Hash Rates and the threat of Centralization-The two main challenges facing Blockchain today

2008 saw the world of finance experience a radical shift from traditional finance to DeFi (Decentralized Finance) as a secure, transparent system for managing digital transactions came up-Blockchain.

Its main aim was to provide a solution to the major problems that were associated with traditional finance systems, such as lack of trust, security and efficiency. With the massive success that has been Blockchain, it has transversed the financial world and started being applied in supply chain management, tokenization in real estate, healthcare, games, digital media and social media.

However, the blockchain industry still finds itself in the same trap as traditional finance, which is threatening the decentralization promise that Blockchain brought to us.

The most famous cryptocurrency you can mention off the top of your head is Bitcoin, which is in the digital wallets of over 400 million people in the world. I will use Bitcoin in this case to illustrate what a hash rate is an why it is the reason that miners are currently bullish on Bitcoin, with many recent selloffs of Bitcoin being used as a hedging strategy to avoid expected risks in the industry.

A hash rate is the computing power that is required to validate transactions and produce new blocks on the blockchain. Therefore for Bitcoin in our example, a higher hash rate enables the Bitcoin network to be more secure and hence maintains the integrity of the network. Remember that for bitcoin investors and traders, trust is very important-and that is why hash rates are so critical in blockchain, regardless of how much energy they consume.

Now the key problem here is that to maintain a high hash rate, there is a need for high energy consumption. What bitcoin miners do is they add transaction data to Bitcoin’s global public ledger of past transactions. Therefore as more miners join the network, the hash rate increases, which means higher energy consumption to sustain it. Bitcoin mining’s environmental impact is hence a concern that needs to be addressed.

The second major concern with regards to the hash rates, is that data shows there is actually elements of centralization of mining power, which has created large barriers of entry for individual miners to compete with these larger pools. There is also the potential for 51% attacks by said mining pools that control the majority of the hash rate. If a single mining pool or a group of mining pools controls over 50% of the hash rate, they could potentially control the network and carry out malicious activities, such as double-spend attacks or rewriting transaction histories. This presents a significant threat to the security and integrity of the Blockchain network.

So what does this mean? Is there a monopoly arising in the Blockchain industry that for so long has prided itself in being decentralized?

The blockchain industry has quickly fallen into a massive imbalance of power, mirroring the traditional finance industry. The concentration of wealth and power within a small group of individuals has created an industry that is far from decentralized. Those who were early adopters of blockchain technology, particularly Bitcoin, were able to accumulate large amounts of wealth through mining, investing and trading. Meanwhile, it is becoming increasingly difficult for new players to enter the market and challenge the dominance of established players. The cost of setting up and running a successful blockchain project can be significant, and not everyone has the resources or expertise to do so. Network effects also play a role in the imbalance of power in the blockchain industry. Blockchain networks rely on network effects, which means that the value of the network increases as more people use it. This creates a self-reinforcing cycle where established networks become increasingly dominant, making it harder for new networks to gain traction. There are ways to curb these challenges though, and still profit from this great innovation that Satoshi Nakamoto gave us.

LIGHT AT THE END OF THE TUNNEL…

Despite the challenges facing the blockchain industry, there are ways to address these issues and create a more sustainable, equitable system.

1.High energy consumption

To deal with this pressing issue, the industry could move towards using renewable energy sources like wind or solar power in the mining operations.

In less powered areas like Africa, shifting to renewable energy to facilitate mining and other blockchain projects will be double productive, as it will also provide power to the more than 600 million people in Africa still living without electricity. This would not only reduce the environmental impact of Bitcoin mining but also make it more sustainable in the long run.

2. Fighting Monopoly creation

In order to ensure that new players are not undermined by the early adopters of blockchain technology, efforts should be made to improve the underlying technology of Blockchain. This could be done by introducing new protocols or adopting existing protocols like the Lightning Network, to significantly improve the speed and accuracy of bitcoin transactions. Finally, greater efforts should be made to educate people about blockchain technology and its potential. This could be achieved by providing greater access to information and resources, offering training programs and workshops, and working with educational institutions to integrate blockchain into their curricula. This move will help educators of today create a new generation of Blockchain-Savvy individuals.