A senior official for the central bank of The Netherlands has presented the results of two cryptocurrency tests designed to explore how bitcoin’s blockchain might be adopted by national banking institutions.
The experiments by De Nederlandsche Bank (DNB) sought to simulate bitcoin both in its early days and in the year 2140, when the final bitcoins are expected to be mined. The bank presented the results at the third-annual Dutch Blockchain Conference, held just outside Amsterdam earlier this month.
The tests, conducted in 2015 but not reported until earlier this year, utilized an experimental digital currency called DNBcoin.
In a speech given at the event on 20th June, the head of the central bank's market infrastructures policy department, Ron Berndsen, explained that researchers within the institution wanted to get a hands-on experience working with the technology.
Berndsen told attendees:
"The general idea was that by adapting the Bitcoin software ourselves we could learn deeper how an actual implementation of the blockchain really works than if we would only perform desk research and go to conferences such as these, no matter how interesting."
Bitcoin in the beginning
To create the simulation environment, the DNB put together a working group of in-house experts who would act as fictional participants in a digital currency system.
To do so, the bank "bootstrapped" a team of “intrinsically motivated” members of the bank, said Berndsen. The group then adapted the open-source bitcoin software to replicate what its members believed the bitcoin ecosystem might have looked like in the first two months of the digital currency's existence.
Using five networked laptops, the DNB team mined their first DNBcoin block – known as the genesis block – and quickly generated “thousands” of more blocks. Along they way, they sent coins to one another, testing the ins and outs of the process like setting transaction fees.
The bank’s network created new blocks, along with freshly minted DNBcoins, about every three minutes, compared to the roughly 10 minutes expected in the bitcoin network, said Berndsen.
In the year 2140
Though the end of bitcoin's lifecycle is more than a century from now, the DNB wanted to simulate what those conditions might look like as well.
“The second DNBcoin prototype takes the other extreme of bitcoin by jumping to the year 2140, the year when the last fraction of the 21 million bitcoins will be issued," Berndsen said in his speech.
For this experiment, the central bank team needed to mine all of the DNBcoins in advance. To do so, they were created using a single laptop before opening the network to other computers.
To cut back on the amount of power needed to mine the DNBcoins, the team began with an initial block reward of 1 billion DNBcoins, then programmed the system to quickly lower the number of coins rewarded per block.
"In doing so we were able to generate 3 billion DNBcoins in 30 seconds. In addition, we observed that after all DNBcoins had been generated, blocks could still be mined and added to the blockchain. The reward was reduced to zero but transaction fees were still collected by the miner who finds the next block."
While the first two prototypes were built with the specific aim of learning more about how central banks might use virtual currency, a third experiment is currently being developed to explore other aspects of blockchain.
Specifically, Berndsen listed digital assets, trust, network resilience and the "intelligence to initiate or trigger transactions" as areas that will “probably” be tested in the third experiment.
Obstacles to central bank adoption
Berndsen said that central banks are “increasingly” interested in blockchain because of the distributed ledger technology’s potential to improve financial market infrastructure.
But specific to the DNB, Berndsen named blockchain's potential to impact all three of its "primary tasks": to promote the smooth functioning of the payment system, provide supervision and oversight and inform monetary policy.
Before central banks can adopt blockchain, Berndsen named interoperability, industry fragmentation and self-interest among financial incumbents as three barriers that need to be overcome.
"History teaches us that when looking ahead into the distant future, it is wiser to predict that something is possible, rather than that something is impossible. The blockchain technology offers a number of advantages over existing technologies. But there are also some drawbacks and barriers to overcome."
Image of De Nederlandsche Bank via Wikimedia