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Bitcoin
Understanding and Assessing potential
Opportunities
January 2014
We are an experienced entrepreneurial team focused
on building successful tech companies in Latin
America and Beyond

Investigation and analysis led by
Julieta Duek
Stanford MBA, 2013

Demian Brener
Senior Analyst at Quasar Ventures
Index

Definitions and functioning
Expected dynamics, arguments in favor and against
Business opportunities
Bitcoin is an electronic payment system based on a
decentralized global ledger
Bitcoin
• An electronic
payment network
− Based on a
global ledger
that records all
txs ever made in
the system
− Ledger cannot be
overwritten or
changed

• Bitcoin is also the
name of the
currency unit of the
payment system

Main features of the Bitcoin network
Decentralized

Network maintenance and tx processing done by a
network of individuals’ computers (“miners”)

P2P network

Theoretically, transactions can be done P2P; there
are also exchanges to facilitate txs

Global

The system doe not care about the tx
origin, destination, or where it is processed

Secure

Ownership and tx of bitcoins are secured by
protocol rules and mathematical algorithms

Open source

Zero or low
processing fees

Software changes can be proposed by any
node, and are widely implemented when 80% of
the nodes adopt the change
Initially free processing, with miners rewarded with
newly generated bitcoins
As # bitcoins reaches 21M, tx fees will prevail

3
How a transaction works: Alice sends bitcoins to Bob (I)
Alice

Bob

creates and Address
for this tx

creates and Address
for this tx

AdressAlice

AdressBob

Message
• AdressAlice
• AdressBob
• Amount to send
• Change
• Tx fee

Signed message

Private keyAlice
Public keyAlice

4
How a transaction works: Alice sends bitcoins to Bob (I)
Alice

Bob

creates and Address
for this tx

creates and Address
for this tx

AdressAlice

AdressBob

Message
• AdressAlice
• AdressBob
• Amount to send
• Change
• Tx fee
Private keyAlice
Public keyAlice

Signed message

Broadcasted to the
Bitcoin network

Miners
5
How a transaction works: Alice sends bitcoins to Bob (I)
Alice

Bob

creates and Address
for this tx

creates and Address
for this tx

AdressAlice

AdressBob

Message
• AdressAlice
• AdressBob
• Amount to send
• Change
• Tx fee

Signed message

Signature verified

Private keyAlice
Public keyAlice

Miners

Processed by one of the nodes
• Adds tx to the global ledger
(block chain)
• Verifies signed message
through Public key
6
How a transaction works: Alice sends bitcoins to Bob (I)
Alice

Bob

creates and Address
for this tx

creates and Address
for this tx

AdressAlice

AdressBob

Message
• AdressAlice
• AdressBob
• Amount to send
• Change
• Tx fee

Signed message

Signature verified

Private keyAlice
Public keyAlice

Miners

Processed by one of the nodes
• Adds tx to the global ledger
(block chain)
• Verifies signed message
through Public key
7
How a transaction works: Alice sends bitcoins to Bob (II)
The ledger registers input and outputs that record the “balance of bitcoins” for each address
Alice

AdressAlice
Message
• AdressAlice
• AdressBob
• Amount to send
• Change
• Tx fee

Bob

Input
from AdressAlice

Output
to AdressBob

Signed message

AdressBob

Only Bob knows the private
key for this address, so only
he can send bitcoins out
from this address

Private keyAlice
Public keyAlice
“balance of bitcoins” for an
address: all the outputs
referenced to the adress’
public key, that haven't been
used as inputs in later txs

8
The Block chain orders who processes each tx block
Miners create blocks of processed
txs to be added to the block chain

The first miner to solve a certain math
problem adds his block to the chain

• Txs are bundled in blocks by miners
• Blocks linked together form the block chain
(the giant ledger)
• Each block is referenced to the previous
block, which gives a time order to the txs
• The system has to determine whose block will
be the next to enter the block chain

• The next valid block is the one that contains
the answer to a certain mathematical problem

• The 1st miner to solve it gets to add his block
to the block chain
− It takes an average of 10 min for
someone to find a solution
− That miner is rewarded with newly
generated bitcoins
9
What is a hash function?
A hash function creates a fixed short digest (H) from any arbitrary length of text (M)
H = hash(M)
Bitcoin uses a SHA256 function, resulting in a 32 byte number.
Properties of a hash function

• It is easy to compute the hash value for any given message
• It is infeasible to generate a message that has a given hash
• It is infeasible to modify a message without changing the hash
• It is infeasible to find two different messages with the same hash
• Pre-image resistance. It is a one-way function: given a hash H it is difficult to find any message m
such that H = hash(M)
• Collision resistance. It should be difficult to find two different messages M1 and M2 such that
hash(M1) = hash(M2).

10
If two miners solve the math problem at the same time, two
branches are created, but only the longest one will prevail
Two miners solve the math problem at
the same time, creating two branches

Only the longest chain will be part of
the block chain

Carol’s chain

• Nodes keep building the blocks on top of the
two blocks created by Carol and Frank
Block # 9JD
Prev #7CF

txns…

txns…

Block # 26K
Prev #7CF

Block # 6TY
Prev # 26K

txns…

txns…

Block # 7CF
Prev #2A4

txns…

Block # Y7T
Prev # 1L7

txns…
Block # 2A4
Prev #473

Block # 1L7
Prev # 9JD

txns…

• Nodes immediately switch to the longest
branch available
• Blocks that belong to the shortest chains, and
the blocks built on top of them, are destroyed

Frank’s chain

11
The Block chain prevents double spending fraud
The decentralized processing could
be risky of double spending fraud…

…but the block chain structure
makes it impossible
• To execute the double-spending Alice would
have to pre-create a “longer chain”
• But the previous-block-reference is part of the
text that goes through the hash function of the
next block
• So she cannot pre-create the chain, because
she needs info from previous blocks to
generate it

• Alice could create a longer branch with the
double-spend tx, that replaces the chain with
the tx to Bob
• The chain with the tx to Bob would get erased
for being shorter
• Bob´s money would get erased

• The only way to do it is being the 1st to create
that chain
•
• She could only win if she has >50% of the
computing power of the network, one of
bitcoins risks

12
Mining and bitcoin generation
Miner´s incentive = 1

Reward for verifying a block of txs + 2

Tx fees

1 Reward for verifying a block of txs
• Miners receive 50 newly generated bitcoins for the first 210,000 blocks and half the
previous amount of bitcoins for each subsequent 210,000 blocks
• Each block takes an average of 10 min to be verified (210,000 blocks take ~4 years)
− The difficulty of the math problem to verify a block is adjusted every 2 weeks so that
the average time to solve a block remains around 10 mins
• Newly minted BTCs cannot be spent for 100 blocks
2 Tx fees
• Incentive for miners verify those txs faster, by including them earlier in the block chain
• They arise from the difference between the values of input and output on a tx
• When all bitcoins are issued, tx fees will be the only compensation for miners to verify
txs, so eventually sending money through bitcoins will not be free
• Rewards and tx fees are a transaction with no input called “coinbase“, included in the block
the miner just created
13
Bitcoin current status (I)
Price grew explosively to $1200 (Mt. Gox) in December, but stabilized around $950 in January

Jul-2012

Oct-2012

Jan-2013

Apr-2013

Jul-2013

Oct-2013
Bitcoin current status (II)
Total volume of bitcoins, and Market Cap

Total # bitcoins is predictable and will
reach 21M in 2140
# bitcoins
(million)

Market Cap fueled by price increase
was around $11.5 Bn in Dec-2013
Mkt Cap
U$S Bn

22

15,0

US dollars stock: $1.220 Bn
US dollars stock: $943 Bn
Gold stock: $8.200 Bn

20
18

12,0

16
14

9,0

12
10
6,0

8
6

3,0

4

2
0

0,0

01/01/2010

01/01/2020

01/01/2030

01/01/2140

Sep-2012

Jan-2013

May-2013

Sep-2013

Historical
Projected
15
Bitcoin current status (III)
Bitcoin volume of transacions per day

# tx/day highly volatile
# tx/day
th
400
350

300

Daily tx volume between $200 – 400M
reaching the level of Paypal
tx/day
$M
450
400

350
300

250

Visa: $16.513 M
Mastercard: $9.863 M
China UnionPay: $7.562 M
Amex: $2.434 M
Discover (Pulse): $438 M
Paypal: $397 M

250
200
200
150
150
100

100

50

50

0

0

Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013

Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013

16
Emerging crypto currencies can be classified as Bitcoin
alternatives and currencies for Other Uses

Alternatives to Bitcoin
• Used as currency, for purchases, money
transfer, store of value, etc
• With slight different functionalities:
Litecoin

Less energy consumption to
process txs

• Based on the Bitcoin protocol
• Created ledgers to transact, register, or
represent other things that are not necesarily
monetary value

Faster txs
Useful for small amounts

Peercoin

Crypto currencies for other uses, based
on protocols similar to Bitcoin

Ripple

Namecoin

Centrally administered Bitcoin
Only one exchange

Quarkcoin

Could be more secure
Not really much different than Btc

Worldcoin

Photoshares

Same protocol as BTC for
representing asset ownership

Similar protocol to Bitcoin but to
acquire shares in Invictus
Innovation DAC

30 second tx time
Direct competitor of Litecoin

• All their functions could be easily incorporated
to Btc as needed
− Except Ripple’s centralized governance

• Could be replaced by Btc.
− I.e.: buying the domain with Btc instead of
Namecoins
17
Alternatives to Bitcoin
Litecoin
(Mkt Cap $727.9M)

Peercoin
(Mkt Cap $93.4M)

• 84 M total coins, four times more
than Btcs
• Tx time 4x less than Btc (2.5
min/block)
• Trying to be the Btc for small txs

Ripple
((Mkt Cap $3.7Bn)

• “Proof of Work/Proof of Stake”
makes processing less energy
consuming
• Inflationary: volume grows 1% per
yr, proportional to PCP held
• Fixed 0.01 PCP tx fee
• Not decentralized, founder Sunny
King has checkpoint control of txs

• Central control by Ripple Labs
• Shared public ledger that holds
balances in any currency
• It is an exchange: ledger registers
offers to buy or sell assets
• Fee in XRP required to transact
• Founders held XRP 100M
initially, gifted XRP 80M to Ripple
Labs, who will distribute 55M
XRPs to users

Quarkcoin
(Mkt Cap $52.3M)

Worldcoin
(Mkt Cap $22.9M)

• 245M Quarkcoins, with 98%
already mined
• Some claim that the more stable
stock of Quarkcoins will make it
less volatile
• With a 6-way hashing
method, claims to be more secure
than Btc but a 51% attack is
equally possible

• 30 second tx time
• Mining has 1% reward reduction
per week, encouraging fast mining

18
Crypto currencies for other uses, based on protocols
similar to Bitcoin
Namecoin
(Mkt Cap $46.9 M)
• Same protocol as Btc but to represent asset
ownership
• Platform can also be used to register
messages, votes, and as login system
• Colored Coins is another service for
representing asset ownership, but can run on
top of BTC or any protocol

Photoshares
(Mkt Cap $21.8 M)
• Photoshares represent shares in Invictus
Innovation Decentralized Autonomous
Corporations (DACs)
• Invictus is a platform that brings together and
coordinates developers who want to build
DACs
• Only 2 M Photoshares are available

• Transaction cost is 0.01NMC
− E.g.: registering a domain or transferring
it costs 0.01 NMC

19
New application platforms and programming languages are
being built using the blockchain technology and protocol
Ethereum1

Bitcloud2

• Ethereum is a decentralized mining network
and software development platform designed
to allow users to encode advanced transaction
types, smart contracts and decentralized
applications into the blockchain

• Bitcloud works on a variation of proof of stake
known as proof of bandwidth. The nodes in
this system are similar to the miners in the
Bitcoin protocol in that they mine cloudcoins by
providing bandwidth to the network

• It includes a Turing-complete programming
language that can be used to build applications
and features on top of the ledger using
contracts as building blocks

• Instead of using a proof of work system where
miners are looking for the solution to a
complex mathematical equation, the nodes in
Bitcloud are rewarded based on their share of
the total amount of bandwidth used in the
Bitcloud network

• A contract is like a computer program that lives
inside the Ethereum network, which is
triggered every time a transaction is sent to it

• Each block reward is distributed among the
nodes based on their share of the overall
amount of bandwidth needed by the Bitcloud
users

1.Ethereum.org
2.GitHub Bitcloud white paper at https://github.com/wetube/bitcloud/blob/master/Bitcloud%20Nontechnical%20White%20Paper.md

20
Index

Definitions and functioning
Expected dynamics, arguments in favor and against
Business opportunities
What are the benefits compared to Fiat and Gold?
What is Money? Medium of exchange, unit of account and store of value

Scarce
Durable
Portable
Divisible
Easily Verifiable
Easily Stored
Fungible
Authenticity
Mass adoption

Fiat
Neutral
Neutral
Neutral
Yes
Yes
Neutral
Yes
Neutral
Yes

Gold
Yes
Yes
No
Neutral
Neutral
No
Neutral
Neutral
Neutral

Bitcoin
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
No

22
The rules of the Bitcoin system have implications and
consequences
Deflation

Implications of
decentralization

Due to limited number
of coins

(+) Harder to stop by
states or companies

Does not invalidate
most of its uses
• It does invalidate
debt txs

(-) Very vulnerable to
market reactions
(-) No central leader to
deal with governments

Volatility
Compare with other
currencies/gold
Understand if higher
volume would solve it

Open source
governance
Anyone can
• Find bugs or errors
• Propose changes
Prioritization and
implementing is led by
the core developers

Concentration of
Bitcoin holders
(-) Are market
makers, thus
controlling price
(+) Could lead
development of the
ecosystem if they can
coordinate themselves

Mining incentives
and tx fees
Still evolving in the
protocol
Will probably end in
market-set tx fees

Mining power
structure
Grouping of miners to
stabilize profits
Pools are not a risk
• But governments
could take over
mining for an attack

Anonimity
Currently achievable
In the future,
regulation will
eliminate it
Five mining pools concentrate 80% of the revenues
Mining generates $4M revenues per day
but is currently not profitable

Top five mining pools
concentrate 80% of revenues

• Total nodes: ~5000

• Mining is no longer profitable
− Excess investment caused excess supply
− Raising the Difficulty levels set by the system
− Causing an arms race of mining technology
that is now slowing down

Unknown & Others

17%

Eclipse MC

• Around $4M revenues per day

Slush

3%
6%

Bitminter

7%

Eligius

11%

BTC Guild

27%

G.Hash.IO

29%

Mining revenues
24
The formation of mining pools could pose a risk for the
Bitcoin system: the 51% attack

The 51% cartel attack is unlikely
An attack would be costly and difficult to
implement
• Requires controlling >33% mining power
• Bitcoin processing power is now >500 most
powerful computers in the world
• Will become even more costly over time
• Building this power takes time1
• The attack itself would have last 20-30 min
• Nodes have tools to report bad behavior

A Goldfinger attack3
could be possible
The attack won’t come from
• Those who own Bitcoins, profit from Bitcoin
industry, or would gain Bitcoins in the attack
The attack could come from:
• Someone who would achieve utility outside the
Bitcoin economy through the attack
Social protestor or hacker

Rewards are limited2
• The attacker could:
– Double-spend his/her own Bitcoins
– Delay others’ txs confirmations
• The attacker could NOT
– Create or destroy coins
– Fake transactions
– Take someone else’s Bitcoins

Too costly for an individual
or non-for-profit
organization

Investor short in Bitcoin

Gain from shorting not
enough to cover costs

Government
Company competing
with Bitcoin

Only a major tech company
could do it, or coordination
of several (low probability)

1. http://hackingdistributed.com/2013/11/04/bitcoin-is-broken 2. https://en.bitcoin.it/wiki/Myths and https://en.bitcoin.it/wiki/Myths
3. The Economics of Bitcoin Mining or, Bitcoin in the Presence of Adversaries, by Joshua A. Kroll, Ian C. Davey, and Edward W. Felten, Princeton University

25
Governance of Bitcoin by emerging leaders
whose power is constrained by the possibility of a fork
Core developers have to push
improvements and avoid forks
Core developers rise and get respect through
their skills and contributions to the system
• Satoshi still has some lingering influence
New core developers can arise anytime
• Power changes have happened in the past1
Main incentives of the core developers are
• Improve the system
– Eliminate bugs and vulnerabilities
– Implement changes to increase adoption
and make the system sustainable
• Generate consensus
– Sometimes the optimal solution is unclear
– If a hard fork happens, and Bitcoin gets
split in two sub-Bitcoins, everyone loses

Upcoming features
Solve the long confirmation time
Develop capabilities for refunds
Multisignature transactions
Smarter tx fee system
• Based on free market rule instead of fixed as it
is today
Put a node in the space as backup to the
nodes on Earth

Researchers2 consider that some governance will have to
emerge to deal with the government intervention risk
1.GitHub history of Bitcoin protocol, where the change of core developers can be seen http://www.youtube.com/watch?v=OztVYTS_Ei8
2. The Economics of Bitcoin Mining or, Bitcoin in the Presence of Adversaries, by Joshua A. Kroll, Ian C. Davey, and Edward W. Felten, Princeton University

26
Index

Definitions and functioning
Expected dynamics, arguments in favor and against
Business opportunities
Different Bitcoin businesses are dependent
on different stages of evolution and adoption of the system
Legitimized system
Regulation
Low volatility / Sufficient market depth
Fast tx processing & confirmation

Now

Easy access worldwide

Secure
Time
Mining (Btc generation and tx processing)
• Mining hardware manufacturing and selling
• Mining pools
Enablers to
hold and
transact Btcs

• Cloud mining
• Equipment reselling

• Equipment and/or platforms to optimize mining

Niche based adoption

Widespread adoption

• Wallets
• Exchanges
• Links between local banks and
exchanges/wallets
• In person exchange organizers
• ATMs
• Instant tx provider
• Issuers of physical unit of Btc
• Btc investment funds

• Online payment services
− Cross-border (hotels, flights, etc)
• Individuals’ money transfer
− Cross-border (remittances)
• Escrow and settlement of high cost tx
(e.g.: real estate)
• Micropayments for current businesses

•
•
•
•

Non-currency use of the protocol
• Time stamping

• Asset ownership and contracts
• Notary services

Btc as store of value
• Btc investment fund

• Wallets
• Exchanges
• Storage
safety
• Identity
proofing

Enablers to buy/sell Btcs with fiat

• Investment advisors
• High security storage systems

• Store of value financial
instruments

• Providers of market and blockchain info

Support services

• Tx fee calculator

Merchant services (online and offline)
Corporate money transfers & payments
Imports/Exports payments
New business models based on
micropayments
• Financial instruments for Btc
• Investment firm in Btcs

• Btc tax advisory

28
Bitcoin is at the chasm in the technology adoption cycle

Innovators

THE CHASM

Moore’s adoption cycle for disruptive technologies

Tornado
Bowling
Alley
Early
adopters

Early
majority

Innovators or Visionaries
Don’t need the technology to work perfectly
• Will make an effort to make it work
Motivated by their vision of the technology

Laggards

Early adopters
Will only buy a complete solution

≠

Motivated by economic rationale

Bowling Alley: niche-based adoption, driven by compelling customer needs and
vendors crafting niche-specific complete products
29
Currently, the bottle neck in the chain is the exchange
from $ to Btc and viceversa
Banked

…

Tx cost
Bank transfer: free
In person cash exchange: free
Btc ATM (CAN, US): 6-7%
Paypal: 6%
Gift card (US): 8.7%

Unbanked
Tx cost
In person cash exchange: free
Btc ATM (CAN, US): 6-7%
Gift card (US): 8.7%

…

Tx cost
FREE

Family in ≠ country
(Biz: Remittances)

Purchase
(Biz: Merchant services)

Tx cost
Bank transfer: free
In person cash exchange: free
Paypal: 6%
Gift card (US): 8.7%

Micropayment
(Biz: Micropayment
services)
Home seller
(Biz: Escrow/middleman for
costly txs)

Tx cost
In person cash exchange: free

Key links in the system
• In US these links are solved  a business focused in the US doesn’t have to worry about that
• For businesses outside the US, there are two options:
− Build those links
− Find a way to go around them (e.g. focus on payments from US to Argentina, work with large Btc holders)
30
Map of opportunities that are feasible in the short term (I)
Business opportunity
Mining

System
enablers

Platform to optimize Btc
mining overall cost
Give access to buy/sell Btcs
in new markets

• Develop a platform to optimize mining
• E.g.: mine where electricity is cheaper, etc

Target market
Global or LatAm

• Btc can offer payments with lower tx costs
• Help building the key gates to the system, and
keep part of the value created

LatAm
(there are already big
players in developed
markets)

• Price volatility and tx confirmation times have a
cost for users
• A centralizer could neutralize part of the
volatility, reduce the overall cost, and charge a
fee lower than the cost borne by individual
transactors

Global

Id proofing services

• Needed to make the system more secure
• Should grow as Btc becomes more regulated

Global

Safety storage tools

• The need is clear
• Not a clear winner yet

Global

Compliance services

• Need will grow together with regulation
• At Western Union, compliance is ~20% of cost

Global

Tx fee optimizer

• Tx fees ~0.6 M /month, high growth expected
• Available best practices are not widely used

Global

Merchant services
Instant Btc txs for a fee
Instant fiat/Btc txs for a fee
Hedging of Btc txs for a fee
System
improver

High-level business hypothesis

31
Map of opportunities that are feasible in the short term (II)
Business opportunity

High-level business hypothesis

Target market

International money transfer

US/LatAm

Btc accounts for foreign
investment

• Btc global nature and low tx costs used to
enable individuals to invest abroad

Global

• Can help increase monetization of sites
• Tx fee costs kept low taking the txs off-block

Global

App to locate Btc holders
and merchants

• As Btc grows people will need to know where
Btc is accepted

Global

Price and blockchain data
provider

• There are sites currently available
• Could be improved and made local

LatAm

Btc news provider
Use of Btc
protocol

• Leverage low tx costs of Btc
• Niche need in payments of foreigners to Arg.

Micropayments solutions

Support
services

US/LatAm

International payments
Complete
solutions

• High prices of current remittances services
• Leverage lower tx costs of Btc

• There are sites currently available
• Could be improved and made local

LatAm

Registering info
ultra-securely

• Unclear how big is the market
• Cost/registration would be 5 to 50 cents

Global

32
Map of Bitcoin existing businesses (non-comprehensive)
Mining ecosystem (Btc generation and tx processing)

Enablers to hold and transact, and buy/sell Btcs with fiat
Wallets

Niche based adoption
Gaming

Exchanges

Remittances

Enablers to buy Btc
Merchant services
Identity proofing

Btc as store of value - trading

Support services

33
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Bitcoin - Understanding and Assessing potential Opportunities

  • 1. Bitcoin Understanding and Assessing potential Opportunities January 2014
  • 2. We are an experienced entrepreneurial team focused on building successful tech companies in Latin America and Beyond Investigation and analysis led by Julieta Duek Stanford MBA, 2013 Demian Brener Senior Analyst at Quasar Ventures
  • 3. Index Definitions and functioning Expected dynamics, arguments in favor and against Business opportunities
  • 4. Bitcoin is an electronic payment system based on a decentralized global ledger Bitcoin • An electronic payment network − Based on a global ledger that records all txs ever made in the system − Ledger cannot be overwritten or changed • Bitcoin is also the name of the currency unit of the payment system Main features of the Bitcoin network Decentralized Network maintenance and tx processing done by a network of individuals’ computers (“miners”) P2P network Theoretically, transactions can be done P2P; there are also exchanges to facilitate txs Global The system doe not care about the tx origin, destination, or where it is processed Secure Ownership and tx of bitcoins are secured by protocol rules and mathematical algorithms Open source Zero or low processing fees Software changes can be proposed by any node, and are widely implemented when 80% of the nodes adopt the change Initially free processing, with miners rewarded with newly generated bitcoins As # bitcoins reaches 21M, tx fees will prevail 3
  • 5. How a transaction works: Alice sends bitcoins to Bob (I) Alice Bob creates and Address for this tx creates and Address for this tx AdressAlice AdressBob Message • AdressAlice • AdressBob • Amount to send • Change • Tx fee Signed message Private keyAlice Public keyAlice 4
  • 6. How a transaction works: Alice sends bitcoins to Bob (I) Alice Bob creates and Address for this tx creates and Address for this tx AdressAlice AdressBob Message • AdressAlice • AdressBob • Amount to send • Change • Tx fee Private keyAlice Public keyAlice Signed message Broadcasted to the Bitcoin network Miners 5
  • 7. How a transaction works: Alice sends bitcoins to Bob (I) Alice Bob creates and Address for this tx creates and Address for this tx AdressAlice AdressBob Message • AdressAlice • AdressBob • Amount to send • Change • Tx fee Signed message Signature verified Private keyAlice Public keyAlice Miners Processed by one of the nodes • Adds tx to the global ledger (block chain) • Verifies signed message through Public key 6
  • 8. How a transaction works: Alice sends bitcoins to Bob (I) Alice Bob creates and Address for this tx creates and Address for this tx AdressAlice AdressBob Message • AdressAlice • AdressBob • Amount to send • Change • Tx fee Signed message Signature verified Private keyAlice Public keyAlice Miners Processed by one of the nodes • Adds tx to the global ledger (block chain) • Verifies signed message through Public key 7
  • 9. How a transaction works: Alice sends bitcoins to Bob (II) The ledger registers input and outputs that record the “balance of bitcoins” for each address Alice AdressAlice Message • AdressAlice • AdressBob • Amount to send • Change • Tx fee Bob Input from AdressAlice Output to AdressBob Signed message AdressBob Only Bob knows the private key for this address, so only he can send bitcoins out from this address Private keyAlice Public keyAlice “balance of bitcoins” for an address: all the outputs referenced to the adress’ public key, that haven't been used as inputs in later txs 8
  • 10. The Block chain orders who processes each tx block Miners create blocks of processed txs to be added to the block chain The first miner to solve a certain math problem adds his block to the chain • Txs are bundled in blocks by miners • Blocks linked together form the block chain (the giant ledger) • Each block is referenced to the previous block, which gives a time order to the txs • The system has to determine whose block will be the next to enter the block chain • The next valid block is the one that contains the answer to a certain mathematical problem • The 1st miner to solve it gets to add his block to the block chain − It takes an average of 10 min for someone to find a solution − That miner is rewarded with newly generated bitcoins 9
  • 11. What is a hash function? A hash function creates a fixed short digest (H) from any arbitrary length of text (M) H = hash(M) Bitcoin uses a SHA256 function, resulting in a 32 byte number. Properties of a hash function • It is easy to compute the hash value for any given message • It is infeasible to generate a message that has a given hash • It is infeasible to modify a message without changing the hash • It is infeasible to find two different messages with the same hash • Pre-image resistance. It is a one-way function: given a hash H it is difficult to find any message m such that H = hash(M) • Collision resistance. It should be difficult to find two different messages M1 and M2 such that hash(M1) = hash(M2). 10
  • 12. If two miners solve the math problem at the same time, two branches are created, but only the longest one will prevail Two miners solve the math problem at the same time, creating two branches Only the longest chain will be part of the block chain Carol’s chain • Nodes keep building the blocks on top of the two blocks created by Carol and Frank Block # 9JD Prev #7CF txns… txns… Block # 26K Prev #7CF Block # 6TY Prev # 26K txns… txns… Block # 7CF Prev #2A4 txns… Block # Y7T Prev # 1L7 txns… Block # 2A4 Prev #473 Block # 1L7 Prev # 9JD txns… • Nodes immediately switch to the longest branch available • Blocks that belong to the shortest chains, and the blocks built on top of them, are destroyed Frank’s chain 11
  • 13. The Block chain prevents double spending fraud The decentralized processing could be risky of double spending fraud… …but the block chain structure makes it impossible • To execute the double-spending Alice would have to pre-create a “longer chain” • But the previous-block-reference is part of the text that goes through the hash function of the next block • So she cannot pre-create the chain, because she needs info from previous blocks to generate it • Alice could create a longer branch with the double-spend tx, that replaces the chain with the tx to Bob • The chain with the tx to Bob would get erased for being shorter • Bob´s money would get erased • The only way to do it is being the 1st to create that chain • • She could only win if she has >50% of the computing power of the network, one of bitcoins risks 12
  • 14. Mining and bitcoin generation Miner´s incentive = 1 Reward for verifying a block of txs + 2 Tx fees 1 Reward for verifying a block of txs • Miners receive 50 newly generated bitcoins for the first 210,000 blocks and half the previous amount of bitcoins for each subsequent 210,000 blocks • Each block takes an average of 10 min to be verified (210,000 blocks take ~4 years) − The difficulty of the math problem to verify a block is adjusted every 2 weeks so that the average time to solve a block remains around 10 mins • Newly minted BTCs cannot be spent for 100 blocks 2 Tx fees • Incentive for miners verify those txs faster, by including them earlier in the block chain • They arise from the difference between the values of input and output on a tx • When all bitcoins are issued, tx fees will be the only compensation for miners to verify txs, so eventually sending money through bitcoins will not be free • Rewards and tx fees are a transaction with no input called “coinbase“, included in the block the miner just created 13
  • 15. Bitcoin current status (I) Price grew explosively to $1200 (Mt. Gox) in December, but stabilized around $950 in January Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013
  • 16. Bitcoin current status (II) Total volume of bitcoins, and Market Cap Total # bitcoins is predictable and will reach 21M in 2140 # bitcoins (million) Market Cap fueled by price increase was around $11.5 Bn in Dec-2013 Mkt Cap U$S Bn 22 15,0 US dollars stock: $1.220 Bn US dollars stock: $943 Bn Gold stock: $8.200 Bn 20 18 12,0 16 14 9,0 12 10 6,0 8 6 3,0 4 2 0 0,0 01/01/2010 01/01/2020 01/01/2030 01/01/2140 Sep-2012 Jan-2013 May-2013 Sep-2013 Historical Projected 15
  • 17. Bitcoin current status (III) Bitcoin volume of transacions per day # tx/day highly volatile # tx/day th 400 350 300 Daily tx volume between $200 – 400M reaching the level of Paypal tx/day $M 450 400 350 300 250 Visa: $16.513 M Mastercard: $9.863 M China UnionPay: $7.562 M Amex: $2.434 M Discover (Pulse): $438 M Paypal: $397 M 250 200 200 150 150 100 100 50 50 0 0 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 16
  • 18. Emerging crypto currencies can be classified as Bitcoin alternatives and currencies for Other Uses Alternatives to Bitcoin • Used as currency, for purchases, money transfer, store of value, etc • With slight different functionalities: Litecoin Less energy consumption to process txs • Based on the Bitcoin protocol • Created ledgers to transact, register, or represent other things that are not necesarily monetary value Faster txs Useful for small amounts Peercoin Crypto currencies for other uses, based on protocols similar to Bitcoin Ripple Namecoin Centrally administered Bitcoin Only one exchange Quarkcoin Could be more secure Not really much different than Btc Worldcoin Photoshares Same protocol as BTC for representing asset ownership Similar protocol to Bitcoin but to acquire shares in Invictus Innovation DAC 30 second tx time Direct competitor of Litecoin • All their functions could be easily incorporated to Btc as needed − Except Ripple’s centralized governance • Could be replaced by Btc. − I.e.: buying the domain with Btc instead of Namecoins 17
  • 19. Alternatives to Bitcoin Litecoin (Mkt Cap $727.9M) Peercoin (Mkt Cap $93.4M) • 84 M total coins, four times more than Btcs • Tx time 4x less than Btc (2.5 min/block) • Trying to be the Btc for small txs Ripple ((Mkt Cap $3.7Bn) • “Proof of Work/Proof of Stake” makes processing less energy consuming • Inflationary: volume grows 1% per yr, proportional to PCP held • Fixed 0.01 PCP tx fee • Not decentralized, founder Sunny King has checkpoint control of txs • Central control by Ripple Labs • Shared public ledger that holds balances in any currency • It is an exchange: ledger registers offers to buy or sell assets • Fee in XRP required to transact • Founders held XRP 100M initially, gifted XRP 80M to Ripple Labs, who will distribute 55M XRPs to users Quarkcoin (Mkt Cap $52.3M) Worldcoin (Mkt Cap $22.9M) • 245M Quarkcoins, with 98% already mined • Some claim that the more stable stock of Quarkcoins will make it less volatile • With a 6-way hashing method, claims to be more secure than Btc but a 51% attack is equally possible • 30 second tx time • Mining has 1% reward reduction per week, encouraging fast mining 18
  • 20. Crypto currencies for other uses, based on protocols similar to Bitcoin Namecoin (Mkt Cap $46.9 M) • Same protocol as Btc but to represent asset ownership • Platform can also be used to register messages, votes, and as login system • Colored Coins is another service for representing asset ownership, but can run on top of BTC or any protocol Photoshares (Mkt Cap $21.8 M) • Photoshares represent shares in Invictus Innovation Decentralized Autonomous Corporations (DACs) • Invictus is a platform that brings together and coordinates developers who want to build DACs • Only 2 M Photoshares are available • Transaction cost is 0.01NMC − E.g.: registering a domain or transferring it costs 0.01 NMC 19
  • 21. New application platforms and programming languages are being built using the blockchain technology and protocol Ethereum1 Bitcloud2 • Ethereum is a decentralized mining network and software development platform designed to allow users to encode advanced transaction types, smart contracts and decentralized applications into the blockchain • Bitcloud works on a variation of proof of stake known as proof of bandwidth. The nodes in this system are similar to the miners in the Bitcoin protocol in that they mine cloudcoins by providing bandwidth to the network • It includes a Turing-complete programming language that can be used to build applications and features on top of the ledger using contracts as building blocks • Instead of using a proof of work system where miners are looking for the solution to a complex mathematical equation, the nodes in Bitcloud are rewarded based on their share of the total amount of bandwidth used in the Bitcloud network • A contract is like a computer program that lives inside the Ethereum network, which is triggered every time a transaction is sent to it • Each block reward is distributed among the nodes based on their share of the overall amount of bandwidth needed by the Bitcloud users 1.Ethereum.org 2.GitHub Bitcloud white paper at https://github.com/wetube/bitcloud/blob/master/Bitcloud%20Nontechnical%20White%20Paper.md 20
  • 22. Index Definitions and functioning Expected dynamics, arguments in favor and against Business opportunities
  • 23. What are the benefits compared to Fiat and Gold? What is Money? Medium of exchange, unit of account and store of value Scarce Durable Portable Divisible Easily Verifiable Easily Stored Fungible Authenticity Mass adoption Fiat Neutral Neutral Neutral Yes Yes Neutral Yes Neutral Yes Gold Yes Yes No Neutral Neutral No Neutral Neutral Neutral Bitcoin Yes Yes Yes Yes No Yes Yes Yes No 22
  • 24. The rules of the Bitcoin system have implications and consequences Deflation Implications of decentralization Due to limited number of coins (+) Harder to stop by states or companies Does not invalidate most of its uses • It does invalidate debt txs (-) Very vulnerable to market reactions (-) No central leader to deal with governments Volatility Compare with other currencies/gold Understand if higher volume would solve it Open source governance Anyone can • Find bugs or errors • Propose changes Prioritization and implementing is led by the core developers Concentration of Bitcoin holders (-) Are market makers, thus controlling price (+) Could lead development of the ecosystem if they can coordinate themselves Mining incentives and tx fees Still evolving in the protocol Will probably end in market-set tx fees Mining power structure Grouping of miners to stabilize profits Pools are not a risk • But governments could take over mining for an attack Anonimity Currently achievable In the future, regulation will eliminate it
  • 25. Five mining pools concentrate 80% of the revenues Mining generates $4M revenues per day but is currently not profitable Top five mining pools concentrate 80% of revenues • Total nodes: ~5000 • Mining is no longer profitable − Excess investment caused excess supply − Raising the Difficulty levels set by the system − Causing an arms race of mining technology that is now slowing down Unknown & Others 17% Eclipse MC • Around $4M revenues per day Slush 3% 6% Bitminter 7% Eligius 11% BTC Guild 27% G.Hash.IO 29% Mining revenues 24
  • 26. The formation of mining pools could pose a risk for the Bitcoin system: the 51% attack The 51% cartel attack is unlikely An attack would be costly and difficult to implement • Requires controlling >33% mining power • Bitcoin processing power is now >500 most powerful computers in the world • Will become even more costly over time • Building this power takes time1 • The attack itself would have last 20-30 min • Nodes have tools to report bad behavior A Goldfinger attack3 could be possible The attack won’t come from • Those who own Bitcoins, profit from Bitcoin industry, or would gain Bitcoins in the attack The attack could come from: • Someone who would achieve utility outside the Bitcoin economy through the attack Social protestor or hacker Rewards are limited2 • The attacker could: – Double-spend his/her own Bitcoins – Delay others’ txs confirmations • The attacker could NOT – Create or destroy coins – Fake transactions – Take someone else’s Bitcoins Too costly for an individual or non-for-profit organization Investor short in Bitcoin Gain from shorting not enough to cover costs Government Company competing with Bitcoin Only a major tech company could do it, or coordination of several (low probability) 1. http://hackingdistributed.com/2013/11/04/bitcoin-is-broken 2. https://en.bitcoin.it/wiki/Myths and https://en.bitcoin.it/wiki/Myths 3. The Economics of Bitcoin Mining or, Bitcoin in the Presence of Adversaries, by Joshua A. Kroll, Ian C. Davey, and Edward W. Felten, Princeton University 25
  • 27. Governance of Bitcoin by emerging leaders whose power is constrained by the possibility of a fork Core developers have to push improvements and avoid forks Core developers rise and get respect through their skills and contributions to the system • Satoshi still has some lingering influence New core developers can arise anytime • Power changes have happened in the past1 Main incentives of the core developers are • Improve the system – Eliminate bugs and vulnerabilities – Implement changes to increase adoption and make the system sustainable • Generate consensus – Sometimes the optimal solution is unclear – If a hard fork happens, and Bitcoin gets split in two sub-Bitcoins, everyone loses Upcoming features Solve the long confirmation time Develop capabilities for refunds Multisignature transactions Smarter tx fee system • Based on free market rule instead of fixed as it is today Put a node in the space as backup to the nodes on Earth Researchers2 consider that some governance will have to emerge to deal with the government intervention risk 1.GitHub history of Bitcoin protocol, where the change of core developers can be seen http://www.youtube.com/watch?v=OztVYTS_Ei8 2. The Economics of Bitcoin Mining or, Bitcoin in the Presence of Adversaries, by Joshua A. Kroll, Ian C. Davey, and Edward W. Felten, Princeton University 26
  • 28. Index Definitions and functioning Expected dynamics, arguments in favor and against Business opportunities
  • 29. Different Bitcoin businesses are dependent on different stages of evolution and adoption of the system Legitimized system Regulation Low volatility / Sufficient market depth Fast tx processing & confirmation Now Easy access worldwide Secure Time Mining (Btc generation and tx processing) • Mining hardware manufacturing and selling • Mining pools Enablers to hold and transact Btcs • Cloud mining • Equipment reselling • Equipment and/or platforms to optimize mining Niche based adoption Widespread adoption • Wallets • Exchanges • Links between local banks and exchanges/wallets • In person exchange organizers • ATMs • Instant tx provider • Issuers of physical unit of Btc • Btc investment funds • Online payment services − Cross-border (hotels, flights, etc) • Individuals’ money transfer − Cross-border (remittances) • Escrow and settlement of high cost tx (e.g.: real estate) • Micropayments for current businesses • • • • Non-currency use of the protocol • Time stamping • Asset ownership and contracts • Notary services Btc as store of value • Btc investment fund • Wallets • Exchanges • Storage safety • Identity proofing Enablers to buy/sell Btcs with fiat • Investment advisors • High security storage systems • Store of value financial instruments • Providers of market and blockchain info Support services • Tx fee calculator Merchant services (online and offline) Corporate money transfers & payments Imports/Exports payments New business models based on micropayments • Financial instruments for Btc • Investment firm in Btcs • Btc tax advisory 28
  • 30. Bitcoin is at the chasm in the technology adoption cycle Innovators THE CHASM Moore’s adoption cycle for disruptive technologies Tornado Bowling Alley Early adopters Early majority Innovators or Visionaries Don’t need the technology to work perfectly • Will make an effort to make it work Motivated by their vision of the technology Laggards Early adopters Will only buy a complete solution ≠ Motivated by economic rationale Bowling Alley: niche-based adoption, driven by compelling customer needs and vendors crafting niche-specific complete products 29
  • 31. Currently, the bottle neck in the chain is the exchange from $ to Btc and viceversa Banked … Tx cost Bank transfer: free In person cash exchange: free Btc ATM (CAN, US): 6-7% Paypal: 6% Gift card (US): 8.7% Unbanked Tx cost In person cash exchange: free Btc ATM (CAN, US): 6-7% Gift card (US): 8.7% … Tx cost FREE Family in ≠ country (Biz: Remittances) Purchase (Biz: Merchant services) Tx cost Bank transfer: free In person cash exchange: free Paypal: 6% Gift card (US): 8.7% Micropayment (Biz: Micropayment services) Home seller (Biz: Escrow/middleman for costly txs) Tx cost In person cash exchange: free Key links in the system • In US these links are solved  a business focused in the US doesn’t have to worry about that • For businesses outside the US, there are two options: − Build those links − Find a way to go around them (e.g. focus on payments from US to Argentina, work with large Btc holders) 30
  • 32. Map of opportunities that are feasible in the short term (I) Business opportunity Mining System enablers Platform to optimize Btc mining overall cost Give access to buy/sell Btcs in new markets • Develop a platform to optimize mining • E.g.: mine where electricity is cheaper, etc Target market Global or LatAm • Btc can offer payments with lower tx costs • Help building the key gates to the system, and keep part of the value created LatAm (there are already big players in developed markets) • Price volatility and tx confirmation times have a cost for users • A centralizer could neutralize part of the volatility, reduce the overall cost, and charge a fee lower than the cost borne by individual transactors Global Id proofing services • Needed to make the system more secure • Should grow as Btc becomes more regulated Global Safety storage tools • The need is clear • Not a clear winner yet Global Compliance services • Need will grow together with regulation • At Western Union, compliance is ~20% of cost Global Tx fee optimizer • Tx fees ~0.6 M /month, high growth expected • Available best practices are not widely used Global Merchant services Instant Btc txs for a fee Instant fiat/Btc txs for a fee Hedging of Btc txs for a fee System improver High-level business hypothesis 31
  • 33. Map of opportunities that are feasible in the short term (II) Business opportunity High-level business hypothesis Target market International money transfer US/LatAm Btc accounts for foreign investment • Btc global nature and low tx costs used to enable individuals to invest abroad Global • Can help increase monetization of sites • Tx fee costs kept low taking the txs off-block Global App to locate Btc holders and merchants • As Btc grows people will need to know where Btc is accepted Global Price and blockchain data provider • There are sites currently available • Could be improved and made local LatAm Btc news provider Use of Btc protocol • Leverage low tx costs of Btc • Niche need in payments of foreigners to Arg. Micropayments solutions Support services US/LatAm International payments Complete solutions • High prices of current remittances services • Leverage lower tx costs of Btc • There are sites currently available • Could be improved and made local LatAm Registering info ultra-securely • Unclear how big is the market • Cost/registration would be 5 to 50 cents Global 32
  • 34. Map of Bitcoin existing businesses (non-comprehensive) Mining ecosystem (Btc generation and tx processing) Enablers to hold and transact, and buy/sell Btcs with fiat Wallets Niche based adoption Gaming Exchanges Remittances Enablers to buy Btc Merchant services Identity proofing Btc as store of value - trading Support services 33

Hinweis der Redaktion

  1. The Bitcoin System is a decentralized network where each node contains information of all transactions made in the history of the system as ledgers. Nodes update their ledger when they receive the message of a new transaction and pass it on to the next node. So basically, it is a system that allows a group of computers to maintain a unified ledger.
  2. How transactions workWhen Alice sends bitcoins to Bob, she broadcast a message with the accounts and the amount sent. To verify that the transaction is authentic a digital signature is used, always different for every new transaction.A digital signature is composed by a private key and a public key. The private key, only known by the owner, is used to create a signature, and the public key is used to verify the authenticity of that signature, without the need of revealing the private key. Public keys are actually the send to addresses in bitcoin.Since the digital signature depends on the private key and the message (transaction):each digital signature is different for every transaction and therefore can´t be reused by someone for a different transaction.the message is original, since any changes to the message would invalidate the signatureThe mathematical algorithms for digital signatures are the Elliptic Curve Digital Signature Algorithm (ECDSA) and the Mathematical Trap Door.Ownership of funds is verified by links to previous transactions, called inputs. Each input must be sent completely in a transaction, so if you try to send an amount that not exactly match one of your inputs, you need to send any remaining amount back to yourself (called change). Therefore, the validity of each transaction is dependent on previous transactions.
  3. How transactions workWhen Alice sends bitcoins to Bob, she broadcast a message with the accounts and the amount sent. To verify that the transaction is authentic a digital signature is used, always different for every new transaction.A digital signature is composed by a private key and a public key. The private key, only known by the owner, is used to create a signature, and the public key is used to verify the authenticity of that signature, without the need of revealing the private key. Public keys are actually the send to addresses in bitcoin.Since the digital signature depends on the private key and the message (transaction):each digital signature is different for every transaction and therefore can´t be reused by someone for a different transaction.the message is original, since any changes to the message would invalidate the signatureThe mathematical algorithms for digital signatures are the Elliptic Curve Digital Signature Algorithm (ECDSA) and the Mathematical Trap Door.Ownership of funds is verified by links to previous transactions, called inputs. Each input must be sent completely in a transaction, so if you try to send an amount that not exactly match one of your inputs, you need to send any remaining amount back to yourself (called change). Therefore, the validity of each transaction is dependent on previous transactions.
  4. How transactions workWhen Alice sends bitcoins to Bob, she broadcast a message with the accounts and the amount sent. To verify that the transaction is authentic a digital signature is used, always different for every new transaction.A digital signature is composed by a private key and a public key. The private key, only known by the owner, is used to create a signature, and the public key is used to verify the authenticity of that signature, without the need of revealing the private key. Public keys are actually the send to addresses in bitcoin.Since the digital signature depends on the private key and the message (transaction):each digital signature is different for every transaction and therefore can´t be reused by someone for a different transaction.the message is original, since any changes to the message would invalidate the signatureThe mathematical algorithms for digital signatures are the Elliptic Curve Digital Signature Algorithm (ECDSA) and the Mathematical Trap Door.Ownership of funds is verified by links to previous transactions, called inputs. Each input must be sent completely in a transaction, so if you try to send an amount that not exactly match one of your inputs, you need to send any remaining amount back to yourself (called change). Therefore, the validity of each transaction is dependent on previous transactions.
  5. How transactions workWhen Alice sends bitcoins to Bob, she broadcast a message with the accounts and the amount sent. To verify that the transaction is authentic a digital signature is used, always different for every new transaction.A digital signature is composed by a private key and a public key. The private key, only known by the owner, is used to create a signature, and the public key is used to verify the authenticity of that signature, without the need of revealing the private key. Public keys are actually the send to addresses in bitcoin.Since the digital signature depends on the private key and the message (transaction):each digital signature is different for every transaction and therefore can´t be reused by someone for a different transaction.the message is original, since any changes to the message would invalidate the signatureThe mathematical algorithms for digital signatures are the Elliptic Curve Digital Signature Algorithm (ECDSA) and the Mathematical Trap Door.Ownership of funds is verified by links to previous transactions, called inputs. Each input must be sent completely in a transaction, so if you try to send an amount that not exactly match one of your inputs, you need to send any remaining amount back to yourself (called change). Therefore, the validity of each transaction is dependent on previous transactions.
  6. To prevent double spending, for each input, nodes check every other transaction ever made to make sure that input hasn't already been used before. Outputs are more mathematical puzzles than addresses. Sending money in bitcoin is like putting it in a public locker and attaching a math puzzle that must be solved to open it, and it is specifically designed so only the owner of a specific public key can solve it.So, the “balance of bitcoins” for a given private key are all the outputs that are referenced to its public key, that haven't been used as inputs in later transactions.
  7. http://www.forbes.com/sites/kashmirhill/2013/11/06/bitcoin-is-not-broken/http://hackingdistributed.com/2013/11/04/bitcoin-is-broken/https://en.bitcoin.it/wiki/Myths
  8. http://motherboard.vice.com/blog/whos-building-bitcoin-an-inside-look-at-bitcoins-open-source-development
  9. The technology adoption lifecycle summarises how communities respond to discontinuousinnovation, i.e. new products that require the end user and the marketplace to dramaticallychange their past behaviour to achieve the promise of equally dramatic new benefits. Pastexamples of this are fax machines, personal computers, spreadsheets and electronic mail.The original work from as early as the 1950’s has been extended by Geoffrey Moore in his booksCrossing the Chasm and Inside the Tornado to include his observation of a large gap betweenthe take up of new technology by technology enthusiasts and the majority market.Visionaries (Early Market):IntuitiveSupport RevolutionContrarianBreak away from the packFollow their own dictatesTake RisksMotivated by future opportunitiesPragmatists (Majority Market):AnalyticSupport EvolutionConformistStay with the herdConsult with their colleaguesManage risksMotivated by present problemsThe Chasm Model has a number of key implications for consideration when developing strategyfor innovation. It should be obvious that the majority of the profit and revenue is made by themarket leader in the majority market.What is less obvious, but crucially important, is that market leader in the majority market willprobably be the market leader when the market takes off.The only cost effective way for vendors that are not leading in a majority market (assuming theleader does not make major mistakes) to attain market leadership is to either introduce or rideon the back of a discontinuous innovation i.e. work in a different market.Moore has developed the concepts in Inside the Tornado to identify 6 parts of the lifecycle thatneed to be considered when developing strategy.• The Early Market, a time of great excitement when customers are technology enthusiasts andvisionaries looking to be first to get on board with the new paradigm.• The Chasm, a time of great despair, when the early market’s interest wanes but themainstream market is still not comfortable with the immaturity of the solutions available.• The Bowling Alley, a period of niche-based adoption in advance of the general marketplace,driven by compelling customer needs and the willingness of vendors to craft niche-specificwhole products.• The Tornado, a period of mass market adoption when the general marketplace switches overto the new infrastructure paradigm.• Main Street, a period of aftermarket development, when the base infrastructure has beendeployed and the goal now is to flesh out its potential• End of Life, which can come all too soon in high tech because of the semiconductor enginedriving price/performance to unheard of levels, enabling wholly new paradigms to come tomarket and supplant the leaders who themselves had only just arrived.