A new study conducted by the University of Wisconsin in partnership with UCL Centre for Blockchain Technologies and the Deutsche Bundesbank has demonstrated that the Bitcoin Economy has significantly grown and matured in the past few years.
Bitcoin evolves and we need to know how
The research has revealed that the number of Bitcoin transactions has increased significantly from approximately 1,000 per day in 2011 to 300,000 per day. As the network has expanded and continues to do so, the need to explore how the cryptocurrency evolves became apparent. This has largely driven the research.
The study explains:
“At the current exchange rate the notional value of daily transaction volume ranges between $200 and $300 million. Thus, 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”.
For that purpose, the research took a direction to identify the interconnection between the economic agents that use the Bitcoin payment network for transferring digital currencies between each other. Data from the Bitcoin Core over the period from 3rd January 2009 through to the 8th May 2015 was imported and managed via a MySQL database designed to run high-performing application codes.
Researchers have gathered together publicly accessible individual addresses as the minimum units of Bitcoin identity and grouped them into particular business categories through analyzing some of their specific transaction patterns.
Applying the input address heuristic, researchers have grouped 75,191,953 unique Bitcoin addresses obtained from the Internet into 30,708,660 clusters which were further filtered to link part of superclusters to real world entities (e.g. BTCChina, Kraken, Xapo, etc.) which belong to different business categories (exchange, mining pool, online gambling, black market and composite). It allowed researchers to further create a map of payment relationships between them and make conclusions regarding transaction behavior in each business category.
Three Regimes in Bitcoin Economy
Relying on the results of the analysis of transaction relationships, researchers measured the relative prevalence of each general business category in the sample and tracked their evolution over the study period. Thus, the study identified three distinguishable regimes that have occurred and evolved in the Bitcoin economy since its inception.
Period 1: from January 2009 through to March 2012 - identified as a proof-of-concept period and characterized by test transactions among a small number of users with very little meaningful commercial activity. The analysis showed that this period was almost entirely dominated by mining.
Period 2: April 2012 through to October 2013 - identified as a period of early adopters, bolstered by black market usage and gambling.
It was no surprise that these types of businesses were among the first responders to Bitcoin, as they were attracted by its unique features such as its relative anonymity (pseudonymity), lack of regulatory and legal oversight, borderless transactions, and low transaction costs absent from taxation.
As study points out, Bitcoin as the new form of secure digital cash appeared to be ideal for the purchase and sale of illicit drugs, stolen items, and other activities that could not be easily paid for elsewhere online. However, there was a concurrent drop in using Bitcoin for ‘sin’ activities in October 2013 when a number of black markets ( the largest among them was the Silk Road) were shut down.
Period 3: November 2013 - Present - period of Bitcoin network maturation, characterized by departure of the Bitcoin economy from ‘sin’ enterprise and diversifying into legitimate payments, commerce and services.
Research indicates that the period from January 2014 to May 2015 was characterized by a significant increase in legal services with digital currency exchange services at the center of this process.
We are to witness further maturing of Bitcoin
The study showed that the Bitcoin economy has indeed matured going all the way from the mining-dominated stage to the exchange-dominated stage.
The study reports:
“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 past few years that it has been operational, with distinct patterns of behavior among its most influential entities and participants.”
The paper also states that as the Bitcoin economy continues to evolve, the method of de-anonymization used in the analysis can be used further to ascribe unknown entrants of the network to new distinct business categories.
The research team also suggested that recent concerns regarding the use of Bitcoin for illegal activities at the present time might be over-exaggerated, and even if such transactions may currently still exist, there is a visible trend towards their diminishing as the Bitcoin economy is maturing.