How Decentralized Is Bitcoin? An Expert Take
Back in 2012, the FBI defined Bitcoin as a decentralized peer-to-peer network-based virtual currency. But even though Bitcoin is undoubtedly p2p, network-based, and virtual, there had been varying opinions on just how decentralized it actually is.
In this article, forklog.media will explain what it means for a cryptocurrency to be decentralized, why it is important, and whether Bitcoin is a truly decentralized currency.
The Meaning of Decentralization
In his famous Meaning of Decentralization, Vitalik Buterin, co-founder of Ethereum, suggested that there are three types of decentralization: architectural, political, and logical.
In a blockchain environment, architectural decentralization relies on the number of physical computers that maintain the network, political decentralization is about who owns the aforementioned computers, and logical decentralization axis gauges how structurally monolithic the entire system is.
According to Buterin, Bitcoin, like many other blockchain networks, is “politically decentralized (no one controls it) and architecturally decentralized (no infrastructural central point of failure) but is logically centralized (there is one commonly agreed state and the system behaves like a single computer).”
The Bitcoin network is indeed not run by a central entity but rather maintained by a community. There is no single entity that prints the money or validates transactions. Every user can run a full node and make sure the network’s rules are observed. There is no single central authority capable of seizing anyone’s coins or blocking transactions. Architecturally, Bitcoin is very much decentralized, but what about politics?
There are two positions of ultimate power within the Bitcoin network. These are Bitcoin miners, who provide computing power that allows Bitcoin to operate, and Bitcoin Core developers, who maintain and upgrade the code. The two groups have a very tight relationship because they ultimately rely on each other. Miners need the software to run and developers need miners to run the software and secure the network. But these groups have one more thing in common—they increasingly resemble a closed club.
Robert Michels wrote in Political Parties that “historical evolution mocks all the prophylactic measures that have been adopted for the prevention of oligarchy.” Even though Bitcoin may have been conceived as a consensus-based decentralized entity, it faces a hard time bypassing the laws of human nature.
The Mining Oligarchy
“The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote,” Satoshi Nakamoto wrote in Bitcoin’s white paper.
According to Satoshi’s vision, one of the PoW’s functions was to prevent individuals or organizations with a large resource base from accumulating an overwhelming power within the network. Buying some extra PCs for mining was way more expensive than procuring extra IP-addresses. Back when Bitcoin was very cheap, it was not a feasible business model. But as Bitcoin’s price rose and researchers came up with ASICs, industrial mining actually became a lucrative business.
Those who started mining early gained a huge advantage. Competing with established players is not an easy feat, especially bearing in mind the upcoming halvings, which gradually make mining less profitable. Today only four largest mining pools control more than half of Bitcoin’s hashing power.
“Can we really say that the uncoordinated choice model is realistic when 90% of the Bitcoin network’s mining power is well-coordinated enough to show up together at the same conference?” Vitalik Buterin noted.
While miners’ power over the network is limited, they do play a crucial role in its maintenance. In order for any change in the code to go live, miners have to support it first. If hashing power is concentrated in few hands, miners can collude. If miners and developers disagree, it often may lead to a hard fork.
Another concern to bear in mind is that while developers are motivated by improving the product, miners are motivated by increasing their returns. And interestingly enough all the largest miners are based in China.
“Bitcoin is exposed to “political risk” centered upon one country, rather than the generic and more amorphous political risk which comes from challenging fiat currency globally. Since even private Chinese companies are subject to being directed by the central government in China, this has resulted in the CCP having at least latent or potential control over Bitcoin. At the very least, miners are monitoring their own behavior so as to not antagonize the CCP,” Gordon Einstein, the founding partner at CryptoLaw Partners told forklog.media.
Within the crypto community itself, many believe that crypto’s decentralization is only a myth.
“Bitcoin is determined in theory at least by Bitcoin core, which is a GitHub repository. Anyone with what they call push access, basically the ability to change the Bitcoin core repository, is in charge of Bitcoin,” said Gavin Wood, Ethereum co-founder, in an interview to Longhash.
The paper published in 2016 by Harvard blockchain researcher Primavera De Filippi and associate professor at Télécom ParisTech Benjamin Loveluck, claims that Bitcoin is a highly centralized network. Researches say that since Bitcoin’s inception Satoshi Nakamoto was the main person in charge of the project, as well as the only person with the right to commit code into the official Bitcoin repository. Once Satoshi disengaged from his brainchild, his mission was carried on by a small and not very inclusive group of “core developers”.
The research goes on:
“Hence, just like many other open-source projects, there is a discrepancy between those who can provide input to the project (the community at large) and those who have the ultimate call as to where the project is going. Indeed, while anyone is entitled to submit changes to the software (such as bug fixes, incremental improvements, etc.), only a small number of individuals (the core developers) have the power to decide which changes shall be incorporated into the main branch of the software.
“This is justified partly by the high level of technical expertise needed to properly assess the proposed changes, but also – more implicitly – by the fact that the core developers have been entrusted with the responsibility of looking after the project, on the grounds of their involvement (and, to some extent, shared ideology) with the original concept of Satoshi Nakamoto.”
Researchers point out the huge gap between the perceived libertarian nature of Bitcoin and it’s actual authoritarian governance structure, which implies that “core developers are (by virtue of their technical expertise) the most likely to come up with the right decision as to the specific set of technical features that should be implemented in the platform.” Such a “technocratic” approach to governance, in their opinion, is problematic in that it goes counter to the original conception of the Bitcoin project:
“There exists, therefore, an obvious discrepancy between the libertarian vision of Bitcoin as a decentralized infrastructure that cannot be regulated by any third party institution, and the actual governance structure that dictates the technological development of Bitcoin – which, in spite of its open-source nature, is highly centralized and undemocratic.
“While the (a)political dimension of the former has been praised or at least acknowledged by many, the latter has remained, for a long time, invisible to the public: the technical decisions to be taken by the Bitcoin developers were not presented as political decisions, and were therefore never debated as such.”
Gordon Einstein, on his part, believes this was perhaps inevitable.
“All the developers working together, whether in a company or association, is, in fact, a form of centralization. But, it’s really hard to get things done and improve the software unless there is some degree of cooperation and collusion. And, in the long term, people need to be incentivized to stick with a project,” he told forklog.media.
Yet another group that has a huge sway on Bitcoin’s ecosystem is the so-called Whales. While fiat money is controlled by banks and governments, Bitcoin is only beholden to the market. But can the market itself be to a certain extent controlled?
It was recently revealed that 40% of all existing Bitcoins were accumulated in just 0.1% of existing addresses.
— Richard Heart: HEX did 8x in 31 days!🚀M⬣⬣N (@RichardHeartWin) November 19, 2019
The whales are capable of influencing the price of Bitcoin in a very tangible way just by collectively selling or buying Bitcoins. And again, the concentration of serious power in the hands of a small group of people is called either aristocracy or oligarchy, depending on how many people there are and other political nuances. But either way, it is not about consensus, democracy, or decentralization.
Bitcoin can be called decentralized only in a fairly narrow interpretation of the word. The libertarian dream unerringly fell victim to the Iron Law of Oligarchy. Rank and file users ultimately find themselves riding in the back seat as Bitcoin is speeding forward. They do not truly control the Bitcoin network and their coins, just like outdated fiat money, are susceptible to intrigues of major players.
Gordon Einstein believes that not much can be done to facilitate the re-decentralization effort because “the only thing that various “solutions” to problems seem to accomplish is moving the problem from one box to another. They rarely actually “solve” the problem. Same with governance “solutions” for crypto. It’s like a big water balloon. If you squeeze and tighten in one area, the pressure just moves to another area of the balloon. You can’t compress the entire thing and, if you try too hard, the thing just bursts.”
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