Decentralization is a common topic in cryptocurrency, and in fact is one of the main underpinnings of using distributed software to run asset networks rather than companies, banks, or governments. Bitcoin pioneered the proof-of-work mining approach, with computers (and later specialized mining machines) solving complex equations in order to secure the network, each awarded a portion of the new coins created in proportion to their participation. This has led to a collection of global currencies whose supply is theoretically accessible by all and restricted to no one, reducing fears of centralization of the monetary supply and the manipulation risk that comes with it, as has been a criticism of central banking. It’s important to look at different coin supplies, and how their distribution models work, in order to get a grasp of decentralization in cryptocurrency.
Many coins have a more centralized coin supply than advertised
Poof-of-work coins that had a well-publicized public launch are generally considered to be decentralized, as anyone around the world theoretically had the opportunity to participate in mining, meaning that the supply is likely spread far and wide. Upon closer examination, however, many projects have ended up with a much less diverse distribution than otherwise advertised.
Litecoin, in particular, is one of the oldest cryptocurrencies, hailing from 2011. A seven-year period for distribution tends to imply that the supply has been spread far and wide. However, according to data from CryptoID, a mere 10 addresses contain nearly 15% of the coin’s supply, with the top 100 containing nearly half of all coins created. This may be due to the coin’s limited interest and development in the years leading up to 2017, leading the fewer participants in the ecosystem to accumulate more.
A degree of centralization of distribution is to be expected in newer coins, as is the case with PIVX. However, in this particular case the supply is extremely concentrated, with the top 10 addresses containing nearly two thirds of the entire supply, half of that remaining in a single address. This is especially problematic because PIVX is a proof-of-stake coin, meaning that new coins can only be created by those already possessing some to begin with. Additionally, PIVX employs a governance and treasury model, with stakeholders voting on development decisions and the distribution of funds for projects, giving the extremely centralized distribution ramifications far beyond simple possession of funds.
Similar cases present themselves with NEM and SmartCash. Nearly half of NEM’s supply remains in the top 50 addresses, with much of this contained in the top 15. SmartCash has over half its supply in a single address, with 75% in the top 25 addresses. Many of these projects are often presented as alternatives or competitors to decentralized cryptocurrencies, while remaining firmly under the control of a few entities.
Decentralized distributions seem to be decreasing in popularity
While proof-of-work mining of a coin from zero is the original cryptocurrency model and has proved effective for nearly a decade, its ability to secure a decentralized network has come under scrutiny recently, as well as its energy consumption cost. On a more practical level, a pure proof-of-work mining model with a fair and even distribution takes years to get going, which makes the selling of coins on exchanges and a quickly-rising market cap ranking much more difficult. Additionally, a fairly-mined coin will likely not produce the value out of the gate for development teams to be able to sustain paid operations off of mining alone, making pre-mined and ICO models more attractive in this regard.
Because of this, many popular digital assets today employ different distribution models. The crowded field of top market cap projects tends to include many newer projects employing a different, and more centralized, model than that which currencies like Bitcoin popularized. Filtering the market rankings by excluding non-mineable coins eliminates many of what are considered to be the top players in the field. As fewer of the early cryptocurrency projects in the top ten survive over the coming years, we may see a higher percentage of pre-mines and crowdsales in the top ten.
Despite awkward beginnings, Dash’s distribution is among cryptocurrency’s best
Dash was launched (first as Xcoin, soon changed to Darkcoin) as many proof-of-work coins, mined from a starting supply of zero by whomever was mining at the launch. However, due to a bug in the Litecoin codebase (from which Dash was originally forked), between 10 and 15% of the coin’s entire eventual supply was issued in the first 48 hours to the early miners before the bug was fixed. Due to this heavy initial distribution, questions were raised about the eventual decentralization of the project.
The distribution of #Dash is looking very healthy compared to #Bitcoin, #BitcoinCash & #Litecoin. All data taken today from @bitinfocharts 💪🏆#Crypto #Cryptocurrency #Blockchain #FinTech #TechNews pic.twitter.com/JLy78qgTjq
— Mark Mason (@StayDashy) May 31, 2018
However, the data seems to paint a much better picture today. In terms of USD amounts, Dash has far less wealth centralization than most of the top coins. In terms of absolute amounts, the top 100 addresses contain under 15% of the total supply (compared with the top 10 for Litecoin containing a similar portion), and the top 1,000 addresses contain under 30%. This puts Dash in a better position from a distribution than some of the oldest and most respected projects, despite being only four years old.
This may be due to several factors. First, the initial distribution caused the market to be flooded with cheap coins, many of which were on exchanges that were later hacked, scattering the remaining supply. Additionally, because of the treasury system which pays developers and other contractors every month, many holders need to liquidate funds regularly in order to pay expenses and complete their work, as opposed to simply holding long-term. Finally, Dash’s focus as an everyday money leads to much more frequent disbursement of funds to various merchants, rather than limiting to large exchanges and the few common speculators who may use them.
Transparent blockchain data keeps anonymity, but allows trends to be inferred
One of the main value propositions of cryptocurrency as originally conceived is its pseudonymity, which identifies addresses and transactions through digital cryptographic signatures, but leaves out any overt connection to the identities of its users. As such, ownership over a coin’s supply cannot be proved without supplementary identifying information, usually voluntarily disclosed. This means that, in theory, a single group or individual could own or control the entirety of a coin’s supply, and simply separate it into addresses and network activity that hides this.
However, the radical transparency of the public ledger can allow quite a bit to be inferred. The entire supply’s distribution, both in which addresses they reside in and the average distribution sizes, to infer approximate ownership. While analyzing a blockchain such as Dash’s can’t for certain tell who owns what, it can convey a greater sense of the coin’s distribution, and the decentralization of its supply. This is particularly important when weighing factors such as stake and ownership, ability for the price to be manipulated, and decentralization of elements which require the proof of stake in the network.