Most Cryptocurrencies Are More Centralized Than You Think
The whole point of cryptocurrencies is that they’re decentralized. Peer-to-peer cash; trustless exchange; bypassing intermediaries. So why are numerous cryptocurrencies structured more like central banks? From adjusting wallet balances to controlling nodes, many crypto projects behave just like the financial institutions they were meant to replace. Throw in the cult of a strong leader, and there’s little to differentiate some altcoins from the Paypals and Visas of the world.
The De-Decentralization of Cryptocurrencies
The word “decentralized” doesn’t appear in Satoshi’s original white paper (nor does “blockchain” for that matter) but it’s since become synonymous with Bitcoin and its successors. For a digital currency to be truly decentralized, it needs to achieve two things: to be censorship-resistant and to be immune from meddling by project leaders. If the price of a coin is dependant upon its founder staying alive, it’s not decentralized. Similarly, if its speed and scalability are on account of centralized nodes, it’s not decentralized.
Cryptocurrencies Are More Centralized Than You Think
“And then he said ‘Ripple is a decentralized currency’.”
By that reckoning, many of the top 20 cryptocurrencies fall woefully short of the standard required. Several work to a “future decentralization” model in which the developers promise to renege control as soon as they’ve got things running smoothly, while others lack the nodes or the hashpower to prevent 51% attacks. Here’s how the world’s most popular cryptocurrencies shape up when rated by node and leadership decentralization. The lower the score (1 to 10), the more centralized the currency.
Bitcoin
Cryptocurrencies Are More Centralized Than You ThinkThere are now almost 12,000 nodes on the Bitcoin network, a figure which has more than doubled in the past year. Each of these nodes records network activity, helping to verify transactions and making the public ledger as distributed as possible. From Germany to Russia and Nigeria to the USA, full nodes are in operation all over the world. Coupled with a hashrate of over 20 exahash per second, and bitcoin is comfortably one of the web’s most decentralized blockchains.
The only real concern is the degree to which bitcoin mining is controlled by Chinese pools, which can account for up to 70% of the hashing power. But with huge new mining farms springing up in North America and Europe, these concerns may soon be alleviated. In terms of leadership, Bitcoin is highly decentralized. Short of Satoshi Nakamoto reappearing from the wilderness and embarking on a power trip, it’s hard to envisage Bitcoin ever being at the mercy of a single entity.
Decentralized ledger: 9
Decentralized leadership: 10
Ethereum
Cryptocurrencies Are More Centralized Than You ThinkThe public ledger used in the Ethereum network is highly decentralized, with over 26,000 nodes verifying transactions. In fact, a recent report by Cornell University researchers claims that Ethereum is better distributed than Bitcoin. That doesn’t mean Ethereum is more decentralized than Bitcoin however. For one thing, Ethereum is in the process of switching to a proof of stake model. While there are benefits to this approach, this algorithm is less secure than proof of work.
Because PoW requires miners to perform actual work to verify each transaction, it would be extremely hard for a bad actor to control the network. Doing so with a PoS model would theoretically be easier. Consensus model considerations aside, Ethereum’s biggest weakness is its centralized leadership. From a symbolic – if not technical – standpoint, the platform’s continued success hinges on Vitalik Buterin sticking around. Also, if bad things ever happen on the Ethereum network, there’s always a chance they’ll just roll back the blockchain, fork off and start afresh.
Decentralized ledger: 8
Decentralized leadership: 3
Bitcoin Cash
Cryptocurrencies Are More Centralized Than You ThinkMuch like Bitcoin Core, Bitcoin Cash is heavily decentralized due to its large hashrate and the number of full nodes, which stand at over 1,200. BCH has only 10% as many nodes as BTC, but by any definition meets the standards required of a decentralized cryptocurrency. In terms of leadership, there are a number of high profile figures who support Bitcoin Cash, but there is no outright leader or CEO – despite what Rick Falkvinge may claim in jest.
Decentralized ledger: 7
Decentralized leadership: 8
Ripple
Cryptocurrencies Are More Centralized Than You ThinkRipple has the potential to be used as a tool of global banks – even if banks seem to have little interest in using XRP – but it is not a decentralized cryptocurrency. All 100 billion XRP were created in Ripple Labs’ own version of the Big Bang back in 2012 and the bulk of them have remained in the Ripple 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 that Ripple could be shut down more easily than almost any other altcoin on this list.
Decentralized ledger: 2
Decentralized leadership: 1
Iota
Cryptocurrencies Are More Centralized Than You ThinkWhere to even start with Iota? It’s a project which hinges upon the whims of an increasingly cantankerous and capricious CEO, and its ethics make Ripple look like a paragon of virtue. The Iota network is controlled by a “coordinator” which has the power to alter account balances and disrupt service while its developers grapple with the legion of bugs that beset the codebase. There’s talk of this coordinator being phased out in favor of a more decentralized model but David Sønstebø doesn’t seem like the sort of boss to give up power easily. Short of having its headquarters built on the Meridian Line, Iota could hardly be any more centralized.
Decentralized ledger: 1
Decentralized leadership: 1
The Best of the Rest
Cryptocurrencies Are More Centralized Than You ThinkLitecoin: Over 14,000 nodes keep the blockchain secure, but like Ethereum, Litecoin is weakened by the cult of a strong leader in Charlie Lee.
Decentralized ledger: 7
Decentralized leadership: 3
Cryptocurrencies Are More Centralized Than You ThinkMonero: Riccardo Spagni aka Fluffypony is the larger-than-life figure at the head of Monero. The project is bigger than even Fluffypony, however, and would continue in his absence. The Monero network currently has over 2,500 nodes.
Decentralized ledger: 5
Decentralized leadership: 5
Cryptocurrencies Are More Centralized Than You ThinkStellar: Basically Ripple lite minus the Gateway freeze feature. There are things to like about Stellar, but decentralization isn’t one.
Decentralized ledger: 3
Decentralized leadership: 2
Cryptocurrencies Are More Centralized Than You ThinkNeo: In terms of centralization, Neo is right up there with Ripple and Iota. There are plans to roll out three new nodes that aren’t under the control of the company (at present all seven are overseen by Neo), but even then Neo won’t be remotely decentralized. Moreover, validator operators will be held legally liable by Neo to maintain uptime, which is the antithesis of the original spirit that inspired cryptocurrency. It’s also worth noting that last October Neo went offline for hours after the network was shut down while the team performed “manual checks”. Any blockchain that has a kill switch isn’t a blockchain.
Decentralized ledger: 2
Decentralized leadership: 3
Work your way through the remaining cryptocurrencies in the top 20 and you’ll find the same pattern play out: projects that lack either the hashrate or the nodes to ensure true decentralization, or which are crippled by centralized leadership. You can still invest in these coins, profit from these coins, and use them to send money peer to peer. But should the shit ever hit the fan and governments start cracking down on cryptocurrencies, these heavily centralized altcoins will be the first to go.
Purveyors of financial freedom can’t rein in the desire of regulators to regulate. But through pushing for decentralization in all its forms, they can ensure that cryptocurrency remains censorship-free and in the hands of its rightful owners.