Research: Bitcoin “Run” by an Influential Group Holding Large Amounts of Cryptocurrency
A study has revealed the possibility of a hidden group of users in the Bitcoin network control a majority of the digital asset. This closed group also completes most of the transactions in the network. Past studies have also highlighted the majority holdings of the digital currency lie in the hands of a few people.
Bitcoin Run by an Oligarchy?
Bitcoin is built on blockchain technology. Once a transaction is completed, its data is stored on the public ledger. This makes it possible for researchers to study and analyze the behavior of bitcoin owners. Researchers Leonardo Ermann, Klaus Frahm, and Dima Shepelyansky released a paper titled “The Google matrix of bitcoin transactions” on July 2, 2018.
The research focused on the time frame between January 11, 2009, and April 10, 2013. They analyzed the ownership pattern by examining past transactions on the bitcoin blockchain.
The researchers stated:
“We found the spectrum has an unusual circle-type structure which we attribute to existing hidden communities of nodes linked between their members. The Gini coeﬃcient of the transactions for the whole period is close to unity showing that the main part of wealth of the network is captured by a small fraction of users.”
Banks and financial institutions manage the payment and settlement of fiat currency. These organizations are opaque and do not reveal a great deal of detail about customer spending and their wealth. However, transparency in a blockchain network is a key criterion for its success. The paper thus confirms the presence of hidden owner communities in the network. Wealth distribution in the network is also concentrated among a few people.
The three researchers developed a Google matrix of bitcoin transactions. This helped them rank important characteristics of the network which influence results of the search engine. “The Bitcoin network has up to a few millions of bitcoin users and we present its main characteristics including the PageRank and CheiRank probability distributions, the spectrum of eigenvalues of Google matrix and related eigenvectors,” stated the study.
The study has revealed the spectrum of complex values for Google matrix has circles formed close to the unitary circle. This has never been reported for any network in the past. The closely formed circular structure highlights a closed community being involved in a long chain of transactions. Meanwhile, the SEC is also probing price manipulation in the trading of bitcoin at cryptocurrency exchanges. If the findings of the study are accurate and can be relied upon, it could be worrying about the entire cryptocurrency market.
Bitcoin may be deviating away from its main theme of decentralization. The cryptocurrency was released in the aftermath of the 2008 financial crisis as an alternative to fiat currencies were looking rather uncertain at the time. However, even though past studies have predicted there is a high possibility of bitcoin being accumulated by a few users, there has been no conclusive proof of that so far. On the other hand, bitcoin mining is also dealing with its problems of centralization, with regards to the hash rate of the network.