What Makes a Cryptocurrency Decentralized?
Without a question, decentralization is an overused buzzword. At the peak of the 2017 crypto bubble, we would see dozens of new projects emerging every day to promise that yet another field or activity would receive its fair share of decentralization via blockchain. However, time and the movements of the free market have taken their toll on this formerly bourgeoning field, with only a number of projects remaining relevant.
But in order to identify the elements that make a cryptocurrency decentralized, we must first look into the meaning of decentralization itself.
Why would anyone use slow, poorly scalable, and expensive blockchains to store and share data? First and foremost, it’s all about censorship resistance. A close second is avoiding the double spending problem. Immutability and the removal of trusted third parties (the bona fide single points of failure) are important too, but their specific issues can also be approached with more efficient databases that are backed up regularly and benefit from greater distribution.
In spite of these criteria, some cryptocurrency projects claim to be decentralized just because they have multiple nodes that are distributed across the world. But if you want to reach Bitcoin’s level of decentralization, you must have:
- no premines or founder’s rewards
- no active founder to impose the development direction of the project
- lots of incentives to bring developers on board
- a great game theory that keeps the miners faithful and at work,
- and the kind of checks and balances which prevent developers and miners from arbitrarily making changes without the support of a majority.
How many cryptocurrency projects live up to these standards of decentralization?
It's hard to name any which come close. Some projects, like Monero, manage to keep the mining process inclusive by periodically disabling ASIC advantages – but the process requires a protocol hard fork which proves that the development is indeed centralized.
Ethereum has an influential foundation that can set priorities and distribute funds among various communities of coders. The fact that a group of people can make a conference call and delay an upcoming network upgrade is a centralizing element which goes to show that Bitcoin’s approach to decentralization is unmatched.
A tricky example is Litecoin: as a tweaked carbon copy of Bitcoin, it retains a great compatibility in development. However, the project created by Charlie Lee can also be pushed in one direction or the other, by leadership. In recent years, this proved to be a positive element: Litecoin’s safe mainnet deployment of SegWit was an important moment in Bitcoin’s scaling debate, and the early experimentation with the Lightning Network was likewise beneficial all across the board. The planned integration of confidential transactions can also become a practical lesson for Bitcoin developers, and it’s definitely interesting to observe how this little sibling experiments with elements for which the king is just too conservative.
Why an Ounce of Centralization Can Be a Feature for Some Altcoins
However, we shouldn’t examine all projects according to the same decentralization standards as Bitcoin. If they don’t serve the same purpose and don’t present their robustness and conservatism as features, then it’s fine for them to integrate greater centralization. After all, no cryptocurrency will ever have the same immaculate conception as Satoshi’s project.
Ethereum is useful because it undergoes research in smart contracts, consensus changes, and blockchain scaling via sharding.
Monero constantly brings improvements to its privacy model and could be regarded as a more confidential extension of Bitcoin (as opposed to a competing protocol).
Litecoin is also at the avant-garde of development and experimentation with extension blocks and the MimbleWimble protocol, and there is no way this would have functioned as effectively hadn't Charlie Lee been around to set priorities.
Ultimately, it’s likely that everything will converge towards Bitcoin as added layers or sidechains. Nonetheless, it’s important for other projects to bring new innovations to the public and generate useful feedback. In their case and for their purposes, a certain degree of centralization is a feature, not a bug. They could remove certain centralizing figures, but the drive and focus would disperse, and interest may be lost amongst investors and developers alike.
It’s difficult to imagine how Litecoin or Ethereum would continue to exist if Charlie Lee and Vitalik were to be arrested tomorrow. Their influence and leadership are essential for the projects that they are leading, and without their input it’s likely for mass departures to happen, thus turning the GitHub repositories into ghost towns.
However, nobody should compromise too much on decentralization. For every net positive project like Monero or Litecoin, there are plenty of terrible coins that function as Ponzi schemes. If the coin distribution is very unfair, a small group of people can make or break the entire project, outside development contributions are discouraged, and the main focus is on price valuation (as opposed to building something useful), then it’s better to stay away.
For this purpose, BTSE follows a strict set of evaluating conditions for any asset before it is listed on the exchange and cleared for spot or futures trading. Highly volatile altcoins can be profitable, but they may just cause more headaches than they’re worth.