As someone who has traveled more than a reasonable amount, I am a firm believer the discovery of new cultures and places are an excellent way to open the mind. When presented with something that you can see, touch or sense in any other manner of perception, it does indeed force you to reconsider any predisposed opinions you may have had of a people or place. Whilst it can be a spiritual experience, it is also one based in the fact of your own discovery...fact being the operative word. It's a fabulous experience and one I thoroughly recommend to those in a position to do so.
Conversely, whilst the internet can also present opportunities to learn and dispel lies, it is also a dichotomy due to the wildfire nature of FUD and fake news often closing the mind. Often, it is left to truth seekers like snopes.com or wikileaks to offer insight into the real world circumstances behind an event, rumor or process. To be fair, I (like everyone I imagine) have probably forwarded/shared a viral phenomenon at some point which in hindsight, may or may not have been true. However I do try to actively ensure information with regards to my investments is well and truly researched and considered before making decisions with regards to my own buy in and/or disseminating information.
Pondering the above, I realised that given the FUD and supposed facts around XRP being a centralised currency offered an opportunity correct the FUD with an in depth analysis of the XRP ledger, comparisons with other cryptos and centralisation as a topic. Are you ready? Grab a coffee and a digestive biscuit or two before we begin...There is a lot to cover.
The Oxford English Dictionary describes centralisation as:
The concentration of control of an activity or organization under a single authority.
‘The centralisation of all financial power in the hands of its leaders’
‘Increasing centralisation of control over logistical planning’
In the context of cryptocurrencies and digital assets, it's a fair statement to say the application of that definition is against two aspects of the digital asset framework:
- Ownership of the coin(s) - who's hands control the majority of the asset volume.
- The transaction validation process and who "owns" said process.
I started this article by trying to address both of these issues but the subject is quite large so its worth splitting the subject down the line. I'm going to run this article purely from the perspective of validation with the idea that I will try to come back and reference ownership separately or perhaps in a "part two" article to this effect. With that consideration, lets start with...
When Bitcoin first hit the market back in 2009, it is probably accurate to say it represented at the time the ultimate in decentralisation (at least from the viewpoint of transactional validation and mining). As most people in the cryptospace already know, transactions on the Bitcoin network are validated through a process called mining. Computers solve complicated equations to validate a transaction and in return the operators of those computers are rewarded with Bitcoins. A thread on bitcointalk.org has forum members discussing mining in 2009 as an easy process with one member claiming to have mined two hundred Bitcoin in four days with a Pentium 4 processor.(1) Considering the original Pentium 4 chip was released nine years before that in 2000 and the final net-burst Pentium 4 chips in 2007(2), that would indicate an accessible method of mining (and therefore validating transactions) in the early days of Bitcoin for anyone who chose to do so with hardware that was for all intents and purposes at the best, average market rate domestic hardware and at the worst, bordering on obsolete by that time. In other words, you could validate transactions, mine coins for yourself using a good old home computer. Anyone could do it and this made the concept very decentralised.
Fast forward to 2017 and the Bitcoin network is faced with a very different set of circumstances. The Proof of Work algorithm used under the Bitcoin network by its nature demands more and more computational power to solve these complex equations as a necessity. Attempting to use regular home computing processing power is now a futile excercise and the rise of GPU and ASIC mining chips has proven this. But these are expensive. This drive towards faster and more powerful processors has over the last eight years pushed all the but the most powerful miners and mining pools to the bottom of the pile. Vast mining farms in warehouses now greedily consume more electricity than one hundred and fifty nine countries on the planet.(3) It is the ownership of these mining operations where power now lies in the Bitcoin network.
As of March 2017, four of the worlds five largest Bitcoin mining pools are based out of China collectively representing close to fifty percent of the mining power and therefore transactional validation of the entire Bitcoin network.(5) Dismissing the geopolitics of this statement for a moment, irrespective of whether that base of power is out of China, it could be interpreted that from its humble roots to where it is now, Bitcoin has not only forgone decentralisation, it is now heading in the other direction altogether, becoming operationally centralised. With the majority of power to approve transactions lying with so few entities and no choice by the user as to which miner or pool will approve their transaction. Putting the geopolitical aspect back in the equation once more, we discover that when other smaller mining pools are added to the total, over seventy percent of the worlds hashpower on the Bitcoin network is within the borders of China(5). This problem becomes apparent when you consider that whilst the bitcoin network has many thousands of nodes to relay messages around the network, the actual validation of a transaction takes place through mining and the hashpower associated with that is the important bit.
What good are ten thousand reachable nodes on a network if none of them have the power to say "yes, this is a valid transaction" and the actual power to approve the majority of transactions within a network lies with no more than four or five grouped entities under which the hashpower remains? How is this decentralised?
It is possible to drill this movement toward centralisation down even further to singular companies when you consider just how much of the process is owned within these entities. Using Bitmain as an example, the areas in grey highlight where Bitmain have large interests and profit generation, estimated at $3-$4billion in 2017. Thats as much as Nvidia made in the same year after twenty four years of operation, whilst Bitmain have been going for only three years: (6)
The above highlights a far more in depth problem that not many have considered. Not only is the Bitcoin network becoming more centralised, but the upwards supply chain of the hardware that the network is built on is following exactly the same route - also within China. Further revelations in source (6) shown Bitmain have moved prices of ASIC based mining hardware in correlation with the price of Bitcoin itself. If this is true as the article highlights that only goes to show a specific monopoly within the Bitcoin ecosystem. A price spike in Bitcoin would lead to further increases in hardware costs which would likely be reflected in network fees as is assumed to be the case in 2017. Monopolisation of the network by mining pools means users are at the mercy of the fees they propose. In the long run, these patterns are self perpetuating and can only lead to further centralisation as part of a vicious cycle.
We have definitely moved from potentially thousands or millions of John Does and their inexpensive Pentium 4's to a few Bitmains, Antpools et al with their expensive ASIC and GPU miners over a period which isnt even a decade in length. Conclusion? Validation and mining within the Bitcoin network has become more centralised over this period and will continue to do so over the next few years, likely culminating with mining pools which make up smaller percentages of the total network mining infrastructure today either growing and merging or being put out of business as a result of other pools doing so tomorrow.
Litecoin uses Proof of Work like Bitcoin does and as such follows similar principles regarding transaction validation, mining and network flow. However, its creator Charlie Lee recognised in 2011 before its creation many of the flaws in the Bitcoin Network and attempted to improve on them with a number of approaches. One approach in particular that attempted to put Litecoin at a significant advantage compared to Bitcoin in the long run with regards to centralisation. That is the algorithm on which is runs.
Part of the reason the computational requirements in Bitcoin advance so fast is the algorithm that powers the network is designed to get exponentially more difficult for hardware to process and solve. Without getting too technical regarding Bitcoins SHA-256 algorithm and its required hashrate, the main difference between that and the Scrypt algorithm which powers the Litecoin network, is the former favours processing power hence the requirement for ASIC based chips which are power hungry, whereas the latter utilises far more of its calculations conducted within the parameters of high speed computer memory (RAM) whilst still using CPU and GPU power simultaneously. It was also designed to be ASIC resistant however there is some debate over this last point and certainly today it is possible to use ASIC miners on the Litecoin network, even though GPU/CPU/RAM intensive mining seems to be more efficient and more purposeful in mining Litecoin in particular. (Still with me? Good... Get another coffee and biscuit.. we're still marching!)
The real world implications of this are two fold. Firstly, less electricity consumption is used when mining Litecoin. That on the surface sounds like it shouldn't have much of an impact on decentralisation, however when you consider it, on a global scale and given the volumes in the cryptospace, it most certainly does from a macro perspective. One of the main reasons China is such a hub for mining Bitcoin is the cost of electricity is very cheap. The national average cost being only 4 cents per KWh making it one of the cheapest places for electricity on the planet. At the polar opposite end of the scale, countries such as the Soloman Islands, Jamaica and The United Virgin Islands vary from 45 cents to 88 cents per KWh. Thats between eleven and twenty-two times the price of China. Think expensive electricity is limited far flung island countries? Nope. Germany is priced around 35 cents per KWh and in fact much of central and northern Europe is priced around 30 cents per KWh.(8)
The point I am making here is global decentralisation of a cryptocurrency validation system cannot really be considered that way if the input cost of both creating AND running that system varies wildly depending on its location and to the detriment of those who cannot afford to take part.
When you collate these costs in large mining pools, the discrepancies become larger and larger as the size of the mining pool increases and hardware requirements are multiplied. It should be noted that whilst Litecoin is not as power hungry as Bitcoin to mine, the costs are not inconsequential, it simply compares better as a result of the algorithm it employs even though large mining rigs would still consume large amounts of power.
The second implication of the Scrypt algorithm also fares better than Bitcoin from a long term perspective on decentralisation. This is the manner in which the "difficulty level" of the equations solved by the mining process are not exponentially increased like they are in the Bitcoin network. Rather the increasing difficulty is incremental making the process more open and accessible to all who partake in the mining process under the Litecoin network. From an objective perspective though, using the Pentium 4 example earlier, it would still likely be a futile exercise to attempt to mine Litecoin on a regular home computer today.
It is at this point however we encounter a bump in the road. Whilst on paper the specs behind Litecoin read for a fairer and more equal distribution of power within the network, in reality as it stands today, nearly sixty percent of the hashpower in the entire Litecoin network is held by three mining pools (data accurate as of 11/08/18):
Conclusion? whilst it would appear Litecoin has a better approach to validation purely from the perspective of decentralisation, The reality today is there is even less decentralisation in the Litecoin network from the perspective of validation than there was in Bitcoin last year. Today, they are approximately equal with three pools at over 50% ownership of hashrate among their respective networks. Its pretty apparent here that a pattern is forming with regards to both Proof of Work and miners in China... for two of the top pools in Litecoin also feature in the top pools in the Bitcoin network. How's that coffee by the way?
Younger than both Bitcoin and Litecoin with the concept announced around 2013 and launched in 2015, Ethereum took a different approach to the crypto market and positioned itself as a platform which provided users the ability to write smart contracts for various applications in the native language of its own custom built platform. Many dubbed it crypto 2.0 in its early days. At its heart though, transactions still represent the core of the networks purpose.
Whilst Ethereum is seeking to amend its consensus mechanism to Proof of Stake and has been seeking a path to this for over a year now, as of this moment, like Bitcoin it is currently still based on a Proof of Work algorithm. As such, many of the issues that apply to the Bitcoin and Litecoin Networks are similarly prevalent with the Ethereum Platform. Mining, transactional validation, mining pools and the growth of those pools are ever present in Ethereum with the division of hashrate in the platform looking like this as of today (11/08/18)
Whilst the percentages are not labeled as they are in Litecoin, its obvious that well over fifty percent of the hashpower is held by the top three pools. Whilst there does seem to be a wider spread of the mining activity of these pools outside of China, F2pool is almost exclusively a Chinese mining pool as is Ethfans with Ethermine also having servers based out of Beijing. It would be a safe bet to assume when you consider mining operations on Ethereum to be equally as demanding as Bitcoin with regards to electricity consumption that China would yet again be the dominant force in approving transactions within the Ethereum Platform.
Conclusion... Proof of Work has become (or is RAPIDLY becoming) completely reliant on electrical consumption costs. Unless drastic infrastructural changes take place with regards to electricity costs in countries where both hardware can be found/built cheaply as well as electrical costs mitigated, the dominance and centralisation of not just these three top coins but ANY Proof of Work based coins will continue to grow inside the borders of China. This ultimately represents centralised networking that completely defeat the purpose of the creation behind the cryptocurrency in question to begin with. Whilst I am no conspiracy theorist or would ever assume that China would simply "turn off the lights", the question does remain... how can these networks ever be considered decentralised if users have no choice who validate their transactions and the vast majority of which take place within the borders of one country, under the top end control of three to four entities and potentially at the whim of their discretion?
The timing of this article is somewhat poignant as from a purists perspective (read: Bitcoin maximalist?) the XRP ledger only met the absolute definition of decentralisation this past couple of weeks, but I'm jumping ahead here, so lets start at the beginning.
The basis of the XRP Ledger and how it works is very different from "traditional" cryptocurrencies. Rather than using Proof of Work or any other system which is based in process heavy work for reward, the system uses a simpler approach called Consensus and does not reward the validation process. In a Proof of Work system, nodes do not have the power to validate a transaction, in consensus, nodes can do this depending on what type of node they are. Validator nodes are the ones we are mainly interested in for the purposes of decentralisation.
At the beginning, it is worth noting whilst Bitcoin when it first came to the market theoretically represented the ultimate in decentralisation, arguably, XRP did not. In fact, with XRP's original creators the system initially did not have much in the way of independent validation back then. (There is an argument to say until people started mining on the Bitcoin network neither did it, but we'll skip past that for now.) The process of validation itself though is quite simple. When a transaction is made on the XRP ledger, it is passed through multiple nodes and each validator node must agree that transaction has not already occurred in order to validate it. There is no mining, no reward for the operator and no incentive to run a validator barring the expansion of a healthy decentralised ledger. This is one of the critical factors which sets Consensus based ledgers apart from proof of work, and on the surface of it doesn't sound like it is sensible. Why would anyone choose to run a validator if they get nothing out of it?
As it turns out, that question has turned out to be somewhat irrelevant. Even without any direct benefits received, XRP nodes which run independently of Ripple began to join the ledgers network one after another. To the point the ledger now has a total of around 800 nodes (some of these are peer nodes, some validator nodes) More over, from the outset, users of the network have always been able to select which validator nodes they choose to engage with rather than being dictated by a dominance of hashpower. I believe this particular aspect of the XRP ledger along with the growth of independent validators set the tone for a more transparent network which, whilst may not have absolute decentralisation to begin with, created a path to becoming so. In this past couple of weeks, that belief has proven to be true.
The XRP Ledger has a number of nodes which are part of the UNL (Unique Node List) and are sort of the "master nodes" communicated with during XRP transactions. Prior to last week, Ripple controlled a majority of those on the UNL list allowing anyone to pose the question "what is stopping them controlling the Ledger and decisions taken within its operation?". This last week, their control of the ledger dropped to 48% (11). Out of the 21 UNL nodes, Ripple now control 10. Furthermore, the percentage is expected to fall further as more nodes attain levels of trust among network users and performance as time passes. As milestones go...this is a pretty important one.
It goes without saying that given running a validator node on the XRP ledger requires no more power than running a standard email server, the ability to join the network with your own validator has very little restriction on both hardware AND running costs when compared to any Proof of Work system. Remember the Soloman islands electricity cost 88 cents per KWh? The difference of running a consensus validator and a mining rig here would be huge in terms of cost savings, but more importantly due to the low power requirements, whilst it would still be more expensive to run a validator here than (say) in iceland, the low power consumption would make the costs in consensus validation at least relatively comparable no matter where they are on the planet rather than completely off the scale.
Validation vs Ownership:
Its worth noting there is some debate over which of the two aspects of decentralisation carry more weight in the cryptospace, (ownership and validation). There is a good case for each argument whether that be dissemination of control in a network to price manipulation through ownership. This point possibly has enough content to merit an entirely new article in its own right. I may well address ownership at some point in another post, but personally? I believe the structure of a network and how it distributes and manages value does far more with regards to decentralisation than the ownership of value within that network (caveat: the degrees here can vary of course. e.g. networks which offer voting rights in proportion with token ownership etc).
Summary and Conclusions
So after all these facts and all this digging, where do we end up?? Quite simply... Time. The saying "Time changes all things" originates from the Swiss Linguist Ferdinand De Saussure. His context when it was iterated was referring to language and the passage of time affecting colloquialism, context, and its development. It can of course be applied to many things. Trees grow, cities develop and teenage humans reach adulthood bringing changes about in all things.
In the context of cryptocurrencies, unlike traditional assets in which changes over time manifest slowly, the effect demonstrating the growing trend of centralisation in Bitcoin, Litecoin and other Proof of Work based coins which began with pure and decentralised notions is not only quick (10 years in the context of global finances is nothing) but it also allows us to see where future changes are going in the networks based on how quickly their directions have formed to date. Visually, it's an easy thing to recognise in this short .gif I have thrown together (note, this is representative of Proof of Work only and not specific to any coin)
Just as the obvious forming of centralisation and the patterns that ensue within proof of work are evident historically and paint the picture of time holding holding the systems nature hostage to centralisation, the opposite is apparent within Consensus. Time is most certainly on the side of XRP as it's becoming more apparent and obvious the status of the ledger is not only decentralised today, but will become more so as time passes... To the point I believe it will be demonstrably more decentralised than most proof of work coins in the next 12 to 18 months maximum. Bold claim? I don't think so. Everything in this article points in that direction.
My final thoughts on this subject may perhaps be perceived as somewhat naive as they refer to trust. Not trust in the way word is applied in decentralised networks and trustless financial systems, but on a more human level. Taking a step back, those invested in the cryptospace should really consider "who do I trust with my money?"
Both Proof of Work systems and Consensus seek to accomplish essentially the same thing, but the manner in which they approach these goals, the demonstrable action of those approaches over the last ten years and the impact of those actions give a picture that is almost inevitable. Proof of work systems and those working within that part of the space are proving a path to attempted monopolisation of the space, whereas consensus may start out centric but beats a path to decentralisation through trust and opening of pathways because when there is nothing to gain but creating validation for the sake of growth, there is no impetus to attempt to monopolise a network.
If decentralisation is considered goal when investing, then you need to forecast where that network will be in years to come...and those patterns are not difficult to find. I found all this with a weeks worth of reading so as always... Do your own reading.