Bitcoin Transaction Network
Article: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3914786/
The article strives to investigate the movement of money, specifically regarding the ‘rich-get-richer’ phenomenon and essentially, confirming this scheme through empirical analysis of the Bitcoin Transaction Network. While there exists an abundance of financial data available for research, much of the information on everyday monetary transactions is limited and kept private. Thus, the paper analyzes Bitcoin, which provides a complete list of publicly available transactions, by reconstructing the list into a transaction network. Each node in the network represents a Bitcoin address, and each directed link between two nodes represents a transaction between the corresponding addresses. The structure and evolution of the transaction network, as well as the dynamics taking place in the network (i.e. the flow of bitcoins) was then studied. By measuring the basic network characteristics in function of time, the paper was able to identify two distinct phases in the lifetime of the Bitcoin system.
In its beginnings, the system was so new that no businesses accepted bitcoins as a form of payment and wasn’t regarded as a real form of currency. In the later phase, Bitcoin began to accumulate more public attention as the increasing number of users also attracted more services. Gradually, the system began functioning as a real form of currency. From this, the researchers were able to study the accumulation of bitcoins through measuring the wealth distribution at different points in time. It was found that sublinear preferential attachment governs the evolution of wealth distribution. The results also allowed them to identify a scaling relation between the degree and wealth associated to individual nodes, in which the ability to attract new connections was fundamentally related to accumulating wealth.
The results of the study conducted on the Bitcoin Transaction Network directly relates to the concept of power laws and the “rich-get-richer” phenomenon. In fact, the sublinear preferential attachment that governs wealth distribution in the Bitcoin market essentially defines “rich-get-richer” scheme in that links are formed “preferentially” to pages that already have a high popularity. In the Bitcoin Transaction Network, this can be seen as the accumulation of wealth of an individual node in the network and its ability to attract new connections and form more links are directly related. In other words, nodes that receive a greater number of transactions and have more links are then able to attract even more transactions and links, allowing it to accumulate wealth more rapidly than nodes with a few links–hence, rich-get-richer.