Is Bitcoin Completely Decentralized?

Updated Auguest 30th, 2021

Many believe that Bitcoin is one hundred percent decentralized. Bitcoin is maintained by all its users in a decentralized manor. No one has yet been able to attack the network successfully or gain some control over it. But could there be a way where someone has complete control over Bitcoin? Is Bitcoin completely decentralized? Some debate that it isn't, others argue that it is.

If Bitcoin is Decentralized, Can Anyone Prevent You from Using it?

Since Bitcoin is decentralized, in theory no one could stop you from using it. Is this the case? Let’s take a look at the whole situation where Bitcoin is illegal.

Bitcoin is illegal to use and obtain in Algeria, Egypt, and Morocco. China has also banned Bitcoin Mining on July 2021. After this ban, miners from China relocated to the US and other countries to continue their Bitcoin mining operations. China has attempted to ban Bitcoin before however, it has been unsuccessful at it.

Even India’s central bank has attempted banning Bitcoin. This attempt also went unsuccessful. The bottom line with these attempts at banning bitcoin is that they were unsuccessful. They were unsuccessful because people could still access the Bitcoin network with VPN’s or with other resources. Because they were unsuccessful it proves that Bitcoin is in fact decentralized.

Whale and Institutional Manipulation

There is a lot of speculation that Bitcoin is manipulated by both institutions and whales. The term Whale is a term that describes people or entities that control large portions of Bitcoin or capital which they are able to use to move the markets significantly.

This is a problem because the idea that Bitcoin is decentralized also has a side meaning to it. If something is decentralized, it also means that not one entity should be able to manipulate it in any fashion. While Bitcoin is decentralized in the way people use it, there is substantial evidence that whales manipulate the price for their own gain.

In March 2020, BitMEX, a notorious exchange got controversial with people claiming they were instigating manipulation. Some thought that a whale operating in BitMEX was creating this manipulation. An article on Medium outlines how massive amounts of Bitcoin were sent to BitMEX right before the exchange encountered problems.

Of course, the exchange came out and said that the problems arose from its REST API coming down due to DDoS attacks.

Massive amounts of liquidations occurred when the exchange encountered its problems. The article illustrates how before a second DDoS attack, massive amounts of Bitcoin were sent to the exchange. The second DDoS attack happened several hours later. According to the Medium author, this is a strategy that is used by whales to manipulate the price of Bitcoin to their advantage.

What’s more evident of manipulation is that Huobi, another exchange received large amounts of Tether transferred to the exchange at around the same time range when the attack happened on BitMEX.

According to the author of the article, all of this was indeed a manipulation scheme, created to acquire more monetary resources at the expense of traders and outsiders.

There is much more evidence about institutional manipulation. Another article on Medium outlines the Wyckoff method in the recent Bitcoin crash. The author indicates how when the price crashes too much, institutions try to pump it back so that they can milk the retail market further. This is after the Wyckoff Method where the distribution phase takes into effect.

There are tons of speculation that Bitcoin is indeed Manipulated. Whether or not these articles are true requires more due diligence.

If they are true, then it may stand to stay that Bitcoin is not as decentralized as it seems to be. This is outlined by the fact that the markets may be manipulated to favor a few holders of Bitcoin.

Bitcoin’s Hash Rate Distribution

Because Bitcoin has the Proof of Work Consensus algorithm, Miners have to solve complex mathematical calculations with computers. The Hash Rate is the rate at which these calculations are solved. Higher hash rate means higher computational power is being produced by the Bitcoin network.

This is important because if certain miners where to achieve 51% of the total networks computational power, then they could attack the Bitcoin Network. This is known as a 51% attack. If certain miners do achieve 51% of the total hash rate, then they could reverse transactions, prevent new transactions, and even double spend Bitcoins. If this where to happen, Bitcoin would not be decentralized anymore.

Some people use the hash rate to see how decentralized the Bitcoin network is. If a pool of miners controls a certain portion of the hash-rate then technically speaking they control said percentage of the network computational power.

Elon Musk pointed out how Bitcoin may be Centralized due to how big mining companies controlled large parts of the hashing power. He outlines how when Miners went offline due to a flooded mine, it killed Bitcoins hashing power by 35%

In response to the thesis that centralization of mining power leads to centralization of Bitcoin, many articles have been written. One article, by CoinDesk outlines how this concentration of mining may be inevitable. However, it is not in the best interest of the mining institution to break Bitcoin.

Satoshi, as a matter of fact tries to outline this in the Bitcoin whitepaper.

"The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favor him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth."

What does this quote mean?

Put simply, when a miner has a large concentration of the hash rate at their disposal, they would make more money from block rewards and fees than from breaking bitcoin. That is because if they 51% attacked Bitcoin, Bitcoin would lose billions in MarketCap value in minutes. Their Bitcoin would be worth less the instant they did it.

Bitcoin can become more decentralized if there were more mining pools. However there always remains a variable. This variable is that even being small, the pools can always collude together and 51% attack Bitcoin. There isn’t anything that stops them. But it also isn’t in their best interest to do so.

The bottom-line stands, Bitcoin is decentralized, and it’s a complicated situation. However, it may become even more decentralized if there were more miners. This would make it more difficult for miners to collude. With that being said, there is nothing stopping miners from colluding and attacking Bitcoin, so in theory this is a grey area.

Many people have different theories and misunderstandings about Bitcoin. We hope that this cleared some of the confusion that you may have. Hopefully you liked the article, if you would like to support us you can do so by sharing it on social media.

Table of Contents