Bitcoin’s Lack of Decentralization: Hash Rate and Wallet Ownership
Although Bitcoin was intended to be a decentralized currency, questions have been raised about how truly decentralized the network is as it has grown in popularity. The concentration of hash rate and wallet ownership is one of the most important problems.
Hash rate describes the amount of processing power needed to create new blockchain blocks. The network is more secure the higher the hash rate. However, there are worries about the network’s centralization as a result of the concentration of hash rate in a select group of sizable mining pools. The top five mining pools held more than half of the hash rate as of August 2021.
The stability and security of the Bitcoin network may be jeopardized by this concentration of hash rate. A 51 percent attack, which gives the attacker control over the network and the potential to double-spend coins, could be carried out if one or more entities have a majority of the hash rate.
Another issue is wallet ownership. Despite the fact that Bitcoin is meant to be a peer-to-peer currency, a relatively small number of wallets hold a sizable portion of the total supply. Just 2% of wallets held 71% of the total Bitcoin supply as of August 2021.
The decentralization of the Bitcoin network may be compromised by this concentration of wallet ownership, as a small number of people or entities may be able to manipulate the market through coordinated buying and selling, resulting in price manipulation and volatility.
Another issue is that nodes on the Bitcoin network automatically create new wallets. The decentralization of the network may be threatened by this feature, which is meant to make using Bitcoin for transactions easier. Without the user’s knowledge or consent, nodes have the ability to automatically create new wallets, which can result in a situation where a small number of entities control a large number of wallets.
The prevalence of bot trading and wash trading is another factor influencing the Bitcoin market in addition to these worries. Bots, which are designed to automatically carry out trades in accordance with predefined criteria, generate more than 95% of the total volume of Bitcoin trading. Due to this, there has been a sizable amount of artificial trading and market manipulation.
Another method frequently employed to manipulate the market is wash trading. In order to create the appearance of trading activity without actually changing ownership of the assets, it involves buying and selling assets. This can be done to artificially inflate trading volume, generate fictitious demand, or manipulate prices.
Last but not least, a select few significant exchanges control the lion’s share of the Bitcoin market’s trading volume. With the ability to control prices and market sentiment, these exchanges have a significant impact on the market. The potential for market manipulation and the true decentralization of the Bitcoin market are both questioned by this power imbalance.
Preventing market manipulation, promoting the adoption of more diverse and decentralized exchanges, and enhancing transparency surrounding trading activity and ownership of Bitcoin are all steps that can be taken to ensure a more decentralized and transparent Bitcoin market. To ensure the long-term stability and security of the network, it is crucial to encourage a more diverse and decentralized network of miners and wallet owners.
The true decentralization of the Bitcoin market and the possibility of market manipulation continue to be worries, even though the creation of new wallets on the Bitcoin network is still largely decentralized. The concentration of hash rate and wallet ownership, as well as the prevalence of bot and wash trading, raise concerns about the fairness of the market and the necessity of promoting a more decentralized and open Bitcoin ecosystem.
Author: Pooyan Ghamari, Economist and Blockchain Specialist
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