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