Decentralization is definitely one of the most important reasons to consider the use of blockchains. Not having a single point of failure, enabling for voluntary participation to the protocol, and allowing anyone to mine or stake are all must-haves for any serious cryptocurrency project. However, the situation is not always favorable for decentralization, even among the most popular projects.
Jackson Palmer, the often bitter Dogecoin creator, has decided to take his criticism of the cryptocurrency market to a new level by creating arewedecentralizedyet.com. In order to ask this puzzling question, he decided upon five criteria which include the number of entities controlling more than 50% of the hash power, the percentage of coin supply being held in top 100 wallets, the number of clients which run the coin’s protocol, the number of live public nodes, and whether or not miners or node runners are incentivized.
Accordingly, the otherwise rational and sound inquiry “Are we decentralized yet?” gets answered from a technical, political, and monetary point of view. It’s everything we need to know about the most important cryptocurrency projects in order to get an objective insight into the state of development. A more centralized coin is definitely undesirable, as it’s more likely to fail in the aftermath of malicious attacks or government interventions. The more decentralized ones should attract more investors, developers, and community members, as they tick all the monetary, engineering, and ideological boxes to become interesting and worthwhile.
In theory, everything is clear and simple. But in practice, we’re bound to discover how more decentralization doesn’t really imply more success. On the contrary, a quick look at the list suggests that projects like NEO, Stellar (XLM), IOTA, NEM, and Nano are very much centralized.
Much centralization, such wow.
At press time, a simple look at Coinexchange’s DOGE network explorer points out that there are 122 active nodes running four different clients of the protocol (Shibetoshi, Block.io, BitcoinJ, and Node). That’s 11 more nodes than Stellar, and this isn’t the only metric that favors the meme coin. In terms of wealth centralization, clients, and voting power, XLM looks much worse and appears to be one of the worst choices if one seeks a truly decentralized project.
The recent Stellar airdrop won’t fix the issue of coin distribution either, as the XLM market cap exceeds 2 billion even in the middle of a terrible bear market, and $125 million worth of tokens amounts to less than 5% of the supply. Conversely, Dogecoin beats Stellar in every department which concerns decentralization. And the fact that an inflationary Litecoin fork which never really exceeded its joke status manages to outclass a project which benefits from lots of investments and attract partnerships with giants like IBM is indicative that nobody really cares about decentralization when it comes to either money or new technologies. Sometimes being easier to manipulate is best for business.
However, let’s not get overly pessimistic about our cypherpunk ideals for decentralization and take a look at three other top 20 projects: IOTA, NEM, and NEO. IOTA is a popular and interesting scientific experiment which doesn’t make use of a blockchain and tries to make the Internet of Things easier to monetize for automated processes which eliminate the need for trusted third parties. It sounds really cool in theory and, according to IOTA-Nodes.net, the network currently has 250 public nodes, out of which 149 are synchronized. And that really isn’t impressive, as Dogecoin has 122 active nodes without making such grand promises of “solving the inefficiencies of the blockchain“. If we also notice that 62% of the coins are owned by the top 100 wallets (as opposed to Doge’s 51%), then we should already start asking ourselves questions about the real intentions of the project.
What about NEM? The idiom “permissioned private blockchain” is already indicative of centralization, and the numbers follow this trend. The top 100 accounts own 53% of the coins (which isn’t as bad as XLM and IOTA), which means that Dogecoin is still more decentralized in terms of ownership. Furthermore, the 494 average nodes pointed out by the project’s proprietary node explorer are almost 20 times fewer than Bitcoin’s. Nevertheless, it’s a little ironic to see how a project which is more centralized by its nature is still more decentralized than others (yet Doge beats it).
More centralization, even more wow.
Now let’s talk about the cryptocurrency that’s objectively the worst of its class in terms of decentralization. Surprisingly, NEO doesn’t do so well in any department. Only one party owns more than 90% of the voting power, which means that we’re talking about a bona fide crypto dictatorship. 70% of the coins are owned by the top 100 wallets. Moreover, the number of synchronized nodes is extremely low and can make Dogecoin seem like the pinnacle of decentralization: at press time, roughly 40 nodes are running, and only about half of them are in sync. Add to that the two codebases (RPC and REST) accounting for the nodes and you get one of the most centralized projects in the space. Is this surprising for the Chinese “Ethereum Killer”? Well, only partly.
On the other hand, NANO is slightly less centralized. In terms of ownership, 62% of the supply is held in the top 100 wallets. There is only one major client in charge of more than 90% of the nodes, but at press time there are almost 400 public nodes supporting the network and that’s pretty good. At least there is one department where Dogecoin gets outclassed so that the more ambitious project of the two can finally shine.
What do these facts teach us about cryptocurrencies? That the whole space is weird and a meme coin can get more support than the project which partners with IBM and attracts investors. Also, Jackson Palmer’s criticism is often times justified by objective data that we should be taking into consideration the next time we talk about decentralizing everything and creating a better technology sector that’s immune to arbitrary interventionism.
Last but not least, we should remember that the technology is still young and it needs to develop towards trustlessness and inclusiveness. If you can’t run a node and you can’t participate in the governance of the project, then you probably shouldn’t invest either. The same goes for cryptocurrencies whose supply has been premined and is held in large amounts by the creators. Not allowing the community to mint the coins or obtain them through a mining or staking process is a red flag in itself.
Is this XLM/IOTA/NEM/NANO/NEO FUD?
It’s certainly embarrassing to have a project that Dogecoin’s community, infrastructure, and coin distribution can outclass. But this is just an indicator that you should be making more efforts to include more community members and incentivize them to participate. Maybe that Stellar has done it through a KYC airdrop, but distributing 5% of the supply is simply not enough for the long-term ambitions and potential of this new technological sector.
Harsh criticism like this is definitely justified and necessary in order to move forward and build the systems that the PR and marketing departments are already promising. Unless this blockchain revolution of decentralization is just a gimmick that will fade into the same old corporate dictatorship and majoritarian stakeholding that we already see in Silicon Valley, then we as users should continuously demand the developers to allow us to participate, while also being more willing to run nodes and engage in constructive debates.
If we regard the cryptocurrency world as an environment for speculative investments, then we’re completely missing the point. There’s probably more money to be made in S&P500, and the risks are lower. If we want to disrupt the technological status quo, we must constantly aim to beat the Dogecoin standard for decentralization. So the next time we howl at the moon and dream of a rocket ship to take us there, we better be ready with a solid infrastructure to take off.
PS: Ripple’s XRP isn’t any better either, and its lack of decentralization has had it removed from arewedecentralizedyet.com