Blockchain and Decentralization: are Blockchains as Decentralized as They Claim to Be?

What is blockchain? Normally, we determine it as a distributed ledger technology. But many people use the term “distributed” as equal to “decentralized”. It is not correct. While a blockchain may be distributed, it doesn’t mean that it is decentralized. 

Cloud computing is a great example of a distributed network, and a public blockchain can be referred to as a decentralized system. “Decentralized” means that there is no central authority or a group of authorities that can control the blockchain. The decision-making power is transferred to a distributed network of nodes and miners. 

But are all popular public blockchains as decentralized as they claim to be? 

What Blockchains Claim to Be Decentralized?

The following public blockchains boast a high decentralization level:

• Bitcoin
• Ethereum
• Litecoin
• Monero
• Solana

But are they as decentralized as they claim? Let’s delve deeper.

Bitcoin - Mining Pools Have the Power over the Blockchain

Bitcoin runs on the Proof-of-Work (PoW) consensus mechanism. It means that new transactions and blocks are confirmed by miners. The more miners join the network the more decentralized the blockchain is. 

Now though, mining BTC is a very energy-consuming process. The mining equipment is not cheap. For example, one decent quality ASIC miner may cost about $4,000. But even an ASIC miner is not sufficient for BTC mining. That’s why miners join mining pools. 

Therefore, we cannot say that the Bitcoin blockchain relies on individual miners now. It relies on mining pools that control the blockchain’s hashing power. 

Here is what the hashing power distribution across pools for the last month looks like:

Source: https://btc.com/stats/pool?pool_mode=month 

Here, we can see clearly that the major part of the BTC blockchain hashing power is controlled by Foundry USA (almost 25%), and AntPool (almost 17%). Therefore, even though we understand that a mining pool is a joint effort of many miners, the control over the hashing rate belongs to a pool, not to individual miners. Even though we see that the Bitcoin blockchain is not 100% decentralized, the decentralization level is high compared to other public blockchains.

Ethereum - Staking Pools Rule the Network

Ethereum has just moved to the Proof-of-Stake consensus mechanism and claims to be one of the most decentralized blockchains with over 4,000 nodes. This story needs more details though. 

In blockchains that utilize the PoS consensus mechanism, validators verify transactions and maintain network safety. With over 4,000 validators, the Ethereum network seems to be pretty decentralized and safe. 

But who can become a validator? Anybody who stakes the minimum of 32 ETH. At the moment of writing, it is almost $42,000. Those who cannot have such a sum available to stake it, cannot validate transactions on the Ethereum network. As you can see, the entry level is pretty high and effectively excludes the majority of people from those who can become validators.

This problem was addressed by several staking pools such as Lido. They enabled users to stake as much money as they had and receive rewards. But if a user stakes his funds in a pool, he loses the right to validate transactions. Instead, the validation rights are delegated to a staking pool. 

Source: https://bi.etherscan.io/public/dashboards/KH9jbP687szqlAnHiNEfNictrwNhvdOEQl0PwB6m?org_slug=default

The distribution of ETH depositors by entity looks as follows:

• Lido - over 30%
• Coinbase - almost 15%
• Kraken - over 8%
• Binance - over 5%

Over 58% of validating power is shared among 4 major players in the market. Almost 10% of validation power belongs to whale wallets. And only 16% of validating power is associated with “Others” - a category that may mean retail users. 

If you have a look at the breakdown of depositors by the entity, the picture becomes clearer:

Source: https://bi.etherscan.io/public/dashboards/KH9jbP687szqlAnHiNEfNictrwNhvdOEQl0PwB6m?org_slug=default

Over 73% of validating power is controlled by staking pools and exchanges. Are there any more doubts regarding the so-called “decentralization” of the Ethereum blockchain? 

Litecoin Is Less Decentralized Than Bitcoin

Litecoin was not pre-mined with the majority of coins distributed to founders or developers. There are many nodes around the globe. So, the Litecoin blockchain seems to be pretty decentralized from a beginner’s point of view.

Litecoin relies on the PoW consensus mechanism, just like Bitcoin does but Litecoin utilizes a different encryption algorithm, Scrypt. Initially, it was ASIC-resistant to prevent wasting too much energy on mining. But in 2021, LTC ASIC miners were invented. With them, Litecoin became similar to Bitcoin: miners have to join mining pools to make LTC mining activities beneficial.

What about having a look at how the hashing power is distributed in the LTC mining network?

Source: https://www.litecoinpool.org/pools

With Via BTC, LitecoinPool, Antpool, Binance, F2Pool, and Dpool controlling over 90% of the hashing power, this blockchain looks even less decentralized than the Bitcoin blockchain.

Monero - a Blockchain with Highly Centralized Hashing Power Distribution

Monero claims to be one of the most decentralized networks. It is ASIC-resistant and can be mined with regular computers. Miners are distributed all around the world with a slightly higher concentration in the USA and Europe.

Source: https://monerohash.com/nodes-distribution.html

But are these individual nodes or do they work in a pool? Here is the reply.

Source: https://minexmr.com/pools

The total network hashrate is 2790.7 MH/s with 2651.0 MH/s belonging to pools - these figures mean that the network is more centralized than we initially believed. From the main pools, Nanopool, Supportxmr, and Hashvault control over 71% of the network hashing power. So, Monero mining is also far from being decentralized. 

Solana: Another Decentralization Myth Unveiled

Solana is another blockchain that is believed to be highly decentralized. The blockchain utilizes the PoW consensus mechanism, so, here, I will check validators.

With over 3,400 validators all around the globe, the blockchain looks quite decentralized. But when we check the stack distribution, things change.

Source: https://solana.com/news/validator-health-report-august-2022

Here, I’d remind you that not the number of validators matters. It is important to understand that those validators that have the highest stake control the network. In the case of Solana, there are 6 validators that have the majority of stake. 

Another thing to consider is the token distribution. With over 25% of tokens distributed to the team and founders, it is difficult to talk about decentralization. Another 37% went to investors. It is logical to claim that these tokens are used to control the validation power of the blockchain.

Source: https://messari.io/asset/solana/profile/launch-and-initial-token-distribution 

Does Decentralization Matter, Indeed?

Blockchain is a distributed ledger, not a decentralized one. At least not to the extent as many people believe it to be and not for 100%. At the current stage, the technology is still not ready to be completely decentralized. Over time, when it improves, solves the existing issues, and becomes more mature, I believe that the blockchain may move to the next decentralization level. For now, though, we still have a lot of work to do.