Do you know about decentralization? It is a term often used in the world of blockchain. Decentralization is the central pillar of blockchain technology and of how mining works. Often considered an absolute, it is said that mining relies on a decentralized blockchain or, on the contrary, a centralized blockchain.
But what makes decentralization important in blockchain and mining? What is the difference between decentralization and centralization?
Let’s go back to the basics to understand the principle of decentralization.
Introduction to decentralization, cryptocurrency and blockchain
What is decentralization?
To explain what decentralization is, let’s use an analogy with common situations.
Many of the services we use every day are centralized. When you make a transaction of your personal data, it must go through a central entity to be processed.
For you centralization means that you trust that entity to keep your personal data private and secure. But in the event of a hack or unfortunate leak from that central organization, your personal data is exposed.
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Decentralization promotes a horizontal and less hierarchical distribution of power and information. The most fundamental principle of cryptocurrency and blockchain is decentralization.
History of blockchain and cryptocurrency
The architecture behind blockchain was described in 1991 when Stuart Haber and W. Scott Stornetta started a computer solution. In 2009 blockchain was created when the first block of Bitcoin, called “Genesis Block”, was mined by a person under the pseudonym of Satoshi Nakamoto. We do not know if the mysterious creator behind this project is a single person or a group of people. Bitcoin was the first cryptocurrency based on a blockchain.
If you want to know more, you can read this article about the history of blockchain.
Bitcoin and its blockchain were a technological and financial proposal in reply to the subprime mortgage crisis. Due to a large number of early adopters who believed in the project, Bitcoin and especially blockchain started to be considered as a financial alternative.
The unique feature of the Bitcoin cryptocurrency is its ability to operate autonomously. There is no central server and no central authority to manage Bitcoin and its blockchain. There is no way for a government to stop it.
Cryptocurrencies have two major characteristics:
- Cryptocurrencies have no physical form. There are no bills and coins in Bitcoin or Ethereum, as they are digital assets.
- Cryptocurrencies are secured by cryptography. Cryptography makes it impossible to spend a cryptocurrency twice. If you can spend the same cryptocurrency twice, it creates money from scratch. As a result, it increases the volume of coins in circulation and lowers users’ trust and market value.
Cryptocurrencies can be traded on decentralized platforms called DEXs. The price of cryptocurrencies rises and falls based on demand and supply. In this way cryptocurrencies are reliable and decentralized.
Anyone can buy cryptocurrencies on DEXs. There is no middleman and the exact amount of the cryptocurrency is sent to the user’s cryptocurrency wallet. There is no way to know who owns a cryptocurrency if that person purchased it on DEX. However DEXs already require some knowledge of cryptocurrencies and are therefore aimed at crypto enthusiasts.
This is why CEXs have emerged. CEXs are centralized exchanges that are a type of cryptocurrency exchange operated by an intermediary company in a centralized manner. Some private companies are therefore promoting mass adoption of cryptocurrencies at the expense of decentralization. CEXs are coming to help new cryptocurrency adopters.
If you want to discover a CEX, you can check Deskoin.
What is blockchain and how does it work?
Blockchain is a technology that allows digital data, financial, political, health, or any kind of data, to be stored and transmitted reliably, securely and without authority. It is a database shared in real time by all users on a peer-to-peer network.
Three pillars come to define what blockchain is:
- Immutability: Once a transaction is made, the distribution of the network makes it irreversible;
- Transparency: Through the peer-to-peer computer network, anyone can see and track transactions on the blockchain.
- Decentralization: The blockchain ledger is not maintained by a single entity, but by users. Despite blockchain’s bad reputation, payments made through it remain safer because they do not require personal information.
In addition to these characteristics, blockchain can take several forms.
Here is how a blockchain works:
- When transactions are sent on the network, it is managed by supporters of the blockchain, called miners. For efficiency reasons, transactions are processed in batches known as blocks, by miners.
- Miners create new blocks following existing ones, through an operation called mining, which validates a set of transactions within a block.
- Once verified by computers, called nodes, the block is added to the blockchain. The operation becomes visible to users.
Does mining contribute to the decentralization of blockchain?
What does mining mean?
There is a way to contribute to the blockchain and be rewarded for it: mining.
On blockchain, miners offer their computing power to solve complex equations. Once a transaction is confirmed by a miner, a block is added to the blockchain and the miner receives a reward. This is Proof of Work (PoW).
Without this mining operation, there would be no cryptocurrencies generated on a Proof Of Work blockchain such as Bitcoin.
Originally Proof Of Work was intended to distribute decision-making power among miners and everyone could easily participate in blockchain. But with the push of cryptoenthusiasts, the mining power ended up being less distributed and more concentrated. It became centralized.
Today mining has become difficult in order to solve this problem. Indeed it takes a very powerful computer to mine cryptocurrencies like Bitcoin and Ethereum.
Creation of mining pools
This ever increasing difficulty of mining led to the creation of mining pools.
A mining pool consists of a group of cryptocurrency miners from around the world who seek to combine their computing power to mine blocks together.
The idea is then to share the mining reward and ensure a guaranteed reward, unlike solo mining which puts you against the entire mining world.
It is easy for miners to join a mining pool and move from one pool to another. Or miners can mine alone.
If you are interested join our Cruxpool mining pool to increase your chances of success and guarantee stable income and rewards shared by all miners.
With mining pools, miners can find technical support that makes it even more accessible for beginners, but also regular payments that provide them with a daily income.
But there’s a paradox. These pools that help people come together to contribute to relatively decentralized blockchains can replicate what most cryptoenthusiasts want to avoid. Having too much computing power condensed into a pool would imply increasing authority over a network.
Centralized vs decentralized mining
Authority and power on mining pools
The ever-increasing difficulty on the most popular cryptocurrencies these last years has made mining pools almost inevitable.
Miners are being pushed to combine their computing power by the increase of difficulty to mine a block. Some miners would have a better computing power than others, meaning that they would spend a lot more time trying to mine blocks without being sure to mine one.
The combined hash power of mining pools is called hashrate. Their authority and weight on the global network hashrate can be observed on various mining pool statistics comparison sites.
There is a small amount of powerful pools on the Bitcoin and Ethereum algorithms that can be considered as a threat to decentralization.
Why is decentralization important for mining and what is the risk of centralized pools? It’s a security issue.
You may have heard of 51% attacks before. 51% attacks mean that if a miner (or pool) were to control or have more than half of the total hash power in the network, they could rewrite transactions and use the consensus for bad purposes. This could lead to double spending.
Nevertheless it would be very difficult for a miner to achieve this percentage on cryptocurrencies because a 51% network attack on such widely used blockchains is almost impossible. For example Bitcoin has never been attacked because of its size and high hash rate.
However mining pools are not the only decentralization potential failure when it comes to mining.
The case of Bitmain
Since it is difficult to mine cryptocurrencies like Bitcoin and Ethereum the demand for electronic components is high. Some companies have made ASICS their specialty.
ASICS, an acronym for Application Specific Integrated Circuits, are devices designed to mine specific cryptocurrencies. These devices are expensive but they are more efficient than some computers.
The problem is that companies like Bitmain dominate the ASICs market. Bitmain already held 80% of the total supply of ASICs for Bitcoin and had a monopoly on the Bitcoin blockchain.
Bitmain found itself in a difficult situation because the company was using its sold ASICs to mine on its own account. Once one of its miners was configured, the miner was able to mine for Bitmain in just a few minutes.
Bitmain was also a major contributor to the creation of Bitcoin Cash, a derivative of Bitcoin, as it was able to provide a large amount of hashing power to the Bitcoin Cash network.
Decentralization is a major foundation in mining. Even though some facts come to question decentralization, the cryptocurrency world is supported by a large community of cryptoenthusiasts who strongly believe in the benefits of decentralization. Most miners are aware of these attempts at centralization and decentralization. That’s why they choose wisely which pool they want to join. For them decentralization is crucial and for us too, Ilium.