Are Cryptocurrencies Decentralized?

Dominik Olech
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Who owns the crypto? The answer to this question seems to be simple. Cryptocurrencies are decentralized, so there is no strictly defined owner of such digital assets. However, the situation is much more complicated if we dig deeper into details.

In one of the latest articles on our website, I stated that the year 2019 in crypto belongs to national authorities. Many governments and private companies have been working recently on their own stablecoins, to jump on the blockchain bandwagon. The involvement of third parties may seem to be a threat to the idea of Satoshi Nakamoto. But could Bitcoin indeed be free from any centralized institutions?

New players

After the announcement of Libra, many voices have criticized upcoming Facebook coin for its centralized character. There may also be concerns about attempts by governments to develop their own digital currency (e.g. DCEP based on Chinese yuan). Why are those new approaches toward the cryptocurrency industry worrying community so much?

The newly announced stablecoins will differ significantly from any previous attempts to develop a cryptocurrency pegged to stable assets. Projects like Tether, although strongly connected to fiat currencies, are following the idea of decentralized money proposed by Satoshi Nakamoto. However, projects like Libra or DCEP will be subject to a centralized system. It means that the character of the currency will largely depend on the decisions of its developers.

Moreover, governments and companies responsible for the development of such coins are influential entities in the worldwide economy. Social Media giant like Facebook, or the leading economies like China, have the resources to launch their stablecoins successfully and become considerable rivals to other cryptocurrencies. In such a situation, concerns about the state of the market seem to be justified. However, the cryptocurrency industry might already be more centralized than we think.

Decentralized dream

We have presented the concept of Bitcoin many times before on BlockChain24.co. The creator of the first cryptocurrency, as same as its initial supporters, believes in the idea of genuinely decentralized money, free from any governmental interference. It was the result of many years of work and discussions carried out by the movement of cypherpunks. This rather unorganized group was devoted to promoting cryptographic technology as a way of life that protects against invigilation.

The high peak of cypherpunks activity falls in the late ’90s. They were mostly communicating through, now archaic, mailing lists. Apart from discussing how to ensure citizens’ privacy, the movement also took up the topic of private money. One of the cypherpunks, Hal Finney, kept working on a reusable blockchain solution, which could be used for anonymous transactions (you may read about his efforts in our Throwback Stories series). The movement eventually faded away, but many supporters of its idea became a natural target for the Bitcoin. The first cryptocurrency appeared to match their dreams of using cryptography to provide a private financial environment.

The backstory of Bitcoin (and cryptocurrencies at all) helps to answer the question of crypto decentralization because it gives a much-needed context. Crypto was designed as virtual currency, free from the influence of any third parties. Money that is 100% yours. And at first glance, it is. You have your coins on your wallet with private keys, which only you have access to. So, everything seems to work just as Satoshi said.

Part of the system

However, if we dig deeper into the details, things are getting complicated. The Bitcoin situation is quite different if we look at it from a broader perspective as a part of a more comprehensive economic system. Is it truly so independent? At first, let’s think about the way of acquiring crypto assets. Most of us are buying them through exchanges, which are somewhat centralized third parties, similar to banks which Satoshi was so afraid of. And even if we take it as a necessary measure to avoid state interference – remember that we are getting our bitcoins in exchange for national fiat currency. 

Okay, but what about mining? Acquiring crypto directly through proof of work appears to be completely free from any governmental influence. Yet still, we have one problem: where the electricity used for mining comes from? In most cases, it comes from national power plants. Examples of using private energy sources (like wind turbines) in mining are still merely a curiosity.

When it comes to using crypto as an actual means of payment, we rely on the state. Apart from the availability of such an option, to pay with Bitcoin, you usually need to pass KYC verification at some point. This procedure isn’t an invention of entrepreneurs obliged to use it, but the top-down state initiative. And when we finally manage to use crypto for buying something, in most countries, we also pay a value-added tax (VAT). And last but not least, we need access to the Internet even to use the blockchain network. In that matter, we also rely on third party internet providers.

Need for balance

We could spend more time pointing out other touchpoints, where the cryptocurrencies are attached to existing systems, but the outcome would be the same. The modern economy is a network of intertwining connections, and digital assets became an inseparable part of it. Cryptocurrencies already rely to a large extent on third parties. The introduction of stablecoins provided by centralized entities won’t change the situation.

The only way for cryptocurrencies to become completely independent from governments, banks and other common enemies of many Bitcoin enthusiasts, is some kind of anarchistic state where those institutions simply don’t exist. And good luck with buying your Lambo in such a situation. 

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