Are Decentralized Blockchain Platforms Truly Decentralized?

OP-ed disclaimer: This is an Op-ed article. The opinions expressed in this article are the author’s own. CoinCodex does not endorse nor support views, opinions or conclusions drawn in this post and we are not responsible or liable for any content, accuracy or quality within the article or for any damage or loss to be caused by and in connection to it.

Bitcoin, Ethereum, and other popular cryptocurrencies are often touted by their supporters as being secure and decentralized, a term that seems to have many meanings around the web. Some people think ‘decentralized’ means that no banks hold all the Bitcoin in the world. Others believe that it means everyone using a cryptocurrency has to contribute to the blockchain… and they’re partially right.

However, the realities of crypto mining of Bitcoin, Ethereum, and other coins have shifted the purpose of digital tokens somewhat from their original goal. While crypto may be lucrative and accessible for investors, mining is much less so for the average user. Let’s explore whether decentralized blockchain platforms like Bitcoin and Ethereum are truly decentralized, or if they’re actually as vulnerable to over-centralization as their fiat currency counterparts.

The compelling promise of decentralized blockchain

At the heart of cryptocurrency is an elusive yet tantalizing promise: an unbreakable, secure type of currency based on Proof-of-Work protocols and decentralization. Bitcoin, Ethereum, and other types of cryptocurrencies rely on users contributing their computing power to verify transactions and ensure the accuracy and immutability of the blockchain platform. In theory, this is a great system, as it allows individuals to control their money outside the reach of big governments or banking institutions.

Although once considered a niche economic project, cryptocurrencies have been taking off in recent years. In fact, a 2020 study conducted by CreditDonkey found that nearly 73% of individuals surveyed reported investing in at least one type of cryptocurrency. More often than not, that cryptocurrency was either Bitcoin or Ethereum.

Part of the reason for crypto’s popularity might be due to their supposed decentralization. The two giants claim to rely on decentralized hash processing to ensure security for their users. But a look at the data – and the enormous power requirements necessary to mine Bitcoin and Ethereum – tells a different story. 

Are Bitcoin and Ethereum really decentralized?

Simply put, no. At the time of writing, five mining pools – collections of mining computer networks/users – control over 80% of the total hash power in Bitcoin. For regular users trying to contribute to the cryptographic network, it’s almost impossible to mine a single Bitcoin given the power requirements needed to carry out the hash processes. 

Ethereum is much the same. In fact, it’s clear that practically every popular crypto coin‘s mining processes are run by a handful of mining pools or groups.

But wait – doesn’t that still mean that Bitcoin and Ethereum are decentralized? Technically, yes, but only if you consider them to be ‘decentralized’ in that they aren’t under the control of a bank or traditional financial institution. But by the more practical definition, both Bitcoin and Ethereum are not decentralized in the slightest because a few groups or individuals control most of the mining for these coins. 

With that mining power comes control over the broader crypto network. This means for the average user or crypto investor, Bitcoin and Ethereum are not decentralized. They are just centralized under the control of powers other than those who control fiat currencies.

Why has decentralization eluded the crypto market?

Once, anyone could make money online by mining Bitcoin or other cryptocurrencies, but this is no longer the case. It all started with the invention of hardware devices – ASICs – that were designed exclusively to mine Bitcoin. These specialized computer devices allowed individuals to band together and dedicate more computing power to coin mining, accelerating the mining process across the web.

Over time, mining pools came about, groups of dedicated crypto coin miners who work together to control the majority of hash power for Bitcoin and other types of cryptocurrencies. The power of these mining pools has only grown over time, along with Bitcoin’s market dominance. This is due in large part to the economies of scale and the power and infrastructure requirements needed to mine a single Bitcoin these days.

For example, just one Bitcoin transaction will take, on average, over 1,544 kW worth of electricity to hash and confirm. For comparison, that’s about 53 days of electric power consumed by one US household. Put another way, a single Bitcoin transaction costs $200 on average in energy bills.

Because of the growing complexity of hashing, it’s virtually impossible for a single person to mine even 1 Bitcoin. The only way to do so is to have exceptional hardware working around the clock for weeks on end. 

Here’s how the math breaks down. Say that you have the best ASIC mining machine on the planet: the AntMiner S19 Pro. This machine has a hash rate capacity of 110 terahash/sec. Assuming it works at maximum efficiency, your machine will only mine about 0.0293 Bitcoin per month.

This means if you want to mine 1 Bitcoin in a month, you’ll need 34 of those machines working around the clock, and each machine costs $4,500. So, in total, it’ll cost you around $156,000 to mine 1 Bitcoin.

Given the above power and infrastructure requirements, it’s no surprise that decentralization has eluded the crypto market overall. It’s simply impossible for the average person and their computer to contribute to Bitcoin or Ethereum mining in any practical sense.

Given that Bitcoin and Ethereum are currently vying for dominance with prices at over $46,000 and $3480, respectively, it’s easy to see why larger organizations are trying to dominate the market however they can.

Is true decentralization possible…or preferable?

So, Bitcoin and Ethereum are not truly decentralized. But is it possible for them to be decentralized in the future? Possibly, but it’ll likely be through newly-created decentralized platforms or coins.

For example, the platform Minima is looking to build a truly decentralized blockchain protocol by creating a new blockchain mobile app that can turn a standard mobile device into a node validator for the crypto network.

Even the major currencies of today are also trying to decentralize the mining process themselves. As part of its ongoing battle with Bitcoin, Ethereum wants to introduce Ethereum 2.0 by the end of 2022. This new coin will use a Proof-of-Stake rather than a Proof-of-Work consensus mechanism. 

Through this model, all users on the Ethereum network will be able to stake 32 ETH and become a node validator, contributing to network security. Still, the proof-of-stake model is not foolproof when it comes to centralization. Stakers with high amounts of tokens may have inordinate power using this model.

Overall, the dream of decentralization – and its many potential applications in fintech, security, and more – may never be as accessible or inclusive as its creators thought it to be. 

Conclusion

Ultimately, time will tell whether Bitcoin, Ethereum, and other cryptocurrencies are ever able to become truly decentralized. These coins and many others like them were sold on the idea that they were low-cost and decentralized tokens to serve as digital cash, but reality has so far shown that this is not the case.

Besides, decentralization (or lack thereof) are far from the only challenges impacting cryptocurrencies. Perhaps future developments in technology and cultural shifts will allow true decentralization for cryptocurrency around the world.

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