What is centralization and is it really so bad?
There’s this episode from one of my old favorite TV series, The IT Crowd (if you haven’t seen it, seriously, add it to your list on Netflix asap), where the main characters, working in the dark and dingy basement of a dysfunctional corporation’s highrise in downtown London, attempt to rid themselves of their newly appointed boss. Their plot is to embarrass the incompetently ignorant new IT manager by encouraging her to introduce a simple black box to her colleagues at her first speaking presentation. This simple black box, they tell her, is… THE INTERNET.
As the main characters snicker and guffaw at the back row of the presentation, they are dismayed to realize that not a single colleague in attendance joins in the laughter, instead awed by the presence of this one centrally important device that is supposedly the hub of all things online (it’s wireless, of course!). When the box is accidentally destroyed, the crowd erupts in panic and chaos, fleeing the scene aghast at the far-reaching implications of a world that has suddenly, tragically, lost the internet.
And if the internet were simply a single, black, wireless box, it would be pretty devastating for that one box to be destroyed. Surely, even just a second box that acted as a backup would be far safer. This, in a nutshell, is the problem of centralization.
And the second box is the beginning of decentralization. In reality, of course, there are many thousands of hubs all over the world, interconnecting users everywhere so as to not depend on any single vulnerable node. This is what makes the internet so powerful and so culturally and historically transformative. Without decentralization, the internet is nothing more than a joke on a sitcom.
This problem of centralization is of great importance when it comes to our current financial system of fiat currency. It is highly centralized, with very few individuals controlling it almost in its entirety. If just a few of these entities experience some sort of crisis, our whole financial system is vulnerable to extremely serious problems. This can and does happen from time to time, as can be witnessed in places like Colombia and Turkey, where centrally controlled currencies have collapsed and are now virtually worthless, resulting in widespread problems from extreme unemployment to food shortages to health care crises, all dependent on failing central hubs that were centrally operated by incompetent leaders and coincidingly vulnerable to negative influence by outside meddling forces.
This is the unique selling point of many cryptocurrencies, but even cryptocurrencies are not all equally decentralized. In fact, there are many elements of various cryptocurrencies that are not at all decentralized, which often leads to passionate arguments and disagreements between different camps of the crypto realm. Some currencies are decentralized in only one or two ways while being centralized in other ways, thus negating some of the strengths of true decentralization. Let’s take a look at a few examples of different kinds of centralization.
Bitcoin itself spawned from the basic premise that if mathematics were used instead of trusting the good will of any individual or group of individuals, one could create a form of money that is not at the mercy of the whims of any party. No trust is then necessary; only mathematical verification. Thus, Bitcoin decentralized the production of money; rather than being printed in a mint, miners anywhere could participate in its production and therefore exert control over ownership on an individual, free basis without the need to trust a bank or central authority.
Of course, even Bitcoin still is, in some ways, centralized. The reality is, Bitcoin is no longer mined by the average computer enthusiast. It is mined predominantly by relatively few powerful ASIC mining operators and pools. Having said that, it is still much more decentralized than any traditional fiat money.
Governance — those in charge of making decisions about a given currency — can also be centralized. In the case of Bitcoin, a large and diverse pool of developers around the world contribute to the currency’s software, ensuring it is secure, optimising it, proposing changes, and maintaining it. Ultimately, however, miners choose whether significant development changes take place via the act of mining. In the case of SegWit2X, for example, the proposal failed while some miners chose to mine the bigger block Bitcoin alternative, Bitcoin Cash. This alternative is arguably much more centralized due to the predominant influence of Bitmain, Jihan Wu, and other major figures in the BCH camp, along with the fact that it is mostly mined by a much smaller concentration of powerful mining farms.
Over the course of time, this may change, but as it stands now, Bitmain also holds a great deal of Bitcoin Cash. This is another kind of centralization — centralization of ownership. If only a few entities own the vast majority of a given currency, it places undue influential power in the hands of the few. Say for example, Bitmain decided to sell off 25% of its BCH holdings, for whatever reason. The value of the currency would plunge into the depths immediately. This can also be said, to some extent, about Bitcoin, many of whose private keys are also concentrated in very large quantities in just a few digital wallets.
XRP has been a big winner in the markets lately. It’s an example of a currency that was never mined, so from the start was completely centralized and began its existence being exclusively owned by the founders of Ripple. Spreading out to some extent since then, now about 60% of XRP is owned by Ripple while a few important founders like Jed McCaleb also own billions of dollars worth of XRP. This currency is also centralized in terms of governance — no democratic system of development here — it is centrally controlled in this sense, as well. So XRP is an example of a currency that was centrally produced, centrally owned, and centrally governed, at least to a very large extent. XRP proponents will point out that the actual transaction of XRP is becoming more decentralized, but it bears mentioning that this is only one attribute that should be considered when looking at the issue of centralization. It is likely that ownership and transactional consensus of XRP will continue to gradually become less centralized, but as it stands right now, XRP is still very centralized in a number of ways.
So, in reality, we’re looking at a spectrum here. People tend to pick a single attribute to tout how decentralized a given currency is or to criticize its lack thereof, but in reality, one should consider many; production, governance, ownership, and consensus of transactions, to name a few. And no single project can be completely decentralized in that there will always be elements that are controlled, at least to some extent, by relatively few people.
When it comes to the effort to achieve true decentralization — or the closest thing to it — a few projects stand out. The trouble is, because these projects are so decentralised, they do not have big shiny corporations, highly public and popular advocates, or massive advertising agencies to promote them. Some clear examples of currencies that push the envelope of decentralization are projects like DigiByte, Vertcoin, Komodo, and Ravencoin, but there are many, many others (share about your favorite decentralized currency in the comments!). These projects often tend to be lower profile, with relatively small budgets (or no budget whatsoever other than donations to foundations, since a large concentrated budget in the hands of a few administrators would be a form of centralization), and with most development work performed by volunteers and enthusiasts, so they tend not to get the same attention as market forces the likes of Tron or XRP.
And it is this push to continually move toward decentralisation that will transform the global financial paradigm. The same kind of transformative power that once enabled the Internet to change the way information is produced and distributed can now be extended to how the world interacts with money. Hopefully, we can enjoy a future where, like the Internet, money is not at the mercy of a few powerful elites, but is instead free from central controls and vulnerabilities.
And seriously, if you haven’t seen The IT Crowd, set aside some time for a binge viewing next weekend.