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Bitcoin, decentralized since Satoshi Nakamoto's disappearance, faces ongoing challenges from centralizing forces like exchanges and mining pools. Yet, its resilience, supported by Proof-of-Work and other mechanisms, underscores its pursuit of decentralization as a core strength and ongoing objective
The day Satoshi Nakamoto disappeared, Bitcoin reached a level of decentralization the planet had never seen. Without the creator’s vision guiding the project, development and maintenance fell into the community’s hands. Thirteen years later, the Bitcoin network is still working hard to improve on the decentralization front.
There’s still a lot of work to be done. The game is afoot, and, in Lenny Kravitz’s immortal words, it ain’t over ‘till it’s over.
Centralization is easy to picture, the concept refers to the concentration of power in a single point. On the other hand, the definition of decentralization varies depending on who you ask. However, considering the previous idea, we could define it as taking decision-making and resources away from that central head.
It’s important to notice that decentralization is a spectrum and no project achieves pure decentralized status. However, Bitcoin was designed to tend towards it and the network participants go to extreme lengths to keep Bitcoin grounded on its founding ideas. Decentralization is, and probably will continue to be, a key factor in many of the major decisions the network has faced and will face throughout the road to hyperbitcoinization.
The Internet is the only modern invention that could compare to Bitcoin. We could easily draw parallels between the current state of the Bitcoin network and the Internet before the invention of the browser. At the center of that comparison, decentralization is the key idea.
Let’s go to Princeton’s 2017 book “Bitcoin and Cryptocurrency Technologies” for an historical perspective:
“On one hand we have the Internet, a famously decentralized system that has historically competed with and prevailed against “walled-garden” alternatives like AOL’s and CompuServe’s information services. Then there’s email, which at its core is a decentralized system based on the Simple Mail Transfer Protocol (SMTP), an open standard. Although it does have competition from proprietary messaging systems like Facebook or LinkedIn mail, email has managed to remain the default for person-to-person communications online.”
Sadly, the current iteration of the Internet was invaded by centralizing forces like social media. The Bitcoin network, on the other hand, remains steady in its path toward more decentralization.
One of the Bitcoin project’s objectives is eliminating the need for a trusted third party. Inspired by this fact, the community created one of its most well-known slogans: “Don’t trust, verify.” In ideal circumstances, to transact, the network participants wouldn’t have to trust each other or a central authority. The code takes care of everything. The network takes care of everything.
In the article “Is Bitcoin a decentralized payment mechanism?,” published by Cambridge’s Journal of Institutional Economics, the authors explain the difference between the possible payment mechanisms:
“A centralized payment mechanism processes a transaction using a trusted third party. A decentralized payment mechanism processes a transaction between the parties to the transaction. A distributed payment mechanism relies on the network of users to process a transaction on a shared ledger.”
They argue that bitcoin is not a decentralized system, but rather a distributed one. That’s neither here nor there, though. The project’s ethos points to decentralization from all possible angles.
The nodes enforce the rules of the network and almost everybody can run one. The participant would only need the willingness to do so, an old laptop, and access to the Internet. The miners validate transactions but - even though it’s an open network and, in theory, everyone can participate - the barrier of entry is a significant investment upfront. However, unlike node runners, miners get handsomely rewarded for their work.
At Bitcoin’s mere center, the Proof-Of-Work consensus mechanism keeps the machine running. It guarantees that a random miner will earn every block reward, thus making sure that people with more resources don't monopolize the system. They might buy more tickets to the raffle, but they’ll never win in every instance.
To discourage dishonest behavior, the system rewards every winning miner through two separate incentives. According to “Bitcoin and Cryptocurrency Technologies,” “The first is the block reward. According to the rules of Bitcoin, the node that creates a block gets to include a special transaction in that block.” And, “The second incentive mechanism is the transaction fee. The creator of any transaction can choose to make the total value of the transaction outputs less than the total value of its inputs.”
There’s another mechanism at work that incentivizes decentralization. The difficulty adjustment guarantees that entities will not monopolize the system through innovation and the introduction of more powerful equipment. The Bitcoin network aims to produce one block every ten minutes. If miners add more hashrate to the system, Bitcoin balances it out by increasing the difficulty. If, on the contrary, miners turn off their equipment for one reason or another, the system decreases the difficulty.
That’s one of Satoshi Nakamoto’s great innovations right there. The difficulty adjustment keeps the network at equilibrium and doesn’t need a third party to control it.
Nothing’s perfect, there are always trade-offs. To achieve decentralization, the Bitcoin network makes significant sacrifices. A blockchain will never be as fast as a centralized database. Achieving decentralized consensus takes time and it’s never as smooth as unilateral decisions from a third party. On the other hand, by aiming for decentralization, the Bitcoin network earns in security because there’s not a single point of failure.
In the 2015 paper “Bitcoin: economics, technology, and governance,” the Journal of Economic Perspectives explains that last point:
“Decentralization offers certain advantages. It avoids concentrations of power that could let a single person or organization take control. It often promotes the availability and resiliency of a computer system, avoiding a central point of failure. It offers at least the appearance of greater privacy for users (and perhaps greater genuine privacy) because, in theory, an eavesdropping adversary cannot observe transactions across the system by targeting any single point or any single server.”
Let’s analyze both sides further.
It’s not a secret that the most popular Exchanges are centralized companies that inflict strict KYC measures on their customers. Traditionally, that fact has been acknowledged and criticized as the Bitcoin network’s single point of failure. When the governments come for Bitcoin, that’s where they will attack, critics used to say.
They were right, of course. Centralized Exchanges are easy to control because they have an office and a CEO. Government officials just have to knock on their door and it’s game over. A few years ago, a new crop of decentralized exchanges arrived on the scene. These are not perfect either, they come with trade-offs and different risks altogether.
What’s the solution? Adoption, circular economies, and using Bitcoin as a Medium of Exchange. Incidentally, Blink’s main objective. Let’s focus on the issue at hand, though.
The point is that centralized exchanges, off-ramps, and on-ramps to the traditional currency markets are centralizing forces. The critics are right on this one. And that’s just one of the issues the Bitcoin network currently faces.
The critics are right about this too, but they don’t count with the counteracting measures the Bitcoin network already took. The paper “Is decentralization sustainable in the bitcoin system?” claims, “even though the Bitcoin system is designed as an egalitarian system, it is likely to evolve into a near-centralized system because of economic forces.” Among those economic forces, the authors identify, “the Bitcoin system is likely to be dominated by a few large-sized miners.”
The article “Bitcoin’s Weak Spot: Mining Centralization and How We're Working on It” goes deeper and identifies three centralizing forces related to Bitcoin mining.
As with the previous section, these risks were identified long ago. In the 2014 paper “Is Bitcoin a Decentralized Currency?,” the authors claim, “the power of dedicated “miners” far exceeds the power that individual users dedicate to mining, allowing few parties to effectively control the currency; currently the top-three (centrally managed) mining pools control more than 50% of the computing power in Bitcoin.”
In 2024, the numbers are similar.
The article “Bitcoin’s Weak Spot: Mining Centralization and How We're Working on It” also identifies solutions to the mining centralization problem. These answer directly to the previous section’s bullet points.
There are problems, sure, but the Bitcoin network is actively solving them.
In the previously quoted 2014 paper “Is Bitcoin a Decentralized Currency?,” the authors identified this problem:
“Other Bitcoin operations, like protocol updates and incident resolution are not designed to be decentralized, and are controlled by a small number of administrators whose influence does not depend on the computing power that they control but is derived from their function within the system. Bitcoin users do not have any direct influence over the appointment of the administrators.”
Let’s be clear, nodes can use any software they trust to interact with the Bitcoin network. However, more than 95% use Bitcoin Core and see it as the official client. Back to the paper:
“Bitcoin developers retain privileged rights in conflict resolution and maintenance of the official client version. These entities altogether can decide the fate of the entire Bitcoin system, thus bypassing the will, rights, and computing power of the multitude of users that populate the network.”
Bitcoin critics are right once again, and this might be the scariest centralization issue so far. Especially considering that Bitcoin Core developers have been acting strange lately. Fortunately, there are alternative clients like Bitcoin Knots and BTCD. And, as it happened with previous threats, rest assured that the Bitcoin network is already on the case.
The Bitcoin network is the most decentralized entity on the planet, but it’s not completely decentralized. Nevertheless, the Bitcoin community has its eyes on the ball. The majority knows that decentralization is crucial to Bitcoin’s success. To Bitcoin’s survival, even. And we’re willing to die on this hill.
