Bitcoin: The Coin of the People ... or is It?
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Bitcoin: The Coin of the People ... or is It?

By Ewok | Ewok Cryptocurrency | 2 Jun 2020


The de facto cryptocurrency bitcoin is the poster-child of decentralization, right? At least, that’s what it was supposed to be. PhD student Sami Ben Mariem, Dr. Pedro Casas, Rainer Stütz, Dr. Bernhard Haslhofer of AIT Austrian Institute of Technology, and Dr. Benoit Donnet of Université de Liège answer this question in their article “All that Glitters is not Bitcoin – Unveiling the Centralized Nature of the BTC (IP) Network.” (See “arXiv:2001.09105v2 [cs.NI] 19 Feb 2020” on arxiv.org to read their paper in detail).

 

How Decentralized is Bitcoin?

Bitcoin is by nature peer-to-peer (P2P), so anyone in the world can create a wallet, buy and sell bitcoin, and participate in the network (at least in its infancy before government regulations creeped in). Bitcoin is supposed to be decentralized, and in 2013 Jennifer Shasky Calvery, then Director of the Financial Crimes Enforcement Network (FinCEN), testified to the US government that the network is decentralized. However, in early 2020 Mr. Mariem and his colleagues took a closer look at the Bitcoin network.

They analyzed the Bitcoin P2P network for the past two years and uncovered some things. Here are the main facts:

  1. The network size hasn’t changed in the past year.
  2. Since 2018 (a price crash year), most nodes are operating in Western nations (US and EU).
  3. Currently, most miners are Eastern (China).
  4. Worldwide, about 35% of nodes are hosted by only five companies, and cloud providers manage 65% of nodes.
  5. A mere 4.5% of all bitcoin holders control 85% of all bitcoins in circulation.

Apparently, tales of the wealthiest few holding most of the world’s money seems to be manifesting itself in Bitcoin as well. 

After analyzing the public ledger and using a bot to crawl the BTC network the team of scientists noticed disconcerting news about Bitcoin’s network infrastructure and mining. Of all the active nodes, 36% of those rely on five cloud companies in the West - half of those physically being in three countries. Imagine if those cloud providers had a physical disaster such as: blackouts, pandemic, civil unrest, native dollar inflation, or war? There goes a massive chunk of the network - gone. As for the miners of bitcoin, half of them are speaking Mandarin. That’s right, China discovers half of all bitcoin blocks (via four big mining pools located in the country). 

 

Network Locations

Over half of the BTC network resides in the West. Namely, US, France, and Germany being the major hosts. That’s not to say that those governments are the hosts, but the cloud companies that have their servers physically in those countries are the hosts. However, if you are a cloud company operating in those countries, guess whose rules and regulations you have to follow?

The top three node hosts are: Hetzner Online (operating 11% of active nodes), Amazon (8%+), and DigitalOcean (6%+). The major names include Amazon, Google, Hetzner, OVH, and DigitalOcean: their nodes make up 65% of all active nodes. Ironically, 65% is also the percentage of blocks mined on the other side of the world thanks to Chinese mining pools.

In terms of the virtual space “locales,” Mariem and co. found that 70% of entities have one or two BTC addresses associated with them (likely individuals). However, the top fifty BTC entities (e.g., exchanges, mining pools, companies) can contain thousands or millions of addresses under their control.

Speaking of wealth inequality, the authors used a method of the Lorenz curve to analyze distribution of wealth. A kind of scoring index called the Gini index associated with the Lorenz curve has 1 equaling a totally unequal society but 0 representing perfectly equal wealth distribution. An EU country that has a mostly balanced wealth distribution scored a 0.3129, but Bitcoin scored a 0.9888. That means that a European country is 31% away from everyone having equal wealth while Bitcoin users are 99% away from everyone having equal share of bitcoin money.

 

Mining

China discovers half of all new BTC blocks. This has been the case since the middle of 2017; the number of global users running full nodes has stayed the same in recent years (making the mining aspect stable but also reflects the difficulty to get into the game at this point). Is China’s goal simply an economic investment or a plot to control the majority of the coin for ulterior or nefarious goals? Either way, it makes for a higher chance of something going wrong for the BTC network if a security issue arises (look at the 51% attack scenario). On top of that, there is a trend where the signing authority on transactions remains hidden - making it harder to identify miners (i.e., if the miner operates in China). 

China may not be the only one to blame for centralizing Bitcoin. As time goes on and it becomes harder for the individual to mine, then mining pools become more popular; collectively a group has a better chance of mining successfully and getting a steady payout. Bitcoin exchanges (e.g., Binance, Kraken) and whales (a few people/entities that hold a lot of bitcoin) mining and collecting bitcoin make the network as a whole stray from decentralization. For instance, the top 1000 BTC entities (one BTC address or a collection of addresses managed by the same individual/business) have 85% of the coins in their wallets.

 

Is Decentralization a Bad Thing?

Yes! The idea behind Bitcoin was to get away from a central bank (especially a government-controlled one) from deciding how much money is worth and having too much control over the financial system, and in turn people’s livelihoods. 

Also, the volatility aspect is hard to ignore. For example, if a whale decides to sell all of their stake in bitcoin, then the BTC market will dip in response, and all the little fish could see their gains evaporate overnight. The silver lining here is that this opens an opportunity for many little fish to buy in at a cheaper price.

Is Bitcoin decentralized in theory? Yes. In practice? Not really the case anymore, unfortunately. Decentralization equals trust. If one country holds or mines all of the coins is it really decentralized anymore, and therefore a trusted network to buy and sell on?

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Ewok
Ewok

My interests include science, movies, and crypto to name a few. My profile photo is by Flickr's Brickset under CC-BY-2.0 (https://creativecommons.org/licenses/by/2.0/).


Ewok Cryptocurrency
Ewok Cryptocurrency

Ewok's articles written on cryptocurrency topics. Thanks to Pete Linforth of Pixabay for the thumbnail image, and also to VIN JD of Pixabay for the header image.

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