13 Feb 201917:57
Most Cryptocurrencies are actually Centralized; 3 coins leads the way.The blockchain and cryptocurrency industry rides on the surfboards of decentralization as much as that of its cryptographic security. However, by the end of 2017, the world had a different view on the ‘decentralized’ nature of projects in this space as XRP gained the media spotlight due to Ripple Inc.’s massive ownership (60%) of the total supply of the token.
This raised the question of whether the blockchains and the associated cryptocurrencies are decentralized. A research carried out by Cryptocompare on over 100 cryptocurrencies across the field showed that only 18% of the projects were truly decentralized.
Centralized vs Decentralized systemsMore critics doubt the actual use of blockchains in today’s global economy in providing decentralization to various sectors of the economy. In this article, we focus on the features that make blockchains centralized and the top five most centralized cryptocurrencies in the industry today.
Reasons leading to a centralized cryptocurrencyThis section explains the degree of centralization of existing cryptocurrencies and the reasons leading to it.
A. Mining CentralizationOne of the most common ways cryptocurrencies are centralized arises from the mining constraints faced by the user base.
Despite the ability for any participant to validate the blocks, your channel may not be able to download the created blocks fast enough. This causes the available nodes on any blockchain to be centralized to those who can afford the expensive mining rigs and equipment.
This is a clear barrier to total decentralization of the blockchain.
Proof of Stake mechanisms also have centralization problems as the cost of maintaining a node is unprofitable. This leads to users to delegate their hash power to selected nodes.
B. Governance (Development) Centralization:The governance of most blockchain is left to the community as “no-one actually controls” blockchains. However, the development of these protocols is dependent on a few core developers as they are able to accept the code changes or understand the development protocols on the blockchain.
The development structure also ignores some opinions from external parties on the blockchain which may end up being useful.
Furthermore, the industry is currently filled with stans of “blockchain celebrities,” such as Vitalik Buterin (ETH) and Justin Sun (Tron), who easily lead change on platforms once they push an agenda. This limits the decentralization and independence of the platforms as well.
C. Centralization of Blockchain ServicesGiven the work-intensive nature of processing a block, most users prefer a trusted centralized institution to carry out the process. Block explorers are centralized between two or three trusted services such as Myetherwallet.com and blockchain.info.
The problem arises if any of these centralized services were to be hacked or compromised. The users will go on their businesses without a clue of the happening as they represent the truth to the investors.
Top cryptocurrencies that are Centralized in 2019The three reasons stated above are the most common among most centralized coins and digital assets. We list below the 5 biggest cryptocurrencies that exhibit centralization and how each is working (or not) on becoming more decentralized.
1. XRPThe king of centralized cryptocurrencies.
Ripple Inc. owns 60% of the total XRP supply. There is no better example across the big cap cryptocurrencies that shows centralized properties than XRP. As mentioned before, Ripple Inc., XRP’s custodian, holds 60% of the pre-mined coins. Furthermore, Ripple Labs, controls a large share of the development on the XRP protocol given the huge interest the company has in XRP.
While decentralization may be a key factor in most crypto projects, XRP is controlled by the Ripple Inc. team. The team has scheduled periods in the future to release the pre-mined assets to investors in a bid to reduce their holdings and raise capital.
2. NEOThe sept of centralized nodes.
While XRP’s centralization arises from developmental issues, NEO’s centralization problem is hugely influenced by governance procedures.
The blockchain is known as the Ethereum of China has grown in ranks since inception, and currently places as number 16 on CoinMarketCap.
NEO is governed by seven fixed nodes that are chosen by the NEO Foundation and, in case one node fails, then the blockchain fails as well. Current efforts by the team to push for decentralization have born fruit as two nodes have been left to the community to run. The Foundation is working towards having a completely decentralized platform by the end of the year.
The NEO Global Development team released a guideline on “How to Become a NEO Consensus Node” to increase awareness of decentralization on the NEO platform.
3. EOSOnly 21 block producing nodes on the platform.
EOS blockchain suffers the same problem as NEO since it too has a limited number of selected nodes that control the system.
“EOS runs on only 21 nodes that check and validate new transactions. Every 126 blocks, 21 new nodes get elected by the stakeholders, which means every round an elected node ‘mines’ 6 new blocks. Blocks get produced every 0.5s, which makes 1 round last ~63s.”
However, the system remains centralized as these 21 nodes are usually voted in through and through, increasing their power and position in the system.
Despite Satoshi having a vision of a decentralized and public network on blockchains, centralization has taken root in most major projects. This has caused a rumble in various communities with some supporting the motive and others criticizing it.
There are, however, some benefits to having a centralized community running the development, governance and services provided on the blockchain, but we’ll leave that topic for a future article.