Home Latest Feeds Technology News Is the Bitcoin network really decentralized, or is it just what we think?

Is the Bitcoin network really decentralized, or is it just what we think?

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Is the Bitcoin network really decentralized, or is it just what we think?

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Bitcoin does not need to be introduced to anyone: the world’s number one cryptocurrency has been playing a decisive role in the financial and tech sector for 15 years, and – although it is often buried – it seems very likely that it will remain with us in the future, just like the Bitcoin network behind it.

The main value of Bitcoin is its decentralized nature. It is based on the blockchain, which is a huge network of computers scattered all over the world, which ensures that no single entity has complete control over the currency traded on the chain or the transaction data. This also reduces the risk of censorship and manipulation.

Advantages of decentralization

The decentralization of the Bitcoin network plays a key role in the cost-effective execution of transactions. In contrast to the centralized institutional system of traditional financial systems, with Bitcoin, the blockchain connects users, who transact directly in this way. There is no need for intermediaries, which results in a reduction in transaction fees and processing time.

Thanks to decentralization, anyone can join the system and the data is accessible to everyone, the system is transparent. Specifically, this means that the cryptocurrency balance and transaction history for each wallet is available in a completely public ledger.

Bitcoin mining

Running the network, validating transactions and creating new bitcoins a mining takes place during Miners compete with each other to solve complex mathematical operations with the help of high-performance computers. This process is energy-intensive and requires significant computing resources. Miners aim to find a specific hash value that matches the network’s criteria. A hash is one of the most important elements of blockchain technology – the result of a hash function, which is a cryptographic operation that generates unique and unrepeatable identifiers from given information.

The hash rate plays an important role in assessing the operation, security and decentralization of the Bitcoin network. The indicator indicates the computing power used for bitcoin mining and securing the blockchain – it shows the speed at which miners perform calculations. The higher the hash rate, the more secure the network becomes against potential attacks. This process maintains the integrity of the network and prevents a single entity from gaining unauthorized control of the Bitcoin ecosystem.

If a miner successfully solves the task, he can add a new block to the chain, which is rewarded with new bitcoins. Anyone with the necessary hardware and software can become a miner and join the network. This shared participation ensures that no single organization or group can gain a majority, preventing centralized control over the network. Or not?

51 percent attack

A 51 percent attack is a form of incident against blockchains. It can be launched by a group of miners that can control more than 50 percent of the network’s mining hash rate. Owning 51 percent of the network theoretically puts the power in the hands of controlling parties to change the blockchain.

Attackers would be able to prevent new transactions from being confirmed, thus stopping payments between some or all users. They would also be able to reverse transactions that were carried out under their control. Reversing transactions would allow them to double spend, which is one of the problems that consensus mechanisms like Proof-of-Work (PoW) were created to prevent.

Mining pools

A mining pool refers to a group of cryptocurrency miners who connect their mining machines through a network in order to increase their chances of being rewarded for creating new blocks. Since it can take years to become profitable after purchasing, operating, cooling, and maintaining suitable mining rigs, joining a mining pool is the most cost-effective way to earn bitcoin rewards.

A high hash rate means that a lot of computing resources are involved in confirming transactions and maintaining the blockchain, making it more difficult to manipulate the network. However, the problem starts when the high hash rate becomes too concentrated. If a single or a few large mining pools own a significant portion of the network’s hash rate, this can lead to centralization problems.

Part of Bitcoin’s founding principle is decentralization, meaning that the network is not controlled by a single entity or group. If the hashrate becomes too concentrated, it threatens the decentralized nature of the network.

THE An extra As of January 12, 2024, the following bitcoin mining pools dominate the market:

  • China’s AntPool, 29.41 percent of the total network hash rate;
  • the American Foundry USA, 26.14 percent of the total network hash rate;
  • and F2Pool, also from China, cover 11.76 percent of the total network hash rate.

Years ago, the concentration of the market due to the formation of bitcoin mining pools received a lot of attention among bitcoin supporters, which caused serious controversy. Today – although some groups still express concerns – these fears have largely faded into background noise. However, in recent weeks, the debate on the issue has rekindled. Mining concentration in 2024 reflects the situation in 2013, when mining pools Ghash and BTC Guild held 55 percent of the network’s total hash rate.

A notable incident in March 2013 led to the majority hashrate being used to roll back the Bitcoin software to an earlier version. The BTC Guild, which controlled 20-30 percent of the hash rate, worked with the developers to restore the software. This action caused considerable controversy in the crypto community. Even Ethereum co-founder Vitalik Buterin wrote about the incident, highlighting that “the incident raises serious questions about the nature of the Bitcoin protocol and shines a spotlight on some uncomfortable questions about Bitcoin’s decentralized nature.”

However, this was not the case in 2016, when the two leading pools (Antpool and F2pool) only had 32.25 percent of the hash rate. Likewise, this level of concentration was not observed in 2017, 2018 and 2019.

However, the weight of bitcoin mining pools started to increase again in 2020, 2021 and 2022. In June 2022, Foundry USA and Antpool together controlled more than 38.47 percent of the total hash rate. As Statista’s latest data shows, today Antpool and Foundry together dominate 55.55 percent of the market among more than 40 pools.

The Challenges of Bitcoin ETFs

The fact that the distribution of bitcoin spot ETFs was allowed in the capital markets of the United States, can bring significant changes to the bitcoin market. Through ETFs, market players belonging to the world’s largest financial institutions entered the market, such as BlackRock or Fidelity. The question may arise as to how these large institutions will influence the decentralization of Bitcoin with the enormous capital at their disposal.

Spot bitcoin ETFs trade on traditional exchanges, are more accessible and easier to manage for investors used to traditional instruments. They open up the opportunity to the crypto market to a wider audience without people directly owning bitcoins.

However, there are also concerns about spot bitcoin ETFs. One of them is that they threaten the decentralization of bitcoin – large institutions can own a significant amount. In addition, spot bitcoin ETFs also charge fees and incur operating costs that reduce the net return on investments.

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