The De-Decentralization of Cryptocurrencies
The word “decentralized” does not appear in Satoshi’s original white paper (nor “blockchain”), but has since become synonymous with Bitcoin and its successors. For a digital currency to be truly decentralized, it must achieve two goals: resist censorship and be immune to the meddling of project leaders. If the price of a coin depends on its founder being alive, it is not decentralized. Likewise, if its speed and scalability are due to centralized nodes, it is not decentralized.
Cryptocurrencies are more centralized than you think
According to this calculation, many of the top 20 cryptocurrencies are sadly below the required standard. Several work on a “future decentralization” model where developers promise to give up control as soon as things run smoothly, while others don’t have the nodes or hashpower to prevent attacks by 51%. Here’s how the world’s most popular cryptocurrencies are set up when ranked by nodes and decentralization of leadership. The lower the score (from 1 to 10), the more centralized the coin will be.
There are now nearly 12,000 nodes on the Bitcoin network, a number that has more than doubled in the past year. Each of these nodes records network activity, which helps verify transactions and makes the public ledger as distributed as possible. From Germany to Russia and from Nigeria to the United States, there are full nodes in operation all over the world. Along with a hash rate of over 20 exahashs per second, bitcoin is comfortably one of the most decentralized blockchains on the web.
The only real concern is the degree to which Chinese groups control bitcoin mining, which can account for up to 70% of the hash power. But with the emergence of huge new mines in North America and Europe, these concerns will soon subside. In terms of leadership, Bitcoin is highly decentralized. Unless Satoshi Nakamoto reappears from the desert and embarks on a journey of power, it’s hard to imagine Bitcoin being at the mercy of a single entity.
The public ledger used on the Ethereum network is highly decentralized, with over 26,000 nodes verifying transactions. In fact, a recent report by Cornell University researchers states that Ethereum is better distributed than Bitcoin. However, that doesn’t mean Ethereum is more decentralized than Bitcoin. For one thing, Ethereum is in the process of moving to a proof-of-stake model. While this approach has advantages, this algorithm is less secure than proof of work.
Since PoW requires miners to do real work to verify each transaction, it would be extremely difficult for a bad actor to control the network. In theory, doing this with a PoS model would be easier. Consensus model considerations aside, Ethereum’s biggest weakness is its centralized leadership. From a symbolic, if not a technical, point of view, the continued success of the platform depends on the permanence of Vitalik Buterin. Also, if bad things happen on the Ethereum network, there is always a chance that they will come back on the blockchain, form, and start over.
Ripple has the potential to be used as a tool by global banks, although banks appear to have little interest in using XRP, but it is not a decentralized cryptocurrency. The 100 billion XRP was created in Ripple Labs’ version of the Big Bang in 2012, and most of it has remained in Ripple’s vaults ever since. Even if you overlook the fact that Ripple Gateways (essentially approved exchanges) have the power to freeze customer account balances, the lack of distributed nodes means Ripple could be closed more easily than almost any other altcoin on this list.