Are Cryptocurrencies Becoming More and More Centralized?

Are Cryptocurrencies Becoming More and More Centralized

Though they’ve been celebrated for being decentralized, recent events have brought this feature into question. Read on!

For years now, cryptocurrency has been synonymous with decentralization. That there is anonymity, transparency and no third-party monitoring by way of employing consensus mechanisms is advantageous. No doubt, transactions are becoming more seamless, eliminating the many layers that would otherwise be present in traditional financial institutions. Though blockchains exist in both forms—centralized and decentralized, the latter grew in popularity for its claim to forgo any governance or single entity rule. Essentially, decentralized blockchains claim to place power in the hands of the community. The reality, however, doesn’t seem aligned. 

Take, for instance, the case of ApeCoin, the native token of Bored Ape Yacht Club (BAYC). Launched recently in March 2022, the token has already raised eyebrows for airdropping free tokens to only BAYC and other Yacht Club members and reserving some for board members of Yuga Labs and the like. ApeCoin is not alone in doing so. Events like these widen the gap between the “rich” and the “poor” in the crypto world, creating a significant disparity. It begs the question: is crypto really decentralized? 

Here’s our take:

Unequal distribution of wealth

Founders, investors, advisors and employees often take the larger slice of the cake when it comes to crypto wealth distribution. Airdrops and bounties are also a popular way to distribute tokens, but these often go to those who are already familiar with the project or have large followings, as was the case with ApeCoin. This, in turn, creates an unequal playing field from the get-go.

The problem persists with Bitcoin mining, too, with significant computational power resting with a select few. For instance, in 2014, it was found that over 50 percent of Bitcoin’s hash rate was controlled by a single mining pool. The CEO of Bitcoin mining company Genesis Mining, Marco Streng, admitted during a 2019 conference that this is a serious problem. He expounded, “In my opinion, there’s too [little] priority from the community put on that. But it’s also not a very easy thing to solve because there is this innate advantage that the large players have.”

Controlled by the rich and powerful few

In 2020, Ethereum faced an outage owing to its infrastructure provider, Infura—a centralized entity determining the platform’s performance. Transactions were halted and users couldn’t access many apps. In fixing one bug in a client, the core developers disrupted many decentralized applications (dApps) on Ethereum. Following this, many users raised questions about the hush-hush way in which the process was undertaken. Some even questioned the decentralization principle of the blockchain. When it comes to Web 3, too, power rests with private, centralized companies that run the platforms. Consequently, these firms often have a large stake in how the network will evolve.

In the case of the blockchain-based operating system TRON, some Super Representatives (users who validate blocks) have more voting power than others. This defeats the purpose of decentralization, where everyone is equal.

In addition to that, there’s the case of crypto whales, which are entities that hold large sums of cryptocurrencies. These can be exchanges, investment funds and even individual investors. These whales often have the power to manipulate prices by buying or selling in large amounts.

To put it simply, those with more money appear to have more power in the crypto world, which goes against the decentralization theory.

It’s evident that cryptocurrencies have a long way to go before they can lay claim to being truly decentralized. To solve this problem, cryptocurrencies will have to come up with creative solutions. For instance, platforms like BetterHash are helping average miners access crypto successfully. In an ecosystem crowded with rich miners, those with a limited cash flow don’t stand a chance. That’s why it’s important for platforms to provide a more affordable alternative to miners and level the playing field. Along with that, education is key. The more people know about how crypto works, the better equipped they’ll be to take part in it.

By working towards greater decentralization, we can make sure that power is evenly distributed among all users. This way, everyone can have a say in how the network develops and grows.

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