Bitcoin [BTC] and other cryptocurrencies have been considered revolutionary in the finance and technology industry. Moreover, Bitcoin, currently the largest cryptocurrency in the space and also the very first cryptocurrency, is often hailed as digital gold, and a currency that would give financial freedom to all.
The topic of whether “Cryptocurrencies offer something new” was recently discussed by the Bank of Canada in its report, ‘Crypto money – Perspective of a couple of Canadian central bankers’. Here, the report elucidates on whether Bitcoin and other cryptocurrencies offer anything new in terms of economic services. It also talks about whether it should be coined revolutionary, considering that cryptocurrency claims to remove intermediaries and the need for trusted third parties.
On this topic, the report first elucidates on blockchain technology. According to the bank, the distributed ledger service has two main economic services; first is noted to be ‘well-established’ and the other is ‘innovative’. Here, the well-established service is “record keeping in a ledger” and the innovative service is the “distributed consensus mechanism,” wherein the most common consensus mechanism is noted to be Proof-of-Work [PoW].
Furthermore, the report states that the main reasons the Bank of Canada and several other players are looking into the use-case of blockchain technology is its ‘potential efficiencies’ and ‘the need to update legacy systems.’
The report reads,
“That said, these experiments show that efficiency gains are not always realized, especially when the existing system is already very efficient. The initial phases of the Bank of Canada’s project to experiment with a DLT-based interbank large-value payments system is an example of this kind of result, mainly because the existing system is highly centralized and efficient. “
It further states,
“That said, efficiency gains may be more likely in other payment systems that are less efficient, for example, because they involve multiple intermediaries across jurisdictions. This is one reason why the Bank of Canada, Monetary Authority of Singapore and Bank of England have examined cross-boarder payments and uses of DLT in this process.”
Furthermore, the report states that despite the technology being built to be trustless, in reality, it is not completely trustless. It states that even if a person does not have trusted counter-parties, an individual will have to trust the developers, miners and the protocol itself.
“One example of a vulnerability that can arise in the system design is the possibility that the ledger could be distorted by a 51 per cent attack. This is not just a theoretical possibility; several altcoins such as Bitcoin Gold, have had issues due to 51 per cent attacks in which miners have ganged together to manipulate the whole ledger. “
This was followed by the report stating that it is “critical” for users in the space to trust the people developing the code that supports crypto assets. It added that people in the space “have to know” that the code is bug-free and is resilient to tampering. Here, the report quotes the bug found in Bitcoin in September 2018 as an example for its importance.
Furthermore, the report speaks about the ‘blockchain trilemma’, written by Abadi and Brunnermeier. According to this, a general blockchain has to correct, cost-efficient and decentralized. However, the blockchain trilemma suggests that “no ledger can simultaneously meet all three criteria.”
The report reads:
“For instance, Bitcoin is decentralized and the ledger is essentially correct. But structure is very inefficient. The consensus process is onerous to ensure the correctness of the ledger. This is done by imposing a computational burden in the form of a very high energy cost, as well as a slow speed for processing transactions.”