Over the weekend the Bank of International Settlements (BIS) pre-released two select chapters from their Annual Economic Report, one of which was focused on ‘looking beyond the hype’ of cryptocurrency.

“The decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money.” – BIS report

The BIS report assesses cryptocurrencies’ potential to challenge traditional centralized authorities such as commercial and central banks that govern the current monetary system.

The BIS is the central bank for central banks. It’s owned by 60 central banks representing 95% of global GDP. Therefore, the report should be looked at critically since cryptocurrency has the potential to challenge the status quo of the system that the BIS represents.

Statements from the report such as “the decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money” exemplifies the bias as the BIS itself represents that very ‘institutional backing’.

 

Will you Break the Internet if you Buy a Coffee with Bitcoin?

While there are several arguments within the report that should be more closely analyzed, the sound bite du jour is that if a cryptocurrency were used to “process the number of digital retail transactions currently handled by selected national retail payment systems… the associated communication volumes could bring the internet to a halt”.

This statement digs straight at the public perception of one of cryptocurrencies’ biggest challenges: scalability.

The argument is that to handle that scale of transactions, the size of the ledger (the record of transactions) would get so large and difficult to process that it would be more than the infrastructure of the internet could handle (see chart below).

While scalability is certainly a challenge for cryptocurrency at this point, the statement from the BIS oversimplifies the situation.

Hypothetical Ledger Size for Nationwide Retail Cryptocurrency

Hypothetical ledger size for nationwide retail cryptocurrency

Data extracted from BIS Annual Economic Report 2018, Graph V.4 (page 99). Notes: “The displayed hypothetical size of the blockchain/ledger is calculated assuming that, starting from 1 July 2018, all non-cash retail transactions of either China, the United States or the euro area are processed via a cryptocurrency. Calculations are based on information on non-cash transaction numbers from CPMI (2017) and assume that each transaction adds 250 bytes to the ledger.” Euro Area: BE, FR, DE, IT and NL.

Cryptocurrencies’ Share of Transactions Won’t Change Overnight

A switch won’t flip where cryptocurrencies suddenly need to process the entirety of all non-cash retail transactions. The efficiency of crypto transactions will improve as the throughput of the internet continues to grow to meet the use cases needed. Even the most cryptocurrency maximalists would struggle to see a future where cryptocurrency accounts for 100% of non-cash transactions. Some thought the Internet was a crappy delivery vehicle for news too:

So the key issue with the BIS’ statement is that when the internet infrastructure becomes overextended, digital content and service providers find novel ways to provide users the utility they want.

As a comparison, consider Netflix. In 2016 they were generating more traffic than the international capacity of the internet, but the internet continued to function and we were all still able to watch the latest episode of Narcos.

Netflix did this by decentralizing its data and storing virtual copies of it locally. Not the most efficient mechanism, but effective nonetheless.

Solutions for Using Crypto for High Volume are Coming

The research assumes that the current structure of cryptocurrency ledgers will be used for this massive upswell in transaction throughput.

That is just simply not the plan for any major cryptocurrency at this point. Bitcoin may be nearly 10 years old at this point but with respect to the overall technology development cycle of cryptocurrency we’re still at an early stage in development.

The technology is constantly being developed and by some estimates, attracting huge numbers of developers.

Building solutions on top of current protocols like payment channel solutions Lightning or Raiden would dramatically affect how many transactions are stored on the main ledger and thus reduce the size needed to store and transmit it.

Other means to improve transaction throughput and reduce burden on the internet infrastructure could involve breaking the ledger into smaller more manageable chunks such as Ethereum is exploring with sharding. Or perhaps simply increasing the size of each block of transactions to improve efficiency — the strategy Bitcoin Cash is pursuing.

The technological trade-offs of all these solutions are still being explored and as is almost always the case in technology development, the solution that meets the needs of the users the best will eventually come to the fore.

Crypto has a chance to re-establish the decentralized principles that the Internet once aspired to. The decentralized protocols and their associated currencies can and should, in our… Click to Tweet

Hey Internet, Take your Crypto Medicine!

The Internet has drastically changed the way we live, work, and play. The guiding idea behind the internet was of “linked information systems” eliminating the many intermediaries that were required to access different types of information.

It has essentially helped to democratize information in the digital age. Most of the world can now easily access information from almost anywhere at any time.

The guiding idea behind cryptocurrency was similar: to democratize online payments by allowing “payments to be sent directly from one party to another without going through a financial institution.”

The internet has several challenges, from privacy to fake news, but one of the biggest challenges is that it has become controlled by gatekeepers who have centralized much of the knowledge that was intended to be shared. Furthermore, these gatekeepers have skewed what the value of that information and knowledge is worth both to the creators and the consumers.

Crypto has a chance to re-establish the decentralized principles that the internet once aspired to. The decentralized protocols and their associated currencies can and should, in our view, redefine how knowledge is valued and shared in the digital age.