As interest in Blockchain booms, Ethereum gains ground

Analysis and trends of investment in the blockchain sector

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Analysis Key takeaways

E VAN B . MORRIS Analyst
BRYAN HANSON Data Analyst
» Given institutional and corporate enterprise attention, interest
in blockchain technology has never been greater. As a result,
Contact PitchBook
Bitcoin and Ethereum’s dollar prices are up 44% and nearly 1,000%
pitchbook.com
respectively, YTD, at time of publish.
RESE ARCH
[email protected] » Bitcoin remains a trusted store of value, even as the developer
community takes a hard look at its perceived flaws.
EDITORIAL
[email protected] » Ethereum is quickly evolving into the primary focus for enterprises
looking to code business logic into the blockchain.
SALES
[email protected]
» Even so, VC investors have tapered their participation in deals
in blockchain companies as alternative forms of fundraising at the
company and fund level emerge such as initial coin offerings (ICOs)
offering specialized tokens, and VC-backed crypto hedge funds.

Contents
A lot has happened since we released the PitchBook Fintech Analyst
Report: Bitcoin/Blockchain last fall. This analyst note provides
Introduction 1
an update on the blockchain subsector of fintech, and goes in-
depth where we see specific opportunities and substantial investor
Private Investment 2
interest. For background on the topic, this previous report provides
a primer on the history of blockchain and how the technology
Bitcoin 4
works. The plateauing venture capital investment figures undersell
the continued growth and broader acceptance of the technology.
Ethereum 5 Investor interest in direct-protocol investment has never been
Institutional greater. As of May 2, one unit of Bitcoin now costs $1,473 and one
6 unit of Ether—the cryptocurrency powering the Ethereum protocol—
Involvement costs $78. This represents price increases of 44% and nearly 1,000%
respectively YTD. Furthermore, high-profile institutions have
Conclusion 6
partnered to explore the technology. Most notably, the Enterprise
Ethereum Alliance’s formation in late February bodes well for the
Company Profiles 7
future of the technology and for developing a standard enabling a
wide range of applications.
 PitchBook 2017 Fintech Analyst Note: Blockchain
2

Top investors
Deal count Private Investment
(since 2013)

Digital Currency Group 82

Venture capital investments into blockchain-based applications
Blockchain Capital 44
have waned since peaking at 74 deals accounting for $236 million
Boost VC 37 in capital invested in 1Q 2015. There is limited opportunity to
challenge early movers into the wallet and payment space given
500 Startups 27
high regulatory barriers to entry in the developed world. Thus,
Pantera Capital 25 many investments have been made through other means. Of the
Techstars 15 traditional venture capital deals into blockchain startups in 2017, just
39% have been to bitcoin-related companies, down from 91% in 2013.
Coinsilium Group 15
This figure should only decrease as other blockchains gain traction
RRE Ventures 14 and protocols develop for wider use cases beyond the facilitation of
payments and the management of digital assets. Furthermore, the
FundersClub 13
development of internal working groups and external partnerships
Roger Ver 12 mean much of the spend on blockchain development remain hidden
in undisclosed corporate budgets.
Timothy Draper 11
VC blockchain investment activity by year
Sean Percival 11

Draper Associates 11
Capital Invested ($M) Deal Count

Source: PitchBook
Andreessen Horowitz 11 228
*As of 4/12/2017

Barry Silbert 10 199 190

Future Perfect Ventures 10

Union Square Ventures 9

NXTP Labs 9
78
Fenbushi Capital 9

Bitcoin Capital 9

SV Angel 8 38
$150

$499

$499

$633

$226

Startupbootcamp 8

Ribbit Capital 8
2013 2014 2015 2016 2017*
Firestartr 8

Y Combinator 7 The current economics of cryptocurrency investment have instead

focused capital to flow into the protocols themselves. Since the
Ben Davenport 7
last time—until this January—that the Bitcoin unit price eclipsed
AME Cloud Ventures 7 $1,000, the Bitcoin market cap has increased to $24 billion from a
2013 then-peak of $11.8 billion, Ethereum’s market cap now stands
Lightspeed Venture
6 around $7 billion as the price has rallied to briefly eclipse $80 in
Partners

Khosla Ventures 6
recent days after starting off 2017 in the single digits.

Paul Veradittakit 6
Cryptocurrencies have the potential to replace certain types of
venture funding as tokens can be constructed to enable a more
Naval Ravikant 6 liquid version of crowdfunding. Blockchain Capital recently raised
Saad AlSogair 6 a $50 million fund, with $10 million coming from BCAP digital
tokens, to be issued this month. This model for a VC fund uses
FinTech Innovation Lab 6
the established Initial Coin Offering (ICO) model used by many
BTCS 6 cryptocurrency projects.

James Pallotta 6
Source: PitchBook
*As of 4/12/2017
 PitchBook 2017 Fintech Analyst Note: Blockchain
3

ICOs—initial coin offerings— a type of According to research firm Smith & Crown, ICO crowdsales have
crowdfunding for blockchain projects raised $270 million cumulatively through November 2016. While
where shares are issued in the form of these opportunities offer few protections to the investor other than
cryptocurrency or tokens what ’s baked into the protocol, the payoff can be huge. The market
cap figures of the most popular cryptocurrencies rival those of
high-profile unicorns. Like traditional equity investments, owners
of the cryptocurrency typically have a say in how these platforms
develop through forking and other mechanisms that can be coded
into the protocol. Even so, for every Ethereum-sized crowdfunded
success, there are 100 failed cryptocurrency projects. Thus, the
same lax rules which make it easy for companies to raise capital this
way, give few protections to individual investors.

Bitcoin and Ethereum market cap ($B) Bitcoin-related companies as % of blockchain deals

$25 91%
82%
$20 73%

$15
54%
ETH BTC
$10
39%
$5 Source: PitchBook
*As of 4/12/2017

$0
2013 2014 2015 2016 2017
Sources: etherscan.io, bitcoinity.org
*As of 5/2/2017
2013 2014 2015 2016 2017*

Count and value of blockchain VC deals by quarter

74
Capital Invested ($M) Deal Count

59 54 54 56
51
55 47
45
40
46 36 36
30
22
14 12
2
$157

$129

$154

$236

$171

$176

$220

$224
$13

$17

$37

$83

$58

$92

$71

$66
$99

$3

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q*
2013 2014 2015 2016 2017
Source: PitchBook
*As of 4/12/2017
 PitchBook 2017 Fintech Analyst Note: Blockchain
4

Bitcoin

Developers wrestle with how to effectively scale the network

amidst continued growth.

Bitcoin has faced challenges as it continues to scale. Recently,

Bitcoin has continued to witness debate over its ideal form as either
a means of exchange or as a store of value. With the current specs
of the Bitcoin blockchain and transactional load, the 1mb block size
only allows for three transactions per second. This has real-world
consequences for merchants and consumers, preventing them from
instantaneously transacting value as one block is mined only every
10 minutes, and transactions may get backed up even further.
Core Dev — shorthand for the Bitcoin
Core development team. A group that The Core Dev, the closest thing to leadership in the decentralized
maintains the Bitcoin blockchain and Bitcoin ecosystem, wants to limit transactions to the current
proposes updates. bandwidth. This preserves Bitcoin’s relative anonymity and status as
a form of digital gold. Bitcoin’s function as a store of value has been
cited as the primary price driver for both Chinese capital flight and
excitement over a potential Bitcoin ETF. These two factors among
others have resulted in a price run-up to once again exceed $1,000
for the first time since late 2013. An increased block size would
allow for many more transactions, but would in turn require more
computing power. This would likely lead to greater centralization
given the economies of scale of Bitcoin mining. A larger block size
would give greater comparative advantage to large mining pools
with greater resources. The fear over centralization is that any
changes in the ledger are contingent on acceptance by a majority
of nodes. If any one entity controlled an outright majority of nodes
or close to it, there would be potential for foul play, or an equally
damaging loss of faith in the system.

Emergent Consensus — a new blocksize Critics argue that the role of the Core Dev already represents
regime whereby the Bitcoin block size centralization in the system. A proposed hard fork called Bitcoin
would be uncapped and dynamically Unlimited would remove the hard cap on block size entirely,
managed by the network to increase allowing miners to coordinate the block size under an “emergent
capacity. consensus.” This would greatly increase the transactional capacity
of the network, and represent a permanent solution to the issue.
For security and centralization concerns, a more short-term
Segregated Witness — a proposed
compromise solution would be the soft-fork segregated witness
VKRUWWHUP´[WRLPSURYH%LWFRLQQHWZRUN
protocol. Segregated witness would double the effective block size
capacity that would double the block
and network capacity, offer certain security upgrades, and facilitate
size,
future changes. However this would only be a temporary solution,
likely requiring continued upgrades in the future.
 PitchBook 2017 Fintech Analyst Note: Blockchain
5

Ethereum

The network has recovered from 2016’s hacks as ambitious new

features are in development.

Turing-Complete — a property of the Ethereum has been the most exciting platform for development
Ethereum network meaning that it can be in the blockchain space since Bitcoin. The protocol’s turing-
used to complete any calculation that a complete nature allows for the application of core business logic
general purpose computer can perform. into contracts. Bitcoin and copycat blockchains are primarily
transactional with few other features. Ethereum’s creator Vitalik
Buterin has laid out an ambitious plan for 2017, adding a range of
features and upgrades.

zk SNARKS —zero-knowledge Ethereum’s increased endorsement by various high-profile

Succinct Non-interactive Argument enterprises is in part enabled by the promise to enable Ethereum
of Knowledge— an upcoming feature abstraction. This will allow a customizable level of security
upgrade to Ethereum that will allow for as custom consensus systems can be swapped out for the
transactions using Ethereum to contain main consensus chain at the enterprise level, enabling secure
no identifying details whatsoever. applications. Finally, Ethereum will implement what ’re called zk
Currently implemented by the ZCash SNARKS or “zero-knowledge Succinct Non-interactive Argument of
cryptocurrency Knowledge” which allow for execution of transactions without any
knowledge of transaction details, an upgrade in anonymity from
Bitcoin.

All of these features will be enabled by the transition from proof of

Proof-of-stake— Ethereum will transition
work to proof of stake. Proof of work was one of the major concepts
to a system without “mining” whereby
refined by Satoshi Nakamoto in his 2008 Bitcoin whitepaper. The
transactions will be validated by those
system rewarded “miners” for completing cryptographic problems
who stake an amount of Ether and then
used to conduct transactions. Ethereum’s forthcoming CASPER
are awarded transaction fees based on
proof of stake system will instead rely on transaction fees. Those
their contribution.
who wish to validate transactions must pay an upfront deposit that
could be forfeited if they use their position to compromise the
network.
 PitchBook 2017 Fintech Analyst Note: Blockchain
6

Institutional Involvement

Enterprises and institutions begin to shift allegiences as winner

and loser consortiums emerge.

Apart from the lofty growth of digital currency prices, institutional

interest and investment into blockchain development has been a
major source of validation for the technology. The likes of IBM and
Intel and others have backed the Linux Foundation’s Hyperledger
project first announced in December 2015 to support open-source
blockchain projects. Furthermore, the banking and technology
consortium formed around blockchain startup R3 in September
2015 is currently trying to raise $150 million in equity capital
from its constituents, revised down from a previous target of
$200 million. R3 has faced hurdles as perhaps its highest-profile
affiliates Goldman Sachs and JP Morgan have announced their
withdrawal from the project. Furthermore, reports have surfaced
that the company’s flagship R3 Corda technology does not utilize
the blockchain. The industry responded with scorn when this was
DAOs - distributed autonomous announced in a recent presentation.
organizations created in smart contracts
promise to automate the investment Ethereum stands as the most promising platform for diverse
process, cutting out expensive business use cases. This comes in spite of last year’s hack of The
management fees. DAO (distributed autonomous organization), an Ethereum-based
smart contract formed to support Ethereum projects. The diverse
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membership of the Enterprise Ethereum Alliance supports this, and
massive smart contract that raised $117
this will be the consortium to watch going forward particularly as
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updates continue to roll out.
in the code allowed hackers to steal $55
million in ether in June 2016.

Conclusion

Consumer-facing applications are just around the corner. Currently,

the technology is being developed to be able to run Ethereum-
based smart contracts without downloading the entire Ethereum
blockchain. Additionally, Ethereum-based smart contracts will no
longer need to be externally funded as the funding mechanism
can be programmed in. While the debate around the Bitcoin block
size rages on, the cryptocurrency itself remains popular amongst
speculators and as a hedge against geopolitical instability. While
the Winklevoss twins’ proposal for a Bitcoin ETF had a recent
setback, further attempts to facilitate main street investment into
the space will continue. Barry Silbert ’s Grayscale Capital recently
launched the Ethereum Classic Trust, a vehicle for accredited
investors to invest in Ethereum Classic for a 3% annual fee. The
company has overseen a similar Bitcoin vehicle since 2013. More
promisingly, the US SEC is currently gathering commentary and
opinions in order to consider approval of an Ethereum ETF. The
combination of developer interest and increased ease of investment
will only drive prices higher, so long as the community avoids
further hacks and scandals.
 PitchBook 2017 Fintech Analyst Note: Blockchain
7

Select 2017 deals 6HOHFW&RPSDQ\3UR´OHV

Total raised
Companies by $ raised
($M)

BitFury Group $30.00 Location: Amsterdam, The Netherlands |

Year Founded: 2011 | Capital Raised to Date: $90M
Filament $15.00
First Funding Date: May 2014 | First Funding Amount: $20M
ShapeShift $10.40 Latest Funding Date: January 2017 | Latest Funding Amount: $30M |
Latest Funding Post-Valuation: N/A
Factom $8.03

Ledger (Bitcoin Security) $7.00

Description: BitFury builds hardware and software solutions for
Blockstack (Blockchain
$4.00 enterprises, governments and individuals to conduct blockchain-based
Software)

Lykke $3.16
asset transfers. Founded in 2011, the company has raised $90 million in
capital from Blockchain Capital, Credit China Holdings, QueensBridge
Wirex $3.12
Venture Partners and others. The government of the Republic of
BitPesa $2.50 Georgia has partnered with BitFury to develop a blockchain-powered
Arc-net $2.50 ODQGUHJLVWU\WKH´UVWRILWVNLQG

Neufund $2.12

Hashed Health $2.00 Location: Austin, TX |

Year Founded: 2014 | Capital Raised to Date: $9.93M
Slock.it $2.00
First Funding Date: September 2015 | First Funding Amount: $1.9M
Source: PitchBook
Latest Funding Date: April 2017 | Latest Funding Amount: $8.03M |
Select 2016 deals Latest Funding Post-Valuation: N/A

Total raised
Companies by $ raised
($M)
Description: Factom provides data-layer technology that functions as
Circle Internet Financial $60.00 a Blockchain as a Service (BaaS). The company’s platform secures data
Ripple $55.00 for private and public organizations by publishing encrypted data or a
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Blockstream $55.00
7KHFRPSDQ\GHVFULEHVLWVHOIDVDYHUL´FDWLRQDQGYDOLGDWLRQOD\HUIRU
Digital Asset Holdings $50.00
DSSOLFDWLRQVVXFKDVPRUWJDJHKLVWRULHVRU´QDQFLDOGDWDDQGFDQKHOS
SETL $39.46 these systems rebuild after a failure.
bitFlyer $27.00

Juzhen Financials $23.00 Location: San Francisco, CA |

Quoine $20.00 Year Founded: 2013 | Capital Raised to Date: $43.9M
First Funding Date: March 2013 | First Funding Amount: $4.4M
TradeBlock $18.00
Latest Funding Date: September 2015 | Latest Funding Amount: $30M |
Polychain Capital $15.00 Latest Funding Post-Valuation: $130M

Coinbase $10.50
Description: Chain is a technology company that partners with
Post-Quantum $10.30
enterprise clients to build, deploy and operate custom blockchain
Colu $9.60
QHWZRUNVWKDWSRZHUWKHGHOLYHU\RI´QDQFLDOSURGXFWVDQGVHUYLFHV
Gem $7.10 Recently, the company partnered with Visa to create Visa B2B Connect,
Symbiont.io $7.00 a platform for global B2B payments using the company’s Chain Core
blockchain infrastructure product. The company has raised $43.9 million
Simplex (Israel) $7.00
from 30 investors including NASDAQ, Visa Ventures, RRE Ventures and
Source: PitchBook
Khosla Ventures, among others.