Can Bitcoin overcome its biggest obstacle — decentralization — and achieve the best governance?

Decentralization has been key to Bitcoin’s value proposition since its inception, but it is also its biggest obstacle.

Whether it’s the block size debate or the more widespread Ethereum Classic debacle, decentralizing public blockchain networks presents significant obstacles to a seemingly simple goal. After seven years of open source research, we’ve only just come close to exploring decentralized governance, with many unanswered questions.

But solving the decentralized governance problem means going back to the roots and finding out what we actually mean by ‘decentralization.’ Do we mean the distribution of computing power? The number of nodes? The inherent ability to fork and split, as Ethereum has recently demonstrated?

The true definition of decentralization in the cryptocurrency debate depends on the context. However, semantics and technical terms often obscure the fact that ‘decentralization’ essentially refers to a system of voluntary cooperation among peers.

Efficiency trade-off

Decentralization is a means to an end.

As a tool, decentralization cannot be the best solution for every possible use case. In fact, decentralization is often very inefficient compared to centralized solutions. For example, when it comes to transaction throughput, Bitcoin lags far behind centralized payment networks such as MasterCard or Visa.

However, network distribution is a necessary prerequisite for preserving the consensus rules that give Bitcoin its value, such as immutability and progressive reward halvings. Network distribution promotes extreme redundancy to prevent censorship and attacks that would threaten these clearly defined consensus rules.

This is an inherent cost in terms of transaction throughput efficiency, power consumption, and overall pace of development.

However, the value of a digital network that can preserve these rules is so great that these costs are justified. As the foundation of the entire decentralized ecosystem, it also becomes very important that we understand and be able to maintain network distribution before we start solving governance issues.

A relative measure

Like hashrate, network distribution is a critical factor in blockchain security. However, we have no clear metric to measure hashrate distribution.

Fortunately, this does not mean that we are completely clueless when it comes to determining preferences. Network distribution itself consists of identifiable distributional factors.

This includes the number of nodes propagating transactions, the number of mining machines, the number of miners and operators behind the nodes, the geographical distribution of all of these, and the number and size of mining pools.

If we isolate these factors, it becomes insignificant to how high or low the degree of distribution is.

For example, 100 independent miners spread out across the world are clearly more decentralized and less vulnerable than 100 miners clustered in one area. The lines start to blur again when we start to consider the tradeoffs. When we do, the weight of these individual factors depends largely on subjective preference.

More decentralized

As we can see, when all else is equal, determining what is more ‘decentralized’ is easy enough, despite the lack of a standard unit of measurement. It becomes much more difficult when it comes to potential tradeoffs being developed at the protocol level.

This is complicated because, even if decentralization is an end in itself, we are missing an important fact. How much and what kind of decentralization do we really need? What is the minimum network distribution that is necessary to ensure the security of Bitcoin or any other cryptocurrency? The answer is: no one knows.

The reason is: no one can predict the scale and manner of future attacks on the Bitcoin network. Under the right conditions, a single Black Swan attack in a horrific form could have a huge negative impact.

If Bitcoin succeeds as many hope, such an attack is not impossible.

Whether these attacks are carried out by well-positioned private institutions shorting Bitcoin, or an organized collection of nation-states determined to eliminate Bitcoin’s popularity, achieving wildly successful Bitcoin adoption requires that we take the possibility of coordinated attacks on the network seriously.

For this reason, if any public blockchain hopes to become the core of a truly pervasive global financial network, it must prepare for the worst. This means that developers should tend to encourage the decentralization of the network.

A delicate balance

But this is not an easy task. If we can determine the minimum network allocation required to protect against the worst possible attack, and if we can ensure that network changes do not fall below that threshold, then data-checking development decisions will be trivial.

But we can’t do any of that. Bitcoin is a voluntary peer-to-peer system, and that’s where the difficulty lies.

We can’t force stakeholders to run full nodes, or prevent miners from joining already sizable mining pools. What we do know is that more decentralization is generally more secure, and the only way to encourage higher decentralization in a voluntary network is through incentivizing the network.

For node distribution, this means lowering the cost of running a node or increasing the value of doing so. For mining, this includes improving block propagation to negate the advantage of a larger mining pool. Such developments will see the network become more decentralized by making it easier, cheaper or more profitable to become a peer on the Bitcoin network.

This is not to say that greater distribution must come at the expense of everything else.

In fact, there are some tradeoffs that are likely worthwhile to achieve less decentralization. The Bitcoin hashrate is tiny compared to the combined power of the world’s supercomputers. It represents the raw computing power that secures every new transaction block on the blockchain, and without professional mining centers, this Bitcoin hashrate would not exist.

However, most of the tradeoffs are less clear.

By allowing larger blocks, this proposal will increase transaction throughput, but like any economic behavior, this comes at a cost.

Larger blocks require more computational resources from nodes and are more difficult to propagate between miners. However, since non-mining full nodes lack monetary incentives, the benefits gained from increasing the block size limit will remain the same. Since the cost of running a node increases with the block size, while the benefits do not, more nodes must drop off the network.

The next challenge

This alone does not tell us whether such a change is worth implementing. But because the cost to the network is not zero in distribution, the attendant burden of proof suggests there is a beneficial and pressing need to do so.

In this particular case, this means that the block size limit is a limiting factor for Bitcoin adoption. If it is not, then there is no pressing need to increase transaction throughput and we can wait for solutions that do not affect distribution at the base network layer.

Given the importance of network distribution and the constraints inherent in its measurement and control, this should be a standard norm in review decisions. In the end, the wider the distribution of a network, the more secure and certain its future will be.

If the mainstream spirit of modern law is "unless proven guilty, innocent", then the guiding spirit of blockchain development should be "unless proven not to be decentralized, it is decentralized".

As long as the network distribution can be adequately maintained, it can serve as the foundation for a large decentralized ecosystem of stakeholders and contributors who rely on a secure and reliable blockchain. The next challenge is to understand the relationships and incentives of these different stakeholders and determine how they can best work together to gradually improve this ecosystem without a central decision maker.

Early opposition to Bitcoin focused on the question of whether a deflationary currency without sovereign backing could ever be a proper currency. However, this skepticism is misplaced. It is not the most immediate or even the biggest challenge facing Bitcoin and other cryptocurrencies.

The more important question experts should be asking is: Can Bitcoin or its successor succeed in achieving decentralization?

As a new phenomenon, the decentralized ecosystem of cryptocurrency raises new questions for stakeholders and independent thinkers. The challenges are undoubtedly great, but the potential rewards are equally great.