30 September 2019, 15:09
2 min reading
A new report by the Bank of Canada titled ‘The Economics of Cryptocurrencies — Bitcoin and Beyond’ suggests cryptocurrencies are one of the best payment options in retail. The report explores the fundamental technology behind blockchain in-depth and explains how aspects such as security can provide significant benefits if adopted. The report explains that massive
A new report by the Bank of Canada titled ‘The Economics of Cryptocurrencies — Bitcoin and Beyond’ suggests cryptocurrencies are one of the best payment options in retail. The report explores the fundamental technology behind blockchain in-depth and explains how aspects such as security can provide significant benefits if adopted.
The report explains that massive blockchain networks are harder to attack and that even if someone were to perform a hack, it would be too expensive to justify the attack. By implementing such technology and using cryptocurrencies for payments, the retail sector can ensure a safer environment.
As for why cryptocurrencies make payments easier and better, the report claims that the nature of crypto mining discourages hackers from performing double-spend attacks on the blockchain network. Miners can ensure stability in a blockchain network as more significant rewards create higher volumes of mining, creating stability in return.
The report notes that the case is not the same for cryptocurrencies with a small value, as mining them releases a smaller reward which puts the blockchain network at risk of double-spend transactions.
In that regard, mass payments that have lower transactional values will make use of cryptocurrencies, while a smaller number of higher-valued transactions will be too expensive and ineffective to process.
For example, the price of Bitcoin makes it too inefficient to be compared to modern payment processors such as Visa, as the blockchain network has an average transaction throughput of 7 TPS. However, the problem can be resolved with lower transaction fees, changing the consensus protocol, or making the rate of coins generated more efficient, the report claims.
The authors state that the base protocol would benefit from a transition of the current Proof-of-Work consensus model to the Proof-of-Stake model. Such change would make the system more effective and it could even be competitive to traditional finance systems.
In another part of the report, the authors claim that Bitcoin wasted a significant portion of its resources to combat double-spending transaction attacks. The loss these preventive mechanisms create are 500 times larger than the losses created by traditional payment processors.
As to the long-term state of Bitcoin, the eventual non-existent generation of coins will make the system rely on expensive transaction fees, which should be instead reduced. The authors claim that the overall design of the cryptocurrency will create a loss of under 0.19% to ensure the best allocation of resources. Compared to the traditional economy, the rate would be equal to a loss that resulted from a 45% inflation rate.
While the report has significantly different views from those of market analysts, the authors claim that the report is based on their views (Thorsten V. Koeppl and Jonathan Chiu) and that it may not support the stance of the Bank of Canada, the central bank of the nation. Jonathan Chiu is a senior research advisor at the Bank of Canada, while Thorsten V. Koeppl is an associate professor at the Queen’s University.
Full report available here.