HIGHLIGHTS OF CREDIT SUISSE’S BLOCKCHAIN 2.0 RESEARCH ARTICLE

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We recently read through the 100 page report entitled “Bitcoin 2.0” written by the wonderfully insightful and hardworking team at Credit Suisse:  Charles Brennan, Brad Zelnick, and Mathew Yates.  We extracted the most interesting points for you to save time. The full document can be accessed here if you have permission.  Note, I’m very skeptical of various coin values, and more optimistic on blockchain future uses.  These highlights will likely reflect that.

  • We note that although bitcoin’s value has soared in the past 12 months, there has not been a proportional explosion in transactional volume.
Bitcoin Transactions

Bitcoin Transactions

  • Around 12 months ago, bitcoin essentially was the cryptocurrency market. Since then, c900 different cryptocurrencies have launched, pushing bitcoin’s share of the total cryptocurrency market down to a minority share at roughly 40%, despite the historic gains of the currency in the past 12 months.
  • ICO funding for tech projects and startups almost surpassed traditional Angel and Seed equity funding rounds in 3Q’17.
  • There were around 50 ICOs taking place each month.
  • Blockchain could be exposed to quantum computing. This also includes an assessment of the implications of quantum computing on blockchain; Shor’s and Grover’s algorithms.
  • Bitcoin can process about 3-7 transactions per second (TPS), while Ethereum’s tops out at about 20 TPS. Meanwhile, Visa typically processes over 1,500 transactions per second.
  • Smaller miners do not have the required computational power to host the full c150 gigabyte bitcoin blockchain.
  • As a comparison, it was reported that one of Visa’s two data centres in the US runs on about 2% of the power that bitcoin demands. Combined, Visa’s two US datacenters process c.200m transactions per day, bitcoin handles less than 350,000 per day.
  • It is estimated in a report by meteorologist and journalist Eric Holthaus that in just a few months from now, at bitcoin’s current growth rate, the electricity demanded by the cryptocurrency network will require more electricity than the entire United States currently uses.
  • In April 2017 a shockwave ran through the mining community when it emerged that a developer had found a backdoor called Antbleed in the firmware of Bitman’s S9 Antminer.
  • Significant proportions of bitcoin and other cryptocurrencies are apparently being held like precious assets, thereby severely restricting the flow and availability of the digital currencies. For instance, c97% of all bitcoins in circulation are held by roughly 4% of bitcoin addresses.
  • To give the current value of bitcoin some context, according to the World Gold Council, there are 187,200 tonnes of gold that have been mined throughout history, with around two-thirds of that being mined since 1950. Based on a current gold price of $1300/oz, this values the stock of gold at $7,875bn.  At c$16,000, the 16.6m bitcoin in circulation, created in seven years, is theoretically worth $265bn.
  • Citrix CEO Kirill Tatariov noted at a conference in New York that the decision by companies to stockpile bitcoin in order to pay future ransoms, such as those demanded in the WannaCry attack, was one of the key drivers of bitcoin’s price at that time.
  • Irreversibility – Lacking a trusted central party, there is nobody who can be appealed to or arbitrate disagreements between transacting parties. Should you, for example, send bitcoins to the wrong address, once broadcast to the network the transaction is only reversible at the discretion of the receiving party.  There is no authority or mechanism for error correction.
  • Recently noted that of the 226 ICOs they analysed, only 20 tokens, such as prediction markets company ‘Augur’ and Cloud storage company ‘Storj’, are currently being used in the running of the networks.
  • For example, blockchain-enabled technology is being developed to help solve music’s attribution problem, encourage investment in athletes, track land and property deeds, monitor unlawful gun purchases, trade stocks, authenticate voting, and protect internet-enabled devices.
  • In terms of quantifying the disruption, Accenture estimates that the global investment banking industry has a $30bn cost base and that blockchain-enabled technologies could save financial institutions up to 70% in reporting costs, 50% in compliance and on-boarding costs, and 30% infrastructure costs, thereby reducing opex for the world’s 10 largest investment banks by $8-12bn.
  • From that moment on, the entire $11trn global market for credit-default swaps will be traded on a blockchain.
  • How is the identity problem solved? We think many blockchain use-cases rest upon the assumption that identity can be reliably determined and managed on-chain, thereby enabling disintermediation of the trusted third-party identity management function.  However, as we have noted regarding bitcoin, on-chain asset ownership by virtue of private key knowledge essentially makes all on-chain assets bearer instruments.
  • A forked road, the lesson of the DAO attack – The Decentralised Autonomous Organisation, which holds hundreds of millions of dollars’ worth of digital currency Ethereum, was hacked in June 2016, forcing it to fork its network to prevent the thieves from stealing more. However, like bitcoin, Ethereum is decentralized network and thus needed the consensus of the community before it could make the immediate changes.  The ‘hard fork’ undertaken by the Ethereum community show, that blockchains are only immutable when consensus wants them to be.
  • IBM survey data has revealed that 90% of governments plan to invest in blockchain in 2018.
  • Dependency on Consensus: Blockchain protocols’ reliance on consensus mechanisms (often proof-of-work) exposes them to the risk of “crowd rules”.
  • For example, with an estimated 30% of Bitcoins as “zombie coins”, which have been untouched for over a year and a half, transaction reversals would require upheaval of many blocks early in the chain and thus invalidation of all subsequent dependent blocks.
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