There has been a rise in the number of people who have been introduced to cryptocurrency and currently use it and make investments on it. This has occurred due to the popularity of cryptocurrency especially in the online space where people interact with each other and exchange their ideas. As the time passes various cryptocurrencies are also starting to become more centralised. This can be a bit conflicting to the idea that cryptocurrency is a decentralized form of currency that is free of government control and does not depend on the value of Fiat currency.
Before discussing why centralisation of cryptocurrency occurs it is important to understand the difference between a decentralized form of cryptocurrency and a centralised form of cryptocurrency. One can also visit https://the-bitcoin360-ai.com to gain more information about the same. Some basic differences between them are:
A decentralized currency refers to one that is not controlled by any third party entity. Entity in this case could be referred to as the government. This kind of decentralization allows for transparency as well as anonymity. This eventually leads to a more seamless transaction as the barriers to such transactions like collection of taxes and verification at various points is eliminated. Such currency tends to make the user feel more in control of their money as they would not be held accountable by the third party for any transaction they enter into using that particular cryptocurrency. It also provides them with power to decide who they want to transact with and when without any outer surveillance.
A centralised currency on the other hand is one that is controlled or influenced by a single entity or a group of entities. This entity can either be the government or a group of influential people who have control over how the currency is being transferred. This takes away the power from the uses of the cryptocurrency regarding what kind of transaction they want to go with. Along with this it can be a little off putting for people as then there would be no difference between using a fiat currency and cryptocurrency as for the surveillance.
Examples of centralisation
In recent times certain examples of centralisation of cryptocurrencies can be seen. Some cryptocurrencies are more beneficial for people who have become members of that particular cryptocurrency club. This has led to quite a distinction and difference between the richer users of such cryptocurrencies and people who are not part of such clubs. This expands the difference between the rich and the poor and hence loses one of the most significant qualities of a cryptocurrency that is the equality in the market. This creates centralisation of cryptocurrency by a few in power.
Similarly certain countries have also started developing their own cryptocurrencies that would be centralised and hence would be governed by the government with respect to the Fiat currency. This is also said to take away the essence of what a cryptocurrency means.
Hence some reasons can be identified that show why Crypto is becoming more and more centralised:
1. Preference given to founders and investors
Cryptocurrencies have different founders who help in developing the currency as well as investors who put their money into developing such a system. When cryptocurrency is used and wealth is distributed among the rich more preference is given to providing founders and investors with money as well as power with regards to that currency. Along with the founders and investors, the other advisors as well as employees of the company also gain significant benefits that cannot be reaped by an ordinary individual using that currency. Air drops is generally one way for this wealth distribution amongst the founders and investors. This creates disbalance in the way money is transferred using that currency.
2. Resources with certain mining pools
Along with the collection of the currency the mining pool where it is mined also plays an important role in its centralisation. In simple words, there are certain mining pools made specifically for mining crypto. What’s more important is that they mine a lot of currency even before a normal person gets the chance to do so. This is especially true with big mining companies. As they mine more, they have access to more crypto which can then be stored with them creating a centralisation. A similar case could be seen in 2014 where 50% of bitcoin’s hash rate was in the control of a single mining company. Such a practice increases their earnings but deprives others from similar benefits.
3. Crypto whales
There are crypto whales, which are entities that own large amounts of cryptocurrency. These can range from exchanges to investment funds to individual investors. These whales frequently have the ability to manipulate prices by buying and selling in large quantities. Simply put, those with more money appear to have more power in the cryptocurrency world, which contradicts the decentralisation theory.
Cryptocurrencies clearly have a long way to go before they can claim to be truly decentralised. To address this issue, cryptocurrencies will need to devise novel solutions. In a system where the rich get the opportunities and perks to become richer, the middle and poor classes suffer and have to work twice as hard, if not more, to gain the same benefit. Those with limited cash flow have no chance in an ecosystem crowded with wealthy miners.
That is why platforms must provide a more affordable alternative to miners and level the playing field. Education and transparency is also important. The more people who understand how cryptocurrency works, the better equipped they will be to participate in it and more transparency leads to more trust in the system. To ensure that power is distributed evenly among all users, one needs to work toward greater decentralisation. This would help gain better access to opportunities where decentralisation can be brought and implemented to make the most out of the world of cryptocurrencies.