Centralized cryptocurrencies

I was inspired to write this article by a recent visit to the Blockchain Technology conference and a discussion of ideas for improving the blockchain with my colleagues. Most of the conference speakers were from large Russian banks, and their presentations concerned the use of the blockchain mainly as databases or smart contract platforms. However, most of them could hardly answer the question: “Why do they need a blockchain at all?”. The answer was recently given by the R3 CEV consortium: “We don’t have a blockchain, because we don’t need it”. Blockchain is not needed by banks, it is needed instead of banks. It is needed only for decentralized systems, while trusted applications will always be more efficient, simple, etc.

The importance of decentralization has been widely discussed (see, for example, Vitalik Buterin’s post ), and it is decentralization that represents the only real reason for using the blockchain. In this article I am going to discuss the extent and reasons for the centralization of existing cryptocurrencies.

Centralization of management and development

It's nice to think that nobody controls the blockchain, i.e. Network members (miners) act as a decentralized community that serves the blockchain and chooses the direction of its further development. In fact, everything is much worse.

The first source of centralization here is amending the protocol. Only a small group of developers can accept code changes or even just understand some of the protocol suggestions . No one will work for free, and an organization that pays money to the core team actually controls the source code of the cryptocurrency. For example, Bitcoin development is controlled by the organization Blockstream, which has its own interests. This problem can be solved using a treasury system similar to that used in Dash or proposed for Ethereum Classic . However, many issues are still not resolved (for example, the 78 pages of the ETS treasury proposal are difficult to understand, and the Dash treasury system was developed without any documentation at all).
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Another risk of centralization in management is the cult of personality. Although Vitalik Buterin tells us in his blog that no one controls cryptocurrencies, his opinion is so important for the Ethereum community that most of its members agreed to the return of the stolen funds of The DAO, although this violates one of the basic principles of the blockchain - immutability.

Finally, there are many interested parties in any cryptocurrency, and the opinions of some of them (for example, regular users) are often ignored. Anyway, the development of cryptocurrency is a social consensus, in which it would be good to have a manifesto, declaring it from the very beginning.

Centralization of services

One of the biggest problems of cryptocurrency at the moment is the centralization of services. Processing the blockchain requires quite a lot of computational resources and time (for example, processing the entire Ethereum blockchain on a regular computer takes several weeks), and ordinary users who want to simply transfer a few coins prefer to use centralized services for this. Most Bitcoin users trust blockchain.info , Ethereum users trust myetherwallet , etc. If these popular wallets are compromised, funds from a huge number of users will be stolen.

Moreover, most users trust block browsers without checking the correctness of blocks in it. What is the meaning of the “decentralized” social network Steemit, if almost none of its users download the blockchain, but believe that the data presented on Steemit is correct? Or imagine that blockchain.info was hacked: a hacker can steal all the money of users from their wallets and replace the theft transactions in the block browser with other transactions, leaving the attack unnoticed for a long time. Thus, the credibility of centralized services leads to the emergence of a single point of failure in cryptocurrencies, allows for censorship and threatens user coins.

Centralization of mining

In the case of popular cryptocurrencies, hardware requirements are high even for simple check of blockchains. However, even if you have modern equipment that can quickly process blocks, your network channel may not be wide enough to quickly synchronize with the network. This leads to a situation where only a small number of high-performance computers can effectively create new blocks, which leads to centralization of mining. Cryptocurrencies were thought of as open systems that continue to work correctly as long as the majority of their users are honest, but at the moment most of the computing power is concentrated in a small number of miners who can easily coordinate an attack of 51 percent. Mining pools worsen the situation - for example, in the case of Bitcoin, only five pools control more than 50% of the hashrate.

The Proof-of-Stake algorithm is usually considered to be less demanding of equipment, but to process a really popular blockchain, you still need a wide network channel to synchronize with the network. In addition, the profits for holders of full nodes in the PoS are usually small, and only a small percentage of the coins participate in mining, which makes the network vulnerable. Often this is eliminated by delegating the authority to mine to someone else, but it also leads to a decrease in the number of full nodes in the network and, as a result, to its centralization.

Centralization as a solution

The most frightening point is that centralization is increasingly seen as a solution to cryptocurrency problems. A large network is slowly synchronizing, and many cryptocurrencies offer the use of a limited number of trusted " main nodes ", " witnesses ", " delegates ", " federations ", etc. to "solve the problem" of too many nodes in the network. The number of these trusted nodes may be different, but using this method to solve scalability problems, developers also destroy the decentralized nature of the blockchain. As a result, this will lead to the formation of a cryptocurrency with one functioning node that processes transactions very efficiently, without delays, confirmations and forks, but in this case the blockchain becomes unnecessary, as is the case with R3.

Unfortunately, most users are not able to understand the technical details of cryptocurrencies, and they increasingly like such centralized blockchains, because centralized services are and will always be simpler to develop and user-friendly.

Conclusion

The existing and emerging blockchain systems are moving towards even more centralization, which will inevitably lead to massive disappointment in the blockchain technology, since it is not required for centralized solutions. The user needs to choose whether to believe a beautiful and fast web interface or use secure and decentralized software that requires downloading and processing the blockchain.

Most of the risks of centralization can be eliminated if there are convenient and decentralized full nodes, wallets and block reviewers, but this is a topic for a separate article.

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