Performance of Key Attributes of Decentralization
Therefore, when constructing and maintaining long-term themes related to the value and utility of the network, monitoring the security and level of decentralization of Bitcoin is crucial.
Security Analysis
Bitcoin, as an emerging open-source technology, has a very strong security record, but it is not perfect. As I wrote in “Broken Money,” here are some notable technical issues it has faced to date:
In 2010, when Bitcoin was still new and had almost no market price, a node client experienced an inflation bug, which was fixed by a soft fork by Satoshi Nakamoto.
In 2013, due to negligence, an update to the Bitcoin node client unexpectedly became incompatible with the previous (and widely used) node client, resulting in an unintended chain split. Within a few hours, the problem was analyzed by developers who instructed node operators to revert to the previous node client, resolving the chain split issue. Since then, the Bitcoin network has maintained a perfect 100% uptime. During this period, even Fedwire experienced disruptions and failed to achieve 100% uptime.
In 2018, a Bitcoin node client accidentally introduced another inflation bug. However, this issue was identified and cautiously fixed by developers before it could be exploited, so it did not cause any problems in practice.
In 2023, people started using the SegWit and Taproot soft fork upgrades in unforeseen ways, including inserting images into the signature part of the Bitcoin blockchain. While this itself is not an issue, it demonstrates the risk of certain aspects of the code being used in unexpected ways, which means a conservative approach needs to be maintained when implementing upgrades in the future.
Bitcoin can indeed recover from technical issues. The basic solution is for node operators on the decentralized network to roll back to the previous update before the error existed and reject new updates that caused the problem. However, we must imagine the worst-case scenario. If a technical issue goes unnoticed for years and becomes part of the widespread node network, and then it is discovered and exploited, it becomes a more serious and potentially catastrophic problem. While it is not irrecoverable, it would be a significant blow.
Due to the existence of Bitcoin’s code repository for several years, it has become more robust and benefited from the Lindy effect.
Overall, the occurrence rate of major errors has decreased over time, and the fact that the network has maintained 100% uptime since 2013 is remarkable.
Decentralization Analysis
We can measure decentralization by looking at node distribution and mining distribution. A widely distributed node network makes it very difficult to change network rules as each node enforces rules for its users. Similarly, a widely distributed mining network makes transaction censorship more difficult to achieve.
Bitnodes has identified over 16,000 accessible Bitcoin nodes. Bitcoin Core developer Luke Dashjr estimates that considering privately operated nodes, the total number of nodes exceeds 60,000.
In comparison, Ethernodes has identified around 6,000 Ethereum nodes, with about half of them hosted by cloud service providers rather than running locally. And due to the bandwidth requirements for Ethereum nodes to operate privately, this number may be close to the actual count.
Therefore, Bitcoin is quite robust in terms of node distribution.
Bitcoin miners cannot change the core rules of the protocol, but they can decide which transactions enter or don’t enter the network. Thus, centralization of miners increases the possibility of transaction censorship.
The largest publicly listed mining firm, Marathon Digital Holdings (MARA), has less than 5% of the network’s hash rate. Several other private miners have a similar scale. There are also various public and private miners with 1-2% ownership, as well as many miners with even less hash power. In other words, mining is indeed quite decentralized, and even the largest participants have only a small allocation of network resources.
Since China banned Bitcoin mining in 2021, the United States has been the largest mining jurisdiction, but its mining hash rate is estimated to be less than half of the total hash rate. Ironically, China remains the second-largest mining jurisdiction as it is challenging to eliminate the mining industry even with high levels of authoritarianism. Other energy-rich countries like Canada and Russia have significant mining infrastructure, and several other countries have smaller-scale mining operations.
Mining companies typically allocate their hash power to mining pools. Currently, mining pools are quite centralized, with two pools jointly controlling about half of the transaction processing, and the top ten pools almost controlling all transaction processing. I believe this is an area that needs improvement:
However, there are some important considerations. First, mining pools do not hold the miners’ machines, which is a crucial distinction. If a mining pool has issues, miners can easily switch to another pool. Thus, while several pools can collectively conduct a temporary 51% attack on the network, their ability to sustain such attacks may be very weak. Second, Stratum V2 has recently been introduced, which allows miners to have better control over the block construction process instead of relying solely on the pool to do all the work.
The physical mining supply chain is also quite centralized. TSMC and a few other foundries worldwide are key bottlenecks for the production of most types of chips, including the specialized chips used by Bitcoin miners. In fact, I would even argue that mining pool centralization is an overestimated risk while semiconductor foundry centralization is an underestimated risk.
Overall, ownership of active mining machines is highly decentralized, but in practice, certain countries have a significant concentration of miners, certain pools have a significant portion of mining power directed towards them, and the mining supply chain has some centralized aspects, which weaken the decentralization of the mining industry. I believe mining is an area that can benefit from further development and attention, and fortunately, the most critical variables (ownership of miners and physical distribution) are highly decentralized.
User Experience
If Bitcoin is difficult to use technically, it will be limited to programmers, engineers, theorists, and advanced users who are willing to spend time learning. On the other hand, if it is almost effortless to use, it can spread more easily to the general population.
When I look back at cryptocurrency exchanges from 2013-2015, they looked very rough. Today, it is usually easier to buy Bitcoin from reputable exchanges and brokers, and the interfaces are user-friendly. In the early days, there were no dedicated Bitcoin hardware wallets, and people often had to figure out how to manage their keys on their computers. Most of the “lost Bitcoin” stories you hear in the media come from that early era when Bitcoin’s value was not significant enough to make people pay close attention, and key management was more challenging.
Over the past decade, hardware wallets have become more widespread and easier to use. Software wallets and interfaces have also improved significantly.
One of my recent favorite combinations is Nunchuk+Tapsigner, which works well for small amounts of Bitcoin. Tapsigner is a $30 NFC wallet that allows offline storage of private keys at an affordable price, and Nunchuk is a mobile and desktop wallet that can be used with various types of hardware wallets, including Tapsigner for medium-sized Bitcoin amounts or a full-fledged hardware wallet for larger amounts.
Several decades ago, learning to use a checkbook was an important skill. Today, many people acquire Bitcoin/crypto wallets before they even have a bank account. Managing public/private keys may become a more routine part of life, used for managing funds as well as signing to differentiate genuine social content from fake content. It is easy to learn, and many people will grow up with it as the surrounding technology evolves.
According to Statista, the number of Bitcoin ATMs worldwide has increased by over 100 times from 2015 to 2022:
In addition to ATMs, alternative purchase methods have also increased, which I believe is one of the reasons why the number of ATMs has recently plateaued. Azteco, founded in 2019 and raised $6 million in seed capital in a round led by Jack Dorsey in 2023, offers vouchers that can be purchased with cash at hundreds of thousands of retail and online platforms (particularly in developing countries) and then redeemed for Bitcoin.
The Lightning Network has been expanding over the past six years, reaching significant levels of liquidity by the end of 2020.
Websites like Stacker News and communication protocols like Nostr have integrated the Lightning Network, ultimately merging value transfer with information transfer. Innovative browser extensions like Alby make it easy to use the Lightning Network across multiple websites with a single wallet and can replace usernames/passwords as a signing method for many scenarios.
Overall, the use of the Bitcoin network has become easier and more intuitive over time, and from what I have seen as a risk investor in the field, this trend is expected to continue in the coming years.
Legal Acceptance and Global Recognition
“But what if governments ban it?” Since Bitcoin’s inception, it has been something that people generally oppose. After all, governments do enjoy a monopoly on issuing national currencies and capital controls.
However, when answering this question, we need to ask, “Which governments?” There are about 200 of them. The game theory is such that if one country bans it, another country can gain new business by embracing it. El Salvador has even recognized Bitcoin as legal tender, and other countries are using their sovereign wealth funds to mine Bitcoin.
And some things are really hard to stop. Back in the early 1990s, Phil Zimmerman created Pretty Good Privacy (PGP), an open-source encryption program. It allowed people to send private information to each other over the internet, something most governments didn’t like. When his open-source code flowed outside the United States, the U.S. federal government launched a criminal investigation against Zimmerman, claiming “unauthorized export of munitions.”
In response, Zimmerman published his complete source code in a book and was protected by the First Amendment. After all, it was just a collection of words and digits he chose to express to others. Some individuals, including Adam Back (creator of Hashcash, eventually used as the proof-of-work mechanism in Bitcoin), even started printing various encryption codes on T-shirts with a warning:
The U.S. federal government did abandon the criminal investigation against Zimmerman and made changes to encryption regulations. Encryption technology became a critical part of e-commerce as secure encryption is needed for online payments, so if the U.S. federal government attempted to overreach, much economic value could be delayed or shifted to other countries.
In other words, these types of protests have been successful in using the rule of law to oppose government overreach and highlight the absurdity and impracticality of attempting to restrict the dissemination of this concise and easily spreadable information. Open-source code is just information, and information is hard to suppress.
Similarly, Bitcoin is a freely available open-source code, making it difficult to eliminate. Even restrictions on the hardware side are challenging. China banned Bitcoin mining in 2021, yet it remains the second-largest mining jurisdiction, indicating that banning it is not easy. The software aspect has even more stickiness.
Further reading:
China’s Cryptocurrency Ban Unsolvable? Pan Gongsheng Tipped to Lead Central Bank, Once Called Bitcoin ‘Dead Body’
Many countries have been inconsistent in their ban on Bitcoin or have fallen into their own rule of law and power struggles. In relatively free countries, the government is not a monolith. Some government officials or representatives like Bitcoin, while others do not.
In 2018, the Reserve Bank of India banned banks from participating in cryptocurrency-related businesses and lobbied for a complete ban on cryptocurrency use. However, in 2020, the Supreme Court of India made a favorable ruling, restoring the right of the private sector to innovate using the technology.
In early 2021, amid a decade-long double-digit inflation of their national currency, the Central Bank of Nigeria banned banks from interacting with cryptocurrencies, although they did not attempt to make it illegal in public as it would be challenging to enforce. Instead, they introduced the eNaira as a central bank digital currency.
Many countries are still exploring their stance on Bitcoin, and some have even embraced it. It is challenging for any single government to unilaterally ban it, and attempts to do so may result in economic disadvantages as innovative businesses move elsewhere. The resistance against government overreach and the use of the rule of law to protect the dissemination of information have proven successful. Bitcoin’s open-source nature makes it resilient, and even restrictions on the hardware side are challenging to enforce.
The Central Bank of IRA is introducing a digital currency and implementing stricter withdrawal restrictions on physical cash in an attempt to bring people into their centralized digital payment system. During the ban, Chainalysis reported that Nigeria had the second-highest adoption rate of cryptocurrencies in the world, mainly stablecoins and Bitcoin, especially with the highest peer-to-peer transaction volume, which allowed them to bypass the banking blockade. By the end of 2023, after almost three years of ineffective ban, the Central Bank of Nigeria changed its decision and allowed banks to interact with cryptocurrencies under certain regulations.
In 2022, Argentina experienced a high demand for cryptocurrencies as a defense against triple-digit inflation. Some major banks were making efforts to provide cryptocurrencies to their customers, but the Argentine government banned banks from offering such services. They cited typical reasons such as volatility, internet security, and money laundering, but in reality, it was to slow down the outflow of their own currency. In 2023, they went further and banned financial technology payment applications from providing digital assets to customers. However, with the election of President Javier Milei, the situation began to reverse as he supported Bitcoin and supported the market’s choice of currency. During Milei’s campaign, economist Diani Mondino (now Argentina’s Minister of Foreign Affairs) wrote, “Argentina will soon become a Bitcoin paradise.”
For years, the U.S. Securities and Exchange Commission (SEC) has been suppressing Bitcoin spot ETFs. Spot Bitcoin ETFs in other countries have no issues, and the Commodity Futures Trading Commission allows Bitcoin futures trading, while the SEC allows futures-based ETFs. The SEC even allows leveraged futures Bitcoin ETFs to be launched. However, they repeatedly block all spot ETFs, which are the simplest type and what the market wants. In 2023, the District of Columbia Circuit Court of Appeals found that the SEC’s practice of allowing Bitcoin futures ETFs but not spot ETFs was “arbitrary and capricious” and not based on reasonable and consistent arguments. By early 2024, several spot Bitcoin ETFs began trading.
There are approximately 160 currencies in the world, surrounded by a “financial brain barrier.” They can control how much physical currency (e.g., cash and gold) can enter the country’s borders and impose strict limitations. They can control which currencies banks can operate with, which domestic and international bank transfers can be made, and which currency accounts they can offer to customers.
Even if developing-market jurisdictions do allow access to U.S. dollar accounts, they can be risky for holders. They are fractional reserves and are not backed by FDIC insurance supported by the U.S. government and the Federal Reserve. In other words, foreign banks’ U.S. dollar deposits in developing countries are essentially junk-grade and uninsured leverage bond funds. In times of currency shortage, U.S. dollar accounts can be forcibly exchanged at a false exchange rate into the local currency or blocked from withdrawal. If someone holds dollars in a domestic bank account in a country experiencing hyperinflation, they are unlikely to recover most or any of the dollars.
These 160 different fiat currencies can be a real problem for many people. Latin America has over 30 currencies, and Africa has over 40. All these financial borders create trade frictions, and all these financial borders lock people into rapidly depreciating currency units.
In other words, if I want to pay a graphic designer from a developing country using various traditional payment methods, and they want to receive dollars instead of the local rapidly depreciating currency, their government and banking system can block the transfer and have them receive the local currency represented in various ways. They can also set an artificial exchange rate. Financial control is strict:
But if that designer chooses to be paid in Bitcoin or dollar stablecoins, I can send them a QR code through a video call or via private message or email, and it will propagate in their banking system. For legal reasons, I won’t send it to sanctioned countries (too risky for me), but if their country allows Americans to send money legally, I’m happy to do so. The friction is on their end; they represent the vast majority of countries.
Furthermore, someone can carry an unlimited amount of Bitcoin and stablecoins globally as long as they have the private keys. They can write it down and keep it in their luggage, store it on a device, remember the twelve words representing the key, or temporarily paste it into a password-protected encrypted cloud file, bringing unlimited value density through any entry point.
I saw a sign at the airport that said “No carrying more than $10,000 in cash,” and I chuckled to myself because they have no way of knowing who among the people in line owns $10 million or any arbitrary value of Bitcoin or stablecoins.
With this technology, the 160 financial borders between us are becoming increasingly porous. Trying to eliminate Bitcoin or stablecoins or similar things is like trying to build sand walls to stop the tide. The ability to transfer funds between banks, any parties connected to the Internet, opens up global competition among currencies.
This is a good thing for most people. It is a bad thing for those who seek rent from top to bottom, continuously dilute people’s savings and wages, siphon off value to themselves and cronies, and rely on obfuscation rather than transparency to finance themselves. Capital naturally flows to places with good legal protections and rule of law, and technology makes this process faster, smoother, and accessible to not just the rich but also the working class and the middle class.
If governments try to ban Bitcoin, holding and using Bitcoin would put them in an awkward position, especially for governments that claim to uphold the rule of law. They would have to argue that having a non-depreciating currency that people can hold and send to others is a bad thing. In other words, they would have to prove that decentralized spreadsheets pose a threat to national security and that this dangerous thing must be banned under the threat of imprisonment.
Instead, the biggest legal challenge to the Bitcoin network in the future may come from the realm of privacy and major governments like the United States. Governments indeed do not want people to have any form of financial privacy, especially on a large scale. Their argument is that in order to prevent 1% of bad actors from engaging in terror financing, human trafficking, or other illicit activities, 100% of people must give up their financial privacy rights and allow the government to monitor all transactions between parties. Furthermore, governments have become heavily reliant on income from income taxes, and income tax enforcement relies on ubiquitous monitoring of all payment flows. However, of course, such a thing can lead to widespread abuses of power and serious consequences.
Additionally, we live in an era of surveillance capitalism. If we give up our digital souls, our data, companies will provide us with countless free services. What we see and consume are highly valuable business information. The government has reinforced this and helped make it the norm because they also have their hands in the backend and collect this data. Sometimes it may be for national security reasons, and sometimes it may be an attempt to control the entire population.
However, the ability for individuals to custody their own money and send money to others in ways that corporations and governments cannot monitor or devalue is an important check on power. For corporations, there are many reasons why they wouldn’t want to surveil us, especially as they are frequently targeted by hackers and have data leaked onto the dark web. For governments, such technology cannot be used to universally monitor and freeze funds without reasonable cause, forcing them to have legitimate reasons before engaging in targeted law enforcement, which comes with costs and legal procedures.
Up until the 19th century and earlier, financial privacy was the norm as most transactions were conducted with physical cash, and there was no significant technology to monitor this. The idea of monitoring everyone’s transactions was science fiction. Starting from the late 19th century, particularly throughout the 20th century, people increasingly used banks for savings and payments, and these banks became more centralized and subject to government surveillance. The telecommunication era and the resulting modern banking era made ubiquitous financial surveillance the norm. Governments didn’t need to enforce privacy controls on individuals; they primarily only needed to enforce them on banks, which was easy and happened behind the scenes. The rise of factories and companies led people to leave farms for cities, earning wages stored in bank accounts with taxes automatically deducted, and all their financial activities became easily monitored.
However, with the constant improvement of computer processing, encryption, and telecommunication technologies, Bitcoin was eventually created, allowing peer-to-peer anonymous value transfer. As Bitcoin and related technologies became more widespread, especially with privacy layers and methods built on top of them, the government’s maintenance of existing centralized surveillance becomes increasingly untenable. People can begin to opt-out, but governments won’t give up easily. They are now trying to enforce banking-style surveillance and reporting requirements on individuals, which is orders of magnitude more challenging than enforcing them on institutions.
I suspect there will be more conflicts similar to the Zimmerman case in the coming years, but this time it will be about financial privacy. Governments around the world will increasingly push against the friction of various privacy-preserving methods, even attempting to criminalize these methods, and the defense of this privacy is that many of these methods are open-source and just information. To restrict the creation and use by those who aren’t engaged in criminal behavior, there needs to be an orderly process of criminalizing the use of text and digital information. It’s difficult to legally justify this in jurisdictions with freedom of speech, and due to the ease of spreading open-source code, it’s also challenging to enforce in practice. In the United States and certain other jurisdictions, well-funded litigation can overturn these laws on constitutional grounds. So, I expect that period to be quite chaotic.
Final Grade: A-
Rating the Bitcoin network is a bit of a joke as it’s not something that can truly be quantified, but overall, most aspects of the network have either improved or remained roughly the same.
We can deduct points to bring it down to an A- instead of an A or A+ in the areas where decentralized mining could be better (especially in terms of mining pools and ASIC production), and the overall user experience and development of Layer 2 applications/ecosystems could be further advanced. For the latter, I would like to see more and better wallets, more seamless use of higher-layer networks, greater adoption of built-in privacy features, and so on.
If Bitcoin enters a sustained period of high fees, like it has recently, I believe the development of Layer 2 will accelerate. When fees are low, people are more likely to use the base layer, and there’s no reason to use higher-layer solutions. When fees are high, various existing use cases will face stress tests, and users and capital will gravitate towards efficient or needed solutions.
Furthermore, governments are usually forced to accept it to some extent, sometimes willingly, sometimes passively. However, the future battles may revolve around privacy and, in my view, this battle is far from over.
Overall, I still believe the Bitcoin network has high investment value, whether directly as the asset Bitcoin or as equity in companies building on top of the network.
Risks still exist, but they represent areas of potential improvement and contribution. The strength of the Bitcoin network lies in part in its open-source nature, allowing anyone to audit the code and propose improvements, anyone to build additional layers on top, and anyone to build interactive applications and continuously improve it.