Berentsen and Schär
4 RISKS
Much like any other key innovation, blockchain technology introduces some risks. The following sections will consider some of these risks. As we mentioned in Section 3, we would like to note that this list is non-exhaustive.
4.1 Forks
As discussed in Section 1.8, the Bitcoin protocol can be altered if the network participants, or at least a sufficient number of them, agree on the suggested modification. It can happen( and in fact has happened) that a blockchain splits because various groups cannot agree about a modification. A split that persists is referred to as a“ fork.” The two best-known examples of persistent splits are the Bitcoin Cash fork and Ethereum’ s ideological dissent, which resulted in the split to Ethereum and Ethereum Classic.
4.2 Energy Wastage
Proof-of-work mining is expensive, as it uses a great deal of energy. There are those that criticize Bitcoin and assert that a centralized accounting system is more efficient because consensus can be attained without the allocation of massive amounts of computational power. From our perspective, however, the situation is not so clear-cut. Centralized payment systems are also expensive. Besides infrastructure and operating costs, one would have to calculate the explicit and implicit costs of a central bank. Salary costs should be counted among the explicit costs and the possibility of fraud in the currency monopoly among the implicit costs. Moreover, many cryptoassets use alternative consensus protocols, which do not( solely) rely on computational resources.
4.3 Bitcoin Price Volatility
The price of Bitcoin is highly volatile. This leads us to the question of whether the rigid predetermined supply of Bitcoin is a desirable monetary policy in the sense that it leads to a stable currency. The answer is no because the price of Bitcoin also depends on aggregate demand. If a constant supply of money meets a fluctuating aggregate demand, the result is fluctuating prices. In government-run fiat currency systems, the central bank aims to adjust the money supply in response to changes in aggregate demand for money in order to stabilize the price level. In particular, the Federal Reserve System has been explicitly founded“ to provide an elastic currency” to mitigate the price fluctuations that arise from changes in the aggregate demand for the U. S. dollar. Since such a mechanism is absent in the current Bitcoin protocol, it is very likely that the Bitcoin unit will display much higher short-term price fluctuations than many government-run fiat currency units.
5 CONCLUSION
The Bitcoin creators’ intention was to develop a decentralized cash-like electronic payment system. In this process, they faced the fundamental challenge of how to establish and transfer
14 First Quarter 2018 Federal Reserve Bank of St. Louis REVIEW