The Game of Crypto-Thrones: Centralization

07.05.2016

If a child from a crypto-maximalist family behaves like a moron, parents probably tell him or her that there’s a centralization hiding under the bed. If they have a farm, there’s a dummy centralization scaring crows away. Maybe they even call people they don’t like that name. All in all, that’s the thing bitcoiners wish to avoid by all possible means. And, ironically, that’s the thing that’s actually happening to bitcoin.

Many have already claimed that the decentralization concept, which underlies bitcoin, has totally failed. The ominous block size debate, which has nearly decoupled the weekly amount of facepalms in the community, is all about the tension between centralization and decentralization. However, while the community devotes its best efforts to disentangle the complex problem of scalability, centralization has found its way through laws of economy and marketing.

As years go by, exchanges go bankrupt, and exchange rate goes up and down, bitcoin ecosystem gets more and more centralized. However, it’s not a process of consolidation into a unified and over-controlled system; it mostly resembles establishment of states at the dawn of humankind.

Indeed, if we imagine that the bitcoin ecosystem is a continent, there will be a few states, or even nations. Each of them is unique and has its strengths and weaknesses, and all of them are just expanding by occupying yet unclaimed territories. For that reason, there are no evident conflicts between them – for now. Anyway, sooner or later the borders will settle, and peaceful expansion will not be possible any longer. That’s when the game will really start.

After all, bitcoin ecosystem has been decentralized only for a short period. Laws of capitalist economy make formation of markets and competition inevitable. And similar to traditional economies, which eventually produced a handful of multi-purpose corporations, which together control almost everything, the very same process is now underway in bitcoin ecosystem.

Signifying the expansionist trends is BitFury. Initially known for being one of the major players in mining market, BitFury has recently announced it intends to go beyond. Adding to manufacturing of mining equipment and mining itself, there are software and hardware items; blockchain-based system for land title protection being currently tested in Georgia; contributions in development of Lightning Network; a digital assets platform based on PaaS (Platform as a Service) principles; and a bitcoin-related analytics service. Missing from the list are, probably, only cryptocurrency exchange services and some unique and very specialized services like provision of blockchain-based authorization tools.

Another example of an expanding principality is Barry Silbert’s Digital Currency Group. It takes several minutes to read through the list of all projects the fund has invested in – those interested may visit DCG’s official website and time the reading. The list includes app development startups, cryptocurrency exchanges, providers of finance and developer tools, as well as wallet providers, merchant tools providers, miners, universal service providers, and even a publication, which is none other than CoinDesk. All in all, DCG seems to be involved in nearly every aspect of crypto-industry, and literally brakes for no one.

The notable instance of possibly expansionist policy in Bitcoin is Blockstream, a remarkable startup led by prominent developers Adam Back and Gregory Maxwell. The company is engaged in development of sidechain solutions. In October 2015, Blockstream announced the release of Liquid sidechain enabling transferring of assets between the main blockchain and sidechains. According to the company, several prominent exchanges, including Bitfinex, BTCC, Kraken and XAPO, participate in the system’s deployment.

Interestingly, some consider Blockstream’s motivation dubious, as the company employs nearly a half of Bitcoin Core developers, including Pieter Wuille, Jorge TimĂłn, Gregory Maxwell, Mark Friedenbach, and Matt Corallo. This caused the most distrustful community members to suggest that Blockstream, in fact, attempts to control Bitcoin protocol itself. Howewer, Bitcoin Core’s chief maintainer Wladimir van der Laan is said to be funded not by Blockstream or any other startup, but by MIT’s Digital Currency initiative. Anyway, employment of so many Core contributors may still seem very suspicious to some.

On the other side of the continent, there is R3CEV, which many believe to be an evil empire set to hurl the whole land into eons of dark chaos. Launched in September 2015, the consortium currently acts as an umbrella for more than 40 major financial organizations, including but definitely not limited to: Barclays, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, UBS, Bank of America, Citi, BNY, Deutsche Bank, Mitsubishi UFJ Financial Group, Morgan Stanley, National Australia Bank, Royal Bank of Canada, SociĂ©tĂ© GĂ©nĂ©rale, Mizuho Bank, UniCredit, BNP Paribas, Wells Fargo, the Canadian Imperial Bank of Commerce – hold on, there’s not much left – BMO Financial Group, Banco Santander, Sumitomo Mistsui Bank Corporation, Nomura, and Westpac Banking Corporation.

Even this abridged list of participants might scare the shit out of any decentralization fan. However, while blockchain is believed to be the main vehicle of decentralization, the consortium intends to beat it at its own game by using the technology for centralized services. One blockchain to rule them all, indeed.

Then, there are exchanges. One of the most active players in this realm is Kraken, whose tentacles continue spreading throughout the crypto-continent. Recent news show that the company receives investments in parcels and acquires less gigantic exchanges. The merger of CAVirtex and Coinsetter was dubbed one of the biggest in the entire history of Bitcoin. Ironically, Coinsetter, just like Kraken itself, is in DCG’s portfolio as well.

Then there are miners. I can feel Mike Hearn smirking in anxiety. Four major Chinese miners, namely AntPool, F2Pool, BTCC and BWPool, collectively control 68.15% of the network’s overall hashing power at the time of writing (according to bitcoinity.org). In particular, 24.19% of the network’s hashing power goes to AntPool, 23.62% to F2Pool, 14.14% to BTCC, and remaining 6.56% to BWPool. With addition of aforementioned BitFury, whose share currently comprises 12.8%, top five miners control 80.95% of the network. Notably, the China-based miners have gained around 2% since last year.

While earlier BTCC was the only player engaged in activities beyond mining, now it has a worthy adversary in the likeness of BitFury. BTCC was indeed involved in nearly every kind of bitcoin-related activity before it was mainstream. It was (and surely is) providing exchange and wallet services. Initially founded as an exchange in 2011, BTCC is the world’s no.1 in CNY trades. Additionally, it launched 100 full nodes across five continents claiming it strives to keep bitcoin system decentralized. However, as it turned out, most of those nodes are hosted by Amazon Web Services. This has caused some community members once again to worry about growing centralization of the system, as Amazon is indeed a very centralized entity.

So, Mike Hearn’s imaginary smirking could be pretty well justified. He might have exclaimed good old ‘toldya!’ and recall the laments in his notorious statement that the blockchain is de-facto controlled by Chinese miners. Anyway, China or not, but there is indeed only a handful of prominent miners, most of which are indeed China-based.
The last prominent principality of the imaginary crypto-continent is Ethereum. So far, its expansion has been the most rapid. Its price has gained nearly 1,200%, and lots of prominent players praise Vitalik Buterin’s brainchild and actively use it in their operation.

The credit should probably go to the fact that, contrary to other principalities here, Ethereum is more of a weapons provider rather than just yet another expanding realm. It sure doesn’t need to occupy new territories, which would have required sound upkeeping; instead, the principality sells weapons to all sides, and thus gets everything it needs without actual necessity to expand and annex new territories.

Aside from this fantasy-world analogy, Ethereum‘s status is as follows. The project has drawn interest from such well-established giant entities like JPMorgan Chase, Microsoft, and IBM. All of those corporations have already employed Ethereum solutions. Microsoft, for instance, runs so-called Blockchain as a Service on its cloud platform Azure to provide a development environment for creators of applications, while R3CEV employs Ethereum’s blockchain to run its experiments in cooperation with the world’s leaders of traditional finance.

A UK-based startup Ethcore founded by one of Ethereum’s founders Gavin Wood has raised funds from Blockchain Capital and Fenbushi Capital to the tune of $750,000. Germany-based startup Slock.it is engaged in development of so-called Ethereum Computer, which is to provide convenient interface for wide audiences of Ethereum-based products and smart locks. Thus, Ethereum developers do their best to drive their project to mass markets. Ethereum’s mastermind Vitalik Buterin sold a quarter of his own Ethers (though he owns only around 0.6% of their total supply) to invest in Ethereum-based projects.

And finally, there’s an island not far off. It’s Dash, a cryptocurrency indirectly but consistently positioning as Bitcoin’s undertaker. Its creator, Evan Duffield, was pretty clear about that, when he said that bitcoin cannot keep up with user adoption, and its users therefore have to alternatives: either switch back to fiat, or to start working with Dash.

Again, according to Duffield, Satoshi Nakamoto couldn’t possibly foresee such an active centralization of mining capacities which had brought about miners to dominate the industry. Eventually, he believes, there is a small group of individuals actually controlling the consensus, and their short-term interests contradict with interests of other participants and the industry as a whole. Finally, it contradicts with interests of Bitcoin’s regular users.
This outlines the market share for Dash: it’s not an actual industry, but a mindset of some users, who make anonymity and decentralization a corner-stone.

The block size debate, which is mentioned so often it’s a miracle it still isn’t abbreviated to BSD, further outlined the centers of power on the crypto-continent. Multiple roundtables held to solve the problem and settle the dispute have shown who is who. The decision-making is carried out by a handful of prominent players, and regular users, in line with what Evan Duffield said, have two choices – either to comply with whatever they decide, or to abandon the ecosystem as it is. The most notable instance of such events is so-called Satoshi Roundtable held this February. As opposed to other such roundtables, the event was closed, its venue was held a secret, and only hand-picked representatives could attend.

Crypto-industry is in the track of good old capitalist economy, and nowadays we’re witnessing its monopolization and centralization in progress. Most importantly, the process is inevitable – as evidenced by giant international corporations, the laws of economy cause enterprises to stick together in order to survive competition. Bitcoin has rapidly become a part of capitalist economy, and since then its fate has been decided.

Notably, none of companies discussed above has done anything illegal or even unethical. Each of them has every right to do what they’re doing, and they don’t have to feel guilty for attempts to run a successful business. However, decentralization fans may totally forget about their daydream. Currently there’s not much conflict between the principalities, but that is just because their expansion is yet incomplete. When their borders come into contact, a fierce competition will immediately arise.

Technological decentralization is a great solution supported by almost anyone, even those in traditional institutions. However, when separated from economic and philosophic decentralization, it is a mere facilitation of current way of things. Bitcoin is already centralized, and, like it or not, it is quite natural. It could disrupt finance all right, but it definitely cannot disrupt the laws of evolution.

by Jenny Aysgarth

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Tags: AntPool, Bitcoin, bitcoin core, Bitfury, Blockstream, BTCC, BW Pool, Dash, DCG, Ethereum, F2Pool, R3