Decentralizing Cryptocurrency Is Hard
“Decentralization shaming” is a popular way for cryptocurrency tribes to laud their anointed altcoin at the expense of the rest. The degree to which a cryptocurrency is free from control by any one entity has become a stick with which to beat projects that don’t measure up to bitcoin, which is all of them. Such arguments are fallacious though, because when you look closely, it becomes evident that all cryptocurrencies are centralized to some degree.
Also read: You Can Now 51% Attack a Coin for as Little as $500
Decentralization: Easy to Define, Hard to Achieve
When the UK’s Visa network shut down on Thursday, it provoked snickers from bitcoiners. The BTC network has worked faithfully since its inception nine years ago, with neither governments nor regulators nor hardware failures capable of halting its progress. It is bitcoin’s censorship-resistance, achieved through its decentralized design, that has lent the digital asset so much of its value. True, most of the investment in cryptocurrency right now is speculative. But the reason why BTC is trading at close to $8,000, and BCH at $1,100, is because the ability to store digital wealth in a manner that can’t be seized is huge.
We know that bitcoin can’t be seized, hacked, or confiscated because attackers have been trying their utmost to do so since day one and have failed. We don’t have to like their intentions, but we can appreciate the fact that their efforts have contributed to bitcoin’s rise in value, with each failed attack adding to the faith invested in the inviolability of the network. Newer blockchains, in comparison, have yet to be battle-tested, which is reflected in the value of their native cryptocurrency. With two of the most hyped blockchains of all time, EOS and Tezos, launching this month, the decentralization debate has returned with a vengeance.
All Cryptocurrencies Start Out Centralized
Just as a newborn needs its mother to survive those precious early months, a blockchain needs its creator on hand in the beginning. Bitcoin was heavily centralized to begin with; with no one other than Satoshi around to oversee the mining, it was unavoidable. But as more users joined the network, bitcoin transitioned to a decentralized model, and within a year it was no longer Satoshi’s plaything – it was now the world’s. Every blockchain that’s came since has also started out heavily centralized, with its creators intending to remedy this “as soon as possible”. Unlike bitcoin, however, many of these chains have struggled to make much headway in that regard.
NEO: Chinese blockchains are notorious for being over-centralized, with NEO a prime example. It was meant to have been decentralized months ago, but it remains under the control of the company, who have the power to reset the network in the event of the Delegated Byzantine Fault Tolerance system failing to achieve consensus.
IOTA: Technically a DAG rather than a conventional blockchain, IOTA is even more centralized than NEO. While it is likely that NEO will eventually reach a degree of decentralization, it is doubtful whether IOTA works in its current incarnation without a central coordinator to rest things every time there’s a glitch.
Cardano: Charles Hoskinson’s Cardano will use a Proof of Stake algorithm called Ouroboros, but it’s yet to be rolled out, and thus for the past 12 months or so the cryptocurrency has been heavily centralized. Once Ouroboros is implemented, Cardano will be more distributed than at present, but whether that constitutes “true” decentralization is a matter of debate. Like EOS, Cardano’s consensus mechanism will place control in the hands of a few whales whose coins and votes will dictate decisions.
EOS: The decentralization, or lack thereof, that comes with EOS has been fiercely debated in a network that is less than one week old. 21 block validators – trusted entities such as Bitfinex – serve as delegates who control the network. EOS’ delegated Proof of Stake algorithm places a lot of control in the hands of a few. A two thirds majority is required to reach consensus.
Decentralization Is More Than Just a Consensus Mechanism
While debates about the merits of consensus mechanisms such as PoW, PoS, dPoS and dBFT, and their role in decentralizing a network rumble on, there are other centralization concerns to address. Almost 50% of all EOS tokens, for example, reside in just 10 addresses. Then there’s the issues of mining centralization, leadership cults, and the risk of low hashrate PoW blockchains being susceptible to 51% attacks. In other words, there’s no such thing as perfect decentralization.
All cryptocurrencies start life in the hands of a single entity. The measure of whether that coin deserves to be called a cryptocurrency lies in the swiftness and willingness of that entity to relinquish power. Time and successfully thwarted attacks are the true tests of a network’s mettle. Decentralization is a scale not a switch.
Do you think decentralization is the most important characteristic of a blockchain? Let us know in the comments section below.
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