BIS Releases Error-Filled Report On Cryptocurrencies
The Bank for International Settlements (BIS) released a report on cryptocurrencies over the weekend. The cryptocurrency community, however, was quick to criticize the error-prone report. BIS released the report as part of its 2018 Annual Economic Report. The goal of the report was to look “beyond the hype” and determine if there were any real-world problems that could be solved by blockchain technology.
As spotted by CoinJournal.net, however, BIS made “a number of obvious errors” in their report, casting doubt on the organization’s ability to predict the future impact of blockchain and cryptocurrencies.
“In their analysis, the BIS made a number of obvious errors. From ignoring the fact that systems like Bitcoin can scale via multi-layered approaches rather than placing all transactions on the blockchain to claiming that miners can decide to change the Bitcoin’s protocol rules on their own via a hard fork, it’s clear that more research was needed before putting out this report.”
Was the report as error-filled as CoinJournal claimed? Or was it an accurate overview of the world of cryptocurrencies? Let’s take a closer look at the purported problems with the report.
Wrong On Scalability
The BIS report was purportedly wrong on scalability. The BIS report claims that the bitcoin blockchain cannot scale to the level of existing financial networks. However, BIS appears to be working with the assumption of on-chain scaling:
“To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months,” says the report.
In other words, BIS is working on the assumption that all bitcoin transactions will be posted to the bitcoin blockchain, causing the size of the blockchain to swell immediately – especially if it starts to replace VISA or Mastercard’s networks for millions of retail transactions.
This isn’t really true, although it’s easy to see where the Bank for International Settlements is coming from. The analysis assumes that every transaction will be 250 bytes. It also assumes scaling will take place on-chain.
In reality, we’ve seen both on-chain and off-chain scaling solutions proposed by the bitcoin community. The Lightning Network, for example, is a multi-layer solution that moves transactions off-chain. Bitcoin Cash’s scaling, meanwhile, is performed on-chain by raising the blocksize limit.
Ultimately, bitcoin’s Lightning Network approach is not yet technically feasible, while Bitcoin Cash’s scaling proposal relies on the continuous increase in computing power and decrease in the cost of storage space. Neither scaling proposal, at this point, is more efficient than legacy financial networks like VISA and Mastercard – so the BIS report is at least somewhat accurate.
BIS Overstates The Power Of Miners
BIS also took an unusual stance on the idea of hard forks. The BIS report gives too much credit to bitcoin miners and how hard forks are handled:
“[A hard fork] arises if some of the miners of a cryptocurrency coordinate to change the protocol to a new set of rules that is incompatible with the old one. This change could involve many aspects of the protocol, such as the maximum permitted block size, the frequency at which blocks can be added to the blockchain or a change to the proof-of-work required to update the blockchain,” says the report.
This is worded in an awkward way. The paragraph seems to suggest that miners are the ones who coordinate incompatible changes to cryptocurrency networks like bitcoin. In reality, miners need the support of users for these types of changes to occur.
If a group of miners suddenly attempted to change rules on its own, they would only end up creating invalid blocks, with those blocks invalidated by full nodes on the network. In other words, they’d be forking themselves off the network.
We saw miners try to do this last year with the SegWit2x proposal, which was abandoned after futures markets and other data indicated a lack of support for the hard fork change among users – despite the fact that miners widely supported it.
BIS Misses The Point Of Bitcoin
CoinJournal.net criticizes the BIS report for a number of different reasons. One of the big reasons, however, is that BIS misses the point of bitcoin.
BIS claims bitcoin cannot compete with legacy financial systems because of issues like scalability, finality, and inefficiency.
However, bitcoin wasn’t introduced to compete with VISA and Mastercard overnight. Instead, bitcoin was created to enable secure, decentralized transfers of value over the internet.
Decentralization comes with its downsides. However, decentralization is also the key feature of bitcoin – and the key feature of all cryptocurrencies. A centralized entity might be able to develop a network more efficiently, but that defeats the point of decentralization.
In any case, you can view the entire report from the Bank for International Settlements (BIS) here.