Systemic risks for bitcoin

The recently published article in Deribit Insights written by independent crypto researcher Hasy is focused on the storage of BTC by third party, especially banks.

Possible threat posed by banking. The point is that current Bitcoin blockchain can record not more than 4400 transactions per block, that is every 10 minutes or so and the widening of capacity is not planned (if additional layers like Lightning are not used).

Hasy shows that the limit is exceeded mostly because of the use of external tools such as BTC banking custody services and the level of banking growth is out of protocol control to the degree that can become a systemic risk.  For example, one of such instruments can be the application Bakkt that will allow its users to exchange BTC without the necessity of registration blockchain in transactions making them fast and cheap.

In future it’s possible that the majority of exchanges will be out of chain and according to an expert the majority of them can be stored in banks.  The long-term stability of the scenario is connected to the fact that crypto users anytime can decide to change a custodian, but if it’s impossible or it’s slow, expensive and difficult, the power of control of this level will remain in banks and governments.  It can lead to a large increase in the cost of disengagement from the system as happened, for example, with gold in 1933 and 1971. Governments against Bitcoin. In other words, governments will have the possibility offered with Bitcoin, by means of banking control of deposit of large number of shareholders.  Actually, Hasy shows that if the upper layer is becoming too big in comparison with the capacity of bottom layer, people lose the ability to return to the bottom layer fast and cheap.

Nevertheless, the researcher offers 2 possible decisions in order to minimize the systemic risk: Firstly, traders can be discouraged with use of banking custody services for BTC on a large scale through policies aiming at new users first of all.  Probably, it is presented, though it doesn’t have a great success. Secondly, there may be found a way that allows ensuring the transition quickly and easily from the higher level of storage to the basic one. It will also allow the users to exchange transactions in order to place more in blocks.  Nowadays the risk seems to be real but limited, while 2 offered decisions are far from realizing.  It’s not certain if the systemic risk can become a real problem. Although much remains to be done to make BTC as an asset that will be available, secure and easy to use.