Decentralization of Public Blockchain Systems, a Myth or Fact
Abstract
The promise of decentralized global systems has many in the blockchain and cryptocurrency community working and innovating feverishly.?Currently, the general population must rely on third parties that control and monitor various types of transacting activity.?The consumer must pay more and/or at times be excluded from participating due to various barriers to entry.?The promise of decentralization is to give back power to the people.?Satoshi Nakamoto started a movement by introducing Bitcoin as an alternative to a centralized currency, removing the “big brother” factors of censorship, third-party custody, and permission.?Satoshi’s idea was revolutionary. However, much work still needs to be done to fully achieve true decentralized, equitable, and distributed systems. ??In the quest to achieve full-proof decentralization, it is important to analyze the architecture of various components such as the infrastructure of the internet, blockchain architecture, consensus mechanisms, and smart contract governance.?This paper will focus on Bitcoin and Ethereum digital currencies to examine the various considerations stated above and how slight variations in them can push these blockchains toward centralization.??In conclusion, possible solutions to centralization tendencies will be proposed.
Overview of Architecture Components
The Global Internet is Centralized
Currently, the global internet is made up of 3 tiers.?Tier 1, the backbone of the internet, allows for settlement-free interconnection (settlement-free peering)?(Wikipedia).?There is no profit being made during the transmission of data on this layer.?Tier 1 providers work together through peering agreements. ?Figure 1 shows the top Tier 1 providers which control most of the data traffic.
These companies are competitors. However, they agree to work together to enable the reach of various endpoints throughout the world.?They generate revenue from the Tier 2 and 3 internet service providers (ISPs) that rely on their backbone to reach global endpoints.?Tier 1 providers at the top of CAIDA’s ranking are the ones that have the most data traffic flowing through their data channels.?Level 3 Parent, LLC ranks number one and according to ASRank?(CAIDA), the number of customers (or endpoints) they reach is over 2 billion.?Figure 2 shows that +68% of all addresses in the world are reached via Level 3's channels.??
Adding on to Level 3’s share are US-based Verizon, AT&T, GTT, and T-Mobile showing that the internet infrastructure is largely centralized to US-governed companies.?This is of concern because US corporations must operate according to the US government.?The Communications Act of 1934?(FCC) gives the President of the United States the power to pull “the internet kill switch” under extreme circumstances.?There have been some notable examples of extreme situations in other countries like Egypt, India?(Gault), and China?(Wikipedia) which have shut down or restricted the general population from accessing the internet based on government mandate.
With the understanding that the infrastructure of the internet is centralized, blockchain technologies that have a large concentration of nodes in specific regions are leaning towards regional centralization.
Geolocation of Nodes
The location of nodes is important to the ethos of decentralization.?It determines if the distributed ledger is fault-tolerant to regional outages or cyber-attacks. ?Bitcoin nodes are distributed all over the world and based on their location it can be inferred that they are distributed through various Tier 1 providers.?
Figure 3 shows that even though there is a large concentration of nodes in the US, there are concentrated pockets of nodes distributed around the world. If one of the Tier 1 providers should go down for any reason then there would be other nodes around the world that could maintain and restore the Bitcoin ledger.?
In the case of Ethereum nodes, the US concentration of nodes is currently 49.19% (Figure 4) which is uncomfortably close to achieving a majority.?Technically, Ethereum’s nodes are decentralized as there are nodes in various countries and if there was an outage the ledger would most likely be able to recover from other nodes. ?However, based on the data, Ethereum’s validating node concentration is inching closer to being centralized from a regional and infrastructure perspective. ?After the merge to proof of stake (PoS) more red flags started to arise.
On Premise or On Cloud
In a perfect world, blockchain nodes would run on individual on-premise systems and not share memory space with any other sandboxed system that could potentially be malicious.?This method would favor a decentralized blockchain.?However, data shows that people are choosing to use cloud providers to run validating nodes due to cost control.
Bitcoin metrics in Figure 5 show that most Bitcoin nodes run on a Tor network which is an anonymous peer-to-peer (p2p) system.?Since this network is anonymous, one cannot tell with certainty what number of nodes are on the cloud versus on-premise.?The possibility of nodes concentrating on the same cloud provider is there and this leaves the Bitcoin blockchain potentially vulnerable to centralization.
When reviewing Ethereum’s network the metrics show that 63.92% of total nodes were on hosting platforms.?According to ethernodes.org, out of 6751 nodes, 4315 were on hosting platforms, 2279 were on AWS. ?Even though there is diversification of nodes amongst hosting platforms, the concentration of nodes on AWS is hard to deny. ?As more players join and want to run nodes it could be possible that these numbers continue to increase in the direction of more centralization. ?In early September, Hetzner - another cloud provider, confirmed that their terms of use state, “hosting service cannot be used to run nodes.” Those nodes will be removed as Hetzner audits their systems, further shifting the demographic of hosted nodes?(C). ??Figure 6 shows the distribution of Ethereum nodes across network types.??
Consensus Mechanism
The algorithms that control blockchain consensus are also a crucial component in keeping the protocols decentralized.?It is not enough to have hardware that is distributed amongst ISPs and geolocations.?If the logic of the consensus algorithm unintentionally clusters users, then it promotes centralization.
Bitcoin’s proof of work (PoW) consensus algorithm originally was mined by individuals with home computers as the difficulty of solving the puzzle to win Bitcoin rewards was relatively low.?Now, mining a Bitcoin has become increasingly difficult as more people are competing for block rewards.??The energy cost for individuals has increased considerably which has pushed people to build mining pools.?The top 4 pools mine over 73% of the Bitcoin rewards.?Normal everyday people can mine a Bitcoin but their odds of winning Bitcoin are incredibly low, 1 in 1.4M?(Wright).?The mining process is no longer equitable and divisible for normal people as Satoshi Nakamoto would have envisioned it during inception. The security and validation of the blockchain are now concentrated on the top 4 pools.?
In the case of Ethereum, the merge to PoS has been paramount.?The protocol has decreased energy consumption by 99.9%?(Hayward) and the token has effectively become deflationary.?Surrounding all this great news is concerns that Ethereum is heading to centralization.?Staking pools have greatly decreased the barrier to entry for folks that want to participate in validation but don’t have the 32 ETH to become a validator.?Currently, the majority of ETH (28.20%) is staked with Lido which is aiming to be a “decentralized staking pool” provider that is currently working on governance specifically related to the management of node operators?(Lido).?They have not launched their distributed validator technology yet, so the node operator selection is currently being done through an application process making it a centralized and permissioned evaluation process?(Operation). Currently, the Lido Node Operator Subgovernance Group (LSNOSG) evaluates the applications of the node operators.?
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Figure 8 shows the distribution of staking pools across the Ethereum network and after the Lido, there is 22.41% of “unknown” validators.?Based on network statistics, it can be inferred that many of the nodes in this category could be with a cloud provider, but nothing can be inferred about who is running them.?Any party including sovereign countries could be running nodes.?The next three largest staking pools belong to Coinbase, Kraken, and Binance which are all centralized exchanges.?Ethereum’s consensus mechanism is technically decentralized as not one of these parties has a majority of 51% stake.?Nevertheless, if the larger known entities were forced to comply with regulation or wanted to manipulate the network, they could come together to surpass a 51% majority stake.
Smart Contract and Regulation
When focusing on Ethereum’s smart contracts it is important to point out that each smart contract is run differently, and some are centralized, permissioned, and can censor parties.? On August 8th, 2022 the U.S. Department of the Treasury sanctioned Tornado Cash?(Treasury), a smart contract application that obfuscated ETH transactions. ??Soon after, Circle the issuer of USDC - a centralized stablecoin banned addresses linked with tornado cash.?This was done through smart contract code (Bonetti) via a function called “notBlackListed”.?There is a lot of controversy surrounding this topic however, this action shows that if the regulation card is pulled by a sovereign state, smart contracts can be modified to change the behavior of transactions.
Conclusion
Bitcoin started a revolution and has planted the seed of an ideology in the minds of many.?A promise of decentralized, permissionless, and uncensored public blockchain technologies adopted by the masses.?A promise of digital currencies that are not controlled by any government or central bank. The fact remains that data does not lie and verifying Bitcoin and Ethereum’s decentralization has shown that both are leaning toward centralization as they mature. How can this be rectified? ?
Potential Solutions
A short-term solution is for the Bitcoin and Ethereum foundations to sound the alarm about this issue to bring more awareness to the problems.?Below is a list of possible solutions:
Public blockchain technology is still in the early adoption stage.?Decentralization standards need to be created to maintain the ethos of public blockchains.?If this technology becomes centralized it will be much easier to censor and control those that use it.?Decentralization is of the most importance to public blockchain technology.
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References
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—. https://en.wikipedia.org/wiki/Internet_censorship_in_China#Usage_of_Internet_kill_switch. n.d. Website. 23 October 2022.
—. https://en.wikipedia.org/wiki/Tier_1_network. n.d. Internet. 20 October 2022.
Wright, Keira. https://cointelegraph.com/news/tiny-bitcoin-miner-defies-massive-odds-to-solve-a-valid-block. 12 January 2022. Website. 31 October 2022.