[Bit]coin flipping: The traditional banking sector is much more “intrusive” than Bitcoin
The Bitcoin economy has gone from an early prototype stage to a second one characterized by gambling and black markets and finally to a third stage which steers away from “sin” and toward legitimate enterprises. This is the conclusion of a research paper titled “The Evolution of the Bitcoin Economy: Extracting and Analyzing the Network of Payment Relationships.”
Economists Paolo Tasca, Shaowen Liu and Adam S. Hayes have joined forces and analyzed the evolution of the Bitcoin economy. The research paper published last month unearthed some interesting facts about where this cryptocurrency is going and what role the blockchain technology will play in our highly digitalized future.
We talked to Paolo Tasca, senior author of “The Evolution of the Bitcoin Economy: Extracting and Analyzing the Network of Payment Relationships” and director at the Centre for Blockchain Technologies at University College London, about the paper and the future of both Bitcoin and blockchain.
JAXenter: How did you decide to start this paper? What is its goal?
Paolo Tasca: Differently from other datasets, all the transactions in public blockchains like Bitcoin are publicly available. This means that one can easily observe them under microscope. On the other side, all the originators and receivers of the transactions are hidden behind pseudonymity.
There are methods to make bitcoin transactions more private.
Thus, for us it was interesting to develop a new methodology (Pure User Group analysis and Transaction Pattern analysis) in order to extract the network of interdependence among the biggest economic entities which, although being largely anonymous, we categorize by their business line. Our method can be exported to other blockchains (like Ethereum) and can be used to run stress tests analysis on the given networks.
JAXenter: In the paper you mentioned that you can map some of the activity and interaction among Bitcoin users because pseudonymity and not strict anonymity is what characterizes these exchanges. Does the idea of pseudonymity ruin one of this cryptocurrency’s primordial goals —namely to be anonymous?
Paolo Tasca: It all depends on what your goals are in being private with your money. The traditional banking sector, along with credit cards, money transfer and electronic payments such as PayPal are all much more “intrusive” than Bitcoin. Your credit card company knows more about you than Google might. Cash is also not by definition wholly anonymous since if I buy something from you in a shop for $5 our identities are revealed to each other. That said, there are methods (e.g. CoinJoin) to make bitcoin transactions more private, and some digital currencies, such as Dash, have this feature explicitly built-in.
Our method can be exported to other blockchains (like Ethereum).
JAXenter: According to the study, by November 2013, the amount of inflows attributable to “sin” entities had shrunk to maximum 3 percent of total transactions. Why is that? Was this the moment when it became obvious that Bitcoin could eventually go mainstream?
Paolo Tasca: As we mentioned in the paper, the takedown of the Silk Road was a big wake up call for darknet users who wrongly assumed that bitcoin was 100 percent anonymous. This single site also accounted for the lion’s share of illegal business at its height. At the same time, you saw entrepreneurs from the technology and financial sectors swoop in backed by VC money. I don’t think Bitcoin is mainstream yet, but it’s on the right path to get there eventually.
JAXenter: Is Bitcoin a safe choice? Are the recent concerns regarding the use of Bitcoin for illegal transactions overstated?
Paolo Tasca: Bitcoin is as safe as you can get thanks to the blockchain, encryption, and the vast mining network that validates all transactions. But it’s also vulnerable to being lost (if you lose your private keys), but that’s the same as if you have cash in your wallet and you lose it. Thanks to some innovative start-ups, web- and cloud-based services to securely manage those private keys is making that less of a problem.
As for illegal activity in the Bitcoin economy, yes, our data show that it now makes up just a very small portion of all transactions, and this is a very encouraging development. That doesn’t mean it has disappeared entirely, though, it may have migrated to other cryptocurrency platforms that are under the radar to law enforcement.
JAXenter: Were the results of the study surprising? What did you expect to find?
Paolo Tasca: Even the current result is already very informative although we expected to find more a clear distinction of transaction patterns between different economic entities.
I don’t think Bitcoin is mainstream yet, but it’s on the right path to get there eventually.
JAXenter: Will blockchain outshine Bitcoin? If yes, where do you expect to see more blockchain activity?
Paolo Tasca: Although bitcoin is certainly the most famous, widely used and successful current application of blockchain, it is destined to recede in favor of other blockchain applications. On this regards, I am agnostic with respect to debate around token-based or token-less blockchains and the debate around public or private ledgers. It really depends on the business cases. I honestly think that some blockchains will serve better their goals if implemented with a native token and kept open. Similarly, I think that for good confidentiality and cost efficiency reasons, some blockchains will serve better their goals if implemented without a native token and if kept private.
Our socio-economic systems will be probably adopt different blockchain infrastructures which will coexist together.
It is difficult to guess what will be the blockchain killer app in the year to come because blockchain technologies can find application in different domains. During the last two years, most of the interest and activities came from the financial industry. For the next years, I expect other sectors like energy, telcos, media and healthcare to be more active. New opportunities will emerge for them to redesign their business logic.
Thank you very much!