Blockchain Consensus Mechanisms: A Primer for Supervisors (IMF Fintech)

Summary

• Bitcoin block rewards fell from 12.5 Bitcoins to 6.25 Bitcoins in May 2020.p.14
• The total energy usage of Bitcoin mining is 140 Terrawatt-hour, which is comparable to Poland.p.14
• The Bitcoin Blockchain processes approximately 7 transactions per second, compared to Visa which averages roughly 1,700 transactions per second.p.14
• DiemBFT proposes to process 1,000 transactions per second at launch.p.20
• Centralized nodes joining DiemBFT must commit at least $10 million.p.20
• A 51 percent attack occurs when malicious actors gain control over 51 percent of nodes in a network.p.9

Key insights

1. Distributed ledger technology can disintermediate markets and reduce costs, but consensus mechanism designs pose environmental, consumer, and financial stability risks.p.6
2. Proof-of-Work provides high security but suffers from heavy energy consumption, slow transaction speeds, and probabilistic settlement.p.14
3. Proof-of-Stake improves energy efficiency but introduces potential wealth-based centralization and settlement challenges.p.15
4. Delegated Proof-of-Stake leverages voting mechanisms to increase transaction speed while requiring measures against validator cartels.p.17
5. Private network mechanisms like pBFT, iBFT, and DiemBFT enable immediate settlement finality but raise competition concerns.p.18
6. The Bali Fintech Agenda provides a 12 policy element framework to guide authorities in harnessing fintech benefits while balancing risks.p.8
7. Supervisors should consider shifting from technology neutrality to a technology agnostic approach to mitigate technology-specific risks.p.23