Bitcoin: A Glimmer of Decentralization
By Amalgam Staff.
Today is the 10th anniversary of Satoshi Nakamoto’s legendary whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System (though, we did not plan to issue this article today for that reason).[5].
In those 10 years, Bitcoin has become more valuable than gold, led to the creation and development of blockchain technology and alternative cryptocurrencies (altcoins), and shown the world that disintermediate systems can be used when two parties lack trust. [5][26][27].
Given these amazing achievements, what may be in store for the next 10 years?
But before we answer that question, we need to take a look at whether Satoshi’s vision for a decentralized, lowtrust, and censorship-resistant network, embodied in Bitcoin, is coming true or being stifled by the powers that be. [6][12][13].
Satoshi Nakamoto’s Vision for Bitcoin
Bitcoin is the first cryptocurrency, and the largest by market cap and trading volume.[1][2][3].
Satoshi Nakamoto released the Bitcoin whitepaper in 2008, and mined the first block on January 3, 2009, with the following message: “ The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” [4][5].
Satoshi Nakamoto wanted to create a decentralized, lowtrust, and censorship-resistant network.[6][13]. Though, these principles can be broadened to include distributed and public. [13].
This network would not be centralized, i.e., the network would have no central point of failure.[6]. This network would require low-trust, to avoid the issues Satoshi saw with central banks where so much trust was required to simply make the fiat currency system work. [6].
The promise of a decentralization Satoshi Nakamoto gave to the world in January 3, 2009, Bitcoin, has grown and many have seen the potential for decentralized systems in many industries and fields, such as finance, Internet-of-Things (IoT), and even climate change.[6][8][9][10].
The mission was to keep Bitcoin decentralized and show the world that there is another way, but this has not been the case, and has led to many forks such as Decred, BitcoinCash, Bitcoin Private, and etc., which want to fulfill Satoshi’s “original goal” (debatable of course). [7].
Unfortunately, a consequence of promoting openness and public accessibility are malicious actors entering the system to upend the very values and principles underlying it.[6]
Bitcoin’s decentralization is threatened by many actors, but two in particular who are deeply involved in the inner workings of the Bitcoin ecosystem are:
- Chinese Mining Pools; and
- Blockstream. [12][13].
Mining in China
Mining in China presents a major challenge to Bitcoin’s decentralized governance in two ways:
- Hashing power of Chinese mining pools; and
- Influence of the Chinese Government. [13][14].
Chinese Mining Pools
The majority (70–80%) of Bitcoin mining pools are located in China, with the Big 4 mining companies: 1) BTC.com; 2) Antpool; 3) BTC.top; and 4) Viabtc, accounting for more than 50% of the hashrate. [13][17].
China became the major mining hub for Bitcoin around 2013, as mining farms pounced on the Chinese government’s initiatives to develop its industrial and energy sector, especially access to cheap sources of energy such as coal plants and hydroelectric dams, increased aluminum production, and a growing interest from Chinese citizens in new asset classes.[15][16].
Chinese mining pools grew therefrom and now present a problem to Bitcoin’s decentralization. [13][14][16].
The majority of the hashing rate in Chinese mining pools gives them the ability to easily execute 51% attacks on the Bitcoin blockchain (if they wanted of course). [14][18][19].
A “51% attack” occurs when a node or set of nodes (malicious intent not necessary)on the network have >50% of the network’s hashing power. [18][19].
The malicious node or set of nodes can prevent new transactions from being added to the blockchain (censoring user actions), prohibit other miners from mining new blocks except for themselves, and even reverse transactions, allowing the node or set of nodes to double spend. [18][19].
The mining pools could easily execute a 51% attack with their hashing power and cause the above issues. [14][18][19].
Second, Chinese mining pools can, in a similar vein to the 51% attack, prevent any significant improvements to the Bitcoin software. [16].
Chinese mining pools can easily prevent any improvements to Bitcoin’s underlying software, even if such an improvement would provide benefits to Bitcoin’s long term growth and other members of the Bitcoin ecosystem (exchanges, wallet providers, etc.). [16].
Chinese Government
The Chinese government has a strong influence over the Bitcoin network because the majority of Bitcoin mining farms are located in China. [13][14][16].
First, the Chinese government has the regulatory authority to turn on Bitcoin mining pools at their discretion. [14][16].
For example, in 2013 the Chinese government stopped Chinese banks from transacting with Chinese Bitcoin exchanges.[14]. Additionally, the Chinese government earlier this year banned Initial Coin Offerings (ICOs), and instituted regulations making it harder to transact with cryptocurrencies. [20]
Second, the Chinese government censors, surveils, and interferes with its citizens communications over the internet through the use of the “Great Firewall” and the “Great Cannon.” [16]. The Chinese government can easily interfere with Bitcoin’s decentralized nature by prohibiting Chinese citizens communications with the outside world. [14][16][20].
Third, the Chinese government can influence the managers of the major Bitcoin mining pools (e.g., Chinese Government influencing the pool managers of BTC.com, Antpool, BTC.top, and Viabtc) to take control of the network’s hashing power. [16]. The Chinese government could easily do this to cripple Bitcoin’s value and reputation by engaging in double spending and reversing transactions from nations it does not support. [16].
Blockstream
Blockstream presents a different issue concerning Bitcoin’s decentralization. Rather than concern for the network’s hashing power, this concern involves funding for the software developers who maintain the Bitcoin software (i.e., Bitcoin Core). [22].
Blockstream, founded in 2014, is a blockchain platform that funds some of the Bitcoin Core developers, and develops sidechain implementations for the Bitcoin blockchain such as the Lightning Network. [23].
Blockstream claims to support the growth and development of Bitcoin Core, but many involved and/or aware of the company’s actions see Blockstream quite differently. [21][22].
Some companies and individuals, such as Gavin Andressen, a former lead developer on Bitcoin Core, and Nodecounter, a website that tracks node sin the Bitcoin network, have asserted that Blockstream does not have the interests of the Bitcoin ecosystem nor Satoshi’s vision for Bitcoin in mind. [22].
Rather, they assert that Blockstream is influencing the development of Bitcoin software for its own private gain, i.e., promoting its sidechain technologies as necessary alternatives/additions to Bitcoin while it funds Bitcoin Core developers cripple Bitcoin’s development. [24].
It is extremely worrisome that Blockstream, a private entity with its own goals and vision, has the ability to disregard the views and opinions of the Bitcoin community, developers, users, and others alike in its search of profits.[21][24].
With Blockstream’s current position, it can, and has, limited Satoshi’s vision for a decentralized network from the one place he thought it would be safe: the source code itself.[6]. Even going so far as suggesting to revise Satoshi’s original Bitcoin whitepaper, Ba-hum-bug![25].
Conclusion
Centralizing agents such as Blcokstream and Chinese mining pools are an ever-present threat to Bitcoin’s decentralization and the fulfillment of Satoshi’s vision. [12][13].
Chinese mining pools control more than 50% of the network’s hashing power, whereby they could easily commit a 51% attack and hold the network hostage.[18][19]. Even worse, the Chinese government may influence or crackdown on Chinese mining pools to take control of the network and cause the above issue. [13][14][16].
Other than Chinese mining pools, the Bitcoin network is also threatened by private entities in its ecosystem such as Blockstream. [12]. Blockstream funds Bitcoin Core developers to improve the Bitcoin network while also developing sidechain technologies to tackle Bitcoin’s scalability issues. [23].
However, Blockstream’s approach is very strange, why develop sidechain technologies to tackle scalability issues when you fund Bitcoin Core developers, who can simply work on incorporating such changes to the Bitcoin Core software.[23].
With centralizing agents such as these, Satoshi’s vision for a decentralized, lowtrust, and censorship-resistant network espoused in the Bitcoin whitepaper 10 years ago, appears even more arduous now than then to bring it into fruition.[6].
However, Bitcoin’s current decentralized nature means that the Bitcoin community always has a choice to rectify the centralization issues they have seen.
There are many procedures the Bitcoin community can undertake, but this is a decision members of the Bitcoin community should decide on together, rather than leaving it up to a few parties.
P.S.
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References
[1] CoinMarketCap, Top 100 Cryptocurrencies by Market Capitalization, CoinMarketCap, https://coinmarketcap.com/.
[2] CCN, Bitcoin.org, the Crypto Resource Site Founded by Satoshi, Celebrates 10th Anniversary, CCN, https://www.ccn.com/bitcoin-org-the-crypto-resource-site-founded-by-satoshi-celebrates-10th-anniversary/, Aug. 25, 2018, 22:45 CET.
[3] CoinMarketCap, 24 Hour Volume Rankings (Currency), CoinMarketCap, https://coinmarketcap.com/currencies/volume/24-hour/
[4] Bitcoin Wiki, Genesis Block, https://en.bitcoin.it/wiki/Genesis_block, last edited on 30 November 2017, at 03:09.
[5] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008, https://bitcoin.org/bitcoin.pdf.
[6] curt00, BITCOIN DIVORCE — BITCOIN CORE VS BITCOIN CASH EXPLAINED, Reddit: r/BTC, https://www.reddit.com/r/btc/comments/7h4m64/bitcoin_divorce_bitcoin_core_vs_bitcoin_cash/
[7] Bennett Garner, What is Decred? The Lowdown on Decentralized Blockchain Governance, Coin Central, https://coincentral.com/decred-lowdown-decentralized-blockchain-governance/, Dec. 10, 2017.
[8] Iota, https://www.iota.org/.
[9] Helen Partz, World Economic Forum Outlines Over 65 Blockchain Use Cases for Environmental Protection, CoinTelegraph, https://cointelegraph.com/news/world-economic-forum-outlines-over-65-blockchain-use-cases-for-environmental-protection, Sept. 15, 2018.
[10] William Suberg, Blockchain Can Add $1 Trillion to World Trade by 2028, Says World Economic Forum, CoinTelegraph, https://cointelegraph.com/news/blockchain-can-add-1-trillion-to-world-trade-by-2028-says-world-economic-forum, Sept. 13, 2018.
[11] Deloitte, 5 blockchain technology use cases in financial services, Deloitte, https://www2.deloitte.com/nl/nl/pages/financial-services/articles/blockchain-technology-use-cases-in-financial-services.html.
[12] Olusegun Ogundeji, Bitcoin’s Possible Privatization: Has Blockstream Created Problem to Provide Solution?, CoinTelegraph, https://cointelegraph.com/news/bitcoins-possible-privatization-has-blockstream-created-problem-to-provide-solution, Jul. 07, 2016.
[13] Alexandre Wanlin, Why mining pool concentration is the Achilles’ heel of Bitcoin?, Medium: Hackernoon, https://hackernoon.com/why-mining-pool-concentration-is-the-achilles-heel-of-bitcoin-ce91089ce1f, Feb. 19, 2018.
[14] Febin Jose, Bitcoin [BTC] is ‘under threat’ from China, says US-based research team, AMB Crypto, https://ambcrypto.com/bitcoin-btc-is-under-threat-from-china-says-us-based-research-team/, Oct. 11, 2018.
[15] BitMEX Research, Mining incentives, part 2: Why is China dominant in Bitcoin mining?, BitMEX, https://blog.bitmex.com/mining-incentives-part-2-why-is-china-dominant-in-bitcoin-mining/, Sept. 15, 2017.
[16] Nathaniel Popper, How China Took Center Stage in Bitcoin’s Civil War, N.Y. Times: Dealbook, https://www.nytimes.com/2016/07/03/business/dealbook/bitcoin-china.html, Jun. 29, 2016.
[17] Blockchain, Pools, https://www.blockchain.com/pools?.
[18] Jeff John Roberts, Bitcoin Spinoff Hacked in Rare ‘51% Attack’, Fortune, http://fortune.com/2018/05/29/bitcoin-gold-hack/, May 29, 2018.
[19] Investopedia, 51% Attack, Investopedia, https://www.investopedia.com/terms/1/51-attack.asp.
[20] Bloomberg, This Is How China Is Stifling Bitcoin and Cryptocurrencies, Fortune, http://fortune.com/2018/01/17/china-bitcoin-cryptocurrency-crackdown/, Jan. 17, 2018.
[21] William Suberg, Former Bitcoin Core’s Gavin Andresen Hits Blockstream, Labels Greg Maxwell and Samson Mow, Cointelegraph, https://cointelegraph.com/news/former-bitcoin-cores-gavin-andresen-hits-blockstream-labels-greg-maxwell-and-samson-mow, MAY 03, 2017
[22] Aaron Van Wirdum, Who Funds Bitcoin Core Development? How the Industry Supports Bitcoin’s ‘Reference Client’, BitcoinMagazine, https://bitcoinmagazine.com/articles/who-funds-bitcoin-core-development-how-the-industry-supports-bitcoin-s-reference-client-1459967859/, Apr 6, 2016, 2:37 PM EST.
[23] Blockstream, About, https://blockstream.com/about/.
[24] Olusegun Ogundeji, Bitcoin’s Possible Privatization: Has Blockstream Created Problem to Provide Solution?, Cointelegraph, https://cointelegraph.com/news/bitcoins-possible-privatization-has-blockstream-created-problem-to-provide-solution, Jul. 07, 2016.
[25] Laira Rebecca, Bitcoin community and its whitepaper has been destroyed by Blockstream, says BTC’s early adopter, AMBCrypto, https://ambcrypto.com/bitcoin-community-and-its-whitepaper-has-been-destroyed-by-blockstream-says-btcs-early-adopter/, Oct. 23, 2018.
[26] Joseph Adniolfi, Bitcoin is now worth more than an ounce of gold for the first time ever, MarketWatch, https://www.marketwatch.com/story/bitcoin-is-now-worth-more-than-an-ounce-of-gold-for-the-first-time-ever-2017-03-02, Mar 3, 2017 7:43 AM ET.
[27] Armand Tanzarian, Ethereum Raises 3,700 BTC in First 12 Hours of Ether Presale, Cointelegraph, https://cointelegraph.com/news/ethereum-raises-3700-btc-in-first-12-hours-of-ether-presale, Jul. 23, 2014.
