This is our weekly blog about what bitcoin really is.
Part 1 explained what problems bitcoin solves, if you have not read it you can read it here.
In Part 2 we talked about how it manages to be a great censorship resistant payment network, you can read about it here.
In Part 3, we talked about how it manages to be a great store of value, you can read about that here.
Today we will be talking about Bitcoin’s decentralization and what it means for a cryptocurrency to be decentralized.
If you have been in the cryptocurrency space a while, you probably have heard the word “decentralization” many times
A cryptocurrency can not only be completely centralized or completely decentralized; it exists on a spectrum. cryptocurrencies can have various ranges of decentralization; some can be more or less centralized than others.
There are a few good reasons to have a decentralized currency; the biggest reason for a digital currency to be decentralized is to provide immutability and censorship resistance. The more centralized a digital currency is, the easier it is for one party to control it.
To be fully decentralized a cryptocurrency must not only have a decentralized protocol, but it must also not have a leader or a leading party. In a cryptocurrency the creators of the currency usually have a leadership position, whether they desire it or not, they a lot of say over the direction of the currency. The creators can not affect the transactions themselves, but they may be able to change the cryptocurrency protocol by influencing the other stakeholders to go a certain direction. In Bitcoin the original creator, Satoshi Nakamoto, has left. The leave of the creator helped Bitcoin become more decentralized, as we speak there is nobody in Bitcoin that can change the protocol without convincing all the stakeholders that the change should be done.
If there is a party that has a lot of say over a certain cryptocurrency, they would have the ability to change it, by changing the protocol; they also could censor transactions, delete old transactions, or even create more coins for themselves out of thin air. For this reason it is important for a currency to be as decentralized as possible. This decentralization does not happen only at the protocol level, but it happens at the leadership level on top of it too. In a perfectly decentralized cryptocurrency no single party can ever gain enough control to censor a transaction, delete an old transaction or create more money.
Bitcoin is the most decentralized cryptocurrency in existence. It was designed to be as decentralized as possible. In Bitcoin the stakeholders all have a say, and the direction of bitcoin can only be changed only if all stakeholders are in agreement.
Bitcoin works based on what is called a Nakamoto Consensus, which was used for the first time in Bitcoin. This particular consensus mechanism allows all the users using the protocol to agree on what transactions are valid Bitcoin transactions and which ones are not.
The Nakatomoto consensus is useful to determine what transactions are valid, but this only makes sense where there is no party in charge of the protocol. If the protocol can be changed by one party without strong opposition, there is no point in using the Nakamoto Consensus.
People will claim that some cryptocurrencies other than Bitcoin are decentralized because they use the Nakamoto Consensus. That allows them to be more centralized than a bank, but most can only be decentralized to a certain degree, because if there is a party that has enough control to change the protocol they can just override the decisions at the protocol level.