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Interesting quotes from the first section of the paper: "We first document that 90% of transaction volume on the Bitcoin blockchain is not tied to economically

Interesting quotes from the first section of the paper: "We first document that 90% of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities but is the byproduct of the Bitcoin protocol design as well as the preference of many participants for anonymity." "We show that the Bitcoin mining capacity is highly concentrated and has been for the last five years. The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity. Furthermore, this concentration of mining capacity is counter cyclical and varies with the Bitcoin price." "We show that the balances held at intermediaries have been steadily increasing since 2014. By the end of 2020 it is equal to 5.5 million bitcoins, roughly one-third of Bitcoin in circulation. In contrast, individual investors collectively control 8.5 million bitcoins by the end of 2020. The individual holdings are still highly concentrated: the top 1000 investors control about 3 million BTC and the top 10,000 investors own around 5 million bitcoins." I haven't read the methods yet, but the idea that the authors were able to do this analysis is fascinating.

paisawalla 5y ago
As someone who's read the paper, do you know how they account for ownership by exchanges? There's got to be a large amount of BTC that is held in Coinbase's wallets, but actually owned by many more individuals. I.e. isn't the BTC I have parked at Coinbase is in the same wallet as many of their other customers' BTC, and shows up on the blockchain as one owner by this analysis?
- rmbyrro 5y ago
  It doesn't change the fact that it is a risk to the system that comes from centralization
garmaine 5y ago
> I haven't read the methods yet, but the idea that the authors were able to do this analysis is fascinating. Their work is nonsense. They assume address=single investor, which is not the case. That large address that has hundreds of thousands of bitcoin on it? It could be a whale, sure. It could also be Bitfinex's cold storage wallet representing tens of thousands of individual investors.
Hermel 5y ago
The top 1000 investors hold 15% of the supply? That’s not “highly centralized” if you compare to the stock market. For Tesla, one single shareholder holds 17% of the whole company.
- 2muchcoffeeman 5y ago
  But isn’t the dream to have some distributed system that no one can control? As an outsider looking in and comparing to the perceived values, this is yet another reason crypto is not worth your attention.
  - po1nt 5y ago
    I don't believe total decentralization is possible. Yet still this ratio is a little unsettling. This issue is not limited to bitcoin but all the cryptocurrencies. But I believe it's still better than to have single party control the whole currency.
  - More-nitors 5y ago
    well wasn't the dream about "no-fee transactions"? "no one can control" means: 1. you can't get bail-outs from phishing/fraud/mistakes (there are card companies/banks that actually provide this service) 2. combined with anonymity, means more wiggle-room for tax-evasion/black-market... (though if you look carefully, you'll have to 'financially-dance' a lot to get actual anonymity in bitcoin... all transactions are logged, right?)
- Gustomaximus 5y ago
  A company is very different from a currency. Apples and oranges comparing those in terms of centralisation.
  - beambot 5y ago
    How does the USD currency compare? I'd wager that the top-10 banks and the various central reserve banks own or control the vast majority of USD.
FabHK 5y ago
> just 0.1% (about 50 miners) control close to 50% of mining capacity So, the much-vaunted "mathematical guarantee" that only 21m BTC will ever be mined depends on the benevolence of those 50 miners not to fiddle with the code base. Makes perfect sense to trust those honourable individuals more than the central bankers in control of fiat. /s
- yourapostasy 5y ago
  > ...the benevolence of those 50 miners... What mechanisms do those 50 miners have to coordinate amongst each other, starting with how do they identify each other, communicate with each other, then overcome Prisoner's Dilemma in negotiating with each other?
- tinus_hn 5y ago
  How are these miner going to fiddle with the code on your computer? That is not the issue caused by this concentration of mining power.
  - CompuHacker 5y ago
    If those 50 people start playing by different rules, the sum of the value of the two resulting currencies will probably be less than that of BTC as it stands now.
    - tinus_hn 5y ago
      No, if they start to play with different rules their mined blocks will be refused by everyone on the network and be worthless. That’s not what the issue is with concentrated mining power.
      - arcatek 5y ago
        If they start to play with different rules, one of the hard fork remaining branches (or both) will be refused by everyone on the network and be worthless. There's no telling whether it'd be the "hijacked" branch or the original one - assuming they control 50%+ of the mining power, there's a decent argument that the remaining miners would follow their lead if only to stay on the largest branch.
3np 5y ago
> The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity This is incorrect. Replace "miners" with "mining pools" and they're closer to the mark. What's happened is that the block construction (done by the pool operator) and the PoW (done by miners) are mostly decoupled. Some miners will run everything themselves, but they're not represented in those numbers. (There are some things that can change here in stratum2, the new protocol used for coordinating mining pool s, but whatever) Sure, pool operators can abuse their power. But as the paper shows, hash power is liquid; miners do move between pools for various reasons. While there is a bit of a systemic risk there, it's not necessarily as bad as it might seem. IMO the biggest risk here is censorship; and we saw how responsive miners are to things like that earlier this year with the whole "OFAC-compliant" debacle.
- Kbelicius 5y ago
  > This is incorrect. Replace "miners" with "mining pools" and they're closer to the mark. It is correct. They are talking about miners not mining pools.
  - 3np 5y ago
    Thanks for pointing that out and unfortunate that I misrepresented it, granted I didn’t read the article properly. As they note themselves it is a best-effort estimation based on publicly available data. Without digging into the data and methodology further, I’m assuming that they are probably at least in the right order of magnitude. One thing I’m noting is that they exclude ~70% of miners and assign ~30% as exchange miners (note that those two figures only coincidentally add up to 100%). One possible methodology error I can see (and again, further digging would have to be done to verify) is that exchanges often pool their user wallets together; it could be that for some exchange(s), they mistakenly lump together several users as one. Since their claimed concentration is very high, it should be feasible to look at the top 50-100 to cross-check. Would be awesome to get more research like this. Overall it’s an insightful article and the authors show great understanding.
hammock 5y ago
>"We first document that 90% of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities but is the byproduct of the Bitcoin protocol design as well as the preference of many participants for anonymity." What do you think a similar metric would look like for the US dollar, when you consider the $600 trillion-plus derivatives markets?
- rory 5y ago
  The notional value of all derivatives ($600T+, maybe, we think) is MUCH MUCH higher than the dollar amount actually transacted in the derivatives market. So kind of comparing apples to oranges there.

paisawalla 5y ago

As someone who's read the paper, do you know how they account for ownership by exchanges? There's got to be a large amount of BTC that is held in Coinbase's wallets, but actually owned by many more individuals. I.e. isn't the BTC I have parked at Coinbase is in the same wallet as many of their other customers' BTC, and shows up on the blockchain as one owner by this analysis?

rmbyrro 5y ago
It doesn't change the fact that it is a risk to the system that comes from centralization

garmaine 5y ago

> I haven't read the methods yet, but the idea that the authors were able to do this analysis is fascinating. Their work is nonsense. They assume address=single investor, which is not the case. That large address that has hundreds of thousands of bitcoin on it? It could be a whale, sure. It could also be Bitfinex's cold storage wallet representing tens of thousands of individual investors.

Hermel 5y ago

The top 1000 investors hold 15% of the supply? That’s not “highly centralized” if you compare to the stock market. For Tesla, one single shareholder holds 17% of the whole company.

2muchcoffeeman 5y ago
But isn’t the dream to have some distributed system that no one can control? As an outsider looking in and comparing to the perceived values, this is yet another reason crypto is not worth your attention.
- po1nt 5y ago
  I don't believe total decentralization is possible. Yet still this ratio is a little unsettling. This issue is not limited to bitcoin but all the cryptocurrencies. But I believe it's still better than to have single party control the whole currency.
- More-nitors 5y ago
  well wasn't the dream about "no-fee transactions"? "no one can control" means: 1. you can't get bail-outs from phishing/fraud/mistakes (there are card companies/banks that actually provide this service) 2. combined with anonymity, means more wiggle-room for tax-evasion/black-market... (though if you look carefully, you'll have to 'financially-dance' a lot to get actual anonymity in bitcoin... all transactions are logged, right?)
Gustomaximus 5y ago
A company is very different from a currency. Apples and oranges comparing those in terms of centralisation.
- beambot 5y ago
  How does the USD currency compare? I'd wager that the top-10 banks and the various central reserve banks own or control the vast majority of USD.

FabHK 5y ago

> just 0.1% (about 50 miners) control close to 50% of mining capacity So, the much-vaunted "mathematical guarantee" that only 21m BTC will ever be mined depends on the benevolence of those 50 miners not to fiddle with the code base. Makes perfect sense to trust those honourable individuals more than the central bankers in control of fiat. /s

yourapostasy 5y ago
> ...the benevolence of those 50 miners... What mechanisms do those 50 miners have to coordinate amongst each other, starting with how do they identify each other, communicate with each other, then overcome Prisoner's Dilemma in negotiating with each other?
tinus_hn 5y ago
How are these miner going to fiddle with the code on your computer? That is not the issue caused by this concentration of mining power.
- CompuHacker 5y ago
  If those 50 people start playing by different rules, the sum of the value of the two resulting currencies will probably be less than that of BTC as it stands now.
  - tinus_hn 5y ago
    No, if they start to play with different rules their mined blocks will be refused by everyone on the network and be worthless. That’s not what the issue is with concentrated mining power.
    - arcatek 5y ago
      If they start to play with different rules, one of the hard fork remaining branches (or both) will be refused by everyone on the network and be worthless. There's no telling whether it'd be the "hijacked" branch or the original one - assuming they control 50%+ of the mining power, there's a decent argument that the remaining miners would follow their lead if only to stay on the largest branch.

3np 5y ago

> The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity This is incorrect. Replace "miners" with "mining pools" and they're closer to the mark. What's happened is that the block construction (done by the pool operator) and the PoW (done by miners) are mostly decoupled. Some miners will run everything themselves, but they're not represented in those numbers. (There are some things that can change here in stratum2, the new protocol used for coordinating mining pool s, but whatever) Sure, pool operators can abuse their power. But as the paper shows, hash power is liquid; miners do move between pools for various reasons. While there is a bit of a systemic risk there, it's not necessarily as bad as it might seem. IMO the biggest risk here is censorship; and we saw how responsive miners are to things like that earlier this year with the whole "OFAC-compliant" debacle.

Kbelicius 5y ago
> This is incorrect. Replace "miners" with "mining pools" and they're closer to the mark. It is correct. They are talking about miners not mining pools.
- 3np 5y ago
  Thanks for pointing that out and unfortunate that I misrepresented it, granted I didn’t read the article properly. As they note themselves it is a best-effort estimation based on publicly available data. Without digging into the data and methodology further, I’m assuming that they are probably at least in the right order of magnitude. One thing I’m noting is that they exclude ~70% of miners and assign ~30% as exchange miners (note that those two figures only coincidentally add up to 100%). One possible methodology error I can see (and again, further digging would have to be done to verify) is that exchanges often pool their user wallets together; it could be that for some exchange(s), they mistakenly lump together several users as one. Since their claimed concentration is very high, it should be feasible to look at the top 50-100 to cross-check. Would be awesome to get more research like this. Overall it’s an insightful article and the authors show great understanding.

hammock 5y ago

>"We first document that 90% of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities but is the byproduct of the Bitcoin protocol design as well as the preference of many participants for anonymity." What do you think a similar metric would look like for the US dollar, when you consider the $600 trillion-plus derivatives markets?

rory 5y ago
The notional value of all derivatives ($600T+, maybe, we think) is MUCH MUCH higher than the dollar amount actually transacted in the derivatives market. So kind of comparing apples to oranges there.