What Actually Makes Bitcoin Decentralized?

What Actually Makes Bitcoin Decentralized?

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To understand what makes Bitcoin decentralized, it is important to have a clear understanding of what decentralization means in the context of Bitcoin. At its core, decentralization refers to the absence of a central authority or control over the network.

However, decentralization can refer to different elements of the cryptocurrency ecosystem, including people, miners, HODLers, nodes, exchanges, and wallets. The importance of each of these elements in achieving decentralization depends on the context.

For Bitcoin, the main objective of decentralization is to provide individuals with a currency that is not subject to government control or regulation. Therefore, the most crucial component of decentralization for Bitcoin is the network of nodes.

If the nodes are not decentralized, the network is vulnerable to centralization, making it susceptible to potential manipulation or attack. On the other hand, if the nodes are genuinely decentralized, then other elements like miners, HODLers, and exchanges become less significant for achieving overall decentralization.

Understanding the objective of decentralization is vital in determining which elements are most important to achieve it. For Bitcoin, decentralization of nodes is the most crucial factor that makes it a decentralized currency beyond the control of governments.

Decentralization is the key. Resist government shutdown

The inception of the Bitcoin protocol was not an arbitrary occurrence but the result of a series of research papers and breakthroughs over several decades. The aim of the cypherpunks was to create a currency that would be beyond the jurisdiction of governments, and Bitcoin is the culmination of this effort. It was only after several milestones, including the discovery of the RSA algorithm and public key cryptography in 1976, the birth of TCP/IP in 1974, and the refinement of the denationalization of money argument in 1978, that Bitcoin became a possibility. The emergence of virtual tokens and currencies in video games between 2000 and 2004, along with the release of the Cypherpunks Manifesto in 1993 and the founding of Digicash in 1989, were also significant milestones.

The creation of Bitcoin was not initially decentralized as it was only on Satoshi Nakamoto and Hal Finney’s computers, leaving it vulnerable to government shutdown. However, as it grew in popularity and more people joined the network by running nodes, it became more decentralized. Today, Bitcoin has the highest node decentralization compared to any other cryptocurrency, as running a node is not prohibitively expensive. Nodes are important as they contain the rules of Bitcoin and a copy of the blockchain. For Bitcoin to be wiped out, every copy of the blockchain would need to be destroyed, which is decentralized as many people have copies. Bitcoin’s decentralization makes it resistant to attacks on its monetary policy, which contributes to its inherent scarcity. Other cryptocurrencies do not come close to Bitcoin’s level of decentralization, making it the most decentralized digital asset.

Stop unauthorized changes to the code by malicious individuals or governments.

Bitcoin has faced several challenges throughout its 14-year history, including the Block Size Wars, where a group of Bitcoin stakeholders sought to change the protocol to allow for an increased number of transactions per second. However, a vocal minority of node operators and developers opposed this change, arguing that it would increase the size of the blockchain and potentially reduce the number of nodes in the network, thus compromising its decentralization.

This conflict highlighted the fact that Bitcoin’s decentralized nature would not allow economically powerful individuals to impose their will on the network. The rules of Bitcoin are encoded in the software that makes up a node, and any changes must be agreed upon by consensus. If a change is made unilaterally, it is no longer part of the consensus and therefore not part of Bitcoin.

Changing something in Bitcoin and remaining in consensus can be difficult. Minor upgrades and improvements to the software can be made without breaking any existing rules. If a new rule is introduced that is more restrictive, it is called a soft fork and needs to be carefully implemented to avoid splitting the network. If a new rule is introduced that breaks the current rules, it is called a hard fork, which creates a new chain or altcoin. However, this is unlikely to be unanimously agreed upon by Bitcoin users and could result in a damaged reputation.

Bitcoin is a decentralized system with no central authority or leader.

Bitcoin has been without a leader since Satoshi Nakamoto disappeared in 2011. This decentralization has protected Bitcoin from potential threats, such as government intervention that could weaken Bitcoin’s code or undermine its users’ freedom and privacy.

In contrast, altcoins often have a leader, and this centralized element can be a weakness. Even if people run their own nodes, they are unlikely to abandon the leader’s wishes and form a consensus network. Furthermore, most altcoin owners are not interested in the benefits of decentralized consensus, which leads to a lack of interest in running nodes and maintaining decentralization.

Another reason for the lack of decentralization in altcoin nodes is the prohibitively high cost of running a node, particularly for Ethereum, due to the enormous computing power and technical skills required to maintain it. As a result, most “independent” nodes are housed in large server parks, making them vulnerable to government and legal attacks.

Bitcoin’s lack of a leader has ensured its decentralization, making it resistant to outside influence. No individual or group has enough influence to make significant changes to Bitcoin’s monetary policy. Unlike other digital assets, Bitcoin has no leader to coerce or committee to bribe, making it a unique and valuable asset.

Running a node is easy and important for the decentralization of Bitcoin mining.

The decentralization of Bitcoin mining is important to resist censorship and disruption of the validation mechanism. If miners are decentralized in ownership and geographic location, it is more difficult for a nefarious actor or government to coerce a majority to their will. However, lack of mining decentralization is not a fatal threat to Bitcoin as it is anti-fragile and can adapt and become stronger.

An attacker would require at least 51% of the world’s mining power to carry out censorship and network validation disturbances, which would require buying or producing an enormous amount of energy and equipment or reducing the amount of equipment/energy in the possession of the rest of the world.

Bitcoin’s ease of running a node allows anyone to verify the entire transaction history and ensure compliance with the protocol. Higher memory and bandwidth requirements for digital asset networks result in lower numbers of nodes that tend to be managed by corporate entities instead of individuals. However, advances in computation may soon enable people to run Bitcoin nodes on their smartphones, further decentralizing the network.

Lastly, it is important to note that one person running 100,000 nodes does not strengthen the network, as a node is not just a computer running code but a human brain as well. It is the human running the node that can resist rule changes and strengthen the network.

The process of mining Bitcoin results in the distribution of coins to various individuals and entities.

The process of Bitcoin mining, which involves significant expenditures on equipment and energy, has resulted in the distribution of coins from miners to individual holders over the years. This is because miners are often required to sell a significant number of coins in order to fund their operations. In contrast, proof-of-stake systems tend to reward small groups of founders with free coins at the beginning and allow them to maintain their stakes over time without having to sell coins to fund their energy expenditure.

While some publicly traded Bitcoin miners have managed to accumulate bitcoins on their balance sheets by raising capital, they may still be forced to sell off some of their coins during market downturns. Additionally, early investors in Bitcoin have also sold off their holdings over time as the value of those holdings grew, similar to how early investors in companies like Amazon often sell off their shares.

Given that Bitcoin has been around for 14 years and has reached a total network value of nearly $1 trillion, it is safe to assume that coins have already spread significantly. As the value of Bitcoin continues to increase, large holders may diversify out of Bitcoin, leading to further distribution of coins to new participants.


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