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Brief introduction to cryptocurrencies

CONCEPT
Cryptocurrencies are the result of a combination of multiple achievements in various disciplines that include, but are not limited to computer science (P2P networking), cryptography (cryptographic hash functions, digital signatures) and economics (game theory).

In short, a cryptocurrency is a digital token that exists within a specific cryptocurrency system which generally consists
of a P2P network, a consensus mechanism and a public key infrastructure. There is no central authority that governs the system; instead the rules governing the system (e.g., defining what constitutes a valid transaction, specifying the total supply of the digital token and its issuance scheme, etc.) are enforced by all network participants (also called ‘nodes’). The entire transaction history can be independently verified by each node as everyone has a copy of the shared ledger. This shared ledger, generally taking the form of a chain of blocks comprised of transactions (‘blockchain’), is constantly updated via a process called ‘mining’, through which new units of the native token (i.e., the cryptocurrency) are created. Anybody is free to join and leave the system at any time, and there are no identities attached to users.

Table 1: Key properties of cryptocurrencies
Property Description
Digital bearer asset User who controls the private key owns the cryptocurrency, which can be used as a speculative asset as well as a medium of exchange. Funds cannot be seized and transactions cannot be censored.
Integrated payment network Generally offers fast, cheap, global and irreversible payments.
Non-monetary use cases Enable use cases that go beyond currency and assets, and provide them in a decentralised, censorship-resistant manner without a central authority.

The main property of a reasonably decentralised cryptocurrency is that the native token constitutes a censorship-resistant, digital bearer asset. It is a bearer asset in the sense that the person who controls the respective private key controls the particular amount of cryptocurrency associated with the corresponding public key, and censorship-resistant in the sense that, in theory, nobody can freeze or confiscate cryptocurrency funds nor censor transactions performed on the integrated payment network.
As cryptocurrency systems are not bound to a particular location or jurisdiction, the integrated payment network has a global reach and can be used to transfer funds within a short time (ranging from seconds to several minutes depending on a variety of factors) all over the world.3 In general, transactions fees are substantially lower than fees charged by traditional payment network operators, and fees are not based on the amount transferred, but generally on the transaction size measured in bytes. This means that a multi-million dollar transaction can be processed for the same fee as a $1 transaction. As a result, cryptocurrency systems can be used for cost-effective micropayments.4 Payments are irreversible once funds have been transferred and received enough confirmations. This poses significant advantages for merchants as they can benefit from lower fees and avoid chargebacks. In addition, no personally identifiable information such as contact details, credit card numbers and passwords need to be stored on insecure servers that can be subject to security breaches, as users are only identified by their cryptocurrency address derived from the public key.
Finally, some cryptocurrency systems have additional properties and functionality that enable non-monetary use cases that go beyond digital assets and currencies. Bitcoin, for example, can be used as an immutable data store by embedding specific metadata (usually in the form of hashes) into transactions that carry special meaning outside of the bitcoin network and can serve as a decentralised timestamping service. This mechanism also enables the creation of ‘overlay networks’ or ‘embedded consensus systems’ that are built on top of the core network and have distinct functionality and use cases, often featuring their own native token or cryptocurrency (dApp tokens). Some cryptocurrency systems have also been developed with the explicit aim of enabling specific non- monetary use cases (e.g., a decentralised domain name registry, a decentralised computing platform, etc.). These systems use a native cryptocurrency primarily as a monetary incentive for participants to keep the system running.

The cryptocurrency industry

EMERGENCE OF A BUSINESS ECOSYSTEM/INDUSTRY
For each of the properties and value propositions, a multitude of projects and companies have emerged to provide services that facilitate the use of cryptocurrencies for mainstream users and take advantage
of the innate properties of the systems that power them. A cryptocurrency ecosystem has emerged that is composed of a diverse set of actors ranging from volunteering developers, academics, non-profit and media organisations to registered companies, among others. This study primarily focuses on the evolving business ecosystem that features economic actors providing products, services and applications that involve the use of cryptocurrency. Initially, a cryptocurrency exists in a vacuum; a closed system that has no connections to other systems (e.g., other cryptocurrency systems, traditional finance, the real economy).
In order to participate, users need to start mining in order to earn the cryptocurrency, which can only be used for transacting with users of the same system as there is no way to spend or sell them.
To counter this, exchanges are established that let users trade cryptocurrency for other cryptocurrency and/or national currencies. As a result, a price can be established for these tokens and they become digital assets that have a certain value. Exchanges provide on-off ramps for new users to join the system and thereby opening up the initially closed system by connecting it to traditional finance. With increasing transaction volumes, merchants begin accepting cryptocurrency as a payment method, thus making the token a medium of exchange. Payment companies that emerge to help merchants facilitate cryptocurrency payments and reduce exposure to price volatility, act as gateways and provide bridges between cryptocurrencies and the global economy.

Cryptocurrency industry actors build interfaces between cryptocurrency systems, traditional finance and the global economy, thereby establishing and boosting the value of the cryptocurrency

In parallel, a variety of actors emerge to provide supporting services, such as data services (e.g., block explorers, market data sites), media and consulting. Moreover, projects emerge that build complex overlay networks on top of existing cryptocurrency systems and expand the utility of these systems by enabling non-monetary use cases. Fuller-featured cryptocurrency platforms are launched to remove the inherent complexities of using cryptocurrency and make it easier for mainstream users to use cryptocurrencies. The sheer range of projects, activities, products, services and applications in the cryptocurrency industry make it difficult to comprehensively catalogue everything taking place.

The cryptocurrency industry builds the infrastructure and services to make cryptocurrencies more accessible to mainstream users
 

OVERVIEW OF MARKET OF CRYPTOCURRENCIES

  • The current number of unique active users of cryptocurrency wallets is estimated to be up to 7.8 million.
  • The lines between the different cryptocurrency industry sectors are increasingly blurred: 31% of cryptocurrency companies surveyed are operating across two cryptocurrency industry sectors or more, giving rise to an increasing number of universal cryptocurrency companies.
  • At least 9,276.000 people are working full-time in the cryptocurrency industry, and the actual total figure is likely well above two thousand when large mining organizations and other organizations that did not provide headcount figures are added.

As you may see from the Figure 2, total capitalization of cryptocurrency market has increased more than 15x during only one year, reaching nearly $167 billion in August 2017.

Figure 2. Total cryptocurrency market capitalization as of 31 August 2017

Moreover, as shown on Figure 3, total market share of alternative cryptocurrencies is booming during the last year, and there are no objective reasons for any change in this trend. It means that even now more than a $92 billion segment of the total market is not being provided with ACIS devices for mining altcoins.

Figure 3. Market share per currency for the period August 2016 – August 2017, %

Although bitcoin remains the dominant cryptocurrency in terms of market capitalization, other cryptocurrencies are increasingly cutting into bitcoin’s historically dominant market cap share: while bitcoin’s market capitalization accounted for 80% of the total cryptocurrency market in August 2016, it has significantly dropped to 45% as of August 2017. Ether (ETH), the native cryptocurrency of the Ethereum network, has established itself as the second-largest cryptocurrency with a rise from 2,5% to almost 21% during the last two years. The combined ‘other cryptocurrency’ category has increased its’ share of the total market capitalization from 4,5% in August 2015 to tremendous 26,2% in August 2017. Taking into account mentioned above, we see a great opportunity in entering this large and vacant segment of the market with an  all-purpose ACISs for mining altcoins. Our Pascal A1 ASIC will be able to switch from mining one cryptocurrency to mining of another one easily. Appearance of such an device in the market will undoubtly increase of market cap of altcoins.

Figure 4. Market share of cryptocurrency 2015-2017, %