Fragmentation of cryptocurrencies will not fulfill ‘the social role of money’, says BIS


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Cryptocurrencies due to fragmentation will not meet According to data from DefiLama, until January 2021, Ethereum was the main layer 1 blockchain, controlling more than 90% of the total. total value locked in Defi. From the time other layer 1 blockchains such as Terra, Avalanche, and Binance Smart Chain were created, until their collapse, Ethereum’s share in Defi TVL dropped by around 54%. until 04.2022

ETH/USD quotes are hovering around 1801,$87

In a June 7 report, economists at the Bank for International Settlements admitted that blockchains have “inherent limitations” which, in effect, lead to fragmentation, making cryptocurrencies unsuitable as a means of payment.

According to the report, with the rapid growth of cryptocurrencies, the decentralized finance ecosystem has started to fragment. It has been argued that this market fragmentation is due to inherent flaws in the design of blockchain systems.

It is the inherent characteristics of blockchains – especially the need to motivate decentralized nodes to approve transactions – that fragment the cryptocurrency landscape. – it appears from the report.

For the blockchain to maintain its integrity, transaction fees should be high enough to motivate approvers. When transaction fees are too low, validators can be incentivized to cheat, putting network security at risk.

It is for this reason that the number of transactions in a block is limited in order to be able to guarantee everyone sufficient remuneration. This is why transaction fees are based on the size of the request. This means that transaction fees increase during times of heavy network congestion.

Ethereum gas fees are currently low, but the high volatility has created the basis for a competition known as “Ethereum killers”.

– (…) users are turning to other blockchains to carry out transactions that have become prohibitive on Ethereum. However, new blockchains often seek to increase transaction limits, even at the expense of greater centralization and weaker security.. – indicated in the BIS report.

NDE

The problem of fragmentation is exacerbated by the lack of interoperability. Despite the fact that bridges have been built connecting different chains, the recent wave of thefts and break-ins on bridges has highlighted the importance of the problem of their security.

According to the report, the fragmentation of virtual currencies is –unlike traditional networks which benefit from strong network effects.

-In a traditional system, the more users are attracted to a given platform, the more interesting it becomes for new users to join, which creates a self-propelled circle. – We read.

Fragmentation means that cryptocurrencies cannot function like money. Ultimately, money is a coordination tool that facilitates economic exchanges. It can only do this when there are network effects: the more users use a type of money, the more attractive it becomes for others to use it.

The same is true for silver which exhibits positive net ripple effects. The more people use a particular currency, the more people trust it.

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