Why Bitcoin's Decentralization Matters14 Jan 2016
Bitcoiners, from Bitcoin Core developers to long-time Bitcoin enthusiasts to recent /r/Bitcoin discoverers, love to talk about how Bitcoin’s decentralization is its ultimate feature. Rarely, however, do you see anyone explain why decentralization matters - surely it’s an interesting property from a computer science perspective, but why should consumers, businesses or investors care? This post is an attempt to write out why decentralization is foundational to Bitcoin’s utility and, somewhat more importantly, set up future posts talking about when it isn’t.
When Bitcoiners talk about decentralization, the first thing that comes up is Bitcoin’s oft-touted lack of inherent third-party trust. While well-placed trust is a requirement for many systems to operate efficiently, when trust has been misplaced systems can become incredibly fragile. Take, for example, trust in US banks before the establishment of the FDIC. While access to banking services allowed for more convenience and allowed many companies to operate more efficiently, banks were known to collapse, taking all customer funds with them. While the introduction of the FDIC and similar programs decentralized trust in financial institutions from one party to two, transactions in much of the world do not offer such protections. Even with such programs, individuals are not universally protected from loss across borders and over certain value.
More recently, regulations which allow individual government officials to seize assets unilaterally have become common. Especially in the US, the now infamous Operation Choke Point and civil asset forfeiture programs have allowed law enforcement officials and private institutions to seize financial assets and deny financial services with little to no oversight. Thus, removing trusted custodians and creating a system with liquid, unseizable assets has the potential to provide more reliable financial services to many who might otherwise not be able to operate efficiently, or at all. This unseizability of Bitcoin is made possible only through its lack of a centralized trust requirement. While centralized e-cash and financial systems have tried to provide such reliability, regulations and business realities have nearly universally prevented it.
A highly-related property that is equally important to the ability of Bitcoin to provide financial services to whistleblowers, foreign dissidents, and porn stars is its transaction censorship resistance. While the ability of third parties to seize assets results in direct and clear monetary loss, freezing assets can have a similar effect. When an individual or organization is no longer able to make transactions to use their assets to pay for goods and services, their financial assets quickly lose their value. While Bitcoin has a very solid unseizeability story (namely that every party in the system enforces the inability of anyone to spend Bitcoin without the associated private key), its censorship resistance story is a bit more nuanced.
In a world where no Bitcoin miners have more than 1% of total hash power (or something else equivalently decentralized), it should be easy to find a miner which is either anonymous and accepting all transactions or in a jurisdiction which is not attempting to censor your transactions. Of course this isn’t the world we have today, and transaction censorship is one of the bigger reasons to be seriously concerned with mining centralization (for full nodes). Still, the ability of an individual to purchase hashpower (in the form of readily-available old hardware or in the form of renting it) to mine their otherwise-censored transaction is an option as long as the longest-chain rule remains in place across miners. While significantly more expensive than it would be in a truly-decentralized Bitcoin, this does allow Bitcoin to retain some of its anti-censorship properties.
If you’ve been around Bitcoin for long enough, you may recognize the above properties as critical to fungibility. A key property in any monetary instrument, fungibility refers to the idea that the value of one unit should be exactly equivalent to every other unit. Without unfreezeability/censorship-resistance and unseizeability, Bitcoin (and any monetary system) starts to lose fungibility. Without it, merchants and payment processors are no longer able to reasonably accept Bitcoin without checking it against a series of blacklists and jumping through hoops to ensure they will be able to spend the Bitcoin they are accepting. If confidence in Bitcoin’s fungibility erodes, its utility could be significantly eroded.
Another property that Bitcoin derives from its decentralization is its open-access. Often exclaimed as one of the most interesting properties of Bitcoin by silicon valley investors, many like to refer to Bitcoin as “permissionless”. The ability of anyone, anywhere in the world, with little more than an internet connection, to accept Bitcoin for goods and services and use Bitcoin to purchase goods and services without significant hassle is exciting. Again, this property hinges on Bitcoin’s decentralization. While many centralized financial service providers exist, many of which tout their availability to anyone, their very presence as a centralized authority which may deny service arbitrarily makes them susceptible to future policy changes for any number of reasons. PayPal, for example, was founded on the ideals of universal access to ecash. However, due to its position as a central authority, it quickly changed its policies in order to comply with the pressure placed on them both by regulators and the policies of the existing financial system, on which PayPal relied. These days, PayPal is widely known to freeze accounts and seize assets with little or no warning. Fundamentally, reliance on centralized parties for service is incompatible with universal open-access in the financial world.
You’ll note that all of the critical features above, the ones that make Bitcoin so exciting to all of us, can be effectively implemented, for some time, by a centralized system. And, in fact, this has been done before, in much more efficient systems than Bitcoin. Of course they’ve never lasted, losing critical properties after tweaks to fix one thing or another, implementing regulatory censorship systems directly into the base layers, limiting access to grow profits and shutting down entirely. Really, decentralization in Bitcoin is not itself a feature, but is instead the only way we know of to obtain the features we want in human-operated systems (with a single class of exceptions, but that’s for another post :p).