Bitcoin is Decentralized

February 7th, 2019

Bitcoin is becoming more decentralized over time.

Recently a report was released by Canaccord Genuity Group claiming that about 50% of all Bitcoin's hashrate was controlled by a single (1) mining pool in 2014. Currently, there are five (5) separate mining pools each with a double digit percentage of the market share.
The Canaccord report also cited research from ARK Invest pointing to the changes in the Herfindahl-Hirschman Index (HHI) of Bitcoin as an indicator that Bitcoin's market is less centralized than before. The HHI went from about 3,000 in 2013 (highly concentrated) to around 1,200 today (competitive marketplace).
*The HHI is a measurement of market concentration that is historically evaluated to understand market competitiveness.

Decentralization being critical to Bitcoin’s value proposition is certainly not new. Having said that, we now must ask ourselves more important questions along the lines of (a) why this has happened, (b) what we need to learn from it, and (c) can the Bitcoin community do anything to help ensure further decentralization?

(a) Why has this happened? — Canaccord’s report acknowledges that many factors contribute to the decentralization of Bitcoin’s hashrate, but they focus extensively on the increasing competition between ASIC chip manufacturers. The key theory is that ASIC chip innovation has been slower than expected and new market entrants (Canaan Creative, etc) have been able to ramp up production, which effectively allows them to steal market share from the previously dominant incumbents (Bitmain, etc). Additionally, it is important to acknowledge that more sophisticated, well-capitalized investors are entering the space. This accelerates the build out of commercial-grade mining facilities and reduces the advantage that early adopters (who have captured incredible economic benefit already) have.

(b) What we need to learn from it? — Competition should be encouraged. Over time increasing numbers of individuals and organizations reorganizing their distribution of resources to capture some of the Bitcoin block reward. The structuring of economic incentives for the decentralized currency was designed exceptionally well and should continue to give incentive for new individuals/entities to participate, which would dilute the market concentration of existing players. Satoshi thought this through quite brilliantly :-)

(c) Can the Bitcoin community do anything to increase decentralization? — Get involved! Contributing to Bitcoin’s hashrate is becoming increasingly easier for non-technical people to do while attempts to decrease barriers to entry continue to develop. One of my favorites is Coinmine (https://coinmine.com), a consumer product that mining in minutes by plugging in a device, connecting to WiFi, and begin mining in minutes. The more people mining, the more decentralized the network.

The Canaccord report is cool breeze in the heat of the public narrative that bear markets will lead to higher levels of concentration for the Bitcoin hashrate. Thankfully the long-term trend favors the further decentralization of Bitcoin.

Bitcoin will continue to increase resiliency as well as decentralization as time goes on. If the ultimate goal of Satoshi was for Bitcoin to become the global reserve currency, those are exactly what he/she/they would need to see.

-AltCoinLife