As the combined Bitcoin and altcoin circulating market cap sets new price records and solidifies its position as a major asset class, we must address an important issue affecting this space.
A standardised rating system must be established to determine how decentralised a blockchain is.
We need this because people are duped into believing a network is (adequately) decentralised when it isn’t. Moreover, it does a disservice to truly decentralised networks such as Bitcoin, Ethereum, Polkadot, and Cardano, to name a few.
Extending this to everyday life, when you spend a lot on top-end steaks, there’s usually a rating system that specifies minimum standards for such products.
Organic food, hotels, oil, seafood, eggs, etc. Certifications exist for a reason, and people have the right to know what they’re buying.
The same should go for coin and token holders of various L1s. Everyone — from beginners to experts — should understand how decentralised a blockchain is, having easy-to-understand information readily available.
With increasing sums on the line and reputations at stake, this matter will only become more important.
There’s no use in telling some porkies like Pinocchio to deceive prospective investors. Many people with a solid grasp of blockchain metrics, tokenomics, and related data can independently verify the information and sniff out the BS better than a Labrador.
However, many individuals don’t know where to look and don’t want to spend time checking this.
How would this work in practice?
It would be something as simple as this. A user visits the official website of the blockchain project in question. In the ‘About’ section, they see something in the description along the lines of:
Project ABC is a Class (or Level) 5 blockchain.
Project XYZ is a Class 3 blockchain.
Page visitors can then hover over the Class number to get a basic explanation of what this means.
Each tier would be classified based on objective (i.e., measurable) benchmarks. The most notable one that comes to mind is the Nakamoto Coefficient.
This figure represents the minimum number of validators that could theoretically collude and control a third* of a network’s total stake.
Balaji S. Srinivasan and Leland Lee conceived the idea in July 2017. I have included the original post below.
The higher the number, the more decentralised the network is.
For example, a Class 5 blockchain is a highly decentralised system with an NC above 100.
I could throw numbers around, but I’d rather leave that to experts to ascertain how much what coefficient (or another suitable metric) best corresponds to each class/tier.
*Srinivasan and Lee used a 51% threshold to calculate the NC, corresponding to a similar phenomenon for Proof-of-Work (mining) systems: the 51% attack.
This relates to the number of active validators for proof-of-stake networks and reachable nodes for proof-of-work/mining systems, with Bitcoin being the most prominent example.
What are nodes? As a basic explanation, they’re the computers linked to a network (e.g., for Bitcoin’s blockchain) that run its software to validate and transmit transactions. River Financial provides a helpful overview of Bitcoin nodes.
The more individual active nodes, the more decentralised the network.
We’re looking at the number of nodes and their spatial (geographical) distribution, which can be tracked in real-time at Bitnodes. There are currently 19,725 reachable nodes worldwide, most located in unspecified* places and predominantly reachable with Tor.
This setup comes with its own risks, but I digress.
N.B. Bitnodes estimates the overall Bitcoin P2P network based on the number of reachable nodes. Check out its website for the methodologies used to determine the abovementioned number.
Anyhow, who would ensure this classification system works?
An independent body, such as the Blockchain Council, could issue a certification guaranteeing the decentralisation claim made by the L1 (or, in the case of Polkadot, a layer-zero chain).
Why should a reputable third party need to authenticate the information? It boosts consumer confidence in various goods and services.
Drawbacks
I acknowledge that the Nakamoto Coefficient also has limitations. For example, an operator can control multiple nodes in a given network.
As mentioned by David Schwartz, the Ripple CTO and a former Bitcoin dev, it’s not about the nodes one controls. Rather, it’s about submitting valid information per the system’s rules.
Nonetheless, Bitcoin is still the most decentralised network by a long shot. Even if various operators control more than one node, having nearly 20,000 discrete computers maintaining its ecosystem is a remarkable feat.
Individuals and organisation with vested interests will do their best to exploit loopholes to game the system (much like various aspects of society) and make one more decentralised than it is.
Even though ratings aren’t foolproof, they’re better than nothing, provided that good actors keep tabs on the network distribution data.
I recognise there’s another issue at play here: Bitcoin mining centralisation.
Four pools control 75% of total Bitcoin mining, with China and the USA accounting for roughly 58% and 37% of activity, respectively.
For context, China controlled over 75% of mining for much of the blockchain’s existence until May 2021, when its central government imposed major restrictions on Bitcoin mining, often incorrectly referred to as a “ban.”
Hopefully, more nations get involved in Bitcoin mining to boost geographic distribution, but I’m not holding my breath.
Still, Bitcoin maintains a ~99.99% network uptime whilst preserving a high level of decentralisation.
Some of you will also point out that approximately 0.3% of addresses control 82% of BTC’s circulating supply. We’ll need to keep an eye on this in future, particularly if this increases (which it most likely will, as many large addresses belong to centralised exchanges that manage their clients’ BTC), as crypto whales will have even more influence on BTC’s price.
Will this idea see the light of day?
I am highly sceptical of this. There will be resistance from the least-decentralised blockchains that are concerned about reputation loss.
It’s ironic as the many entities that claim to be part of Web3 (which touts itself as being more “transparent” than Web2) aren’t as open and decentralised as people think. Some are, but many aren’t.
To play devil’s advocate, I imagine experts in this space will dismiss it as an ill-conceived idea despite its good intentions.
Additionally, most people in this space have little or no consideration of decentralisation and focus solely on the lucrative gains many alts have generated over the years.
This won’t stop individuals or even some companies from investing in speculative coin tokens that could plausibly yield a higher ROI than BTC, ETH, and various blue-chip crypto assets.
So why am I still spending my time writing an article about this, even if part of me believes this is a futile endeavour?
The main reason is that, much like educating family, friends, and acquaintances about distributed ledger technology, Bitcoin, and altcoins, I want to spread the idea.
I don’t want anyone to say in the future, “Why wasn’t this concept suggested earlier?”
If you believe this is a worthwhile idea, clap the article, share it, comment, and spread the good word about this (still) nascent asset class and technology.
Disclaimers
• N.B. None of this is financial advice; I am not a financial advisor. You are ultimately responsible for crypto investments, let alone in any asset class.
• The opinions expressed within this piece are my own and might not reflect those behind any news outlet, person, organisation, or otherwise listed here.
• Please do your research before investing in any crypto assets, staking, NFTs or other products affiliated with this space.
• Bitcoin (BTC) and Ethereum (ETH) account for about 45% of my crypto portfolio at the time of writing.