“Blockchain Analysis of the Bitcoin Market” Makarov, Igor, and Antoinette Schoar Flashcards
What is the main idea?
Sheds light on how Bitcoin is really used.
A lot of questions on how regulators should deal with Bitcoin: adopt it? Fight it? Integrate it?
What is the methodology used?
The authors:
o Build a novel Bitcoin database and develop a methodology for identifying info about the main market participants
o Conduct 3 major pieces of analysis that focus on the core functions of the new architecture:
Document the transaction volume and network structure of the main participants
Document the concentration and regional composition of miners which ensure the integrity of the blockchain ledger
Document the ownership concentration of the largest holders of Bitcoin
What does peeling chains mean?
Creating multiple addresses and splitting the initial payment among them (hackers often use it to make it harder to trace them).
How does Bitcoin blockchain volume divide?
o Spurious volume – within-entity volume (including peeling chains and sending stuff back to yourself)
o Real volume – transfers between different entities
What is the split of transaction volume by network participant types? (illegal stuff/exchanges/investing)
90% of volume is a by-product of Bitcoin protocol design and preference of participants for anonymity (e.g., sending bitcoins to themselves).
Of the remaining 10% (of the real volume):
*75% is linked to exchanges or exchange-like entities (trading and speculation)
*3% – to illegal activities
What is the problem with Know-Your-Customer (KYC) norms?
Some countries impose Know-Your-Customer (KYC) norms on exchanges.
But one could still transfer funds from KYC exchanges to non-KYC exchanges that have their servers in countries that tolerate nonKYC.
How concentrated is mining capacity entity- and region-wise?
Probability of mining a block is proportional to the hashing power spent on mining; this provides a strong incentive to pool resources and then split rewards.
Very high concentration: top 10% miners control 90% of hashing power, top 0.1% – 50%. Top 0.1% is just 50 miners!
Concentration is counter-cyclical: smaller miners join when bitcoin price goes up, leave when it goes down (think when 51% attacks are more likely)
Between 60% to 80% of power is in China
How concentrated is Bitcoin wealth?
Intermediaries hold 30% and
individual investors 50% of Bitcoin in circulation.
(Top-1000 individual investors 18%,
Top-10,000 individual investors 30%)
What are mining pools?
Miners collaborate to mine more efficiently.
This is the first study that accurately links miners to their mining pools.
In 2020, mining pools covered 90% of mining rewards
Describe the Xinjiang Event.
o 2021 a major coal mine was flooded in China
o Chinese gov shut down the mine for the weekend – no electricity then
o Due to cheap electricity, there were a lot of miners in Xinjiang
o Worldwide Bitcoin mining capacity dropped by 35%
o Most of affected miners were using local exchange (Huobi) or Binance – gives credibility to assumption
