Bitcoin : Centralization vs. Decentralization

Decentralization is an important concept that is not unique to Bitcoin. The notion of competing paradigms of centralization versus decentralization arises in a variety of different digital technologies. In order to best understand how it plays out in Bitcoin, it is useful to understand the central conflict — the tension between these two paradigms — in a variety of other contexts.

On the one hand we have the Internet, a famously decentralized system that has historically competed with and prevailed against “walled‐garden” alternatives like AOL’s and CompuServe’s information services. Then there’s email, which at its core is a decentralized system based on the Simple Mail Transfer Protocol (SMTP), an open standard. While it does have competition from proprietary messaging systems like Facebook or LinkedIn mail, email has managed to remain the default for person‐to‐person communication online. In the case of instant messaging and text messaging, we have a hybrid model that can’t be categorically described as centralized or decentralized. Finally there’s social networking: despite numerous concerted efforts by hobbyists, developers and entrepreneurs to create alternatives to the dominant centralized model, centralized systems like Facebook and LinkedIn still dominate this space. In fact, this conflict long predates the digital era and we see a similar struggle between the two models in the history of telephony, radio, television, and film.

Decentralization is not all or nothing; almost no system is purely decentralized or purely centralized. For example, email is fundamentally a decentralized system based on a standardized protocol, SMTP, and anyone who wishes can operate an email server of their own. Yet, what has happened in the market is that a small number of centralized webmail providers have become dominant. Similarly, while the Bitcoin protocol is decentralized, services like Bitcoin exchanges, where you can convert

Bitcoin into other currencies, and wallet software, or software that allows people to manage their bitcoins may be centralized or decentralized to varying degrees.

With this in mind, let’s break down the question of how the Bitcoin protocol achieves decentralization into five more specific questions:

  1. Who maintains the ledger of transactions?
  2. Who has authority over which transactions are valid?
  3. Who creates new bitcoins?
  4. Who determines how the rules of the system change?
  5. How do bitcoins acquire exchange value?

Different aspects of Bitcoin fall on different points on the centralization/decentralization spectrum. The peer‐to‐peer network is close to purely decentralized since anybody can run a Bitcoin node and there’s a fairly low barrier to entry. You can go online and easily download a Bitcoin client and run a node on your laptop or your PC. Currently there are several thousand such nodes. Bitcoin mining, which we’ll study later in this chapter, is technically also open to anyone, but it requires a very high capital cost. Because of this there has been a high degree of centralization, or a concentration of power, in the Bitcoin mining ecosystem. Many in the Bitcoin community see this as quite undesirable. A third aspect is updates to the software that Bitcoin nodes run, and this has a bearing on how and when the rules of the system change. One can imagine that there are numerous interoperable implementations of the protocol, as with email. But in practice, most nodes run the reference implementation, and its developers are trusted by the community and have a lot of power.

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