July 21, 2024

Closed clubs and the oligarchy: how decentralized is Bitcoin

He talks about the formation of closed clubs in the Bitcoin community, oligarchy and the problem of decentralizationforklog.media editor Konstantin Golubev.

Disclaimer

This material reflects the private opinion of the author and does not necessarily coincide with the position of the ForkLog editorial staff.

Back in 2012, the FBI described bitcoin asdecentralized virtual currency based on a peer-to-peer network. But even despite the fact that Bitcoin is undoubtedly peer-to-peer and virtual, opinions regarding its decentralization sometimes differ widely.

How Decentralized Is Bitcoin? An expert take

The meaning of decentralization

Ethereum co-founder Vitalik Buterin in the definition of decentralization suggested that there are three types of it: architectural, political and logical.

On the blockchain, these aspects of decentralization determine:

  • the number of computers serving the network (architecture);
  • owners of these computers (policy);
  • how structurally monolithic the system as a whole is (logic).

According to Buterin, Bitcoin, like many othersblockchains are decentralized politically (no one controls it) and architecturally (there is no single point of failure in the infrastructure), but logically — centralized (there is one generally accepted state, and the system behaves as a single computer).

The first cryptocurrency network is really notmanaged by a centralized organization, and supported by the community. There is no single entity that prints money or verifies transactions. Each user can run a full node and make sure that the network rules are followed. There is no single central authority capable of confiscating someone else's coins or blocking transactions. From an architectural point of view, bitcoin is decentralized, but what about politics?

There are two poles of power in the network. These are the miners and developers of Bitcoin Core. Both groups are closely related and rely on each other. Miners need software to work, and developers need their equipment to protect the network. But these groups have one more thing in common - they are more and more reminiscent of a closed club.

Robert Michels wrote in the work«Political parties» that «historical evolution has ridiculed all the preventive measures that have been taken to prevent oligarchy». Even though Bitcoin is designed to be a consensus-based, decentralized structure, it does not easily circumvent the laws of human nature.

Oligarchy miners

«Proof of Work (PoW) also solvesthe problem of determining representation when decisions are made by the majority. If the majority were based on the principle of "one IP address - one vote", anyone could carry out sabotage. PoW is «one CPU — one vote»,— Satoshi Nakamoto wrote in the Bitcoin whitepaper.

According to Satoshi's vision, PoW is designed to protectnetwork from being captured by a group of individuals with significant resources. Buying additional computers for mining was much more expensive than acquiring IP addresses. In those days when Bitcoin was cheap, such a business model was unrealistic. But when the price went up and ASIC devices were developed, industrial mining really became a profitable business.

Those who started mining early got a hugeadvantage. Compete with famous players is not an easy task, given the upcoming halving, which will gradually make mining less profitable. Today, only four of the largest mining pools control more than half of the bitcoin hash.

«Can we talk about uncoordinated solutions when 90% of Bitcoin's mining power is well enough coordinated to appear together at a conference?»- Buterin noted.

Although the influence of miners on the network is limited, theyplay a crucial role in its maintenance. To make any change to the code, miners must first support it. If the hash is concentrated in several hands, they may conspire. Lack of agreement between miners and developers can often lead to a hard fork.

Another issue to keep in mind is: for developers, the motivation is to improve the product, and for miners - an increase in their own profits. Interestingly, all the major miners are based in China.

«Bitcoin is subject to «politicalrisk» associated with one country. Because even private Chinese companies are under the control of the Chinese central government. This has led to the CCP having at least latent or potential control over the cryptocurrency network. At least the miners monitor their behavior so as not to contradict the CCP»— Gordon Einstein, founding partner of CryptoLaw Partners, said in an interview with forklog.media.

Developer authoritarianism

In the community, many believe that the decentralization of cryptocurrencies is generally a myth.

«Any person with access to the Bitcoin Core repository on GitHub is in theory responsible for Bitcoin»,— said Ethereum co-founder Gavin Wood.

In the work that was published in 2016Harvard Primavere De Phillippi, a blockchain researcher and Benjamin Lavelack, associate professor of Télécom ParisTech, claims that Bitcoin is a highly centralized network.

Researchers have noted that since its inceptionSatoshi Nakamoto was the main responsible for the project, as well as the only one with the right to enter the code into the official repository. After Satoshi moved away from his brainchild, his mission was carried out by a small group of developers.

«Consequently, as in many otherIn open source projects, there is a tension between those who can contribute to the project (the community at large) and those who ultimately decide where the project goes. Indeed, while everyone has the right to make changes to the software (e.g. bug fixes, incremental improvements, etc.), only a small number of people (core developers) have the right to decide which ones should be included in the main branch.

Researchers noted a huge gap betweenthe perceived libertarian nature of bitcoin and its actually authoritarian management structure, since the decision on a specific set of technical functions that should be implemented in the platform is made by the core developers.

«This is partly due to the high levelthe technical knowledge required to properly evaluate the proposed changes, but also, indirectly, by the fact that the core developers are entrusted with further care of the project by virtue of their involvement in Satoshi Nakamoto's original concept.

The problem with such «technocratic»approach to governance, in their opinion, is that it goes against the original concept of the Bitcoin project. Gordon Einstein thinks it may be inevitable.

«All developers working togetherwhether in a company or association, are in fact a form of centralization. In reality, it is difficult to achieve success and improve software without some degree of cooperation and collusion. And in the long term, people need to be encouraged to stick with the project»,— he told forklog.media.

Thalassocracy of whales

Another group that has a huge impacton the Bitcoin ecosystem, these are the so-called whales. While fiat money is controlled by banks and governments, cryptocurrency belongs exclusively to the market. But is it possible to some extent control the market itself?

In August 2019, according to some reports, only 2% of the addresses owned 80% of all existing bitcoins, although some questioned the methodology of this study.

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Whales can significantly affect the price of bitcoin,just collectively selling or buying coins. And again we see the concentration of serious power in the hands of a small group of people called either the aristocracy or the oligarchy, depending on their number and political nuances. But in any case, this is not about consensus, democracy or decentralization.

Output

Bitcoin can only be called decentralized ina rather narrow interpretation of this concept. The Libertarian dream fell prey to the iron law of the oligarchy. Ordinary users end up finding themselves in the backseat as bitcoin accelerates. They really do not control the network, and their coins, like obsolete paper money, are subject to the intrigues of large players.

According to Gordon Einstein, little is possibledo to promote decentralization, because the only thing the various &#171;solutions&#187; problems is moving them from one box to another.

The same goes for control mechanisms. It’s like a big ball of water. If you squeeze it in one area, the pressure just moves to another part. You cannot squeeze it all, and if you make excessive efforts, it will simply burst, he added.

Konstantin Golubev