A hallmark feature of Bitcoin and the blockchain it relies on has been the notion of decentralization. Praised by users and believers as the answer to the evils of Big Government, Wall Street and a host of other perceived societal ills, decentralization has been touted as the way forward. The design of Bitcoin is, at first glance, clearly decentralized. No government or single entity is responsible for backing Bitcoin, as central banks back most national currencies. But digging deeper in the Bitcoin ecosystem yields evidence of increasing centralization, a trend running contrary to what Bitcoin believers would have the public think.
The most recent and pressing issue facing Bitcoin as a whole has been the proposed increase to the block size. Changing the block size is fundamental toward enabling more, and larger transactions, which many view as necessary for scaling the blockchain. The debate over block size has polarized users and developers, prompting wide discussion that often turned nasty. The most noticeable aspect of the debate, however, has been the wide influence wielded by a very small number of developers with control over the Bitcoin source code. How can Bitcoin continue to be decentralized if control of the Bitcoin protocol is centralized? The conundrum has caused increased concern over the future of Bitcoin as a currency. Major revisions or updates may create alternate types of cryptocurrencies, “alt-coins,” derided by many Bitcoin users in a somewhat ironic display of puritanical belief in Bitcoin as the one authentic cryptocurrency. The concern over decentralization even touches what should be the most egalitarian element of Bitcoin: mining.
Mining Bitcoins is a key component of what attracted early users. By harnessing the power of their personal computer and converting it into a digital goldmine, users of Bitcoin were creating their own wealth. As the popularity of Bitcoin rose the scale of mining rose as well, prompting a veritable arms race of computing power between mining entities known as pools. Pools grouped miners together, sharing the spoils together, greatly enhancing their potential of finding a block and earning the reward contained therein. This arms race has culminated in concerns over 51% attacks, and massive centralization of the mining community. Economies of scale and the increasing expenditure on mining equipment have concentrated mining activities, creating a centralized mining community, a contrast to the purported decentralizing intent of the mining mechanism.
Where else has centralization crept into Bitcoin? Old wallets full of unmoved coins come to mind. Service providers like Coinbase, Bitfinex, and Bitstamp may control potentially damaging amounts of liquidity in an ecosystem designed to be deflationary. Considerations of centralization in a protocol that was designed to attract those opposed to centralized systems demand concern from the Bitcoin community. In future pieces, we’ll look at the centralization in Bitcoin, and the natural tendencies that markets have toward centralization.