Decentralization Levels: Bitcoin's Proof-of-Work vs. Obyte's DAG Approach

Decentralization may be a concept difficult to grasp for a lot of people. It sounds technical, but, in the end, its importance is more political. This decision is about having only one leader or central party in charge of everything or distributing that power among numerous parties or an entire global community. Central banks, as the name suggests, have pretty central control over local money (USD, EUR, etc.). Most cryptocurrencies, on the other hand, were designed to be decentralized —which means, no central party in full control, limiting or freezing transactions for any reason.

Before the Bitcoin release, even if a private company were to build and share its virtual currency, it’d be tied to and supervised by their local regulations. They’d have to monitor the operations of their users, and, if ordered by authorities and governments, also block and freeze accounts. As the control was concentrated in one party (the company, overseen by a government), a legal kill switch could be applied easily.

That’s not the case with cryptocurrencies like Bitcoin or Obyte. They work similarly in general aspects, including the use of open-source, transparent, and immutable distributed ledgers. That already means a certain level of decentralization: there’s no single company or central party in control of their networks because they’re running thanks to numerous computers (nodes) operated by very different people scattered all across the globe, and they’re maintained by numerous developers checking their source codes.

However, they do use different tactics to achieve their version of “decentralized.” Have you ever thought which one of them is less prone to censorship, external control, and any other form of centralized power? Let’s check some of their features.

Inside Bitcoin

Bitcoin was the first of its kind and is the most adopted digital currency so far. The solution provided by Satoshi Nakamoto (its creator) to avoid double spending of coins, increase the network’s security, and provide some nice rewards to all those nodes that help maintain the system operational, can be summed up in a Proof-of-Work (PoW) algorithm. That’s the thing that allows crypto mining to happen.

Nodes configured as miners compete to be the first to solve pretty complex mathematical problems to find a “solution” for a puzzle in every block in the blockchain. In the process, they verify transactions and take some good time and electric energy, because only a specialized machine could solve that kind of cryptographic puzzle efficiently. In exchange, miners get some newly minted BTC coins for every solved block, plus some transaction fees from regular users. Everyone wins, theoretically.

The miner who is the first to solve the puzzle wins the right to create the next block in the blockchain. The block would include the transactions that the miner chooses to include. Before inclusion, the miner of course verifies every transaction to make sure it is valid (otherwise the entire block would be invalid). Verification is not energy intensive, unlike mining and many non-mining nodes verify transactions too.

The fact that literally anyone from everywhere can sign up as a miner, simple node, or regular user is what gives Bitcoin its current level of decentralization. As of March 2024, Bitcoins counts with over 18,370 nodes worldwide securing and successfully distributing its network. For cryptocurrencies, that’s good news: the more nodes, the harder it is to bring down the network in a head-on attack (one would have to expensively attack every node separately), and the higher decentralization is achieved.

Now, in practice, it’s not like a PoW system couldn’t present some serious inconveniences. Especially for the good old average (and clueless) users.

Bitcoin Downsides

People may trust Bitcoin, but its system doesn’t come without its shortcomings. The mining itself could be a shortcoming, indeed. The thing is, mining Bitcoin hasn’t been an easy feat since the earliest times. The more miners have arrived over the years, the higher mining difficulty has become. The first BTC miners, back in 2009-2010, could have used a simple CPU to get some coins. By now, that’s unthinkable. You’d need a several-thousand-dollar ASIC machine just to start. And there are big companies that already have entire “mining farms” full of those.

If you’re not a big company, the best path to mine some BTC is joining a mining pool. Which means, joining another company that has created a system to combine the efforts of multiple ASIC machines all over the world. This way, even if “your” specific machine didn’t solve the block puzzle first, you’ll get some rewards just for participating. Not the same as mining an entire block by yourself (currently at 6.25 BTC / 415,000 USD), but better than nothing.

According to Coin Dance by late March 2024, three mining pools are dominating the whole Bitcoin computational power: Foundry USA (27.8%), AntPool (22.7%), and ViaBTC (14%). That’s around 64.5% of all the Bitcoin network and does not seem very decentralized.

Potential Attacks & Censorship

The fact that those pools are controlling over 50% of the Bitcoin network could be alarming too, because of the potential attacks they could pull off. In theory, if a single entity or group controls more than 50% of the mining power in a crypto network, they could censor transactions, double-spend coins, and potentially disrupt the network's operation.

Nevertheless, to be fair, a single hour of operating all mining on Bitcoin would cost around $2,330,370 [Crypto51]. In the dumbest, head-on attack scenario, an attacker would need to rent a similar hash power and bear similar expenses hourly to attain the 51% share (they would also earn from block rewards). It’s a huge amount, so why bother about such an attack, you could ask. Also, mining companies are interested, at least for now, in the Bitcoin network's well-being to keep profiting from it, after all.

Such a drastic attack might be less likely while mining remains profitable (which isn’t a constant, anyway), but censorship applied by miners isn’t out of the table. They can (and they do) cherry-pick transactions to include in the blocks they mine, and the ones to exclude or reorder, according to the revenue (the fees) those transactions will provide for them. This tactic is often called Maximal / Miner Extractable Value (MEV). While MEV is profit-motivated and might not be an issue in Bitcoin due to lack of DeFi activity there (as opposed to many other blockchains), censorship is still a serious concern. For example, it could be caused by governments coercing the mining pools to censor the transactions of specific users.

Inside Obyte

Obyte took inspiration from Bitcoin, but completely changed its internal structure. Instead of a blockchain, Obyte is assembled as a Directed Acyclic Graph (DAG) built by its very users with every transaction they send. Therefore, there are no PoW systems or powerful miners (middlemen) capable of taking over the network or censoring transactions as they please.

The DAG partially provides some order of transactions, and the work is completed by Order Providers (OPs). They’re users that post their own “guiding transactions” to help order the rest, yet cannot alter the DAG history or refuse transactions.

When a user creates a transaction referencing past ones, it becomes part of the DAG, immutable and beyond alteration. Any operation in a DAG can occur without requiring approval from miners or OPs. Even if these providers collude, they cannot censor transactions.

Attempting to rewrite DAG history for a double-spend is mathematically unviable as every transaction includes hashes of a few earlier ones, making it impossible to rewrite one transaction without rewriting all that followed. Users' funds always remain secure due to the absence of private key access by external parties. Selective censorship is also unfeasible without censoring all subsequent transactions, rendering it ineffective.

The sole recourse by malicious OPs is to team up by over 51% and halt the network—a drastic and self-destructive measure. While effective momentarily, a new network with fresh Order Providers can swiftly emerge, resuming from the point of interruption. So, they’d just lose funds and their previous reputation to gain nothing.

More Adoption, More Decentralization

The Obyte system is already designed for a higher decentralization, but its adoption is still behind Bitcoin. There should be 12 independent Order Providers, composed of different parties, organizations, and reputable individuals interested in the network's wellbeing —they’re not supposed to be anonymous and are selected by community voting. Currently, there are only seven independent ones, while the remaining five are still under the control of Tony Churyumoff, Obyte’s founder.

On the other hand, there are at least 33 full-node wallets, two relays (to forward new storage units to peers), and one hub (an intermediary for encrypted messages). More adoption would mean an increase in these stats since anyone can propose themselves as a candidate for OP, or run a full node, a relay, or a hub without asking anyone.

The more nodes, the more decentralization. However, in the meantime, even with fewer nodes, Obyte remains a more decentralized option than Bitcoin, more free of censorship and limits — due to lack of miners or other powerful power centers.

We can say that Obyte's decentralized framework empowers users with greater control over their data and transactions, fostering a more privacy-centric environment. Do you have your private keys at hand? Are you able to add transactions to the ledger directly, without miners and other middlemen? If so, you have full control.