BASEL SWITZERLAND—Among other risks, cryptocurrency assets may have one particular large downside compared to the traditional financial system, the Bank for International Settlements (BIS) is cautioning.
In a new bulletin, the BIS noted blockchain-based digital assets are subject to fragmentation, which ultimately renders them unable to fulfill the role of money in a society, The Daily Hodl reported.
A crypto asset’s ecosystem becomes fragmented when users break into distinct groups over time, diminishing the benefits of network effects, according to the BIS.
“The fragmentation of the crypto landscape stands in stark contrast to traditional (payment) networks, which benefit from strong network effects,” the BIS stated in its bulletin. “In the traditional system, the more users flock to a particular platform, the more attractive it becomes for new users to join that platform, creating a virtuous circle. This drives costs down, improves service quality and promotes financial inclusion. The recent launch and rapid adoption of Brazil’s Pix instant payment system illustrates these dynamics. In just over a year since its launch, Pix has seen 114 million users sign up, or 67% of the adult population.”
Seeking ‘Alternative’ Chains
The BIS further explained the fragmentation takes place when congested blockchains create high transaction fees, in turn prompting users to seek out alternative chains, The Daily Hodl noted.
“This bulletin argues that fragmentation arises from inherent limitations of blockchains. To maintain a system of decentralized consensus on a blockchain, self-interested validators need to be rewarded for recording transactions. Achieving sufficiently high rewards requires the maximum number of transactions per block to be limited,” the BIS said.
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