A report released yesterday by the Swiss organization Bank for International Settlements (BIS) asks what specific economic problems cryptocurrencies can solve.
In a chapter of the report, entitled “Cryptocurrencies: looking beyond the hype“, the report’s authors detail the numerous issues surrounding Bitcoin and cryptocurrencies in general. They speak of problems with adoption, scalability and the large amount of processing power required to conclude transactions.
“The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte.”, the report states.
Since the decentralized nature of a blockchain requires every new transaction to increase the size of the blockchain, mass adoption could mean an exponential growth that would quickly become unsustainable. The report points out that only supercomputers could keep up with the verification required.
There have been a number of other reports lately, related to the environmental issues caused by the increasing demand for processing power that blockchains create.
Transaction Fees and Instability
The fluctuating cost of transactions fees was also highlighted. During periods of high demand, transaction fees for Bitcoin have been known to soar. In a video included with the report, the bank’s head of research Hyun Song Shin mentions the $57-high that Bitcoin transaction fees reached during late December last year.
A further key issue that the BIS report highlights as reducing the usefulness of crypto in the real world is its unstable value. Without a centralized entity to modulate the supply of payments in line with transaction demand, there is no guarantee of stability.
These issues are not new though, and already the wider blockchain community has begun to address them to some degree. One example of these solutions is Lightning Network which was created to solve Bitcoin’s problem of scalability. Lightning Network is a separate payment protocol operating on top of the blockchain that enables near-instant transactions.
While the report focuses largely on the negative issues facing cryptocurrencies, it does admit that the underlying technology could be useful in certain situations such as administrative processes and financial settlements.
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