What is Decentralised Cryptocurrency?

Decentralisation Meaning

Decentralisation means that power is in the hands of the many and not the few. So planning and decision making is more of a democratic process that benefits the system as a whole. Hence decentralised cryptocurrencies have many people that have a say on the future of the network.

On the other hand centralisation is the consolidation of power that is in the hands of an individual or group. All requests must pass through them.

One of the core principles of cryptocurrency is decentralisation. In fact the cryptocurrency community prioritise it and make sure the projects they build continue to maintain it.

centralisation-vs-decentralisation

Centralisation vs Decentralisation

 Centralised
Cryptocurrencies
Decentralised
Cryptocurrencies
SecurityLess secureMore secure
CommunicationVerticalOpen and free
Speed of Decision makingSlowFaster
ResponsibilityResponsibility lies in a few handsShared responsibility
LeadershipLeadership and coordinationLacks leadership and coordination
Energy ConsumptionLessMore

Advantages of Decentralisation

There are benefits to both centralisation and decentralisation at a system level.

However when it comes to crypto, decentralised cryptocurrencies are the way to go. This is because decentralised cryptocurrency has many benefits.

Better Security in Decentralised Cryptocurrency

Security is one of the most important things of decentralised cryptocurrency. Centralisation is in fact a security flaw. This is because decentralised cryptocurrency has no single point of failure. So it makes the network more robust and able to hold up when things go wrong.

For example if a lot of computer nodes suddenly shut down there are other nodes that can continue to work. The network is strong enough to keep on going with no interruption as if nothing every happened.

On the other hand when nodes shut down on centralised cryptocurrency it could shut down all the network. No one can make payment or do anything at all. So the network will come to a standstill. That is to say until the network starts up again.  

Speed of Decision Making

The larger a centralised organisations gets the slower it becomes to reach a decision. If you take the banking system for example it does not respond to change very quickly. In fact it has not had any innovation for around 30 years or so.

On the other hand decentralised cryptocurrency is able to adapt to the needs of the community. Of course this depends on what, because a crypto needs to stick to its ethos.

For example Bitcoin is all about security using proof-of-work. So the Bitcoin developers are going to resist changing the network to proof-of-stake just because of social trends. Instead Bitcoin developers are more interested in making Bitcoin more user friendly to appeal to a more mainstream audience.

Responsibility and Decision Making

The responsibility of a decentralised cryptocurrency is in the hands of the many people involved. This means that any decisions that are taken are for the benefit of most or all of the community.

As a result the majority of people fully back future projects and root for them to work out. The responsibility of anything that goes right or wrong is equally shared between the community.

The community get feedback on what is in the best interest of the cryptocurrency at hand. So they usually are fairly quick to respond to what is important to work on.

Peer-to-Peer

Any cryptocurrency whether decentralised or more centralised are peer-to-peer.

The whole point behind cryptocurrency is so that currency is removed from the control of governments or institutions. Similarly to the separation of church and state.

Many cryptocurrency advocates say that this is a huge positive because no institution can censor or ban anyone. Instead cryptocurrency works without any intermediary. So no banks are involved in between to make the payment happen.

The network works without trust. As a result you can send a payment to anyone directly without you needing to trust the other party. This is because the blockchain ensures the payment is made and it cannot be reversed.

This is a big decentralising factor in cryptocurrency.

Disadvantages of Decentralised Cryptocurrency

Leadership and Coordination

The lack of leadership and coordination in a decentralised cryptocurrency project is sometimes a problem in some respects.

Example of a lack of leadership
When Bitcoin was still young a portion of developers had different opinions on how to move forward. In fact it caused rifts in the community to the point where Bitcoin kept hard forking.

A hard fork in blockchain is when a community of developers wants to see other functionalities in the crypto. As a result this community of developers decide to split off from the original group.

When the split happens the dissenting developers copy the original blockchain. At that point the two blockchains are exactly the same. However the one with the dissenting developers will become a new cryptocurrency. It will also have a radical change in the network direction from then on.

Bitcoin had many hard forks at the beginning. The most well-known example is Bitcoin’s hard fork to create Bitcoin Cash. In this case the developers for Bitcoin Cash wanted larger block sizes. So instead of 1-megabyte blocks they wanted 8-megabyte blocks.

Some developers wanted larger block sizes because it would make Bitcoin more scalable. However not everyone agreed so hence the split.

The hard forks were only possible because of the lack of leadership. Luckily since those days Bitcoin has settled down and everyone knows its value proposition. So only developers that agree with either one group or the other will join either one.

As a result the dust has settled from those tumultuous days. So the fact that Bitcoin is a decentralised cryptocurrency wasn’t so great to start. However it has flourished after that.

Energy Consumption

Decentralised cryptocurrency does have many benefits, but it does come at a price. A more decentralised cryptocurrency consumes more energy and therefore costs more. This is firstly because you need more servers as opposed to having one central server.

Additionally there are many computers that are storing the same data of the blockchain. This is also wasted space and has an additional energy cost to it.

Decentralised Cryptocurrency

When we talk about decentralised cryptocurrency it is something that can happen on many levels. That includes:

  • Power to operate the network
  • Servers
  • Decision making of the future of the cryptocurrency
  • Mining (for proof-of-work)
  • Validators (for proof-of-stake)
  • Dapps (Decentralised Apps)
  • Exchanges
  • Wallets
  • Staking

Cryptocurrencies are not just either centralised or decentralised. However there are varying amounts of decentralisation or centralisation. Some cryptos are more decentralised than others.

Decentralised Cryptocurrency: Power

Ideally miners need to use different power sources to power the network for good diversification. Firstly because any power grid can suddenly go down with an increase in energy demand. Also a power grid can go down if it is compromised by a cyberattack.

Usually there are not that many options for power supply you can use in any given area. However one way to get more decentralised power is to get politician’s on board. So that they can help ensure you will always have a stable power source. One that is secure and with no down time.  

Otherwise you can also opt to go off grid.

Decentralised Cryptocurrency: Servers

Another aspect to having decentralised cryptocurrency is by using a diverse amount of servers. That also includes cloud based services.

For example around 60% of Ethereum nodes are on cloud based platforms. Hence the Ethereum network is not in full control of its own network.

Instead it is in the hands of a company with one or a few main company leaders. Like for example AWS which is owned and controlled by Jeff Bezos. He may decide for any reason to terminate Ethereum’s access to their cloud service. It is an unlikely scenario, but in life there are no certainties.

In the meantime the Ethereum team is working on ‘stateless clients’ which will get rid of this issue. This is because the network will not require as many nodes with Ethereum 2.0. So it will make Ethereum an even more decentralised cryptocurrency.

Decentralised Cryptocurrency: Decision Making

It is important that decisions on the future of a crypto are in the hands of a community. So no one can change the protocol to favour them.

There are some cryptocurrencies that are more centralised. Like for example XRP which is a cryptocurrency made and backed by large institutions.

In fact because of this, XRP is not much different from a regular fiat currency which is backed by banks. The only difference is that it is a cryptocurrency so it benefits from having a blockchain. That is to say quicker transactions and lower payment fees.

On the other hand some other cryptos have other centralisation issues. Like for example with Ethereum to an extent.

Vitalik Buterin is one of the founding Ethereum developers. He has a good amount of influence on the direction of the platform. He can consequently sway the opinions of the community of developers.

This is to the point where developers end up working on projects that would not have been picked up otherwise. However in fairness this has not always been the case in the past. The Ethereum developers have sometimes ditched his work when they did not see it as worthwhile.

On the other hand Bitcoin has more of an equal playing field. This is because Satoshi Nakamoto; the Bitcoin founder, disappeared and let the community figure things out. So in this respect Bitcoin is one of the most decentralised cryptocurrencies in this sense.

Decentralised Cryptocurrency: Mining

Of course mining is done only on proof-of-work based cryptocurrencies. For mining to be decentralised it should happen in several areas:

  • Mining hardware
  • Hash rate
  • Mining pools

Mining Hardware

Some cryptocurrencies are ASIC resistant so they do not need specialised ASIC mining hardware. This is good because you can get any standard computer and set it up to mine. Additionally it does not price out anyone from joining the network because ASICs are expensive.

There were cryptocurrencies that were once ASIC resistant. However miner manufacturers managed to figure out a way to mine them anyway.

The issue with mining hardware is that there are not many companies that produce them. It would be good if there are many more companies for some more competition.

This is because these companies can have influence on the crypto community. In fact this has happened before when Bitmain threatened to stop shipping miners to China.

Bitmain did not want the Chinese to vote for the Segregated Witness soft fork on the Bitcoin network. They were really close to influencing the outcome, but luckily the result did not go their way.   

Hash Rate

The many more computers that mine the better. Additionally ideally the computers need to be located in many different jurisdictions.

This is because some countries might regulate and not welcome mining any more. Like for example when China banned crypto mining. All of a sudden miners had to find a different country to call home.

If there are other miners in other jurisdictions they can continue to mine the blockchain. If not then the network comes to a halt. As a result the network will become less secure and a hacker can take advantage of the scenario.

Mining Pools

When there is more competition for mining blocks the amount of block rewards a miner receives can go down. This is the case for more popular cryptocurrencies. So miners end up getting together and combine their mining power to form mining pools.

As a result there are a smaller amount of mining pools than individual miners. So miners can earn a steady income because the block rewards are split between the miners in the pool.

Example of Bitcoin Mining Pool Distribution (Over 1 Week)

Sourced from BTC.com image taken on 26th April 2022.

Of course this is good for the miners, but it also means there is consolidation. So the cryptocurrency becomes less decentralised. You could argue that anyone can still join any mining pool, which is true to an extent.

Additionally for example you have a small handful of miners with great resources that do the bulk of mining. They might spread their power across the different mining pools. So this is less of a decentralised cryptocurrency because these juggernauts can still impose their will on the community anyway.

The solution to mining pools needs to be based on software to code a solution to decentralise the system.

Decentralised Cryptocurrency: Validators

Proof-of-work cryptocurrencies are more decentralised than proof-of-stake. This is because proof-of-stake can place limitations on who can become a validator.

3 Factors For Choosing A Validator:

  • Staking age – how long you have had your coins staked on the network
  • A node’s wealth
  • Random selection

The larger the amount of crypto you have staked the better the chance you have of becoming a validator. As a result the richer a node is the more voting power that node has. This gives the person or entity behind the node an unfair advantage.

The more the node stakes the more staking rewards they get. So over time the validators consolidate and can quickly start to influence the network.

Instead to have a more decentralised cryptocurrency, proof-of-stake developers can modify the code. They could make it more favourable to everyone taking part on the network. Therefore giving anyone a fairer chance at becoming a validator.

Decentralised Cryptocurrency: DApps

Cryptocurrencies that have dapps that are built on top of it need to also be decentralised. That also includes those on Bitcoin DeFi.

For example an issue of centralisation cropped up with a Dapp service offered on Ethereum. Lyn Alden pointed out that the network effect is increasing the percentage of Ether into Lido.

lido-leads-liquid-staking-centralising-cryptocurrency
Sourced from Lyn Alden’s twitter

For those that do not know, Lido is a staking pool service for Ethereum that is liquid. That is to say, you do not have a staking contract with a fixed time frame. You can unstake at any point in time by using Lido’s liquidity pool.

As CoinDesk pointed out Lido is on track to control over 50% of all staked Ether. This means that Ethereum will end up less of a decentralised cryptocurrency.

In fact some people had flagged this as an issue of centralisation to the Lido team. No Dapp should have that much power to dictate the future of the Ethereum platform as a whole.

As Lyn pointed out Lido did accept that this was an issue. So they stated that they wanted to avoid centralisation and the risks it brings. In their statement they highlighted:

The core reason we started Lido was to prevent a centralised exchange or group of exchanges from winning the staking market.

Lido

This is definitely another centralisation issue that the community needs to keep in check.

Decentralised Cryptocurrency: Exchanges

Regulated exchanges are great for buying cryptocurrency. However if they are the only on ramps to buy crypto then this is a problem.

This is because governments can enforce exchanges to ban people from certain countries or particular individuals. In fact this is already an existing issue of centralisation. It is not much different from allowing people to get access to a bank. This is a basic service that everyone should have access to.

Apart from regulated exchanges there are also unregulated exchanges or decentralised exchanges called DEXs. So all you need is an internet connection and email address to sign up.

The DEXs do not ask you for any documents for verification unlike regulated exchanges. So anyone can have equal access to get into crypto or exchange cryptocurrencies without restrictions. However we have a shortage of them so we need some more.

Decentralised Cryptocurrency: Wallets

There are both custodial wallets and non-custodial wallets. Custodial wallets are wallets where you do not have access to your private keys. As a result you do not have full control of your cryptocurrency. A third party also has access to your funds.

You can choose either to manage your cryptocurrency, but non-custodial wallets are better. Non-custodial wallets are truly decentralised and you alone have control of your crypto.

There are quite a good number of non-custodial wallets around. Each one might offer a different batch of cryptocurrencies that they support.

In an ideal world all cryptocurrencies should have a selection of non-custodial wallets that support them. However that is not realistic. So it is better to focus on popular cryptocurrencies that are likely going to have a target over their head. Or other coins that regulators might take issue with.

These cryptocurrencies should have a range of wallets that support them. Just in case one of them drops out of the market or has issues for one reason or another.

Decentralised Cryptocurrency: Staking

You can only stake crypto on proof-of-stake cryptocurrencies.

Centralised exchanges offer many services including staking. As I mentioned before regulated exchanges need to follow government regulation. So that means that some people will not be able to access staking on regulated exchanges.

However there are other ways of staking. Like for example using Dapps like Lido or non-custodial wallets.

As mentioned you don’t want to have too many people staking through one Dapp. So we need some more competition in this respect to have a range of Dapps. They all need to give good incentives to entice people to stake using different ones.

There also are some non-custodial wallets that support staking for a number of cryptocurrencies. However other cryptocurrencies that are new might have their own dedicated wallet that also offers staking.

The more options that are non-custodial the better for having decentralised cryptocurrency.

Conclusion

To sum up, to have decentralised cryptocurrency we need to have decentralisation on many levels. The more levels you are able to decentralise the better.

This is because at every level there is the possibility for anyone to influence a cryptocurrency. Either by controlling future upgrades or regulating what transactions are or are not possible. The network could also get shut down by power outages. As a result the community need to keep making sure that they ensure there is decentralisation.

However instead of ensuring decentralisation it is better to have incentives to ensure we have decentralised cryptocurrency. Just like Lyn Alden suggested in her Tweet.

As a long term solution this is better because it will ensure crypto remains decentralised. Otherwise multiple opportunities are there to tempt many different people to take advantage to consolidate power. So at some point you will get someone that will take advantage of the opportunity.

Other Articles In This Section
Decentralised cryptocurrency. Are cryptos fully decentralised?
What are CBDCs? Inside Central Bank Digital Currencies.
What are Stablecoins? An introduction to how stablecoins work.
What are Privacy Coins? Privacy and anonymity in crypto.
The best Privacy Coins. Cryptos to maintain your privacy.
What is Monero? An introduction to one of the top privacy coins.

Frequently Asked Questions

What is decentralised cryptocurrency?

A decentralised cryptocurrency needs to be decentralised on many levels. That includes:
·      Power to operate the network
·      Servers
·      Decision making of the future of the cryptocurrency
·      Mining (for proof-of-work)
·      Validators (for proof-of-stake)
·      Dapps
·      Exchanges
·      Wallets
·      Staking

What is the most decentralised cryptocurrency?

The most decentralised cryptocurrency is Bitcoin. However there are still some areas where it can improve on decentralisation.

Are all cryptocurrencies decentralised?

Some cryptocurrenicies are more decentralised than other. XRP is an example of a more centralised cryptocurrency because large institutions control the network.

Is Bitcoin truly decentralised?

Bitcoin is the most decentralised cryptocurrency, but developers can improve it to make it even more decentralised. One aspect they can improve is to make mining more decentralised.
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