In the cryptocurrency arena, the term decentralization is thrown around as an absolute: The system is either decentralized or it is not. This, however, isn’t exactly the case. Decentralization, in fact, can be thought of as a spectrum and many aspects of a cryptocurrency system fall on different portions of the decentralization spectrum.
The spectrum of decentralization.A major aspect of decentralized peer-to-peer blockchain-based systems is the fact that any user can spin up a node and be an equal participant in the network. Here are a few other factors that can also be used to rank cryptocurrencies on the decentralization spectrum.
- Initial coin distribution and coin issuance: For a Proof of Work cryptocurrency with a predetermined issuance schedule, the distribution of coins can be considered fairer than a system in which a high percentage of the coin issuance was pre-mined and distributed to a select few insiders. This would place pre-mined cryptocurrencies further toward the centralized spectrum than fairer and more decentralized coin-distribution models.
Chart depicting the coin issuance schedule and inflation rate for bitcoin. It has served as a model for most Proof of Work distribution schedules.To view a detailed breakdown of the Bitcoin network’s coin issuance schedule, see the image above, which shows the interactive chart being dynamically created. (Go to the website and run your mouse pointer along the lines to see the exact numbers at any time.) The stepping line shows the block subsidy halving every 210,000 blocks, or roughly every four years. The upward curve line shows the amount of bitcoin in circulation at any time. As for researching other cryptocurrencies, the comparison sites will show how often the currency’s coins are issued.
- Node count: The nodes are the gate keepers of valid transaction data and block information for blockchain systems. The more active nodes running on the system, the more decentralized the cryptocurrency. Unfortunately, this is a tricky one; it’s probably pretty difficult to find this precise information for most cryptocurrencies.
- Network hash rate: The level of the cryptocurrency’s hash rate distribution among peers is also an important decentralization measurement for PoW cryptocurrencies. If only a few companies, individuals, or organizations (such as mining pools) are hashing a blockchain to create blocks, the cryptocurrency is relatively centralized.
- Node client implementations: Multiple versions of client, or node, software exists for many of the major cryptocurrencies. For example, Bitcoin has bitcoin core, bitcore, bcoin, bitcoin knots, btcd, libbitcoin, and many other implementations. Ethereum has geth, parity, pyethapp, ewasm, exthereum, and many more.
Cryptocurrencies with fewer client versions may be considered more centralized than those with more. You can find this information at the cryptocurrency’s GitHub page and on its website, most probably. Check here for an interesting view of the Bitcoin network client versions for nodes on the network.
- Social consensus: Social networks of users and the people participating in these cryptocurrencies are also very important in regard to the cryptocurrency decentralization spectrum. The larger the user base and the more diverse technical opinions on the system, the more robust the software and physical hardware is to changes being pushed by major players in the system.
If the social consensus of a cryptocurrency is closely following a small set of super users or a foundation, the cryptocurrency is, in effect, more centralized. More control is in the hands of fewer people, and it is more likely to experience drastic changes in the rules of the system.
An analogy can be seen in sporting events; the rules (consensus mechanisms) are not changed by the referees (users and nodes) halfway through the competition. The number of active addresses in the cryptocurrency’s blockchain provides a good metric indicating social consensus and the network effect. This shows the number of different blockchain addresses with balances associated.
This metric isn’t perfect, as individual users can have multiple addresses, and sometimes many users have coins associated with a single address (when utilizing an exchange or custodial service that stores all its clients’ currency in one address).
However, the active addresses metric can still be a helpful gauge to compare cryptocurrencies — more addresses means, in general, more activity and more people involved.
Coinmetrics.io compares active-address quantities between different cryptocurrencies (and provides plenty more statistics).A helpful tool to find cryptocurrency active address numbers can be found at Coin Metrics; choose Active Addresses in the drop-down list box on the left, and select the cryptocurrencies to compare using the option buttons at the bottom of the chart. For smaller cryptocurrencies this information may be hard to find, but the data would be accessible via that cryptocurrency’s auditable blockchain.
- Physical node distribution: With cryptocurrencies, node count is important, but it is also important that those nodes are not physically located in the same geographical area or on the same hosted servers. Some cryptocurrencies have the majority of their nodes hosted on third-party cloud services that provide blockchain infrastructure, such as Amazon Web Services,
Infura (which itself uses Amazon web Services) Digital Ocean, Microsoft Azure, or Alibaba Cloud. Systems with this type of node centralization may be at risk of being attacked by these trusted third parties. Such systems are more centralized than purer peer-to-peer networks with large node counts that are also widely geographically distributed. Check out this view of the Bitcoin network node geographical distribution. For the smaller cryptocurrencies, this information may be harder to find.
- Software code contributors: A broad range of code contributors to the client software implementations — and code reviewers — is important for the decentralization of a cryptocurrency; the larger the number of coders, the more distributed and decentralized the cryptocurrency can be considered. With fewer contributors and reviewers, errors in the code can be more prevalent and intentional manipulation more possible.
With larger numbers of reviewers and coders, mistakes and malfeasance is more easily caught. The developer count and activity on various cryptocurrency code repositories can be gleaned by exploring its GitHub page. For more detail, check out bitcoin’s core repository. As an example, Ethereum averages just under 100 active repository developers per month, while the Bitcoin network averages just around 50. For most other cryptocurrency networks, that number is much lower. On average, about 4,000 developers are currently working on about 3,000 different cryptocurrency projects each month. Of course, this evolves all the time.