Does Decentralisation really exist in cryptocurrency?

Bitcoin was built on the premise that no single individual or entity will the power to control the network. The pillars of censorship resistance and permissionless and borderless access were a central selling point to many individuals who decided to participate in blockchain technology and cryptocurrencies.

When Bitcoin was established in 2009, it was born out of the need to eliminate the possibility of a single point of failure, such as a large bank setting off a cascade of crises around the world, like the financial crisis we saw in 2008 by the failure of institutions in the United States.

So far, we have all believed that cryptocurrencies represent a decentralised paradigm for money. This is a situation where centralised systems, regulated by government bodies such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. 

Although Bitcoin and some cryptocurrencies have promised the haven of decentralisation, we are, however, seeing a shift from that very foundation of decentralisation as government regulation begins to set into the market. Asides from government regulation, the current Russia and Ukraine war can be viewed as a test of how real the promise of decentralisation is.

What is Decentralisation?

On the blockchain, decentralisation is often referred to as the transfer of control and decision-making from centralised entities such as individuals, organisations, or groups to a distributed network.

Vitalik Buterin, one of the co-founders of the world’s second-largest cryptocurrency network, Ethereum, in his writeup on “The Meaning of Decentralisation,” stated, “Blockchains are politically decentralised (no one controls them) and architecturally decentralised (no central infrastructural point of failure), but they are logically centralised (there is one commonly agreed state and the system behaves like a single computer).”

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A counter argument

Before now, blockchains that claim to be decentralised have been criticised with the argument that they are not. The founder of Algorand, Silvio Micali, a professor at MIT and a cryptocurrency expert, believes that many popular blockchains have failed on all three dimensions of what is known as the ‘blockchain trilemma.’ They include decentralisation, security and scalability. 

For Silvio, while many existing blockchains were unscalable, he was more concerned that they were insufficiently decentralised. He argued that Bitcoin and Ethereum were not genuinely decentralised, stating that the computational complexity of the Proof-of-Work (PoW) consensus mechanism made it expensive for individuals to participate in their respective network’s consensus.

In Silvio’s view, because of the existence of mining pools, the concentration of power over the networks in question made these networks undesirably centralised in the hands of a few coordinated groups. 

Alongside Silvio, the CEO of Ripple and the creators of what many in the crypto space call the banker’s coin, XRP, shared similar views, stating in an interview, “Bitcoin is really controlled by China. There are four miners in China that control over 50% of Bitcoin.”

He said this before the great migration, where China was responsible for more than 50% of the computational power of Bitcoin. He reiterated this sentiment during a 2020 hearing with the SEC, where he stated, “The Bitcoin and Ethereum blockchains are highly susceptible to Chinese control because both are subject to simple majority rule.”

Case studies – the Decentralisation counter argument

• Bancor Hack of 2018

The Decentralised Finance (DeFi) platform, Bancor had always boasted of being a platform focused on decentralisation. But, back in 2018, a hacker gained access to one of the platform’s admin wallets – the wallet used to upgrade smart contracts on the platform.

The hacker was able to initially make away with $23.5 million. However, due to the network’s ability to freeze its native token, Bancor managed to stop the hacker from going away with $10 million of its native token. However, $13.5 million was taken away by the hackers.

Remembering the definition of Decentralisation, which is where a protocol exists without the influence of any entity or organisation, including those that built the protocol itself, Litecoin’s CEO, Charlie Lee claimed that Bancor’s response to the hack proved that the DeFi exchange is not truly decentralised. This is because of the platform’s ability to freeze tokens at any point in time.

Charlie wrote on Twitter, “A Bancor wallet got hacked and that wallet has the ability to steal coins out of their own smart contracts. An exchange is not decentralised if it can lose customer funds OR if it can freeze customer funds. Bancor can do BOTH. It’s a false sense of decentralisation.”

• OpenSea Account Restrictions

The world’s largest NFT marketplace, OpenSea, has reportedly barred its Iranian users from its platform, sparking outrage from NFT collectors and raising concerns about Decentralisation in the crypto space. Many Iranian OpenSea users wrote on Twitter that their accounts were being deactivated or deleted with no prior warning.

A popular Iranian NFT artist, ‘Bornosor’, expressed his frustrations on Twitter.

“NOT A gm AT ALL Woke up to my @opensea trading account being deactivated/deleted without notice or any explanation, hearing lots of similar reports from other Iranian artists & collectors. What the hell is going on? Is OS straight up purging its users based on their country now?”

A representative of the marketplace told CoinDesk in a statement that “OpenSea blocks users and territories on the U.S. sanctions list from using our services, including buying, selling, or transferring NFTs on OpenSea. If we find individuals to violate our sanctions policy, we take swift action to ban the associated accounts.”

Those on the sanction list includes Iran, North Korea, Syria, and now, Russia.

The act of blocking accounts of users in a specific region due to sanctions coming from centralised bodies has sparked a debate in the cryptocurrency community about the supposed decentralisation of OpenSea.

• MetaMask and Infura Restrictions

Alongside OpenSea, we also saw popular digital wallet provider, Metamask, restrict accounts of Iranian users by banning wallets associated with Iranian IP addresses. Numerous crypto and NFT community members took to social media, sharing news that they had been completely barred from accessing MetaMask services.

Metamask explained in a blog post that the ban was due to their agreement with Infura, which is the service provider that MetaMask uses to get information on and off of blockchains. Ultimately, the wallet provider stated that services will not be available to users in “certain jurisdictions due to legal compliance.”

• Russia and Ukraine War

At the tail end of February, Russia began a special military operation in Ukraine. This marked the beginning of Russia’s invasion of Ukraine after weeks of failed talks. Due to the United States and other European nations’ sanctions imposed on Russia, in solidarity with Ukraine, there have been calls for centralised cryptocurrency exchanges to ban their Russian users.

One of those calling for exchanges to ban Russian users is Mykhailo Fedorov, Vice Prime Minister of Ukraine. He asked major exchanges to block the addresses of Russian users. This comes after majority of the Russian banks have been removed from the SWIFT payment system, which is the system that banks all over the world use for cross border payments, thereby sending Russia into the financial stone age.

Fedorov stated in a tweet, “I’m asking all major crypto exchanges to block addresses of Russian users. It’s crucial to freeze not only the addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users.”

While some platforms that offer cryptocurrency-related services like PayPal, Visa and MasterCard have gone ahead to restrict access to their Russian users, two of the world’s biggest cryptocurrency exchanges, Coinbase and Binance, have rejected calls for a blanket ban on all Russian users. These calls for cryptocurrency exchanges to ban Russian users are coming on the heels of the removal of Russian banks from the SWIFT system, believing that Russian users will turn to cryptocurrency to circumvent the sanctions.

Although they are standing in solidarity with Ukraine, the mere possibility of excluding people from a particular country from using cryptocurrency puts a big question mark on the Decentralisation theory.

Does decentralisation truly exist in the cryptocurrency space?

Expert Opinion

Ajibola Lawal, a DeFi specialist at Kaicho Digital Assets, said, “Answering the decentralisation question is a matter of a sliding scale, rather than a simple yes or no question. That is on the one hand. On the second hand, the answer also has to be in the context of several factors — from the ethos for which decentralisation should exist, and what the alternatives are. 

“Bring it all together: the sliding scale starts with no decentralision (in this instance, with financial systems, markets and payments) to full decentralisation where anybody, anywhere, whether good, evil or everyone in between is able to transact. 

“As it stands, there is some level of decentralisation in that there is only so much exclusion/prohibition of financial actions that can happen — this is evidenced by the lack of control that governments have over being able to control what their citizens can donate to, using cryptocurrency. 

“However, we don’t have full decentralisation as is evidenced by the actions of Web3 platforms denying access to individuals of certain countries. Within this context, even a partial decentralisation as we can experience now may sometimes be enough, to give people access to self-sovereignty.”