liberty Standard, $1 was worth 1.309,03 BTC. The exchange rate was calculated using the average amount of electricity that was required to run a computer with high CPU power for an entire year (1331.5 kWh). This was multiplied by the average residential electric costs in the US ($0.1136) divided by 12 months. This number was then divided through the amount of BTC a computer was able to mine over the past 30 days. About a week later the first Bitcoin to fiat transaction was made, where New Liberty Standard bought 5.050 BTC for $5.02 (NewLibertyStandard, 2009, p. 1). By the end of 2009, the software developer Martti Malmi has joined Nakamoto for the development of Bitcoin and he was the first developer who had the full permission to change the codebase. The first software update version 0.2 and the log of changes to the software showed that Malmi was now the main actor. The first difficulty adjustment took place on De- cember 30th,2009 (Popper, 2015, p. 13). The day of May 22nd, 2010 marked the first Bitcoin pizza day. This was the day when Laszlo Hanyecz (laszlo) made the first purchase of a good using Bitcoin. He traded 10.000 BTC, which were approximately $40, for two pizzas. With this transaction, Bitcoin reached a milestone and proofed it could be used to purchase goods or services (laszlo, 2010, p. 2). The next milestone for Bitcoin was the announcement and the later formation of the first big Bitcoin exchange called Mt. Gox It was announced on July 18th, 2010 by Jeb McCaleb who later went on and found Ripple. Mt. Gox is known as the exchange that had the biggest theft of Bitcoins till today. The Bitcoin community grew slowly but steady and more and more people heard about it. This led to the event on November 6th, 2010. It was the date when the

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market capitalization of Bitcoin surpassed $1 million for the first time. Roughly around the same time, 1 BTC was worth $0.3 (Norry, 2018, p. 1). The first real used cases for Bitcoin was introduced at the beginning of 2011 with the concept of the Silk Road, that was the first darknet market to use Tor and Bitcoin escrow. By late April early May of 2011, the final E-Mails from Satoshi Nakamoto were sent. After that no one has ever heard of him again, leaving the community to wonder who he is and what he is doing currently. In his last E-Mail, he left Gavin Andreson in charge of the Bitcoin project. Other consumer services were also launched in this year. Wikileaks, for example, started to accept donations in Bitcoin. BitPay, the first payment service provider for Bitcoin was introduced and run on an App for iOS and Android. This allowed merchants to accept Bitcoin as a means of payment for their products and services, while in the backend BitPay exchanged the Bitcoins for Fiat currency and paid the merchants with it. More and more exchanges opened up allowing users to trade Bitcoin for other currencies (Crown, 2016, p. 3). On June 19th, 2011 the first major hack of a Bitcoin exchange occurred. The exchange Mt. Gox, which was one of the most used and popular ones at that time, got hacked by a compromised computer belonging to an auditor of the company. The trading price of popular was artificially altered from $17 to just one cent and then 2.000 BTC were taken from customer accounts and sold. Furthermore, another 650 BTC were purchased at the penny price and never returned (Norry, 2018, pp. 1-2). In August 2011 the first Bitcoin improvement proposal (BIP) was submitted, explaining what a BIP is and what its aim is. BIP are proposals by the community for improvements to the Bitcoin protocol (Luke-jr, 2011, p. 1). Till mid-2012 there where a lot of efforts taken by the Bitcoin community to promote and upgrade Bitcoin. The first Bitcoin conference took place and more and more people heard about the new currency Bitcoin. The company Coinbase was founded in June of 2012 and would go on to become one of the major crypto currency exchanges in the US by 2018. Another important milestone for Bitcoin was the establishment of the Bitcoin Foundation on September 27th, 2012 (Liu, 2014, p. 1). By the end of 2012 other merchants like WordPress.com and Overstock.com are accepting Bitcoin for purchase as well as upgrades and the trading price for 1 BTC was at around $4 (99Bitcoins, 2018, p. 1). In early January of 2013, the Bitcoin startup 21e6 was founded. The company specialized in producing special Bitcoin mining chips that would enable any individual to mine Bitcoin efficiently. The first ASIC chips where delivered to customers by the end of January. A month later the Bitcoin update 0.8.0 was released, which increased the volume of transactions that were possible to be processed (Popper, 2015, p. 17). The market capitalization of $ 1 billion was passed on March 28th, 2013 starting a very early slow but steady adoption of Bitcoin. US-Authorities announced that Bitcoin and other virtual currencies are subjected to anti-money laundering regulations. Despite the negative news for Bitcoin, the users saw this statement as a sign of recognition form the authorities and the price rose from $180 at the beginning of April and broke the $200 barrier short afterward (Dörner, 2013, p. 1). The Exchange Mt. Gox went on the be the world’s largest exchange for Bitcoin despite a lot of struggles behind the scenes. The US Department of Homeland Security investigated a subsidiary of Mt. Gox in regard to operating as an unregistered money transmitter, which resulted in the seizure of $5 million from the company’s bank account. As a result of this, the company was not able to pay out dollar withdrawals which resulted in delays. Because of this and other factors, Mt. Gox lost its place as the world’s largest Bitcoin exchange by the end of 2013. In April 2013, the Winklevoss twins announced that they own 1% of all 21 million Bitcoins. Furthermore, a few months later they announced that they were launching the first stock traded Bitcoin fond. Another test for Bitcoin was the closure of the darknet market Silk Road. US Authorities arrested the person behind the website and seized all Bitcoins, which had an estimated value of $3 million at that time. At that time Bitcoin’s, main use case was for the purchase of goods on the website Silk

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Road. Despite this event, the acceptance grew further and at the beginning of November the first Bitcoin ATM`s were introduced in Canada (Dörner, 2013, p. 2). On November 18th of the same year, the US Senate had a hearing in regard to digital currencies. Federal officials indicated that digital currency networks offer benefits for the financial system with the acknowledgment that these new digital currencies provide avenues for money laundering and other illegal activates. This hearing boosted Bitcoin enormously. It was conceived as a very positive signal that the US Senate is discussing the topic of Bitcoin not only in regard to money laundering and criminal activities. Shortly after the price of 1 BTC surpasses $700 (Times, 2018, p. 2). More positive signals came from China when a subsidiary of the Chinese internet giant Baidu announced that they accept Bitcoin as a payment. Furthermore, reports about Bitcoin were broadcasted on the state own TV-program CCTV. The Chinese based demand for Bitcoin pushed the price of 1 BTC above $1.200. By that time the Chinese Bitcoin exchange BTC-China had surpassed the daily trading volume of Mt. Gox. At the end of December 2013, Chinas positive attitude toward Bitcoin changed. The Chinese government forbids private bank from trading Bitcoin, the central bank of China warns that there are dangers associated with the unregulated currency and Baidu’s subsidiary stops all activities in regard to Bitcoin payments. BTC-China also stops all deposits in Yuan and the fear that China could completely ban Bitcoin pushed the price down, which stabilized at the end of the year between $650 and $800. Overall 2013 was a huge year for Bitcoin especially that it gained, in the mind of its community, some sort of legitimization from the US Authorities (Dörner, 2013, pp. 2-3).

4.2 Bitcoin 2014 – 2017 The year 2014 started out quite well for Bitcoin with its price at around $750. At the beginning of the February Apple banned all Bitcoin apps from their App Store, which resulted in protests again that policy (CCN, 2015, p. 1). A few days later the exchange Mt. Gox suspended all withdrawals, which marked the beginning of the collapse of the exchange. On February 19th, 2014 all trading was suspended and the exchange went offline. Within a few days, an internal document surfaced that claimed hackers had raided the exchange and stole 744.408 BTC belonging to the customers as well as additional 100.000 BTC of Mt. Gox holdings. This led to Mt. Gox filing for bankruptcy protection in Japan as well as the US. An investigation revealed that the hack has started as early as September of 2011 resulting in Mt. Gox operating while being technically insolvent for a period of two-year leading to the complete loss of all its Bitcoins by mid-2013 (Norry, 2018, p. 4). In March Mt. Gox reported that it had found 200.000 BTC on an old wallet. These Bitcoins are held at a trust while the company remains under bankruptcy protection. The collapse of one of the biggest exchanges caused a fallout. The confidence in the market dropped to a new low resulting in a Bitcoin price in April of $460 (CCN, 2015, p. 2). In the meantime, the software version 0.9.0 of the Bitcoin code was released using the name “Bitcoin Core” rather than “Bitcoin-Qt”. This was done in order to reduce the confusion between Bitcoin the network and Bitcoin the software (BitcoinCore, 2014, p. 1). Approximately at the same time, the Internal Revenue Service (IRS) announces that it will treat Bitcoin as property for tax purposes. In May the first Bitcoin bank was launched. Circle insured deposits that hat 0% fees and claimed to maintain 100% reserves. In June Apple reverses its ban on Bitcoin apps and allowed mobile wallets applications in the App Store. Japan surprised the world in June when it announced that it will not regulate Bitcoin and will become a Bitcoin- friendly nation (CCN, 2015, pp. 3-4). In July the NYDFS announced that it will impose a virtual currency regulatory framework (BitLicense). In a first step, this resulted in exchanges having to apply for a license if they operated in the state of New York. The regulators expected that other types of virtual currency companies will apply in the near future (Hughes, 2014, p. 67). All these new regulations, as 15 Crypto Currencies

well as the aftermath of Mt. Gox, lead the Bitcoin price of approximately $330 at the beginning of October (Coinmarketcap, 2016, p. 1). The Belizean company 247Exchange secured an agreement with over 400 banks in Europe to allow direct Bitcoin purchase for their customers. This was an unbelievable achievement that did not last long. 247Exchange was a too small player in the market, punching above its weight and the agreement fell apart within the following weeks (Smart, 2014, p. 2). By the beginning of December Microsoft announced that it will accept Bitcoin as a payment for apps, games, and videos from online stores. The payment processing startup BitPay had signed a partnership agreement with Microsoft to process its payments. Other companies like Dell, Expedia, and Overstock.com had also begun to accept Bitcoin (Sparkes, 2014, pp. 1-2). Overall the year was a rather dark one for Bitcoin. At the end of the year, the price for 1 BTC was at $320. The Mt. Gox shock was still present and the imposing new regulations where party responsible for the price decline in 2014. Within the Bitcoin community, there was still hope that it would recover especially with the recent news that ten merchants in the US with a revenue above $1 billion would start to accept Bitcoin payments. Furthermore, Coin- base expanded its operations to support the acceptance of payments for the publisher Time Inc. (Hern, 2014, pp. 1-2). The Bitcoin networks adoption had grown to a number of estimated daily transaction of more than 97.000 and an estimated number of 15.8 million Bitcoin wallets by December 2014 (Cordell, 2016, p. 1). 2015 started for Bitcoin with a big bang. The exchange Bitstamp had announced that six of its employees were targeted in a week-long phishing attempt. This led to the theft of just under 19.000 BTC with an estimated value of $5 million. The employees were attacked through the attamed to distribute files con- tained malware via Skype and email communications (Higgins, 2015, p. 1). Coinbase announced in January that it completed a $75 million series C funding round. This funding round was a huge success considering investors like the New York Stock Exchange, Fortune 500 financial service group USAA, the Spanish bank BBVA and the Japanese telecom company DoCoMo participated in the funding round. Coinbase wants to use this money to grow its employee sizes as well as improving its mobile products (Rizzo, 2015, pp. 1-2). An important event was the conviction of Ross Ulbricht, not in regard to the direct development of Bitcoin but rather as an example case from the US authorities for using virtual currencies in an illegal matter. Ulbricht was sentenced to life in prison for his creation of the darknet marketplace Silk Road. In addition to that, he was fined to a massive restitution of more than $138 million. The prosecution had estimated that this would have been the estimated value of the total sales of illegal goods (Greenberg, 2015, pp. 1-2). The Chinese attitude of 2013 had eased by now and a report by Goldman Sachs found out that 8 out of 10 Bitcoin trades, buying and selling involves the Chinese Yuan. The report estimates the surges is a result of a weakening confidence in the Chinese economy and the weak Yuan. The price at that time was still below the all-time high of 2013 sitting at approximately $275 but the trading volume started to increase of which 50% of Bitcoin transaction where made in China (Cordell, 2015, p. 1). Late in April, a surprising statement from the global stock market giant Nasdaq was published. They were exploring how a blockchain-based solution could change the way shares are transferred and sold manually. Nasdaq would later reveal that it was testing it in the Nasdaq private market, a private marketplace that was launched in January 2014. The proof-of-concept would then be revealed at the Money 20/20 conference in November of 2015. The New York BitLicense was passed in June. Soon after the Bitcoin exchanges ItBit and Gemini launched their services in New York, operating with a banking charter. Later, the Startup Circle was able to secure one of the first and for a long period the only BitLicense in New York (Palmer, 2015a, p. 4). In July Bitcoin and other virtual currencies were banned in Ecuador by the national assembly (Tiwari, 2015, p. 1). The software development of the Bitcoin code was continually maintained and improved. By July 12th the software version

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0.11.0 was released with upgrades in regards to speed and blockchain size (BitcoinCore, 2015, pp. 3-4). On August 19th a flash crash occurred on the Hong Kong based exchange Bitfinex. The Bitcoin market price dropped by 14% in a period of just 30 minutes. The price on Bitfinex dropped by 29% from originally $214 to $179 (Palmer, 2015b, p. 5). Mark Karpeles the owner of the bankruptcy Mt. Gox exchange admitted that he had tampered with users balance for his personal gain. He was later charged in Japan for embezzlement while Mt. Gox customers were still waiting for a reimbursement of their funds. Add- ing this news on top of the already bad Mt. Gox news, which resulted in a major hit for Bitcoin’s health on a whole. In the meantime, the seized Bitcoins from the Silk Road were auctioned off by the US authorities. The last batch of 44.000 BTC were sold in November. Overall the month of November was a good one for Bitcoin. Market shifts caused huge growth, partly done by the Chinese Bitcoin market. The Bitcoin black Friday was a major success enabling Bitcoin users to find great deals. The number of transactions, as well as the volume, spiked up and afterward remained on that level. Another important event that occurred in December is the continued debate about the block size. Supporters for both sides advanced where the majority of the miners want to increase the block size. A larger block size would generate higher transaction fees for miners. Other argued that an increase in block size and the associated fees will stifle global adoption (Cordell, 2016, pp. 5-7). Overall 2015 was a mixed year for Bitcoin. On the one hand, regulators cracked down on Bitcoin and made an example by sentencing Ulbricht to life in prison for creating Silk Road. Furthermore, big exchanges like Bitstamp where hacked and a lot of users lost their funds. On the other hand, the increase in Bitcoin trading volume, the growing usage in China and the attention that big companies were giving Bitcoin as well as the blockchain technology helped Bitcoin to continually grow. Additionally, more and more blockchain based startups were founded and received huge funding’s from public and private investors. Especially in regard to the development of the Bitcoin software, it was a year with a lot of progress and improvements. The Bitcoin price reached a high of $465 at the end of 2015 (Palmer, 2015a, pp. 4-6). Starting 2016 a 1 BTC was priced at around $430 with a total market capitalization of $6.5 billion (Coinmarketcap, 2018c, p. 7). On January 25th, 2016 the Bitcoin network exceeded the power of one Exa Hash/s. This can be translated into 10.8 ZettaFLOPS per second, making the Bitcoin network the most powerful network on earth. In comparison to the world`s fasted supercomputer Tianhe-2, which is able to do 34 PetaFLOPS, the Bitcoin network is roughly three hundred thousand times more powerful. Having this network metrics was a very important achievement for Bitcoin because it showed the underlying health of the distributed currency and its network. Many argue that this health is a more important indicator than median coverage or value speculation. Over the long term, the number of miners will increase, regardless of some short-term issues. With the network power constantly growing one of the network effects – the value of a good will increase with the number of people using it - will rise as well (O`Ham, 2016, p. 1). Starting in 2015 the Bitcoin scaling debate continued through 2016 with more traction than before. The scaling debate had the community and its actors divided. One side wanted to increase the block size from 1MB to 2MB in order to be able to process more transactions per second. This scaling solution is called on-chain scaling (McManus, 2017, pp. 1-2). The other side was convinced that the on-chain scaling solution was not a long-term solution and proposed an off-chain scaling solution called Segregated Witness (SegWit) that was announced with BIP 141 in December 2015. With current (2016) Bitcoin transactions (non-SegWit) the needed signatures to unlock the inputs are stored in the hash with the rest of the transaction data. SegWit transactions are different in two ways. Firstly, the signature data is not included in the hash, but they are still stored as part of the “witness” data in the block with the transaction. The second difference is that the block size changed from 1MB (1.000.000 bytes) to a 4.000.000 “weight” limit. This weight limit is an arbitrary new metric. A witness byte has a

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weight of 1 whereas a normal byte in a transaction has a weight of 4 (Lombrozo, Lau, & Wuillie, 2015, pp. 2-3). On February 10th a hard fork of the Bitcoin network occurred, and Bitcoin classic was initially released. Bitcoin classic had implemented a block size limit increase to 2MB. With this hard fork, the on-chain scaling solution was supposed to be initially tested. (Andresen, 2016, p. 1). The off-chain scaling solution was led by the Bitcoin core development team. They release the code for SegWit in April to the community. Since the code was new it needed intensive testing that took place over the next half year. The debate started to intensify when both sides started to promote their solution more aggressively (Morgan, 2017, pp. 10-12). Since the value of Bitcoin and other virtual currency rose over the past years, scammers started more and more to appear and use the new technology for their advantages and created numerous of scam projects with the sole purpose of scamming investors out of their Bitcoin and other currencies. One of those was HashOcean. With was advertise as cloud mining platform where investors could invest BTC and in return, they would get a daily / weekly / monthly payout. By the end of June, the HashOcean website was down, its YouTube and Facebook pages both erased (Ogundeji, 2016b, p. 1). Three separate online petitions were started by individuals who lost their investment with HashOcean. The petitions were seeking to get the interest of several trans-border law enforcement agencies, for example, the FBI, CIA, Interpol and the MI6. Furthermore, several hackers have tried to follow the digital path of HashOcean back to its founders but were unable to find the individuals behind HashOcean. A member of the hacking team claims they were contacted by a representative of HashOcean offering them 100 BTC if they would stop trying to get HashOcean (Ogundeji, 2016a, pp. 1-2). On July 10th the Bitcoin halving event took place. This was the second time such an event took place. This marks the point where the block reward is halved. Before this date, miners would get a reward of 25 BTC per produced block, whereas after July 10th they will receive 12.5 BTC per produced block. The Bitcoin code is designed that these halving events occur roughly every four years. In the time leading up to the event, the speculations of what would happen especially in regard to the price development where abundant. The price rose from the beginning of the year to an approximately $650 before the halving. The anticipated price shift, however, did not occur with a price of $675 after the event (Wirdum, 2016, p. 1). The Bitcoin community was shaken once again when on news circled that the exchange Bitfinex was hacked and roughly 120.000 BTC where stolen with a market price of approximately $66 million. For a long period of time, there was the common belief that multi-signature wallets were the best and most secure way to store funds in a hot wallet. The Bitfinex wallet was a multi- signature wallet and showed once again that just multi-signature wallets alone are not secure enough. By the time the hack occurred Bitfinex was a very big and established exchange and on the one hand a hack was not expected and on the other hand, Bitfinex had enough funds to survive the loss of these funds (Bergmann, 2016, p. 2). Bitfinex announced on April 3rd,2017 that it had reimbursed all its customer with their funds that were lost during the hack (Keirns, 2017b, p. 1). The US IRS rocked the Bitcoin community when it chose a brute-face force in the enforcement mechanism for Bitcoin and other virtual currencies. The IRS demanded all user data in the timeframe from January 1st, 2013 to December 31st, 2015 of the exchange Coinbase. The same summon was already issued in the UBS offshore scandal in 2009 (Winters, 2016, pp. 1-2). Coinbase heavily fought the summons but ultimately, Coinbase would lose the fight in a San Francisco court in November of 2017 (Sihannon Liao, 2018, p. 1). The Bitcoin price began a strong rally in late 2016. At the end of October, 1 BTC was traded at around $700. By end of December, the price would increase to approximately $960 (Coinmarketcap, 2016, p. 1). The price surge was partly pushed by the Chinese market because of the devaluation of the Yuan. Furthermore, the isolationist rumbling in the UK and US and an increasing acceptance by consumer and business pushed the price of Bitcoin in 2016. Also, the regulators starting to take a clear first stance on the topic of Bitcoin. The Russian Deputy Finance Minister announced that Bitcoin did not represent a threat to

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the financial ecosystem in Russia and therefore the plan to ban virtual currencies including Bitcoin was put on hold. State regulators initiatives increased in the US and resulting in states proposing bills, pub- lishing guidance document and approving companies with a license to operate (Coleman, 2016 p. 9). The Bitcoin price was at approximately $1.000 by the beginning of 2017 and had a market capitalization of roughly $16.5 billion (Coinmarketcap, 2017, p. 1). The price dropped between January 4th and Janu- ary 6th from $1.139 to $752. This was because the Chinese central bank announced that it had launched investigations into the some of the biggest Chinese exchanges in regard to money laundering, unauthor- ized financing, possible market manipulation and other issues. Following these investigations, these exchanges suspended withdrawals of Bitcoin. In March the Security and Exchange Commission (SEC) denied two requests for a Bitcoin exchange-traded funds (ETF). It based its decision on the unregulated nature of the Bitcoin market and that without regulatory mechanisms in place the risk for investors would be too high. In the meantime, Bitcoin reached for the first time ever a price of $1.268 (BEG, 2018, p. 2). On April 1st a law was put in place in Japan that would recognize Bitcoin as a legal method of payment. The new law included that exchanges and other Bitcoin companies must apply strict Know- Your-Customer (KYC) and Anti-Money-Laundering (AML) rules for their operations. Furthermore, it included capital requirements, cybersecurity and operational stipulations for exchanges (Keirns, 2017a, p. 1). The world was shocked in May 2017 when the WannaCry computer virus attack occurred. The virus infected Windows computers and encrypted all relevant user data and demanded a ransom that had to be paid in Bitcoin. The virus attacked the network of the telecommunication company Telefonica as well as computer across the globe and the data could only be unlocked for $300 worth of Bitcoin. In total 200.000 computers were infected worldwide. Microsoft shortly afterward released a patch that would stop the WannaCry virus from infecting other computers in its network (Hern & Gibbs, 2017, pp. 2-4). An IT-Security researcher found a kill switch for the WannaCry virus shortly afterward. By registering a specific domain, the WannaCry virus could access this domain, which was not possible before and with this connection the virus stopped spreading (Link, 2017, p. 1). The scaling debate was in 2017 one of the main discussions in the Bitcoin community. On the Consensus Conference in New York, an agreement was formed between the 50 leading Bitcoin companies, including exchanges, miners, and other important stakeholders. The aim of the New York agreement was to propose a scaling solution together. This proposal was a two-step plan. In the first step SegWit would be active through a user-activated-soft-fork (UASF) and in a second step, a hard fork would occur where the block size is increased to 2MB. Opponents to this agreement saw it as a corporate overtake of Bitcoin, especially the second step (Wirdum, 2017, p. 1). For the original SegWit proposal (BIP141) it needed 95% of the network agreement but because of the BIP91 the agreement level was lowered to 80%. Once this threshold was reached the proposal is accepted and locked in the network. For SegWit this threshold was reached on July 20th, 2017 (Song, 2017b, p. 1). The Hong Kong based exchange Bitfinex announced on July 28th that a minority of Bitcoin miners would be hard forking the Bitcoin blockchain to create a new version Bitcoin on August 1st called Bitcoin Cash. Bitcoin holders will be credited with the same amount of their Bitcoin holdings in Bitcoin Cash (Bitfinex, 2017, p. 1). Bitcoin Cash can be compared to Bitcoin Classic that was launched a year before. It differentiates itself in two ways from Bitcoin. One the one hand the code for SegWit was removed and on the other hand, the block size was increased to 2MB. Later that year Bitcoin Classic would announce that it would stop its operations because Bitcoin Cash was the adequate solution for the scaling debate. The Bitcoin Cash hard fork would split the Bitcoin community in two, on the one side, there is the Bitcoin community and on the other side there is the Bitcoin Cash community. At the time of the hard fork, the USFA took place and SegWit was activated. This was the first step proposed by the New York Agreement. Before August 1st there was a lot of

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uncertainty in the market in regard to what would happen with the UASF and the Bitcoin Cash hard fork. Surprisingly everything went very smooth, which was also represented in the Bitcoin price development. On August 13th it reached its new all-time high of $4.000, which was broken by a new all-time high on September 2nd where the price of Bitcoin reached $5.000 on some exchanges (Bergmann, 2017). Shortly afterward China announced that it would ban all ICO’s. On September 8th documents surfaced the Chinese government is planning to shut down all exchanges in the country and this time for good (BEG, 2018, p. 8). Despite that the news was untrue the Bitcoin price crashed to $3.500 by the end of the month (Coinmarketcap, 2017, p. 4). With the price at a low, good news came from IBM that part- nered with a blockchain company and had started developing a network of banks to use digital currency and blockchain to move money across borders throughout the South Pacific (Roberts, 2017, p. 1). De- spite the tighter regulations from China and the signaling of the SEC that ICOs might all be considered to be unregistered securities, Goldman Sachs announced that it would support its customers with buying and selling Bitcoin and other virtual currencies. Furthermore, Goldman Sachs was probably the only banking giant that issued price targets (Lucinda, 2017, p. 1). At the end of October beginning of No- vember, the Bitcoin community prepared for the upcoming SegWit2x hard fork. This was the second step that was proposed by the New York agreement. The SegWit2x hard fork would improve the long- proposed code optimization as well as increase the block size to 2MB. SegWit2x was supported by the large mining pools, exchanges like Coinbase and BitPay. The plan was opposed by many Node operators, nearly all developers from Bitcoin Core and a large portion of the community (Alyssa, 2017, pp. 2-4). On November 8th BitGo CEO, Mike Belshe published a statement that said the SegWit 2x hard fork schedules for this month will not occur due to a lack of community support. After the announcement, the price quickly settled at a new high of $7.900. Belshe further stated that keeping the community together was more important than to scale, but he is still convinced that an increase in block size is deeply needed (Samuel, 2017, pp. 1-2). Big news came from the Chicago Mercantile Exchange on De- cember 1st, 2017. It announced that it has self-certified the listing if Bitcoin futures contracts and that they would launch on December 18th (CME, 2017, p. 1). This news uplifted the spirits of investors and the price of Bitcoin reached its all-time high on December 17th with a price of 1 BTC at $19.783,06. The announcement of the Bitcoin future was definitely one reason for this massive price surge (Morris, 2017, p. 1). Overall the year 2017 was a very good one for Bitcoin, especially for the price development. It started in January at $1.000 and climbed it way up to $3.000 but the uncertainty in regard to the upcoming hard fork in August dropped the price down to approximately $1.900. Before the China announcement described above the Bitcoin price was able to reach its all-time high of $5.000 before crashing down to $3.200. Shortly afterward Bitcoin picked up hitting $5.000 by October 13th. By November 8th the price was close to $7.500. After the CME announcement in December, the price rallied from $10.000 and closed the year 2017 at December 31st at around $14.000 (Chaparro, 2017, pp. 1-3). The price decrease was partly due to the announcement of the South Korean government that it would impose further measures to regulate speculations in crypto currency trading within the country. By that time South Korea developed into an important player in the Bitcoin and crypto currency markets. This announcement would unleash a negative impact on the Bitcoin price across the globe (Reuters, 2017, p. 1). This was one of the first announcement of many that would come the following months. That resulted in such a high market uncertainty in combination with regulatory uncertainty and with other factors, the price of Bitcoin crashed to $10.000 and that would mark the start of a long bearish market period in 2018 (Reuters, 2018, p. 1).

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4.3 Bitcoin Use Cases This chapter will show two different use cases for Bitcoin in order to illustrate its different use. The use cases are Bitcoin as a store of value and Bitcoin as a payment network. The value of Bitcoin has different origins, one of it being that Bitcoin has value because individuals accept it. Money is a medium of exchange and as soon as someone is willing to accept it for a purchase of goods or services it has value, at least for the two parties doing the exchange. At the same time money is also a store of value and a unit of account. Money can have different forms like paper (notes) and rock (gold) or digitally (Bitcoin). Bitcoin has all three attributes and therefore has value (Andreessen, 2014, p. 30). Gold has been established as one of the best stores of values compared to fiat currencies. Since the emergence of Bitcoin and its constant growth, one of its use cases is the ability to be used as a store of value. Hougan (2018) argues that a new store of value needs to have a certain volatility. Furthermore, he argues that two things are expected of a new store of value. First, a rapidly appreciating price that is slowing down over time. This is usually because in the beginning only a few people know of its existence and there for the demand and price is low. The price would then start increasing exponentially as it establishes itself. Over time this increase would slow down as it reaches its steady state. The second thing is that is has a high but over time declining volatility. Here the same trend emerges. In the beginning, the volatility is high as its long-term sustainability is questionable. Over time when is sustainability is clearer, the volatility would decrease as the asset becomes more established. The value of gold is $1.300 per ounce because people are willing to pay that amount. If compared, the current market cap of Bitcoin is at $143 billion but the market cap of gold is at $7.5 trillion. This illustrates that Bitcoin is just in the beginning of its existence and therefore the volatility is still high, but as it matures it will decrease and the use case as a store of value can establish itself further (Hougan, 2018, pp. 3-4). When comparing Bitcoin to gold as a store of value Bitcoin has certain advantages. For example, Bitcoin is very portable. If someone wants to store a large amount of money using Bitcoin he can take and also transfer them anywhere in comparison to gold that is heavy and hard to transport. Additionally, the verifiability, di- visibility as well as the scarcity is higher with Bitcoin compared to gold. Bitcoin can be easily verifiable proofing its originality and ownership using the private key. Also, the Bitcoin protocol is designed that only 21 million BTC will be ever in existence. This number cannot be changed so the scarcity is definitely higher compared to gold (Boyapati, 2018, p. 7). Of those 21 million BTC at least 75% have already been mined. When compared to gold its scarcity is limited because every year approximately 32.000 metric tons are mined adding 1.7% to the total supply per year (McMahon, 2018, p. 2). Ruderman (2018) investigates what crypto currencies can be used as a store of value. He concludes that Bitcoin is the clear winner in regard to crypto currencies as a store of value. He argues that Bitcoin is the oldest crypto currency running for almost ten years, which results in a head start for the Bitcoin ecosystem where most projects are just a few years old. Anyone switching from paper money to crypto currencies will encounter Bitcoin and sees a clear value proposition despite its lack of features compared to newer projects. He further argues that in general, all crypto currencies could be stores of values if they are aged, possess value as well as has the right monetary policy. These things allow people to come to a consensus about the durability, scarcity and intrinsic value of an asset (Ruderman, 2018, pp. 5-6). By 2014 at least 22.000 merchants accepted Bitcoin as a payment for goods and services. Within this group of merchants, companies like Virgin Airlines, Zynga, Overstock.com, Bloomberg, Microsoft were using the payment provider BitPay to process the Bitcoin transactions (Andreessen, 2014, p. 3). BitPay allows companies to accept Bitcoin while not being exposed to the volatility. BitPay accepts the customer’s payments, exchanging them to fiat currency and then transferring the fiat money to the company’s bank account. By 2015 over 100.000 merchants accepted Bitcoin as a payment and around 60% 21 Crypto Currencies

of them used BitPay to process them. Of these IT services, marketplaces and financial services made up more than 50% of the industries using BitPay’s services (Young, 2015, p. 1). Hileman and Rauchs (2017) found out that Latin American and Asian-Pacific payment processing companies are primarily focused on local users, whereas North American and European companies have a global focus and therefore a significant number of users from non-local countries. Furthermore, they found out that 86% of the survey participants are using the Bitcoin network as the main payment for cross-border transactions. With the fast development of merchant adoption using the Bitcoin network for payments another use case for Bitcoin are payments transactions, especially cross-border transactions (Hileman & Rauchs, 2017, p. 69). Cross-border payments accounted for around 40% of the global payment transactional revenues in 2016 with payment flows of $135 trillion. The system that is currently used has some shortcomings. It is not possible to fixate the exchange rates until the funds have arrived, and the involvement of many institutions result in delays. The current system uses for cross-border transaction multiple financial institutions that results, in a complex web that can lead to delays and inaccuracy. Furthermore, at each step of the transaction fees are charged that result in high transaction fees for cross-border transactions. In order to overcome the weakness of the current system, banks and financial institutions are exploring the option of using the Bitcoin network for cross-border transactions. It offers higher security, lower costs and has a higher reliability (NASDAQ, 2017 p. 1). Another payment use case is that Bitcoin is used by people who work or live abroad and send part of their earnings back home to their families. Traditional payment processors charge high fees for cross-border transactions, reducing the amount that for the family. These people are starting now to use the Bitcoin network to send money back home to their families. While using the Bitcoin network they can be sure that the money will arrive within hours, it is tamper proof and the transaction fees are a fraction of that of the traditional payment processors (Carlozo, 2017, p. 3). The Digital Currency Group states that the cross-border payments that were settled using Bitcoin has grown from $5 million to over $40 million in the timeframe from January to October 2016. Unbanked countries like India and Kenya have realized the potential benefit they can gain while using Bitcoin. It has proven to be cheaper and a more effective alternative to other mobile payment networks. South Korea has strengthened its regulations in regard to bank account opening. Customers of South Korean banks are now required to spend at least $400 per month to create a bank account. The tighter regulations had led users to use alternatives like Bitcoin for their transactions (Young, 2016, p. 2). In order to make faster and cheaper transaction for the Bitcoin network possible, developers have introduced the lightning network. This solution enables users to open payment channels and then transacting on those for instant transactions. This lightning network is currently in a live and running test phase. Using this solution for cross-border payments would enable users to instantly send funds while paying nearly no transaction fees (Poon & Dryja, 2016, pp. 4-6). The two presented use cases, Bitcoin as a store of value and Bitcoin as a payment network are only two possible fields of application for Bitcoin. With the growing maturity of Bitcoin, the real use case will eventually emerge. Also, the extreme volatility of Bitcoin will ease with further adoption and as soon as the confidence of Bitcoin’s substance has been gained. In the end, the community will decide what direction the protocol will be developed and for what use cases Bitcoin can be used.

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5 Case Study Ethereum Ethereum is an open source software platform based on the blockchain technology. The platform uses its own currency called Ether (ETH) in order to pay its transaction costs. It is designed that developers can use the programming languages C++, Go, Python, Java, JavaScript and others in order to create dApps for the Ethereum ecosystem. An example here for can be wallet applications, decentralized exchanges or smart contracts based dApps. One feature of Ethereum with which it can distinguish itself from Bitcoin is the ability to write and execute smart contracts (Buterin, 2013, pp. 11-13). In the first part of this section, the history of Ethereum and its currency Ether will be shown, which is followed by two different use cases for Ether and Ethereum.

5.1 Ethereum 2015 – 2017 The journey started when 19-year-old Russian-Canadian programmer Vitalik Buterin had the idea that led to the development of Ethereum. Unlike Bitcoin, Ethereum has a real name attached to it. Buterin came in contact with Bitcoin in 2011 and was previously known as a co-founder of the Bitcoin magazine. Instead of going to university he decided to create Ethereum full time after he received the Thiel fellow- ship (Adams, 2018, p. 1). The Ethereum project was officially announced by Buterin in January 2014 at the North American Bitcoin Conference in Miami. He was soon joined by Dr. Gavin Wood who published the Ethereum Yellow Paper in April that was used to describe the technical specification of the Ethereum Virtual Machine (EVM) (Gerring, 2017, p. 1). Aside of developing the software, the ability to launch a new crypto currency requires a lot of resources. In order to fund all of those activities, Ethereum announced a crowed sale of their currency ETH. In order to comply with legal requirements, the Ethereum Foundation was founded in Zug, Switzerland. The pre-sale took place at the beginning of June 2014 for a period of 42-days. In total 31.591 BTC were raised in exchange for 60.102.216 ETH. At the time of the sale, Ethereum raised over $18 million. This money was used to pay back the mounting legal fees as well as the developing effort (Buterin, 2014, pp. 2-4). After the pre-sale Buterin and the community start actively working on the development of Ethereum. For this, the Ethereum developer team (ETH DEV team) was established in order to push the development of the platform. In July 2015 the first version of Ethereum was released under the name Frontier. It was a test network that enables developers to create smart contracts and dApps. This enabled exchanges for the first time to display ETH as a crypto currency. With the continued updates of features and engaging actively the community, Ethereum was able to keep its momentum. With increasing traffic and a growing user numbers on the Ethereum forum as well as on the subreddit, proof that the platform was attracting a fast-growing developer community. The first major success reached Ethereum when Kraken announced that it will launch ETH trading pairs. In November the ETH DEV team hosted the first Devcon-Event. It was designed to bring Ethereum developers from all over the world to Berlin in order to discuss the future of Ethereum (EtherBase, 2017, p. 2). In March of 2016, the second update of Ethereum was released under the name Homestead. It included several protocol changes as well as the foundation for future network upgrades (Wilcke, 2016, p. 2). The market cap of ETH grow constantly and it surpassed the $1 billion mark for the first time on May 19th, 2016 (Coinmarketcap, 2018h, p. 1). Christoph Jentzch founded a decentralized autonomous organization (DAO) in 2016. A DAO is a complicated smart contract and is designed to create a decentralized venture that is able to fund various dApp development projects. This announcement gained a lot of interest especially because the DAO would eliminate the need to trust humans and that it was able to

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function autonomously. If someone wanted to influence the DAO he needed to purchase ETH. The higher the percentage of ownership of ETH was, the more weight once vote has. Developers submit proposals and all ETH holders vote on them, it was required to secure at least 20% of all votes of ETH holders. This was a completely new concept and found a lot of support in the Ethereum community. In total, the DAO raised over $150 million at its crowd sale. There was just one major problem. The smart contract designed to run the DAO had a loophole that was exploited on June 17th, 2016. The hackers were able to drain approximately $50 million at that time of the ETH funds that the DAO had previously raised. This event was a huge blow for the community and especially for the very young technology and the DAO principal. The Ethereum community agreed on a solution that would erase the attack (Adams, 2018, p. 3). This included hard forking the Ethereum blockchain, reversing the hack and continue with the new chain. It can be compared to a refund smart contract where investors could request a refund for the lost ETH. Despite the refund of the hack victim’s funds, it sparked a heated argument in regard to the concept of the immutability of Ethereum. For many, this was something standing in conflict with the core principals of the blockchain concept. It furthermore included the concerns to censorship resistance of Ethereum. The vote concluded with 89% for the hard fork, that the Ethereum blockchain would fork at block 1.920.000, which was on July 20th, 2016. This resulted in the creation of Ethereum classic that shares the same data with Ethereum until block 1.920.000. On the Ethereum Classic blockchain, the hack had occurred, and it continued, whereas the Ethereum blockchain reversed the hack, returned all stolen funds and continued without the hack ever occurring. Since then, the two blockchains have remained divergent and are two crypto currencies that shared the same beginnings (Avon, 2017, pp. 1-2). After the hard fork, Ethereum argued for decentralized-decision making, conflict resolution, and extra protocol. Ethereum Classic took a very different approach and argued for the blockchain immutability and that code is law (Ray King, 2018, p. 2). In the meantime, developers started to develop dApps using the Ethereum platform. In order to fund their projects, they issued their own token in return for an ETH investment. On September 28th, 2016 the project Iconomi launched its ICO. It raised $10.1 million within 24 hours. Iconomi is an open fund management platform with the aim to disrupt the fund management industry. By creating a new financial service category for the imminent decentralized economy Iconomi promised to revolutionize the investment industry. Another successful ICO in 2016 was the project SingularDTV. It is a blockchain based entertainment studio platform that produces, partly its own partly buys, content for its video-on-demand service. Furthermore, it gives artists the possibility to tokenize their work and use this way to fund their projects. This is possible because of the smart contract based, rights management function. This project raised $7.5 million. Developing project on the Ethereum platform and get funded using the ICO method became more and more popular and the first real use case for Ethereum and its currency ETH emerged (Cummings, 2016, p. 1). By the end of 2016, the price for 1 ETH was approximately $8 and it had a market cap of roughly $710 million (Coinmarketcap, 2018h, p. 1). In February 2017 the formation of the Enterprise Ethereum Alliance (EEA) was announced. The EEA has the aim that companies join forces to enhance Ethereum and the systems that surround for enterprise- grade application solutions. The first members of the alliance included Thomson Reuter, Intel, Microsoft and BP (SingularDTV, 2017, p. 1). By July the EEA had grown to a 150-member organization, which made it to the largest open source blockchain initiative. The members are originating from industries such as technology, government, energy, banking, insurance, pharmaceuticals as well as a number of fast-growing Ethereum startups (EEA, 2018, p. 1). Big announcements also came from the Ethereum Dev Team in 2017. Throughout the year the planned move from Homestead to the new update Metrop- olis started its first updates. Metropolis enables the Ethereum platform to be faster, lighter and more

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secure. The updates were broken down in two peaches. The first update, Byzantium took place in Octo- ber 2017 and was done through a hard fork. The second part of the update is called Constantinople and its release date was not announced yet. With this hard fork, Ethereum will update to Metropolis (Ray, 2017, p. 1). The Metropolis includes a set of updates in regard to the ability of the platform. By using the Zero-Knowledge-Proof (zk-SNARKs) Ethereum enables anonymous transactions. Furthermore, the updates enabled easier programming for developers, increase wallet security, more predictable transaction fee prices as well as other features. All updates result in faster blocks as well as lower transaction fees for users (Karnjanaprakorn, 2017, p. 2). The planned switch from PoW to PoS was postponed till Constantinople will be activated. The switch will not happen instantly, in a first stage a hybrid of both will be used, as described in the Casper Basic paper (Virgil, 2017, pp. 2-4). The Ethereum PoS protocol is named Casper, currently existing in two different proposals. One is developed and led by Vlad Zamfir who is at the forefront of the Ethereum development. The other proposal is led by Vitalik Buterin but until now no consensus was found in regard to what version will be used. Casper will eventually pave to way for Ethereum’s scaling in order to achieve mainstream adoption (Karnjanaprakorn, 2017, pp. 7- 8). At the Beyond Block Taipei 2017 conference in November, Buterin presented the Ethereum Roadmap 2.0. The aim is that Ethereum will evolve over time and 2.0 will lay the foundation for what the protocol will look like in the future. This is supposed to be done by introducing sharding. Buterin described it as creating a blockchain with a hundred different universes with different account spaces in each universe. These universes are systems that are connected to each other and share consensus. This will enable Ethereum to quadratic scalability. Throughout the whole year, Ethereum continued to grow in value and more important in popularity with the community and developers (Marcom, 2017, pp. 1- 2). Despite all the hacks and other security issues, 2017 can be described as the year of ICO’s. Because most ICO’s used the Ethereum platform to develop their dApps, Ethereum and its currency ETH profited enormously from the ICO boom. All newly created Ethereum based tokens were issued using the ERC- 20 token standard. Different projects were able to raise millions during their ICO and sometimes even in minutes (Nation, 2017, pp. 1-2). Fabric Venture and TokenData conducted a study in regard to ICO’s in 2017 and concluded that out of a total number of 913 ICO attempts 435 were successful resulting in a 48% success rate. The average successful ICO project raised $12.7 million but the 10 largest sales of 2017 raised over $1.4 billion, which represents roughly 25% of the total capital raised in 2017 using the ICO funding method. Filecoin was the project that was able to raise the most funding in 2017. Their project aims to build a decentralized data storage solution using the blockchain. The ICO took place in September and was able to raise $257 million (Williams-Grut, 2018, p. 1). Regulators, especially in China, saw risks in the ICO funding method. They are vulnerable to money laundering and terrorist financing due to the anonymous nature of the funding transaction. Other concerns included the ICO’s are financial scams as well as pyramid schemes. For this and other reasons, the Chinese Central Bank announced on September 4th an immediate ban on ICO funding. Furthermore, 60 crypto exchanges were put to subject of inspections (Russell, 2017, pp. 1-2). The news spread like a wildfire in the community and the crypto currency markets started a four day long sharp decline. Within these four days, the market cap dropped by $35 billion. The market eventually stabilized again but this event was important because on the one hand it showed how big and important the Chinese market was and on the other hand, it shows how easy uncertainty can be spread among market participants (Acheson, 2017, p. 1). With the rising popularity of Ethereum the amount of ICO’s that turned out to be scams as well as hacks increased. Not even one hour in the CoinDash ICO hacker was able to change the smart contract address and replace it with one of which they possessed the private key. CoinDash has raised $7.3 million before

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the hack occurred and it released a statement that it would give out its token to the investors who send their investments to the changed address (Nikhilesh, 2017, p. 1). Another big security lack is known as the Parity hack. Parity is a wallet provider based on Ethereum that also offers multi-sig wallet. These types of wallets are often used by ICO project to store their raised funds. Hackers were able to exploit a vulnerability in the wallet software resulting in the loss of 150.000 ETH, which had a value at that time of $30 million, but the value would rise closer to $100 million by December 2017. The problem was initially reported by Parity since the targeted multi-sig wallet smart contract was part of the Parity software suit (Palladino, 2017). In November of 2017, one of the biggest security incidents took place. A Parity user accidentally found a vulnerability in the software code that resulted in freezing 513.774 ETH. After this incident happened reports surfaced that Parity was already informed about that problem by a user in August, but developers classified it as a possible problem and resolved the issue “a fix at some point in the future”. With the immutability of the Ethereum blockchain, it is not possible to reverse the transaction and Parity is still looking at how to free the funds, but there was and still is not an immediate solution. One idea was to hard fork the Ethereum blockchain again and reverse the transaction. For this Parity considered to submit several Ethereum improvement proposals (EIP) to the community (Pauw, 2018; Thomson, 2017, p. 1). It eventually did so in April 2018 that resulted in a community vote. The EIP-999 would allow the users to regain access to their funds. The vote ran from April 17th till April 24th resulting in 55% of “no” votes. The funds were not stolen or lost but they were stored exactly where they were supposed to be, the problem was that the access to these funds has been destroyed. Till today the funds are frozen and there is no solution to unfreeze them (Pauw, 2018, p. 1). These incidents and hacks were just a few that took place in 2017. Bacina (2018) estimated that the value of all ETH funds taken by hacks and lost in incidents is close to $1 billion by January 2018 (Bacina, 2018, p. 1). ETH had a price of approximately $8 and a market cap of roughly $710 million. By end of March the price has risen to $50 and a market cap of $3.9 million. The extreme price increase continued, and on May 19th ETH broke for the first time in its 4-year history the $100 mark. Within one month the price tripled to over $370 and a market cap of approximately $34 million. For the next months, the price ranged between $200 and $350 on average. Towards the end of the year, another price rally had started. The ETH price jumped on November 22nd within the next 24 hours from $381 to $425, breaking the $500 mark for the first time on November 29th. ETH reached its all-time high of 2017 on December 21st with a price of 1 ETH at $880,54 and closing the year off at around $760 (Coinmarketcap, 2018h, pp. 3-18). The overall price performance in 2017 was an unbelievable one for ETH in 2017. Starting off at around $8 and closing 2017 at around $760 means it gained close to 10.000% in one year. One reason for this growth was the ERC-20 token standard that all Ethereum based ICOs used for their own tokens. All ICOs accepted ETH as a payment for their own new tokens, resulting in an increased demand. At the same time, all transaction fees are paid in ETH meaning the more the network gets used the more ETH will be used. By the end of 2017, there were more than 250 Ethereum based dApps that were running live and over 500 projects that were between the concept and demo phase. These dApps were the biggest driver for Ethereum and ETH in 2017 and the more popular it becomes to develop dApps on Ethereum the higher the value of the ETH goes (Liebkind, 2018, pp. 2-3).

5.2 Ethereum Use Cases One big difference between Bitcoin and Ethereum is the smart contract function that is native to Ethereum. The smart contract function can be used for many different use cases and represents the main use case of Ethereum. On a very basic and abstract level, smart contracts can be compared to vending

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machines. Money is put in and the preselected item will be automatically and without the need for a third party released. Smart contracts operate fairly similar, but they can be used for a variety of different scenarios across different industries. By using smart contracts, the middleman in these business transactions is eliminated. The contract uses the programming language Solidity and enables developers to create dApps using a smart contract. For developers, it is a lot easier to use the existing Ethereum infrastructure to create their dApp. This means that all transactions are processed as well as stored on the Ethereum Blockchain. Furthermore, all payments are processed on the Ethereum Blockchain meaning that no third party like a payment provider is involved in the value transfer. Ethereum’s complete front- and back-end software code is open source and can be verified easily (Buterin, 2013, pp. 28-32). The Ethereum platform is designed to make the development of dApps relatively simple by providing the necessary tools. All starts with the Ethereum smart wallet that acts as a gateway to the dApps. The project tokens can be designed using the smart contract and they can be used as a currency, a virtual shape, a proof of membership, a representation of an asset or anything else. The ERC-20 token standard allows the compatibility with any Ethereum wallet, exchanges or other contractors. In order to kickstart the project, it can host a trustless crowd sale, where the newly created ERC-20 tokens are sold in order to receive funding for future development. The ultimate goal advertised on the Ethereum website is the formation of a DAO. Here all decision and business transactions are executed by the smart contract but the DAO hack showed Ethereum and the community that smart contracts in general and its programming language has yet been developed for such a sophisticated use (Ethereum, 2018, pp. 1-4). One use case for a dApp would be as notary service. Most of the world’s ownership records are stored offline or on paper at a centralized location. This results in the problem that the records can be easily tampered with or altered. Using the blockchain tampering is not possible. If a user enters their proof of ownership data through a dApp onto the Ethereum blockchain the data can only be changed by the person that owns the matching private key. It is not possible for a third-party to alter the entry without the private key. This use case can be achieved without third party intermediaries, which simplify transactions and also reduce its costs (James, 2018, p. 2). Another field of application is the supply chain management. The blockchain has the ability to be a tamper-proof database and therefore can be used to store supply chains transactions as well as transfer of ownership. The advantage of this is that it is stored decentralized and in a transparent matter so that everyone has access to it. With this, it is possible to prove to the consumer that a product is real and contains what was advertised. Furthermore, the individual steps the product had during its production process can be displayed as well giving the consumer complete transparency over the production process. This can help to fight product piracy and stop sellers from distributing them. It is also possible to record the transfer of ownership on the blockchain giving the consumer a proof of purchase as well as a proof of ownership and originality making the resale process much easier (Korpela, Hallikas, & Dahlberg, 2017, pp. 4187-4190). These were just two possible industries where the Ethereum blockchain can be deployed. All these projects need to have some kind of entity in the background. The Crypto Valley in Zug, Switzerland positioned itself with attractive regulations that it would be an ideal place for blockchain companies to be. For this reason, the Ethereum Foundation was established in mid-2014 in Zug, Switzerland. This was done to use the ICO friendly regulation in Switzerland (Gerring, 2016, p. 4). Because of Ethereum and other big industry players, the region became known as the Crypto Valley. Till today more than 350 projects have used the location of Zug to have its companies residing there. It is estimated that in 2018 an additional 200 companies will be established in the Crypto Valley (Matt, 2018, p. 1). Using the ICO fundraising model all these different use cases for Ethereum smart contracts, they are able to develop their envisioned product. Sadly, some projects are shady from the start and

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others use celebrities to promote their product to uneducated investors. One of those celebrities was Floyd Mayweather. In 2017 he promoted a total of three ICO’s one of which is facing a class action lawsuit in regard to violating US securities law. The Tezos project also got into trouble facing four different class action lawsuits in regard to selling unregistered securities. On the other hand, other, seri- ous projects use this funding method to successfully raise funds and do develop their promised products (Orcutt, 2017a, pp. 1-2). Most of the financial value that is transferred during an ICO is done by using Ether. Within the year of 2017, a total number of 913 ICO’s opened while 537 closed and over $6 billion were raised. Not all ICO’s used Ethereum to launch their project but it can be said that the majority did so. It is believed that the trend of ICO’s will continue to grow over 2018 (Gibson, 2018, p. 1). The Ethereum blockchain is not capable of handling a big volume of transactions per second. Currently, it supports roughly 15 transactions per second, which is quite small compared to Visa’s 10.000 transactions per second. The scaling problem Ethereum is facing is that it requires a network of nodes on which the entire history of transactions, state of account balances and contracts need to be stored. The fear is that eventually the size of this data package will be too large for regular users and only a few big companies have the resources to host a complete Ethereum node. If the block size would be increased the problem would not be solved because the bigger the blocks will get the bigger their amount of data that has to be stored. Despite that, hosting a node is the most private and secure way to use the system. Additionally, it would weaken the security of the whole network because there would be fewer nodes to verify transactions. The Sharding solution is one of which could solve this scaling problem and enable an enterprise- and user adoption (Hertig, 2017, pp. 1-3).

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6 Case Study Monero This Chapter will give an overview of the privacy currency Monero. Since Monero is a community funded as well as driven project and has its prime focus on privacy the information available is limited. In the first part, the creation of Monero will be described followed by its development and important events that led to Monero becoming a privacy-focused crypto currency with a market cap of $2.2 billion (Coinmarketcap, 2018i, p. 1).

6.1 Monero 2014 – 2017 Monero (XMR) was created in April 2014, is a privacy-focused crypto currency with its focus on decentralization, scalability and is open sourced based. A significant algorithmic difference in regard to the blockchain obfuscation can be achieved compared to Bitcoin by using the CryptoNote protocol (Osterrieder, Lorenz, & Strika, 2016). The first version of the CryptoNote whitepaper was released in December of 2012 describing the Bitcoin privacy issues and proposing ring signatures to increase privacy (Saberhagen, 2012, pp. 6-8). By October 2013 the second version of the whitepaper was released followed by the code release and the beginning of Bytecoin (Saberhagen, 2013, p. 1). By 2014 Bytecoin began to gain traction, even without anyone knowing who the developer Nicolas van Saberhagen really was. Since Bytecoin was designed for privacy it did not matter to its users. It was also clear that the currency had one important problem. That being 80% of all coins had been already mined by the time users started to pay attention. A user that is only known by the username thankful_for_today forked the Bytecoin code and created Bitmonero that did not have the pre-mining issue. Because of disagreements, by April 2014, seven users took the Bitmonero code and forked it off to Monero. Only two of the developer’s identities are known that of Riccardo Spagni aka Fluffypony and Francisco Cabanas. Spagni acts as the main developer and face of Monero (Ray King, 2018, pp. 2-3). The rest of the developers followed to the currencies ethos and stayed anonymous. They are only known by their pseudonyms smooth, othe, NoodleDoodle, binaryFate and luigi1111 and form with the other two the Monero core team. The core team, who serve as guides, comprises of members with areas of expertise in applied cryptography, cod- ing, public relations, software architects and economic development. The Monero builds on the back of its community out of contributors, volunteers, and donations. Till today more than 240 developers have worked on Monero and contributed to the project including 30 core developers. It has organized itself into five different section. There is the research and academic arm, Monero’s Research Lab, Monero.org, MyMonero the core development team and the community developers. Governance guidelines were needed in order for such a complex community to function effectively. The core team argued at that time that in regard to crypto currency projects the term governance is quite a sensitive topic. But it is also known that a lack of governance, especially in regard to decision making, can be the death to any open source project. Therefore, governance guidelines were issued in 2015 that would help to manage the decision-making process among the community. The Monero user forum is using the direct and indirect trust mechanism. Posts that get comments by direct or indirect trusted people will appear more often at the top compared to posts where people with no trust relationship commented. By using this mechanism Monero eventually bypassed trolling and shill posts (Hunte, 2018, pp. 3-5). Monero uses the forum funding system in order to pay for the development and other expenses. In this system, anyone can request funding for a Monero based project and the users can decide if in their opinion this project would be good for Monero and fund it accordingly. This is completely voluntary and not connected to any consensus rules. Some developers build Monero related services that will financially benefit from the growth of the Monero network and finance themselves this way. Others donate to the core developer 29 Crypto Currencies

team for instant most of the Monero mining pools include small donations to the core development team. There is even a community hall of fame for members that donated more than 20.000 XMR to the core development team in either the direct way or using the forum funding system (user26303, 2016, p. 1). Once a project is proposed, explained why the developers are suited for the project and a cost projection was presented to the community, the core development team decides which candidate or team is developing the task and creates a funding request. The community members can decide if they want to fund a task or project. If they do so they can reach status levels and earn badges the more project they funded. A project only starts if at least 60% of the funding was raised. Once this threshold is passed the task is moved to “work in progress”. Developers can request payments once a week but the funds are only released if there is general agreement in regard that the work is being done (Hunte, 2018, p. 6). The strong privacy is achieved using ring signatures that make transaction untraceable. Anyone who uses the Monero network owns a piece of Monero and with every transaction, the network hides that piece between others in a ring of that public address so that it cannot be found easily. Furthermore, all Monero coins are fungible meaning they cannot be tracked. The security for the network is provided by the miners. In order to incentive, the miners to continuously secure the network, Monero’s block reward will never go lower than 0.3 XMR (Kabessa, 2018, pp. 5-6). In 2016 the Monero core development team and the other structural parts of the project released important updates for the network and the community. The first update was launched in January called the Hydrogen Helix that fixed important bugs. Till September the fifth Monero research lab paper was published, the network configuration was changed to a minimum ring size of 3 on all transactions (Monero, 2018, p. 1). On September 18th, 2016 the software update Wolfram Warptangent was released that included the necessary modifications of the dynamic block size limiter algorithm. This enables Monero to be used on a more scalable level (Fluffypony, 2017, p. 1). This update was deeply needed because Monero started to get used for its first use case as currency on the dark web marketplace AlphaBay. On June 10th 1 XMR was approximately worth $1, by mid of September the value of 1 XMR increased to more than $10 (Coinmarketcap, 2018j, p. 1). By September 1st AlphaBay and Oasis, the two largest darknet marketplaces announced that their users are able to purchase goods on their websites using the crypto currency Monero. This decision was based on the newly gained popularity of Monero among users of the dark web as well as on this ability to make transactions untraceable and therefore provide a certain level of security to the marketplaces and its users. By that time Monero was still in a very early stage and no graphical user interface (GUI) wallet existed and it as only possible to access Monero using command line or web-based wallets (AlphaBay, 2016, pp. 1-2). The adoption of Monero through the darknet help Monero to grow and soon Monero would account for 2% of AlphaBay’s total sales volume (Greenberg, 2017a). XMR ended the year 2016 at a price of $13 with a market cap of approximately $177 million (Coinmarketcap, 2018j, p. 1). Through 2016 it gained so much popularity and had an actual demand that by November 2016 XMR was listed on the Bitfinex Exchange. In January 2017 the crypto currency exchange Kraken announces that it will list XMR with multiple trading pairs enabling the trading of XMR on the widely used exchange (Hunte, 2018, p. 9). On January 10th Monero announced RingCT an updated version of the older sing signatures. It will enable Monero to better obscure transaction outputs, making it impossible for outside parties to view the transaction details. It builds on the existing privacy features including hidden transactions, hidden accounts as well as trustless coin generation. It is scheduled that the RingCT feature is updated through a hard fork occurring in September 2017 and making the use of it mandatory from this point on (O’Leary, 2017, p. 1). In September the Monero network had major updates scheduled that would enhance the currency’s privacy function further. In a first step, the Helium Hydra 0.11 was

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launched and designed to increase the minimum size of ring signatures to 5, blacklisting of duplicate members within a ring and enabling the launch of the RingCT signatures. Furthermore, it introduced the “Fluffy Blocks” that are the optimal compact blocks designed to reduce the bandwidth requirements for the node operators. From that update on it was possible to host a full node on the operating systems Android and iOS with full support (MinerGate, 2018, p. 1). The case that scams and hacks increased as the value of the crypto currencies increased was already described in the previous chapters. The same happened with Monero, but it played a more important role in these events because of its privacy feature. The criminals behind the WannaCry virus used their gained Bitcoins and laundered them using XMR. Using XMR enabled them to hide their transaction and use the money to their preferring (Orcutt, 2017b, p. 6). Beginning in May 2017 and ongoing throughout the whole year a Monero mining virus was deployed to mine XMR using a security flaw in the Microsoft operating system. Hackers used the mining software and modified it and used the security flaw IIS 6.0 to install it on different servers. Over a period of time, they were able to build a botnet of infected servers that mined XMR for them. The advantage of mining XMR, in this case, was that it uses CPU and GUP mining, which, if done by big servers is more effective as well as because of its privacy feature (Kalnai & Poslusny, 2017, pp. 1-2). The widespread of the mining virus was possible using EternalBlu, the same NSA exploit that was previously leaked by the Shadow Brokers and also used for the WannaCry virus. Within a few months the virus spread to over 526.000 windows computer. The highest number of infections were seen in Russia, India, and Taiwan and at least 25 computers were used to constantly scan for new vulnerable computers. With this network of miners, the hackers were able to mine approximately 24 XMR per day over a period of months. Different versions of the virus were used by multiple groups and organizations, resulting in multiple different Monero mining viruses all of which use the EternalBlu exploit. Microsoft released a patch for the security flaw but machines that have not been updated are still vulnerable (Khandelwal, 2018, pp. 1-2). A similar mining virus was discovered in the second half of 2017. The VenusLocher ransomware war modified from its original version to mine XMR (Salvio, 2017, p. 1). This kind of virus attack became known as crypto jacking. The number of attacks rose by 8500% in the fourth quarter of 2017 according to a report from Symantec (Symantec, 2018, p. 1). The report states that mining other user’s CPU is far easier than using other methods. This is done in a way that the extra computational power that is consumed is kept so low that it will not show up on the power bill. This occurred during the timeframe of the Bitcoin and general price spike making illegal activities much more lucrative (Shannon Liao, 2018, pp. 1-2). The XMR price had an impressive development in 2017, starting the year at $15 with a market cap of $188 million. By August 2017 the price had more than tripled to $50, the market cap had grown to $600 million. Monero reached the first time $100 on August 25th and remained above it for three weeks, dropping below only for a short time. For the next months, the XMR price would stay around the $100 mark, breaking this resistance level in November. From November to December the XMR price continually increased to $200, $300 and even $400 for 1 XMR. The all-time high was on December 20th with a price of $476. XMR’s price at the end of 2017 was $356 and it had gained a market cap of over $5 billion (Coinmarketcap, 2018j, pp. 1-17). A study by Möser et al. (2018) investigated the traceability of transaction in the Monero blockchain. More precise they have investigated the weaknesses in Monero’s mixing sampling strategy. They found out that about 62% of the transactions using one or more mixing processes are vulnerable to chain- reaction analysis resulting in the traceability of the real input by elimination. Another problem they found in their tests was that the mixing process sampled coins in a way that they can be distinguished. They claim that they have developed a heuristic that can guess the real input with 80% accuracy overall transactions with one or more mixings. They applied this heuristic to the transaction history of the

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timeframe of AlphaBay’s high times, removed all mining pool activity and found a large amount of potentially privacy-sensitive transactions (Möser et al., 2018, pp. 152-157). There were also other pub- lications calming that Monero’s transaction can be traceable now and for sure in the future. Monero fixed that problem of traceability with its updates of the RingCT. Until now law enforcement agencies are still not able to link XMR transactions to individuals, which limits the ability to identify suspects (Corcoran, 2018, p. 1). A recent threat to the Monero community came from the Bitcoin mining and chip manufacturer Bitmain. Monero uses the PoW consensus algorithm, which is from the basic princi- ple very similar to the one Bitcoin uses. The Bitcoin mining company Bitmain announced at the beginning of March 2018 that it would sell Antminer X3 an ASIC miner specially designed to mine Monero. The core developer Spagni had previously announced that he would do everything in his power to help the community to prevent centralization including ASIC’s on the Monero Network. Many community members feared that the use of the powerful ASIC miners would lead to the centralization of Monero and that would undermine the main value proposition of it, security. When ASIC miners are deployed in the Monero network it will make mining inaccessible for most people and centralize the computing power of the network in the hands of a few large mining operations (Oberhaus, 2018, pp. 1-2). On March 28th Monero announced that it had scheduled a major upgrade, which would result in the network un- dergoing a hard fork. The update had two primary reasons. The first reason was to modify the PoW algorithm in a way that it would become resistant to ASIC miners in order to prevent the centralization danger. The Second reason was to increase the ring size to 7 to strengthen the privacy afforded by Monero. The hard fork occurred on April 6th and followed the scheduled proceeds (Samuel, 2018, pp. 1-2). Another hard Fork occurred around April 30th when a group of developers forked from the Monero code to create MoneroV. MoneroV is from the concepts very similar to Monero, both using a block interval of around 120 seconds, have stealth addresses and use ring signatures. It aims to solve the issue of the inflated Monero blockchain, infinite supply of XMR, high transaction fees and the centralized- decision making process. Furthermore, MoneroV claims that Monero is discouraging normal miners by increasing the hash rate based on the bulk usage of automated miners and other possibilities for stealth mining. Stealth mining or crypto jacking describes the process of a user’s browser mining without the user’s knowledge. MoneroV uses a different privacy-oriented protocol, the Mimblewimble. It is a modified version of the Bitcoin protocol that is expected to significantly increase the privacy and fungibility of the crypto currency network leading to higher scalability potential (Hong, 2018, pp. 2-3).

6.2 Monero Use Cases This chapter will show the main use case of Monero. As it is a currency its main use case is to be used for a value transfer of products or services. For Monero the optimal use case is users that have a strong preference for private transactions that cannot be traced. These users are most likely involved in some kind of illegal activity. Therefore, Monero has the reputation to be the drug dealer’s crypto currency. With its strong privacy settings and a focus on true decentralization, Monero provides the features that were needed the most from one special community, the darknet black market community (Greenberg, 2017b, p. 1). With the growing popularity of Monero amongst this community, the darknet marketplace Oasis announced in August 2017 that it would officially accept payments made in XMR. A month later the leading darknet marketplace AlphaBay announced its support for XMR as well. For this point one user of darknet marketplaces could by illegal substance, paying for them using XMR that enabled them to be undetectable by authorities. Previously this was mostly done by using Bitcoin (AlphaBay, 2016, p. 4). The Monero price increased approximately 200% the month following the acceptance on Alpha- Bay and Oasis. One of Bitcoin’s first use case was as a means of payment on the SilkRoad. Since its

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closure, other marketplaces have opened up and are now using a more secure currency as a payment vehicle (O’Connell, 2016, p. 1). AlphaBay and Hansa one of the two biggest darknet marketplaces were eventually closed by the US Department of Justice in July 2017. Both of them were associated with the trade of illegal goods such as guns, drug, personal data and computer viruses. According to Europol, there were more than 40.000 sellers on Alphabay alone, offering illegal merchandise. These sellers advertised over 250.000 items of illegal drugs and chemicals (McGoogan, 2017, p. 1). Law enforcement agencies started to work together with chain analysis tools that made Bitcoin transactions traceable. chain analysis combines the blockchain data with other publicly available information to identify users through their addresses and then map how they moved their funds around. This technique can be used to identify a Bitcoin exchange where players of a gambling site are exchanging their winnings in US Dollars (Simonite, 2013, pp. 2-3). Law enforcement agencies like the IRS, FBI, SEC, and DEA have worked with chain analysis tools since 2015 and use the tool to investigate Bitcoin addresses they find during investigations. These chain analysis tool can track Bitcoin, however, it is not able to track XMR (Orcutt, 2017b, p. 4). In a recent announcement law enforcing agencies have warned that criminals are moving away from Bitcoin and are using now Monero for their illegal activities. Bitcoin was so popular among criminals because of the provided privacy. But with the technological advances there came a new currency that provided even better privacy for the users (Corcoran, 2018, p. 1). The trend that cyber and other criminals are moving away from Bitcoin into the privacy currency Monero is no longer a secret. Europol raised its alarms already at the end of 2017 that crypto currencies such as Monero gained popularity in the digital underground (Kharif, 2018, p. 2). According to a forensic firm, the proportion of darknet related Bitcoin transactions has dropped from 30% to just 1%. The firm further states that it has investigated a massive increase in the use of Monero. Furthermore, the use of Monero spread through the use of viruses and ransomware. Now, criminals will give their victims instructions on how to buy Monero compared to a few years back where they instructed them how to buy Bitcoin (Shukla, 2018, p. 3). Using malware to infect other computers and use them to mine XMR is quite lucrative. An average computer is able to mine $0.28 of XMR per day. Just a botnet of 2.000 computer is able to produce $568 in XMR per day that would result in earning of $204.400 a year. A Palo Alto cybersecurity firm announced that it has witnessed the trend of hackers switching from ransomware to malicious crypto currency mining attacks (Fox-Brewster, 2018, pp. 3-5). In the end of 2017, a large-scale crypto currency mining operation has been identified that was active for more than 4 months and had infected as far as 30 million users (Grunzweig, 2018, p. 1). Hackers were able to take an economic value of 798.613 XMR about $142.750.400 using the crypto jacking method. The report added that in total $175 million have been found to be mined via XMR representing approximately 5% of all XMR currency in circulation (Shaikh, 2018, p. 2). Another case where XMR was actively used is in regard to the Shadow Brokers. This hacker group got known for leaking hacking tools from the NSA including zero-day exploits. These exploits were specifically designed to target enterprise firewalls, antivirus software, and Microsoft products. These exploits would later be used in the crypto jacking attacks. The Shadow Brokers started to accept XMR from June 2017 onwards as a payment. It was a subscription-based access to different zero- day vulnerabilities and other exploit tools (LMNtrix, 2017, p. 1). Monero is also used to launder money. The hackers behind the ransomware WannaCry received their ransom payments in Bitcoin to a common address. They then would take these Bitcoin funds and exchange them via exchanges into Monero in order to launder them. Exchanges are getting faster in blacklisting these kinds of launder transaction and are reporting them to the authorities. With the newly gained information, law enforcement agencies then request further information from other exchange to track the hacker’s steps. The closer monitoring of all exchanges in regard to AML lead hackers and other criminals to find new ways to take their profits from illegal activities (Möser et al., 2018, p. 157). The Monero core developer Spagni said in regard to

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the use to Monero for illegal activities that Monero will with no doubt be used in potentially unsavory ways, like the example of ransomware and a currency for gambling as well as for the porn industry. He further adds to the statement that Monero will also be used in innocent forms of financial privacy, for example, if someone makes regular payments but wants his net worth to be secret. He reminds that the use of Monero is out of his hands (Greenberg, 2017b, p. 6). But Monero is also used in a non-criminal way. For example, the news website Salon lets its ad-blocker-users decide if they want to pause the ad- blocker or if they want to give their devices extra power to mine XMR. This revenue model was chosen because these news sites need to finance them somehow. Normally it does that using advertisement but since ad-blockers become more frequently used it was hard for these websites to generate enough revenue. Using the user’s extra computational power is another way to earn revenue. The website Salon, compares it with someone borrowing a calculator for a few minutes to solve a math problem and then giving it back when he leaves the website (Konugres, 2018, p. 3). Monero has established itself as the privacy currency over the past years. With its value proposition, it offers its user true privacy and it is expected that the more people pay attention to privacy the faster Monero’s adoption will go. Monero offers 5 unique characteristics to its users. Firstly, it offers fewer attack vectors and less attack surface in regard to centralization, regulations and the power of a few powerful. It is important to note that governments can threaten individuals behind other crypto currencies like Ethereum for example, but since Monero is a community-driven project this attack vector is relatively small. Secondly the fact that Monero is community driven and community funded. This reduces the risk of a central party deciding the way of Monero’s development. Thirdly, the privacy setting of Monero transactions is by default on. This makes it impossible to send non-private transactions. Fourth would be scaling but since the Monero’s blockchain uses a lot of space because of its mixing transaction only the future can show how exactly Monero can scale. The last characteristic is the utility. As described above Monero presents a real utility to its users. The utility of being enabled to perform untraceable transactions and transact with a high privacy level. (Dian, 2017, pp. 2-5).

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7 The Economic Impact of Bitcoin, Ethereum and Monero This chapter will investigate the economic impact of crypto currencies especially Bitcoin, Ethereum, and Monero. The economic impact will be illustrated using the examples of mining, exchanges, payments, ICO’s and crypto currencies as a financial asset class. Since 2013 the mining of crypto currencies had gained tremendous popularity and over the time big mining companies came and went but a few were able to establish themselves on the market. One example of such a mining company is Bitmain. It was founded in 2013 in Beijing by Jihan Wu and Micree Zahn. Since then it has evolved into one of the primary Bitcoin mining companies manufacturing ASIC chips and mining at the same. Bitmain’s ASIC chips are approximately 50 times faster than a tradition GPU. It also uses its manufactures chips to build ASIC mining units, which it then sells to its customers. Analysts estimate that Bitmain has between 70% and 80% of the overall market share in Bitcoin miner equipment and ASIC chips. Most of Bitmain’s revenue is generated by selling ASIC miners that are powered by the company’s chips. In 2017 Bitmain’s operating profits were estimated to be somewhere between $3 and $4 billion. In comparison, the operating profits of Nvidia were $3 billion in the same time period. Nvidia is one of the leading GPU manufacturers for personal computers and gaming con- soles and has a history reaching back almost 25 years (Cheng, 2018, pp. 1-3). The Bitcoin core developer Song (2017a) investigated how profitable Bitmain really was in 2017. He found out that Bitmain is able to earn 100.000 BTC per year if they maintain their hashing power at 13.2% of the complete network. He furthermore stated that the Bitcoin mining break-even point for Bitmain’s operation was at that time $430 per BTC. This is one reason by Bitmain and other large mining operation can survive a long period with low and falling Bitcoin prices. Because of their scope of operation, their break-even points are set at a very low level. Furthermore, by manufacturing their own mining equipment they make an additional profit (Song, 2017a). In June 2018 Bitmain announced that it has raised $400 million in a pre-IPO funding round led by Sequoia Capital China. Based on that funding Bitmain is valued at $12 billion, which matched Bitmain’s internal estimations. Bitmain plans to go public in September at the Hong Kong Stock Exchange with an expected market cap of $30 to $40 billion. This shows what kind of value and valuations are associated with big crypto mining operations (Wilmoth, 2018b, p. 1). Their business activities have a big impact in a financial matter but also in regard to the global energy market. Running Bitcoin and other PoW mining equipment is an electricity-intensive process. A new study concluded that the Bitcoin network consumes at least 2.6GW of power that is almost as much as Island consumes per year. If the Bitcoin network continues to grow at the current rate it is expected that it could consume more than 7 GW by the end of 2018. These energy consumptions result in high costs but based on the current price of Bitcoin every day are Bitcoins created worth over $14 million (Vries, 2018, p. 804). Researchers have estimated that with the current network growth rate it will consume more energy than the UK by end of 2018, more than the entire US by mid-2019. Today it already consumes more energy than 159 countries including Ireland and most African Countries. These estimated are based on the current conditions and the data of power compare (Powercompare, 2017, pp. 1-2). In January of 2018, the Chinese government announced that it plans to impose limitations on the power use of mining operations. Chinese officials are concerned that Bitcoin miners have taken advantage of the low energy prices and that it starts affecting the normal electricity use. China is not the only country that is considering energy consumption limits for Bitcoin mining in order to cope with the huge and rising energy demand from these mining operations (Yang, 2018 pp. 1-2). The Bitcoin mining industry and its recent popularity gain had another economic impact in regard to GPU mining. The rise in mining using GPU’S had created an unexpected and never seen before global shortage of GPU’s. It was a usual picture to see empty GPU shelves in major US retail stores. It is estimated that regular miners had purchased over 3 35 Crypto Currencies

million units worth over $776 million with GPU manufactures emerging as the prime benefactors (Lilly, 2018, p. 1). The prices of GPU units rose in some cases from $380 up to $700 because of the shortage. In the fourth quarter of 2017, it is estimated that 10% of Nvidia’s revenue came from selling GPU’s for mining. It made a revenue that quarter from selling mining equipment of close to $300 million. In the first quarter of 2018, Nvidia reported a $3.21 billion revenue, an increase of roughly 66% compared to the first quarter of 2017 (Martindale, 2018, p. 2). Because of the constant rise of crypto currencies especially Bitcoin, Ethereum and Monero a multi-billion-dollar industry has formed around them, using it to create value in an economical new way and contributing to the overall economy. Another economic impact is originating from the crypto currency exchange industry. Exchanges generate their profit by charging transaction fees on all trades and transaction that occur using their platform. If a token should be listed on the big exchanges it not unusual to pay between $50.000 and $1 million in listing fees (Sedgwick, 2018, p. 1). Exchanges and transaction processors can be seen as the big winners in the crypto industry because they enable people to transact and participate in that market. It is no surprise that the big exchanges have a daily trading volume of over $1 billion. The largest exchange by trading volume at the time of writing is EXX that has a $5.6 billion daily trading volume, followed by Binance and OKEx both reaching daily trading volumes above $1 billion (Coinmarketcap, 2018a, p. 1). Depending on the exchange transaction fees between 0.2% and 0.7% and sometimes additional with- drawal fees are charged. It is estimated that OKEx and Bithumb are making more than $1 million, Bittrex and Huobi over $2 million and Upbit and Binance more than $3 million in daily revenue. These estimations were published in the beginning of March 2018. Most of these big exchanges are located in Asia because on the one hand of the centralization of crypto mining and on the other hand because of the young population. They are adopting technology quicker, are more comfortable with mobile payments and have a strong gaming culture that incentivizes virtual transactions (Russo, 2018, pp. 2-3). This young population is the main customer group of exchanges, not limited to Asia, it can rather be seen as a global trend. At the end of 2017 crypto currencies like Bitcoin, Ethereum and Monero gain such a popularity that exchanges saw new records of users signing up every day. This went so far that exchanges like Kraken had 50.000 new user registrations per day. Additionally, these new users generated 10.000 new support tickets per day. OEX.IO went that far that it only allowed new users to register when they had a special invite code. This massive demand of new users eventually was too much for the exchanges and they paused new account openings. Bitfinex paused the registration process for more than a week to handle the workload. Other exchanges followed and stopped new users from creating new accounts (Terlato, 2018, p. 1). On the day Binance re-opened for new users 240.000 signed up. Between December 2017 and January 2018, Binance’s website had a traffic increase of over 600%. These numbers illustrate what a demand for exchanges exist and why they are making so much profit on the way (Tokel, 2018, p. 1). With the increased financial activity that is occurring on these exchanges, the regulators are increasingly focusing their attention on regulating these exchanges because they function as the main gateway to crypto currencies. The new rules that were introduced have a boarder set of rules in regard to governing payment services. These new laws were set to take effect in the EU from the beginning of 2018. These new rules put a strong focus on the KYC processes as well as on the AML and terrorist financing control and prevention. This includes conducting customer due diligence, transaction monitoring, screening, reporting suspicious transactions and keep the adequate records. The authorities in Singapore subject intermediary’s, that facilitate offers or issues digital tokens to regulation and they are obliged to hold a capital market service license in order to operate (Tan, 2017, pp. 1-2). One of the biggest success stories is the one of the Binance exchange. The founder Changpeng Zhao started developing high-frequency trading systems for Wall Street and realized that speed is everything.

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When he started Binance he built it to be a Ferrari. He was able to build such a good exchange and spread the word, that Binance was able to become the largest crypto exchange in the world in under 180 days. Binance is able to process 1.4 million transactions per second and on a peak trading day in January it processed 3.5 billion new orders, cancels, and trades. During that time Binance reached $10 billion daily trading volumes (Kauflin, 2018, pp. 2-3). With such popularity and so many users, Binance can charge between $350.000 and $1 million as a coin listing fee. It is estimated that Binance will be able to generate up to $1 billion in profit in 2018. During the first half of 2018, its user base grew from 2 million in January to 9 million by June. With the presented exchange industry, it is clearly visible that they have an economic impact. On the one hand, they generate so much profit that they are reinvesting in through different investment funds in different projects and at the same they are a nice tax income source for countries they are based in an create jobs on the way (Wilmoth, 2018a, pp. 1-2). Payments can be viewed as another economic impact especially in the long term depending on the adoption of the technology. Srokosz and Kopciaski (2015) concluded in their study that virtual communities are creating their own medium of payment for the exchange of goods and services, in which central monetary authorities are not involved in the emission or circulation. The emergence of crypto currencies can be traced back not only to the shortcomings of traditional currency systems but also to the development of the internet where crypto currencies can prove to be a better-suited form of money (Srokosz & Kopciaski, 2015, p. 627). One industry that is starting to intensify using crypto currencies is the porn industry. Porn currently accounts for approximately 12% off internet traffic and the potential benefits of crypto currencies have been recognized very early. VIP Passion became the first escort service to accept Bitcoin as payment, long before mainstream companies like Microsoft started to accept it. In regard to these transactions, Monero is also used quite frequently. Today numerous adult entertainment companies accept crypto currencies as payments. In March 2018 the Vice Industry Token launched, a crypto currency specially designed for the porn industry (Penny, 2018, pp. 3-5). At the same time, crypto currencies are more frequently used for regular payments as well. The retailer acceptance in 2017 rose by 30%, the monthly payments in Bitcoin for goods and services increased from $9.2 million to $190.2 million from 2013 to 2017. Overstock.com that was among the first companies accepting Bitcoin is now accepting other crypto currencies as well. Even Amazon has registered at least four crypto-related do- mains so far (Moore, 2018, p. 1). This growth is party enabled through payment processors like BitPay. They enable companies to accept Bitcoin and other crypto currencies without the volatility exposure and therefore drive the retailer adoption. BitPay processes over $1 billion in payments per year and was able to grow its US Dollar payment volume over 300% year-over-year from 2016 onwards. 48% of BitPay’s customers are from North America, 35% from Europe and 16% from Asia. Only 2% of its customers are based in South America (BitPay, 2017, p. 1). Especially in the regards to payments the shadow economy and the use of crypto currencies like Bitcoin and specially Monero have a significant impact. These currencies are made for the informal economy, Bitcoin in the earlier days and Monero today. The OECD estimates that the global black market is as big as $10 trillion. Monero and other crypto currencies are able to bypass the traditional banking system and financial institutions, it can be seen as a currency in the shadow for the shadow economy. The DEA concluded in their recent national drug threat assessment that Mexican transnational criminal organizations (TOCs) use their cash possessions and convert them to Bitcoin or Monero in order to bypass financial oversight. These currencies are accepted by a wide range of Chinese manufactures, receiving Chinese goods for the TOCs crypto currencies (DEA, 2017, p. 125). Furthermore, Monero and others play a huge role in all darknet marketplaces. At its peak times, AlphaBay had more than 369.000 items listed and a daily transaction volume of up to $800.000, which would result in a yearly volume of roughly $250 million. Chain analyst claim that in

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2017 more than $660 million in Bitcoin were send to darknet markets. With today’s importance of the internet, transacting on it and making payments is mandatory. The current monetary system is not able to serve this purpose to the fullest and therefore crypto currencies are representing a good alternative. In this regard, the economic impact of crypto currencies could be enormous. It is too early in the technological development to predict the adoption and its future use cases (Banfield, 2018, pp. 8-11). ICO’s that use the Ethereum platform to launch their dApp has another big impact on the economy. ICO’s were already in detail discussed in the Ethereum use case chapter but it is important to highlight the overall economic impact. Projects were able to raise more than $1 billion in funding to establish their venture and create economic value (Garg, 2018, p. 2). From January 2018 until the end of July 2018 a total of 978 ICO’s took place and collected together over $6 billion in funding (ICOData, 2018, p. 1). In June alone ICO funding exceeded $500 million and it was the first month that ICO funding had surpassed angel and venture capital funding. They funded startups with approximately $300 million. Also, in July ICO funding exceeded $300 million whereas angel and venture capital funding was just over $200 million. Oliver Bussmann, a former chief information officer at UBS, stated that ICO as a new business model leveraging the blockchain technology will sustain as a digital way, combining crowdfunding and a new hybrid asset class of equal ownership and currency (Kharpal, 2017, pp. 1-2). With that amount of new businesses, regions or even countries have positioned them to have friendly regulations in regard to their business venture. One of such regions is Zug located in Switzerland. Ma- thias Rauch the CEO of Lakeside Partners in Zug states in an interview that Lakeside Partners receives more than 100 requests per week of new companies that are planning to establish their business in Zug. He estimates that in 2017 roughly 100 new companies were established in the Crypto Valley. If the trend continuous he estimates that in 2018 between 200 and 300 new companies will be established (Gerbl, 2018, p. 1). The investigation of CrunchBase data concluded, that out of 527 funding campaigns, 68% were funded via venture capital while the remaining 32% got funded using the ICO method. This is indicating a trend that more and more ICO projects are starting to go back and get funding the old fashion way. It will be interesting to see what kind of funding method blockchain based startup will use in the future and how they evolve over time (Garg, 2018, p. 2). With the creation of blockchain and Bitcoin, it was possible to create Ethereum and all the other currencies that have now resulted in a new asset class. Currently, the major asset classes for investment purposes are stocks bonds and the money market. The market cap of major US corporations is between $600 and $800 billion and they have a company history of at least 15 to 20 years. Bitcoin as an asset class is well-aligned with the fundamentals of its time, which bodes extremely well for its future. Fur- thermore, it has a healthy foundation for the continuous growth of its value and the volatility. For an asset class, the sustainability and growth rates are important (Oliver, 2017, p. 3). The total market cap of all listed crypto currencies by end of July 2018 is close to $300 billion but had its peak at the beginning of the year with a market cap of roughly $800 billion (Coinmarketcap, 2018g, p. 1). A recent survey of institutional investors of Triad Security concluded that 62% of all respondents are buying or are considering buying Bitcoin and other crypto currencies. Towards the end of 2017, a new wave of crypto hedge funds was established that shows that the crypto currency asset class is still small but major players are moving in to trade it (Aziz, 2018, pp. 2-4). Crypto currencies have a different use than traditional financial assets and therefore present an uncorrelated asset class for investors. But it is important to mention that crypto currencies are a perfect asset class for individuals participating in the industry and use them for transactions. For people who are just using the asset class in order to achieve a quick financial gain with no knowledge about the industry, it is a very risky one. Another reason to have a septate crypto currency asset class is that it is hard to compare different types of assets, like stocks and bonds. It is only

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possible to compare assets within one class and structure the investment portfolio to one’s preferences in regard to classes. A crypto hedge fund managers job is to make profits in crypto currency terms and if it is possible to grow something in their own terms it should be considered as an asset class. Long- term investors plan is not to trade the crypto currencies back to fiat but to use the crypto currencies (Brown, 2017, pp. 2-3). Some argue that with the extreme gains of the overall market cap of all crypto currencies in 2017 the first step towards a mainstream adoption of this asset class was made. This trend can also be seen in the user experience exchanges and other service providers are offering now and how easy an investment in a crypto currency is done (Horsley, 2017, p. 4). During the slow development of the crypto asset class, some start sub-dividing the asset class into four sub-classes. These are currencies, network value assets, utility tokens and non-fungible assets. For each sub-class different valuation methods are required as well as value propositions. Due to the fast development of the blockchain ecosystem it is possible at any time that new technologies emerge that may result in a new sub-class. The most common value metric is the market capitalization, which is the sum of value of each coin or token multiplied by the number of coins in circulation (Henot, 2018, pp. 1-2). It is important to note that the crypto currency asset class is a quite young one and faces certain problems. For once, coins like BTC, ETH and XMR are very volatile changing their value in short periods of time, sometimes over 15%. Since the underlying technology is so new and has not been properly explored yet and it is questionable if the majority of crypto currencies can survive on a long-term basis. The risk of that asset class is further increasing because of the lack of regulations and consumer protection laws. With regulators just starting to think about regulations in 2017 the regulatory security is nearly not existing. By the end of 2017 with the crypto boom regulators realized that crypto currencies are being heavily traded and that certain regulations were needed. Japan established a licensing system for exchanges and countries like Liechten- stein and Malta are working on an economic frameworks for crypto currencies and the distributed ledger technology it is clear that crypto currencies are an emerging trend for payments and it is expected that in the near future the percentage of payments made using crypto currencies will increase significantly (Jagati, 2018a, pp. 1-2).

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8 Discussion and Conclusion This chapter is used to analyze and discuss the findings of this research paper. Furthermore, this chapter will include the limitations of this research paper, the recommendations for further research as well as the research paper’s conclusion.

8.1 Discussion Since the creation of Bitcoin in 2009 different crypto currencies with different use cases and functions have emerged over time. After a few years of testing Bitcoin, different users had identified shortcomings and decided to develop new projects that addressed these shortcomings. Monero with its prime focus on privacy and decentralization started in 2014 and enables by to today its users to perform untraceable transactions. By 2015 the Ethereum began to operate and enabling any developer to develop his own dApp utilizing the existent Ethereum infrastructure. The real engagement and development of different projects based on the blockchain technology started after Ethereum offered the proper tools to easily develop and execute projects. Bitcoin is the largest crypto currency and it can be said that more people know about Bitcoin than about any other crypto currency. Most people encounter it sooner or later when they are trying to buy crypto currencies because most coins have trading pairs with Bitcoin. Furthermore, most merchants and other enterprises accept Bitcoin as a payment method enabling its customers to easily spend their Bitcoins as shown in this research paper. It also is from the community sounding it the largest and probably most engaged and has the widest developer community as well as the strongest foundation. The same can be said for Monero, since it is completely community driven and funded, except it is much younger than Bitcoin and therefore has fewer developers and overall less experience. Monero has its own user base that values Monero because of its privacy. It will always give privacy focuses on individuals that will use currencies like Monero and therefore it can be expected that privacy coins are will continued to be used and will continue to have an economic impact. Ethereum, on the other hand, has a central figure representing the platform, Vitalik Buterin. Ethereum enables many developers to try and build something with the blockchain technology, which is helping the adoption of Bitcoin, Ethereum, Monero and more importantly the blockchain technology. With the existence and more importantly the usage of Bitcoin, Ethereum and Monero, industries have formed around them, providing the users all the services they require in order to join the industry and be a part of the blockchain movement. The mining industry grew so big and powerful, that the announcement of one chip manufacturer leads to the change in the consensus protocol of a currency. Mining companies are worth billions of dollars, planning IPO’s and have positioned themselves so good in the market, that they have multiple business ventures generating profits independently from each other. By differentiating their operations, they are able to survive long bear markets, because their price per Bitcoin or price per unit is so low, that other companies are not able to compete. The same can be seen with exchanges except that here users can actively choose which exchange they are using. If a more competitive exchange comes long, most of the users will switch to that exchange because it is better in some way or offers cheaper transactions. This nomadic behavior of crypto currency users can not only be seen in regard to exchanges but also in regard to wallets and projects. The industry is young and with the uncertainty already being very high, the community gets easily cared. One of the biggest economic impacts of crypto currencies can be seen in the payment industry. Trans- ferring value using Bitcoin has advantages in comparison to the traditional financial system as shown in this research paper. Transactions are cheaper and a lot faster resulting in a higher financial flexibility

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for its users. Furthermore, the current monetary system was not designed to be used on the internet. Bitcoin, Monero, and Ethereum have proven themselves of having a clear advantage when used on the internet. Sonner or later most of all payments that occur on the internet will be done using crypto currencies. It is important to keep in mind that the crypto currency market is very young and has not matured yet. With this, there are a lot of risks associated. On the one hand there are some projects designed to be scams and stealing user funds and on the other hand, there are hackings, crypto jacking, ransomware and phishing that try to gain access to user’s funds. For newcomers to the industry, these fakes projects look very real and the promises given by the projects sound too good to be true, and that’s exactly what they are. In the traditional economy, it is said that nine out of ten startups will not survive the first 5 years. It is also relating to crypto currency projects and their digitals coins or tokens. Many investors forget that actual startups are associated with the majority of crypto currencies. One of the few excep- tions are Bitcoin and Monero, they are community driven. It is very likely that a majority of today’s listed coins are dead in less than 5 years. Additionally, the whole market displays a huge volatility that is affecting the performance of individual coins as well as the whole market. With these just being a few risks the new asset class is accompanied with, it is one to be watched but with caution. The economic impact from this new asset class is hard to determine exactly and only can be seen in the development this asset class will have in the next 10 years. Crypto currencies have an economic impact especially Bitcoin, Monero, and Ethereum. This economic impact, compared to the global economy is very small and irrelevant. The economic impact always has to be seen in context. Ten years ago, there were no crypto currencies and no blockchain technology. All the economic impact these crypto currencies are doing today were developed in less than ten years and many believe that the future adaption curve could be exponential. In order to answer the research question, the author is coming to the following conclusion. That crypto currencies have an impact on the economy is definitely shown and illustrated in this research paper and therefore, it can be said that crypto currencies like Bitcoin, Ethereum, and Monero do have an economic impact. In regard to the age of the technology as well as the existing data, it is currently not possible to determine or express the economic impact of crypto currencies in numbers. In the opinion of the author, the development of the internet can be compared to the development of the blockchain technology and crypto currencies. With this in mind, we will see a fast development of the blockchain technology, new projects will come and go, and the overall landscape will change very much in the next five to ten years.

8.2 Conclusion Over the last nine years, the crypto currency industry developed itself, at the beginning very slow with an exponential growth that is still occurring today, sometimes stronger and sometimes weaker. With the technology only existing nine years it is very early to determine an exact economic impact but as this paper presents, by today the economic impact of crypto currency is slowly starting to appear on the surface of the overall global economy. On a more regional level, it can be said the economic impact is relatively big. Regions transforming themselves into new hotspots for crypto business generating jobs and other economic value, while giving these businesses the room to grow. The same can be said for the mining and exchange businesses that formed around the crypto currency industry. Just the announcement that companies starting to accept currencies or forming partnerships would drive the price up and also down. Longfin Corp. announced that it would engage in a partnership with a blockchain technology company and the stock price rose by 2000% (Sen, 2017, p. 1). An economic impact can also be seen in

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the regard to the electricity consumption the mining operations require. These have started using so much energy that other businesses and communities had electricity shortages. With the global electricity consumption already rising the additional power that crypto currencies require need to be produced. With today’s growth and practices, this will not be sustainable for long. Even governments have started to limit to the energy consumption of mining operations. Different solutions have been proposed to solve this energy consumption problem one of which the switch from PoW to PoS is. Ethereum wants to try to upgrade their network to run with PoS and it is anticipated and feared at the same time that the mi- gration process will result in issues for the network. Another anticipated solution is to locate mining operations next to power plants in order to use their energy surplus that otherwise would have been wasted. It is clear that the community needs to find a solution in order to scale the systems and reach the mainstream adoption. The whole industry of crypto currencies and the blockchain technology needs to be observed and further developed. Within the next ten years, many new business and use cases will be developed based on crypto currencies and the blockchain technology. With the future development and adoption, the economic impact of crypto currencies will also grow and gain importance.

8.3 Limitations The largest limitation of this research paper are the sources. Since the blockchain technology and crypto currencies were developed quite recently and are considered to be a very young technology, the amount of academic literature is very limited and, in most cases, not existent or not relevant. In the parts of the research paper events related to Bitcoin, Ethereum and Monero were described that had no academic relevance and therefore news articles, blog posts, forum entries of different crypto currency forms, books, podcasts and other literature resources were used. The author always tried to find the most accu- rate and reviewed data but, in some cases, no current data was available. Additionally, all events that were presented in this case study were chosen by the author in accordance with the relevance of the research paper. Some events were excluded on purpose because it would have exceeded the scope of this case study. The findings in regard to this case study are only valid in regard to the cited information and it has to be checked if these findings are applicable to other cases. The presented use cases were picked by the author and are not representing all use cases for crypto currencies and the blockchain technology. In the opinion of the author the chosen use cases represent a good distribution of cases in terms of use and importance.

8.4 Recommendations for Further Research In regard to the relative youngness of the research field, there are quite a lot of suggestions for further research. These suggestions are structured on the one hand on a macro crypto currency and blockchain level and on the other hand on a micro crypto currency specific level. On a macro level further research is needed in the fields of economic impact, adoption, payments, regulations and other use cases. It would be helpful to investigate the adoption curve of crypto currencies and the blockchain technology in an overall perspective. Also, the adoption in different industries, how fast are they, is there even an adoption yet or is that industry unaffected from crypto currencies and the blockchain technology. In regard to payments, major banks and payment institutions are testing the blockchain and crypto currencies for their cross-border payments, but how usable and forward thinking is the technology, what are the impli- cation for banks and other financial intermediaries have not been widely researched. Also, the impact of the mining- exchanges and crypto currency related industries has not been investigated yet.

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Regulations are just starting to appear but on what academic and scientific foundation are they placed and how fast will the technology change and in what regard can regulators control it, is a regulatory research filed that has not received much attention. On a micro level, Monero should receive more attention from the research community. Questions like what impact Monero has, how can the privacy be used for regular business transactions as well as the regulators perspective and the economic impact have not been researched and it would be interesting to see the results of such studies. In regard to Ethereum the impact of ICO projects on the overall crypto currency market, their impact on the local and global economy and business practices would be a suitable research field. Additionally, the research field of ICO needs to gain traction and investigate the crowdfunding practice, its impact on startups, the venture capital, and other investor-related industries. The sustainability of ICO projects and their long- term impact could not be assessed yet due to a lack of data but within the next ten years, more data should be available to answer these questions. How crypto currencies are valued and is their value sustainable is another question research should investigate. Overall it can be said that there is a deep need for further research in all fields of crypto currencies, blockchain technology and their economic impact that will result in interesting findings over time.

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