Is Bitcoin Truly Decentralized?
The top buzzword you hear associated with bitcoin is “decentralization.” Everyone talks about the weaknesses of a centralized fiat currency and how a digital currency that runs on the blockchain can solve many of these problems.
Bitcoin (and other cryptocurrencies) have gained a lot of steam over the last year, but nobody has stopped to ask the question, is bitcoin moving towards decentralization?
Exchanges and Gatekeepers
Right now, almost all of the top exchanges for cryptocurrencies are centralized. They have a few shareholders who hold the majority of control, and with this comes the ability to censor the flow of funds.
Decentralized exchanges are on their way, but all of the currency decentralized solutions only allow for crypto-to-crypto trading, which is limited in its use.
Centralized exchanges also often manage the online storage of cryptocurrencies as well. The private keys stay in control of these exchanges, which is not only the exact same set up as leaving your money with a bank (and placing a large amount of trust in a single institution), but also creates a honeypot for potential hackers.
Maintaining custody of your private keys is something that is generally encouraged from a risk management perspective, but is also in line with the ethos behind bitcoin. Centralized exchanges retain a ton of data and have the power to censor the movement of funds.
Future regulation is still hazy for cryptocurrencies, and know-your-client laws require a certain amount of data to be stored by companies, but it is possible that these companies retain or sell this information in the future. The fact that your private key can be associated with you instantly takes away the anonymous aspect of cryptocurrency, which means you and your funds can be censored.
Mining in China
Examining this from a different angle, mining is an essential part of the governance and maintenance of the bitcoin network. The original idea was to have a widely distributed network that was so large that it was immune to any single entity that wished to dominate 51% of the currency and therefore control the fate of bitcoin.
However, this has not proven to be the case. There are an estimated 12,000 nodes currently in operation on the Bitcoin network, and they collectively have the power to vote on resolutions like SegWit 2x. As more nodes are added to the network, it has begun to trend towards a higher level of concentration in China. Now, have approximately 70% of the nodes controlled by entities within China.
Bitcoin doesn’t suffer from some of the same problems as other cryptocurrencies like Ripple, where the management is explicitly controlled by a single person, the CEO of the company. Satoshi Nakamoto designed and released bitcoin, then disappeared. The development team has the power to propose certain innovations, but it is far from an autocracy.
Many cryptocurrencies are set up in a way where a single player can steer the future with little oversight. This past form of governance is beginning to disappear and presents another reason why a democratic (and decentralized) solution like bitcoin has future potential.
The Bitcoin Ethos
Bitcoin’s promise is to deliver a digital currency that runs independently of any meddling top-down management, but right now this doesn’t seem to be the case.
Until the crypto ecosystem is run in a way that makes it possible to acquire, exchange, and store cryptocurrencies in a completely private manner, the innovations are negligible. Additionally, having a high proportion of the nodes in operation controlled by a country that doesn’t allow free access to the internet is another point against the decentralization of bitcoin.
None of this is to say bitcoin is going to fail or has no merit, but that “decentralization” isn’t a core trait it currently possesses. Certain changes are necessary to improve the robustness of the network, and it is highly possible they will be enough to maintain bitcoin’s dominance in the cryptocurrency world.
Featured image courtesy of Shutterstock.