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Bitcoin Market, An Apology for Blockchain
What is blockchain and bitcoin?

Blockchain is defined as an “open distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. Blockchains are secure by design because of distributed computing system through which consensus is obtained.

Bitcoin is a currency based on blockchain and is espoused to have all the properties of blockchain and is supposed to be decentralized.

Users in bitcoin vote using their computing power to prevent double spending attacks, so it effectively limits the power of individual users while making Sybil attacks. The assumption is that no user will likely attain the huge computing power required to overpower the system. The overall assumption that everyone is making with respect to bitcoin is that it is decentralized, and its operations are based on the principles of blockchain.


Is blockchain truly decentralized?

When you scratch below the surface, it transpires that various operations that are being conducted in bitcoin does not make it decentralized as it claims to be. The various facets that we will be looking at are the limited set of entities who control decision making, mining and incident resolution in bitcoin and how having bitcoin exchanges introduces components of centralization again.


Concentration of power in bitcoin mining

Bitcoin tackles the problem of double spending attacks by relying on a distributed proof of work mechanism. The assumption here is that most of the computing power in the network will be honest. Mining in Bitcoin is rewarded by Bitcoin generation which has led to emergence of several mining pools. A rough estimate of hashrate distribution shows that from July 2013 to December 2017 the computing power held by 6 centralized mining pools has increased from 75%1 to 78.4% (estimate) 2. If these pools were to effectively coordinate to acquire more than 51% of the share of the computing power in the system, an effective control of confirmation of all transactions occurring in the system can be controlled by them. The control exerted will include approving and disapproving certain set of transactions.


Wallets are the only easy interface for non-geeks and that’s a failure point

Users currently rely on centralized services called web wallets as the bitcoin client installation takes a lot of huge disk space. Also, managing bitcoins without wallet is a full-time job as one needs to keep abreast of latest developments on Reddit. A non-technical lay person cannot be expected to manage it. Hence, lay users prefer to use web wallets. A web wallet is an online wallet, hosted on a remote server accessible on a website. Some web wallets store the private keys on the server side, while some store it locally in the browser of the user. This practical problem of managing bitcoins create centralization and failure points immediately touching day to day operations of bitcoin. They negate the salient feature of decentralization.


Behavior of web wallets at critical juncture is not in line with spirit of decentralized ledger

Web wallets can gain unilateral control over the bitcoins owned by its users. In April 2013, when theft of bitcoins occurred in the mining pool of Oz Coin and some of it was transferred to web wallet of Strong Coin, it was intercepted and transferred back. The decision by Strong Coin was taken without consensus from majority of users in the network.


Behavior of miners at critical juncture is not in line with spirit of decentralized ledger

During bitcoin operations miners extend the longest blockchain in the network, when there is difference of opinion, miners work on different blockchains which leads to forks in a blockchain. In March 2013, there was a conflict in version of chains being adopted by miners, the longest chain was the chain adopted by version 0.8 clients. But, nevertheless bitcoin developers after 90 minutes of the fork occurring forced the smallest chain to be recognized as the genuine one by convincing owner of the biggest mining pool Eleuthria to support the decision. Thereby, less than 10 entities took a decision to outvote majority of the computing power in the network.


Bitcoins trading happens on “exchanges”, a group of centralized entities by definition

None the major bitcoin exchanges are based on the decentralizing principles of blockchain. The very fact that trust scores are being assigned to these exchanges proves the point of bitcoin exchanges not espousing the trustless system of blockchain. This defeats the very purpose of bitcoin being an application of blockchain.


Margin calls on Trustless System – you must be joking or….. not…

Having futures on bitcoins on a centralized system with margin calls is anathema to the true spirit of trustless system and is diametrically opposite to the revolution blockchain was expected to bring out in the world.


Other “minor” issues

The cost of confirmation of bitcoin is skyrocketing and the confirmation is almost never instantaneous.


Conclusions

The spirit of distributed ledger and the revolution of trustless system that blockchain was supposed to bring about has been trampled in the wild party of speculation running around true innovation.

We have seen since the time of the French Revolution that the first iteration of a true society wide innovation gets destroyed by the very people trying to usher in that revolution. We are seeing the replay of that movie again.

Also, we should keep in mind that first application of a revolutionary technology determines the public mood, and policy stance toward the technology for generations to come. The first application of nuclear fission was inhumane wanton destruction and that has handicapped that technology from becoming mainstream even now after three generations. We pray that the aftermath of bitcoin bubble does not leave that long lasting impression with public memory and we can get on with real business of applying blockchain to solve real problems of society pretty soon.


1 https://eprint.iacr.org/2013/829.pdf
2 https://blockchain.info/pools?timespan=4days




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