The Bitcoin Economy Has Grown Up

In partnership with Deutsche Bundesbank, the University of Wisconsin, and the UCL Centre for Blockchain Technologies, researchers declare that Bitcoin is maturing towards critical mass and enterprise usage.

Data reveals that transactions across the network have risen “exponentially,” and seem to be increasing at a rapid rate. This makes Bitcoin an appropriate study, researchers say, that explores how this cryptocurrency will evolve over time.

The paper explains:

It becomes appropriate to explore how the Bitcoin economy is populated and extract the map of payment relationships, as well as to trace the evolution of those relationships over time. This paper takes that direction by identifying the interconnection between the economic agents that use the Bitcoin payment network to transfer the digital currency among each other.

Researchers discuss the many sectors Bitcoin has advanced, such as gambling and black markets, detailing how exchanges have matured over time before and after the Mt Gox fiasco.

The study also focuses on transaction relationships through clusters allowed the researchers to allocate how Bitcoin was being used by certain businesses. The paper states:

In particular, we start by clustering the minimum units of Bitcoin identity, which are the individual ‘addresses,’ into what we call ‘super clusters,’ and then we tag those clusters using de-anonymized addresses. A supercluster can be thought of as an approximation of a business entity in that it describes a group of addresses that are owned or controlled collectively for some particular economic purpose by the same entity.

The 3 Stages of Evolution

Network visualization of the interactions of the super clusters

Furthermore, the research notes three “distinguishable regimes” that have occurred within the Bitcoin economy since Satoshi introduced the protocol.

The first period is from 2009 to March 2012, which they call the “proof-of-concept” period. This means the network has a subtle number of users, early adopters, and “very little meaningful commercial activity.”

The second period was bolstered by black market usage and gambling. Researchers also note there was a concurrent drop in gambling as well in October of 2013 when the Silk Road operations had ceased. The decline was relatively small only dropping by 3% in total transactions.

The third period is where the Bitcoin network is currently positioned, marked by significant maturation. The paper says how the Bitcoin economy has moved “away from ‘sin’ enterprise and diversifying into legitimate payments, commerce, and services.” From January 2014 to May 2015 researchers noticed an increase in legal services, with cryptocurrency exchanges at the center of this movement.

The paper concludes by saying Bitcoin has indeed matured rather than continuing to be volatile, if not unreliable, as many economists have suggested in the past. It reads:

The result of this work is to show that the Bitcoin economy, rather than being a fleeting and frivolous pursuit, has grown and matured over the few years that it has been operational, with distinct patterns of behavior among its most influential entities and participants. As the Bitcoin economy continues to expand and evolve, the type of de-anonymization and analysis employed in this paper can be used to ascribe unknown entrants to perhaps new, distinct business categories, as well as further update and re- fine the network of payments.

Bitcoin has truly grown up over the course of its lifetime as “The Evolution of the Bitcoin Economy” research tracks the different stages through clustering analysis. Moving forward, expect researchers to continue monitoring the progress of the world’s first cryptocurrency as its network continues to expand.

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