Why Bitcoin May not be decentralized

Why Bitcoin May not be decentralized

Say what? I think in web3 culture, saying that Bitcoin is not decentralized is an equivalent of making fun of someone's religion. The kind of fanaticism the BTC community has is unparalleled. 

Before we  proceed further, a few disclaimers. (A) I am a part of this fanatic community just with a little more open eyes. (B) I am a big fan of the network effects created by the orange pill. So I have no intention of fighting with them. 

With that out of the way, let us talk about how Bitcoin may not be as decentralized as we thought it would be. And after all, why is decentralization important?

The Genesis of BTC:

Back in 2008, when the first block of BTC was mined, it had a message encoded in the raw data that said: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."

It is very clear that the ethos of BTC was to create a peer to peer transaction system without any intermediary in place. In other words, creating a network that is not owned by anyone but run by everyone. Thus the term 'decentralized' got a new meaning altogether. 

And to be honest, the idea is really novel. If banks are replaceable, why not do it? If money is an abstract concept, why can't BTC replace it? 

A couple of days ago, an ECS debit hit my bank before the salary got credited. As a result the payment bounced and the bank levied a penalty. Why? Is there a cost involved with reconciliation of cheque bounces? 

What I am trying to say is that I am completely sold on the idea. But then, decentralization has so many layers attached to it. Let's find out. 

What is Decentralization?

As mentioned, the very ability of a network to be run by all the participants rather than a central authority is known as decentralization. 

When it comes to Bitcoin, there's no company or organization running it. It is maintained by something called a node. These nodes are deploying computational power to validate and put the next block in the Blockchain. Best part? Anyone can become a node. Thus making the system completely democratized. 

But there's often more than it meets the eye. Story doesn't end here. Believers of BTC would say that BTC has about 16,000 nodes. Thus making it a fairly decentralized system. But here's something that is often overlooked.

  • Client Decentralization:

    Oversimplified definition incoming. Think of client codebases as pieces of software that help in mining. These are the softwares that would help you calculate hash and mine the blocks. Turns out that the most popular client codebase is Bitcoin core and Bitcoin unlimited is the second one. 

    This means it would take very little effort to compromise BTC if either of these codebases are compromised with. Now, you tell me. Is it really decentralized if the validation mechanism is dependent on just two parties?

  • Geographical Dependence:

    Another argument against decentralization is the fact that nodes are concentrated in a few countries with China being the largest player. If some of these countries decide to launch a 51% attack collectively, it is quite possible to compromise Bitcoin. 

  • Ownership Centralization:

    Although BTC is people's money, we are very well aware of the fact that large corporations have a great influence on the prices of the orange coin. Microstrategy alone his one of the biggest holder of BTC and one can imagine the mayhem it may cause if they ever decide to sell. 

    We saw this live in action when Luna Foundation Guard decided to sell their reserves to safeguard UST peg. However, the only thing that came out of it was that BTC had touched $24K. 

    What I am saying is that in case of such a transaction in stocks, there are rules set by regulators to inform beforehand. But with BTC being 'decentralized' people abuse their money to loot retail investors.

  • Dev Decentralization:

    Another interesting lens to look at this. How many devs are working on BTC? We recently got a taproot upgrade, how many people contributed to it? Because if the number of people who understand the code and work on it is limited, we are yet again at their mercy. All of them might introduce something to BTC that non techies cannot even fathom. 

  • Mining Pools:


  • The image says it all. What if these folks ever decided to do a 51% attack on Bitcoin? Where is your god now?

Which Means?

Well, everything aside, I feel BTC is still better placed than all other cryptocurrencies out there. Also, one should realize that decentralization is a spectrum and not a boolean. What that means is that you would always have elements of centralization in an ecosystem. So if you are interested in quantifying decentralization of a network, I would recommend you go through the theory of Nakamoto Coefficient.

Related Stories

No stories found.
Voice Of Crypto