The term “decentralization” is thrown around quite loosely in the blockchain world. Scaling public blockchain networks to meet user demand often presents a challenge when it comes to maintaining decentralization and security. The rise of “decentralized finance” (DeFi) protocols outlines the benefits of peer-to-peer financial services with no gatekeeper or intermediaries. However, some of the most prominent smart contract-enabled blockchains and cryptocurrency projects emphasize performance and security over decentralization. Accordingly, different cryptocurrencies have different levels of decentralization. This begs the question, “which is the most decentralized cryptocurrency?”.
In this article, we’re going to dive deep into the concept of cryptocurrency decentralization. We’ll explore the most decentralized cryptocurrency and discuss the benefits of decentralization. Also, we’ll take a look at the factors that contribute to the decentralization of a cryptocurrency network and the issues that arise when scaling public blockchains.
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What is Decentralization?
Before we dive into looking at the most decentralized cryptocurrency, let’s first take a closer look at decentralization itself. Decentralization refers to a distributed network without a single controlling entity. In decentralized blockchain networks, decision-making is not the responsibility of a single entity. Instead, the entire network shares the responsibility.
There are several benefits to this. For example, decentralized networks reduce the amount of trust each participant places in others throughout the network. Furthermore, bad actors can’t make decisions that negatively affect the rest of the network without everyone else agreeing to it. As a result, participants in a decentralized blockchain network have financial incentives to act in a way that prioritizes the health of the network.
Rather than relying on a single factor or metric, blockchain decentralization is a dynamic state that takes multiple factors into account over time. This means that blockchain decentralization is in a constant state of flux. One of the most common metrics for determining decentralization is the percentage of a token supply that belongs to any single entity. Accordingly, 100% of the total Bitcoin supply was once owned by Satoshi Nakamoto before other miners were involved. Another important aspect of decentralization is consensus. Blockchain networks use various consensus mechanisms to prevent bad actors from acting in a way that would benefit themselves and not the entire network.
Despite the various claims of decentralization throughout the blockchain world, many so-called “DeFi protocols” operate with a similar corporate structure to centralized companies. For an application or protocol to achieve true decentralization, management and access to resources should be equitable. Decentralization has historically come at the price of low transaction throughput. However, some modern blockchain networks appear to favor speed and performance over decentralization. Moreover, these “trade-offs” are becoming increasingly prominent throughout the blockchain industry.
Features of Decentralization
A decentralized blockchain network has no central authority. This lack of central authority requires network participants to oversee decision-making. Also, a distributed network of computers carries out network maintenance, and anyone can join the network.
Furthermore, the issuance of decentralized cryptocurrencies is predicated by immutable code. Nobody can suddenly decide they want to issue more of a specific cryptocurrency without the entire network agreeing to it. Accordingly, every network participant can verify the number of tokens in circulation at any given time.
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What are the Benefits of Decentralization?
In financial terms, decentralization refers to transactions outside of the legacy financial ecosystem without intermediaries. Storing transactional data on a centralized, siloed database leaves it open to a single point of failure. Also, anyone who interacts with that database has to trust that the people in charge of it won’t change any of the data it contains.
However, decentralized blockchain networks such as Bitcoin allow network participants to trust the math, science, and economic incentives to maintain the integrity of the network rather than people. Furthermore, every node throughout a blockchain network has a copy of the same distributed ledger. As such, anyone who attempts to defraud the network is easily identifiable and can be ousted from the rest of the network.
Also, decentralization can make resource distribution more efficient. Rather than any single node or server bearing the burden of every computation, the network distributes computations across each node to provide better performance and reduce the likelihood of a successful attack, downtime, and bottlenecks.
The Blockchain Trilemma
The blockchain trilemma refers to three core issues that developers experience when scaling blockchain networks. Often, developers have to compromise on one of the three issues, leading to a trade-off. The three issues in question are decentralization, security, and scalability. Many believe that only two of these issues can be a priority at any given time.
Furthermore, the surge in the adoption of blockchain technology puts pressure on new projects to prioritize scalability and security over decentralization. However, some blockchains and cryptocurrencies aim to minimize centralization and prioritize decentralization over transaction speed and scalability.
What are the Most Decentralized Cryptocurrencies?
Determining the most decentralized cryptocurrency requires some sort of framework for a consensus about what defines decentralization. However, according to several metrics, many consider some first-generation cryptos and blockchains to be the most decentralized. Below, we will look closer at some of the contenders for the most decentralized cryptocurrency.
Please bear in mind that the factors which determine overall decentralization are subjective. The cryptocurrencies below are a cross-section of the top crypto assets many consider the most decentralized.
Bitcoin
Bitcoin is the longest-standing public blockchain network in existence and the leading cryptocurrency by market capitalization. The identity of the anonymous creator(s) Satoshi Nakamoto is still, to this day, a mystery. Many consider Bitcoin to be the most decentralized cryptocurrency. According to “bitnodes.io“, the Bitcoin network has 15,092 active nodes. This is higher than the current number of nodes on the second-largest blockchain network, Ethereum, which stands at 5,873, according to “ethernodes.org“.
However, only a handful of developers are responsible for the maintenance and updating of the Bitcoin network. Despite the global distribution, there is a significant concentration of Bitcoin nodes in the United States and Germany. In addition, Bitcoin’s proof-of-work (PoW) consensus mechanism requires specialized hardware and ongoing electricity costs.
Bitcoin was created in a way that would enable anyone in the world with a computer to become a miner. However, the reality is that competition among miners and the growing size of the Bitcoin blockchain create a situation where expensive, powerful computers are essential for being a Bitcoin miner. Also, independent Bitcoin mining is often unprofitable.
This high barrier to entry means that only those who can afford to mine Bitcoin can participate. Moreover, Bitcoin mining is in danger of becoming something only the wealthy can afford to participate in. Accordingly, a small handful of industrial mining facilities have substantial control over the Bitcoin network. Despite this, the Bitcoin network theoretically becomes more decentralized as new miners join.
Ethereum
Ethereum is the number one smart contract blockchain and the second-largest by market capitalization after Bitcoin. Although it has a smaller number of nodes throughout the network than Bitcoin, Ethereum is home to one of the largest development communities in the world. Accordingly, the Ethereum network could be considered to be more decentralized than Bitcoin in terms of how many participants steer the future direction of the network.
However, Ethereum has a central authority, co-founder Vitalik Buterin. Also, the concentration of Ethereum’s hash power in the US is around 40%, more than double that of Bitcoin. In addition, Ethereum’s PoW consensus mechanism is susceptible to the same monopolization that occurs throughout the Bitcoin mining community.
Despite this, Ethereum is transitioning to a proof-of-stake (PoS) consensus mechanism that has the potential to significantly increase decentralization by removing the need for mining equipment and mining pools. Accordingly, Ethereum’s move to PoS is lowering the barrier to entry for validators. Instead of requiring expensive machinery and steep, ongoing electricity costs, Ethereum’s PoS consensus mechanism requires validators to stake 32 ETH. Although this is still a hefty sum, the transition marks a move towards an equitable and sustainable future for the Ethereum network.
Litecoin
Litecoin was launched using a fork of the Bitcoin Core client source code and is one of the oldest cryptocurrencies around. It uses a proof-of-work (PoW) consensus mechanism and is quite similar in design to Bitcoin but with a transaction throughput around four times greater. Furthermore, Litecoin has a central point of authority, creator Charlie Lee. However, the Litecoin Core software spreads across a global network of nodes, similar to the Bitcoin Core software.
That said, there is also a high concentration of Litecoin mining in the US. Also, Litecoin mining has become so competitive that independent mining operations are largely unprofitable. This means that Liteocin miners will likely need to join mining pools, which are highly centralized, with only three pools controlling around 65% of the overall hashrate. Despite this, the Litecoin network has been around for so long that the coin distribution is more decentralized than a significant number of newer crypto projects.
What are the Dangers of Centralization?
Almost every cryptocurrency is intended to be decentralized. However, as we have come to learn, almost every cryptocurrency suffers from some sort of centralization over time. Sometimes this is perceived to be essential for the survival of a blockchain network. Nevertheless, it is widely acknowledged that centralization poses a threat to public blockchains and cryptocurrencies.
If any person or group of people own a majority share of a particular crypto asset, they have the power to manipulate its price. Also, a concentration of hash power can lead to a situation where the bar to profitable crypto mining is set too high for most people to participate. Furthermore, centralization creates a single point of failure that can make databases and computing networks vulnerable.
The Most Decentralized Cryptocurrency – Summary
The importance of decentralization varies depending on who you ask. High throughput and low transaction fees could be a higher priority than decentralization for many smart contract developers. Also, the increase in layer-2 scaling solutions in recent years suggests that the mass adoption of blockchain and cryptocurrencies could rely on performance more than it does decentralization.
That said, the Bitcoin network is the most secure computing network on earth. The five or so transactions per second (TPS) the Bitcoin network can process is a trade-off many believers of sound money can live with. Also, those who see Bitcoin as digital gold may not want to use it for payments and high-frequency transactions. As such, waiting a few minutes for a Bitcoin transaction to process is a fair compromise when it allows individuals and businesses to gain financial freedom and hedge against the debasement of fiat currencies.
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