How decentralized is the Bitcoin network nowadays?
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Do you like Bitcoin because of its decentralized authority structure? Or perhaps you are interested in conspiracy theories? Well, in any case, take a big breath while we dive into one of the most interesting topics surrounding the Bitcoin network where we try to answer how decentralized is the network nowadays and what led us to this point.
Why is decentralization important?
If we look into the meaning of decentralization, we see that it refers to the transfer of control of any activity or organization to authorities rather than a single one. Decentralization is important because it empowers small players, grants autonomy and freedom from centralized powers where they could take advantage of their position. Bitcoin and the rest of the altcoins strive towards a distributed peer-to-peer network, with small variations between them, mostly in the area of how they trust their peers.
The Bitcoin whitepaper says “The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”. In other words, as long as there is no centralized institution or group of individuals controlling more hashrate than the good guys, the bitcoin network remains secure.
Now, perhaps because we were blindsided by the lights of the bull run, the media talking about Bitcoin, or simply by COIVD-19, we did not pay close attention to what is happening to the network. We want to point out the elephant in the room which has been growing at a slow and steady pace. Contrary to most people’s perception Bitcoin is more centralized than ever.
Why is Bitcoin becoming centralized?
Allow us to clarify that the technology did not change, the decentralized network remains, the key strength of technology remains untouched.
“- Ok, Lykke. But why do you say it is becoming centralized? “
Perhaps Satoshi Nakamoto (Bitcoin’s creator) didn’t think it was possible that the miners could become centralized under one flag. This is completely understandable. Back in 2008 we imagined it would have been very hard to estimate the growth of the network and its magnitude and to foresee the agglomeration of miners in areas where electricity is cheaper (China).
If we take into consideration, the hashrate distribution by country, we come up with something like the chart below:
The chart is taken from (https://cbeci.org/mining_map)
This information clearly validates the growing hashrate centralization of the Bitcoin network in China. To the month when this article was written (March 2021) the Chinese mining pools control over 65% of the total Bitcoin network.
What does it mean?
The majority of us all know about the recent Huawei scandal, however, if you were enjoying your time in the 2020 cave, let us briefly explain it to you. Since its foundation in 1987, Huawei has been a manufacturer of mobile networks and during the past years, it has also become a smartphone manufacturer, peaking in 2018 as the second largest smartphone manufacturer in the entire world. At the moment they own 9.62% of the global market share. Security concerns have been raised by several governments - led by the United States - from which they have prohibited telecom companies to use Huawei equipment in the 5G mobile networks.
Robert Strayer, the former US Deputy Assistant Secretary of State for Cyber and International Communications and Information Policy, said to the Washington Post “A country that uses data in the way China has - to surveil its citizens, to set up credit scores and to imprison more than 1 million people for their ethnic and religious background - should give us pause about the way that country might use data in the future”.
The Chinese government has the authority to demand tech companies like Huawei or in our case Chinese miners to turn over useful information or provide access to the technology owned by the Chinese private sector.
With indirectly owning more than 65% of the bitcoin network, the famous and almost undoable 51% attack is back on the table. From preventing new transactions from gaining confirmations, allowing a halt on payments between users, or even reversing transactions that were completed, all these options are a practical reality once again.
Imagine what the Chinese authorities could achieve if they organize the miners to act in a particular direction under a given instruction. Even if miners are honest like Satoshi previously described, they will do exactly what the Chinese authorities want.
Imagine you are a person of interest for the Chinese government, let’s say you are a threatening competitor to one of their state own companies. Would you trust your Bitcoin transactions will go inadvertently to them? Would you trust they will allow you to perform transactions? What if they want to silence you? Of course, we can already imagine your reasoning, “How would they know my Bitcoin address?..”, to which we say.. “Really?..” Do you think they can’t know that if you are a person of interest on their radar? we urge you to think again.
With that being said, we raise the question again.. how decentralized is the bitcoin network nowadays?
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Lykke is a Swiss-based investment and financial product provider leveraging the power of the blockchain. Lykke runs a proprietary exchange — Lykke Wallet — where clients can buy, sell and store a large variety of tokenized assets, amongst them cryptocurrencies, national currencies, native tokens but also investment products.