Dutch central bank releases test results of digital currency DNBcoin

Rage Review : The two previous digital currency tests conducted by the Dutch Central Bank (DNB) explored how national banking institutions would use blockchain technology. The results of the third test of DNBcoin were announced at the third Dutch Blockchain Conference held in Amsterdam earlier this month. The test tested digital assets, trusts, network resilience and "intelligence to trigger transactions." The first two protocols wanted to learn more about how central banks use virtual currencies, and the third test currently being developed is to explore other aspects of blockchain. The three major obstacles that financial institutions currently need to overcome include interoperability, industry segmentation and their own interests.

Translation: Nicole

Senior officials from the Dutch central bank have published the results of two digital currency tests aimed at exploring how the national banking institution can apply blockchain technology.

The Dutch central bank (DNB) attempted to simulate the state of bitcoin in its infancy and in 2104, when the last bitcoin will be issued, through tests that simulated the state of bitcoin in its infancy. The bank announced the results of its tests at the third Dutch Blockchain Conference, which took place in Amsterdam earlier this month.

The tests were conducted in 2015, but it was not reported until earlier this year that the digital currency DNBcoin was used in the experiments.

In a speech published on June 20, Ron Berndsen, head of the central bank’s market infrastructure policy department, explained that institutional researchers wanted to experience blockchain technology first-hand.

Berndsen told attendees:

“The main purpose is that by using the Bitcoin software ourselves, we can gain a deeper understanding of how the blockchain actually works, which cannot be achieved by just doing desk research or attending some conferences.”

Simulating the initial state of Bitcoin

To create a simulation environment, DNB convened a team of internal experts who would act as virtual participants in the digital currency system.

Berndsen said the bank “self-directed” a group of “internal mobile” bank members, who then used the open-source bitcoin software to replicate the members’ bitcoin vision for the digital currency’s first two months.

The DNB team mined the first DNB coin block (called the genesis block) using five laptops connected to the internet, and then quickly produced "thousands" of blocks, passing DNBcoins to others as they tested various details of the process, such as setting transaction fees.

Berndsen said the bank's network can mine DNBcoins every three minutes as it creates new blocks, compared to about 10 minutes on the bitcoin network.

Simulating the state of Bitcoin in 2140

Although Bitcoin is still more than 100 years away from the end of its life cycle, DNB still wants to simulate what these situations would look like.

Ron Berndsen

Berndsen said in a statement:

“The second DNBcoin protocol, which uses the other extreme Bitcoin, will jump to 2140, when the last of the 21 million Bitcoins will be issued.”

For this experiment, the central bank team needed to mine all the DNBcoins in advance, and they were all created by one computer before opening up the network to other computers.

In order to reduce the effort of mining DNBcoins, the team started by rewarding 1 billion DNBcoins for the initial block, and then programmed the system to quickly reduce the number of DBNcoins rewarded for each block.

Berndsen explained:

“Doing this allowed us to mine 3 billion DBNcoins in 30 seconds. Additionally, we observed that after all DBNcoins were mined, blocks could still be mined and added to the blockchain. The reward was reduced to zero, but the miner who found the next block still received transaction fees.”

The first two protocols were intended to learn more about how central banks use virtual currencies, and the third test, currently in development, is intended to explore other aspects of blockchain.

Berndsen specifically listed digital assets, trust, network resilience and “intelligence to trigger transactions” that will be tested in the third test.

Barriers to central bank adoption of blockchain technology

Berndsen said central banks’ growing interest in blockchain is due to the potential for distributed ledgers to improve financial market infrastructure.

But for DNB, Berndsen cited blockchain’s potential impact on three “top priorities”: facilitating the smooth functioning of payment systems, providing regulation and oversight, and informing monetary policy.

Berndsen cited three major obstacles that current financial institutions need to overcome before central banks can use blockchain technology: interoperability, industry segmentation and self-interest.

Berndsen concluded:

“History tells us that when looking to the future, it is wise to believe that something is possible rather than to rule it out. Blockchain technology brings us more benefits than current technology, but there are still some shortcomings and obstacles that need to be overcome.”