The 2008 financial meltdown and the recent implosion of FTX have one thing in common — the concentration of power in the hands of a few.This is exactly why decentralised networks like Bitcoin were introduced — to bypass traditional centrally controlled systems.However, the very crypto networks that have been introduced to solve this problem are now showing signs of centralisation.
When blockchain arrived in the market in 2009, it did so through the launch of Bitcoin, the world’s first cryptocurrency.Bitcoin introduced a decentralised version of fiat currency, allowing for the seamless peer-to-peer transfer of value without the need for any central governing authority.The network’s underlying blockchain technology meant that anyone could participate in the transaction verification process and maintain a copy of the network’s transaction history.
Budget 2023: Prioritising defence and innovation
Jan 31, 2023 IST4 Min(s) Read
Budget 2023—ESOP tax incentives drive start-up growth
Jan 31, 2023 IST6 Min(s) Read
Budget 2023: Focused investment in edutech and human capital must become an imperative
Jan 31, 2023 IST2 Min(s) Read
This Microsoft project is enabling the digital presence of low-resource languages
Jan 30, 2023 IST7 Min(s) Read
Over time, Bitcoin boomed and fundamentally changed the way we look at finance.Moreover, hundreds of other cryptocurrencies or ‘altcoins’ started emerging, all following in Bitcoin’s decentralised footsteps.
Today, the crypto industry is worth more than $1 trillion.However, the element of decentralisation, which is supposed to be at the core of this entire innovation, is somehow coming under suspicion.
Crypto is meant to be decentralised.Yet some of the latest findings and events challenge this perception.Let us dig deeper and explain what we mean by that.
Centralisation in Bitcoin mining
Data reveals that Bitcoin, which is supposed to be a decentralised digital currency, is highly centralised in terms of its mining activities.
According to a report from Mempool, 50 percent of the Bitcoin hashrate is controlled by two mining pools, Foundry USA and Antpool.
Hashrate refers to the amount of processing power being given to the network through mining.The same study goes on to state that as much as 80 percent of Bitcoin’s hashrate is controlled by as little as 5 mining pools.
Back in the day, when Bitcoin mining was possible through personal computers, thousands of individual miners contributed to the network’s total hashrate.However, with mining difficulty increasing exponentially over the years, the mining process now requires massive amounts of advanced computing power.This has restricted Bitcoin mining to large mining firms and mining pools.
Mining pools allow thousands of individual miners to combine their computing power and mine as a collective.Over time, mining pools have become quite popular as they allow individual miners to partake in the lucrative mining process.
Owing to their increasing popularity, these pools now control a majority of Bitcoin’s hashrate.
This highly centralised mining system poses significant dangers to the Bitcoin network.Hypothetically speaking, miners that are part of these pools could orchestrate a 51 percent attack, where they gain majority control over the transaction validation process and use it to alter the Bitcoin blockchain to their advantage.
Few staking platforms are controlling a majority of ETH staking
Ethereum introduced the staking feature in December 2022.Since then, over $24 billion worth of ETH has been staked on the network — that’s more than 13 percent of the altcoin’s supply.However, there is one issue with Ethereum staking: its high upfront cost.One needs to stake a minimum of 32 ETH, which is worth nearly $51,000 at current prices.
This is where staking pools come into the picture.
Just like mining pools, staking pools allow several individuals to accumulate their ETH and stake it as a collective through one staking platform.However, over time, a handful of staking pools have come to control the vast majority of all staked ETH.
Also read:
A mobile gaming app that rewards you with Bitcoin for playing chess – all you need to know
The most dominant staking platform, controlling 29.08 percent of staked ETH, is Lido.According to its official website, Lido is responsible for 4.65 million staked ETH, which is equivalent to $6.8 billion.Further, as per a report by Dune Analytics, centralised crypto exchanges such as Binance, Coinbase, and Kraken are in possession of an estimated 26.7 percent of staked ETH.
The report also states that the top 4 ETH staking platforms control 55.78 percent of the total number of ETH that has been staked so far.This again indicates hints of centralisation in the world’s second-largest cryptocurrency network.
Polygon’s controversial hard fork vote
Polygon, a decentralised scaling platform designed to enhance Ethereum, is a reputed name among some of the top blockchains.Recently, the network executed a hard fork on January 17 to radically enhance the blockchain’s infrastructure.Following the hard fork, MATIC, the native token of Polygon experienced a 17 percent hike in prices.
But the hard fork has received severe criticism from the crypto community.The reason behind that is the fact that Polygon, which claims to be a decentralized network, executed the hard fork with only 13 validators.
Initially, Polygon had declared that the deciding vote regarding the hard fork would involve 100 validators.However, the proposal sparked a debate within the Polygon community.
Some users wanted more clarity on the updates and their necessity, while others wanted developers to focus on other pressing issues.Therefore, when it came to deadline day, only 15 validators cast their vote on the proposal, of which 13 voted in favour of the changes.
Armed with this 87 percent majority vote, Polygon went ahead with the hard fork.
The move drew significant flak from the Polygon community.“The entire Polygon network was hard forked.The fork was voted on by only 15 people.
Centralized ASF,” wrote one user on Twitter.And this is not the first time something like this has happened.Back in 2021, the decentralised exchange, Uniswap, faced similar backlash after it delisted tokens without any voting process or consulting its community member.This raised questions about how much control creators can have in crypto.
Conclusion
The 2008 financial meltdown and the recent implosion of FTX have one thing in common — the concentration of power in the hands of a few.This is exactly why decentralised networks like Bitcoin were introduced — to bypass traditional centrally controlled systems.
However, the very crypto networks that have been introduced to solve this problem are now showing signs of centralisation.
Fortunately, the web3 community has seen several innovations that can help combat this narrative.For instance, the formation of DAOs to govern crypto platforms is a great way to democratise the crypto space.Some founders are also relinquishing their share of a project’s token to the public as a way of providing complete control to its community.
Therefore, it’s fair to say that efforts are being made to maintain decentralisation within the crypto space.The success of these efforts is of paramount importance if cryptocurrencies are to play any role in the future of transacting and finance.
Check out our in-depth.