Blockchain has the answer to the age-old problems of centralised capital and the inequalities that are the inevitable result. Or so we thought. Just how decentralised the top cryptocurrencies really are is the question you should always ask, especially before investing your own money.
There are three main categories that can be used as useful diagnostic tools. The first question to bear in mind is: are miners being rewarded or incentivised for keeping the network secure? The second factor to bear in mind is the number of entities that control more than 50% mining power. Mining pools are included into this number, and are something to really pay attention to: if more than 50% of a currency’s supply is controlled by two or three mining pools, just think of the potential consequences of hacking! Finally, we need to be looking into the concentration of wealth in these networks; if we diagnose the top 100 addresses in the currency’s ledger, what percentage of monetary supply do they control?
So, with these three major factors in mind, how did the top currencies perform, and what does this tell us about the overall status of decentralisation in the crypto environment? Well, the short answer is that there is not that much decentralisation. Bitcoin, still the best known cryptocurrency around, does reward mining – people point their computing power to the network, receiving block rewards and transaction fees to the processes within that block. However, the three top mining pools control more than 50% of this currency’s hashing power. Ethereum and Ripple did not fare much better: both currencies have more than 50% of their respective assets controlled by small- read centralised –pools.
Why is centralisation happening? A simple answer would be that this is the way humans work: we centralise power in order to achieve greater efficiency. But we should also be looking at available resources. People store their money in centralised systems, such as exchanges, because individual resources (e.g. mobile wallets), just are not powerful enough.