Is Centralization in the Bitcoin Ecosystem Inevitable?

[JayCoDon]

To start off, I understand that the blockchain is, by its very nature, decentralized. So I'm not talking about the core software that is bitcoin. I wanted to that out of the way.

In the latest issue of my newsletter, I started to think about something that I had noticed occurring in the bitcoin ecosystem that reminds me of other events that have taken place in the past. And it left me with a question: is centralization inevitable?

Why do we have so many big banks? Why is Coinbase growing larger and larger? Why is the mining pool getting more centralized? Why did 70% of the total number of bitcoin wind up being held at MtGox?

For a technology that is so great and so decentralized, there are so many people that naturally start moving toward a centralized service provider. Is this just because humanity likes to be centralized with someone else to make the tough decisions? Or is there some other reason that even with a technology that is supposed to be decentralized, things are becoming centralized? I'd love to hear your thoughts.

[Snail2]

Until the core network is decentralized a few quasi monopolies in certain service areas are doesn't really means centralization.

[sana54210]

It will go against the primary principal of Bitcoin, which is decentralization, any big companies, monopolies and government can't make the system centralized, Bitcoin will forever remain decentralized and true to the vision of Satoshi.

[JayCoDon]

Bitcoin itself can't be centralized, I agree. But the services on top of it very easily can. We can see it with the largest wallet providers growing even bigger. We can see it with mining becoming centralized. While the ledger will always remain decentralized, I can't help but see human nature wanting other things to centralize. And I wonder why that is...

[Snail2]

Bitcoin itself can't be centralized, I agree. But the services on top of it very easily can. We can see it with the largest wallet providers growing even bigger. We can see it with mining becoming centralized. While the ledger will always remain decentralized, I can't help but see human nature wanting other things to centralize. And I wonder why that is...

Anyone can make a competing service, so a big company isn't really an issue. They can ask you politely to use their services, but they can't force you. Mining also isn't really centralized, there are several farms everywhere across the world and they can point their hashes wherever and whenever they want. If a pool getting annoying they can switch to an other pool in matter of minutes or they can make their own pool.

[Amph]

Bitcoin itself can't be centralized, I agree. But the services on top of it very easily can. We can see it with the largest wallet providers growing even bigger. We can see it with mining becoming centralized. While the ledger will always remain decentralized, I can't help but see human nature wanting other things to centralize. And I wonder why that is...

this is true, and it is the reason for why we need a decentralized exchange(there were some attempts in the past but they didn't work well, because of escrow issues) too besides a decentralized market

[Lauda]

this is true, and it is the reason for why we need a decentralized exchange(there were some attempts in the past but they didn't work well, because of escrow issues) too besides a decentralized market

I don't think that it's possible (yet). I'm not sure how someone is going to make one that is legal and decentralized. That's the part of Bitcoin that has to interact with the financial system of each state.

Bitcoin itself can't be centralized, I agree. But the services on top of it very easily can. We can see it with the largest wallet providers growing even bigger. We can see it with mining becoming centralized. While the ledger will always remain decentralized, I can't help but see human nature wanting other things to centralize. And I wonder why that is...

Anyone can make a competing service, so a big company isn't really an issue. They can ask you politely to use their services, but they can't force you. Mining also isn't really centralized, there are several farms everywhere across the world and they can point their hashes wherever and whenever they want. If a pool getting annoying they can switch to an other pool in matter of minutes or they can make their own pool.

Mining is only centralized because of greed. Miners could opt for p2pools but they chose not to. I think if Bitcoin were to get centralized in any possible way it would start dying.
One of the main things that makes Bitcoin so great is the decentralization. People just can't force changes on anyone no matter what happens.
You're right though. Some services will get centralized but that doesn't matter. It's up to the people; they decide which one they want to use.

[DannyHamilton]

- snip -
I can't help but see human nature wanting other things to centralize. And I wonder why that is...

The three biggest reasons I can think of are:

Convenience: A very large portion of the human population are intrinsically lazy.  They have no interest or motivation to learn or do more than that the bare minimum to survive or accomplish a particular goal.  As such, they will tend to gravitate towards services that are presented as requiring minimal effort on their part to send, receive, or store their bitcoins.  No need to install or maintain software.  Less need to secure their computer.  No need to understand how bitcoin works.  Just open an account, and click the pretty buttons on the webpage.  The innovators and entrepreneurs that are willing to put forth the effort to create such services understand this lazy nature in others and create centralized services to profit off it.

Fear:  People fear that they don't understand how to properly secure their bitcoins. They fear that they will get hacked, or that they will fail to properly back up their data, or that they will forget their password.  They are willing to turn over control to a centralized service because the centralized service has convinced them that it is better capable of protecting them against these potential losses.

Reduced volatility: The nature of the design of Bitcoin is that each block contains the entire reward (subsidy plus fees) for solving the block.  With lower hash power available, the probability of solving a block on your own is reduced.  The miner has to choose between receiving the entire reward very infrequently and unpredictably (solo mining), or receiving a small share of the reward with every block (pooled mining).  When the miner's hash power is low enough that the probability of solving a block solo mining drops below an average of once every 2 weeks, they then have to take into consideration the fact that the difficulty could increase before they ever solve a block.

[OrientA]

Mining will be centralized. The bitcoin itself will not. As time goes on, the newly mined coin as a percentage of total coin will reduce.

[R2D221]

Mining centralization was expected by Satoshi. He envisioned that only large server farms would do the mining when Bitcoin was widespread.

[acquafredda]

- snip -
I can't help but see human nature wanting other things to centralize. And I wonder why that is...

The three biggest reasons I can think of are:

Convenience: A very large portion of the human population are intrinsically lazy.  They have no interest or motivation to learn or do more than that the bare minimum to survive or accomplish a particular goal.  As such, they will tend to gravitate towards services that are presented as requiring minimal effort on their part to send, receive, or store their bitcoins.  No need to install or maintain software.  Less need to secure their computer.  No need to understand how bitcoin works.  Just open an account, and click the pretty buttons on the webpage.  The innovators and entrepreneurs that are willing to put forth the effort to create such services understand this lazy nature in others and create centralized services to profit off it.

Fear:  People fear that they don't understand how to properly secure their bitcoins. They fear that they will get hacked, or that they will fail to properly back up their data, or that they will forget their password.  They are willing to turn over control to a centralized service because the centralized service has convinced them that it is better capable of protecting them against these potential losses.

That's my view as well. And we are where we are because of people's lazyness. And we can't do much about that.
It's easier, for example, to have a smartphone than to be be smart yourself!

[RodeoX]

My bitcoins will be as centralized as I allow. I suspect that the future model for most BTC users will be a centralized system using traditional banking, shared private keys, etc. But that is not my future. With bitcoin I have the choice to hold my own keys, run my own node, be my own bank. I will continue to operate in the parallel bitcoin economy.  

[countryfree]

I have never used MtGox nor Coinbase. There are many other exchanges, and there are countries where Coinbase isn't even available... I don't see a centralization coming there, but it's definitely happening in mining. I guess this is due to the actual low price. If BTC goes back to $1,000 there will be new people investing again in mining.

[ticoti]

In my opinion computer systems can be decentralized because you can program them,but talking about people is really difficult to decentralize things.
for example bitcoin foundation,how could it be decentralized the programming of bitcoin? really difficult

[MicroGuy]

My bitcoins will be as centralized as I allow. I suspect that the future model for most BTC users will be a centralized system using traditional banking, shared private keys, etc. But that is not my future. With bitcoin I have the choice to hold my own keys, run my own node, be my own bank. I will continue to operate in the parallel bitcoin economy.  

This seems correct. Bitcoin gives consumers the choice of using a centralized service provider or to go it alone.

I also think when we look back at bitcoin in a few years, we'll see how it opened the door for other coins that will have already surpassed it in popularity. Competing blockchains will become instrumental in preserving digital currency's decentralization.

[johnyj]

Decentralization is a new concept just appeared during the latest decade, people have always been living in a centralized and hierarchical environment since thousands of years ago, even today most of the countries are managed in a centralized way. It takes time for them to adopt to new way of managing things

[Hydros]

I think it'll happen with anything and humans tend to, consciously or not, lean towards putting people in positions of power and making things centralized.

[Q7]

In part that is because of human nature to take control of things they deem will be able to secure their wealth or provide them with power, stature, you name it. The design and core principle of bitcoin was to lead us away from all that and no matter how well it has been thought of, there is still a way to slip pass through it. There are people who thought that pos will prevent that but to certain extent with human greed eventually it will mean everything will go back square one.

[ensurance982]

It's the human nature to follow a herd, just as some people like to do the very opposite just for the sake of doing so. Also, it seems to be obvious that some services (Coinbase, BitPay, various pools) are better than their competitors and thus attract more people/customers. They grow larger and can offer even more incentives to use their services.

[ChuckBuck]

I believe there is room for both decentralizatioin and centralization for the Bitcoin Ecosystem.

Certain aspects will remain decentralized, like obvious things.  Blockchain, the cryptocurrency itself, the end users transacting among each other.  Decentralized exchanges, decentralized marketplaces, etc..

There are also cases for Centralization with the regulated exchanges and payment processors.  Coinbase and Bitpay are two of the largest entities in the whole Bitcoin ecosystem and do their part in pushing Bitcoin forward, centralized or not.

Doesn't have to be one or another, there is more than enough space for both.