Covering the technology, people, and culture of the cryptocurrency and blockchain world

Media finally notices that Bitcoin and Ethereum are actually VERY centralized

US regulators awakening to reality of China’s total mining dominance

(Kevin Sanders for Modern Consensus)

The issue of how to classify and regulate cryptocurrency and blockchain technology is one that has stumped decision makers in Washington. This is unsurprising, given that offices in the Department of Defense were still using 8-inch floppy disks as recently as 2016. But while regulators in DC wring their hands over who has jurisdiction and whether certain coins are securities or not, many crypto observers fear that China, able to move with the speed and certainty of a dictatorship, is emerging as the gatekeeper of crypto. And that dominance is finally starting to rouse Beltway regulators who fear surrendering America’s digital future.

Though China has a ban on trading digital assets, this has not stopped quick-thinking players from lining up their chess pieces to mine coins. According to Forbes, a whopping “80% of the mining on the Bitcoin blockchain is centralized in China.” Forbes also correctly points out that this monopoly over the ledgers lends itself to wide scale fraud, compromising the integrity of the coins’ transaction history, precisely the problem that cryptocurrencies were created to avoid. This scenario would absolutely do nothing to dispel the perception of volatility that plagues the crypto world and undermines trust on the consumer and business side.

Ironically, actors in China have been able undertake this wildly successful mining operation on the back of cheap energy provided by dirty coal by moving the energy-suck computer systems needed to mine crypto coins to warehouses in Inner Mongolia. But at the same time, companies are also aggressively developing the computer-based technology needed to facilitate the mining of digital coins. For instance, Bitmain, the Beijing-based company whose mining pools control over half of the Bitcoin hash rate, or confirmations, also holds an estimated 70-80% market share in crypto-specific ASICs, which can mine both Bitcoin and Ether.

By having all of these functions centralized in China, by Chinese-based companies, those who want to embrace coin technology around the world run the risk of winding up at the mercy of a totalitarian government with a reputation for shutting down websites it doesn’t like.

American crypto companies are starting to push back. Yesterday in Politico, Ripple’s chief market strategist Cory Johnson posed a frightening prospect: “China’s government could force those miners to refuse certain transactions.” In a country where even the heat literally must be turned on by the government, it’s not such a far leap.

Consider this alarming but completely realistic scenario: Bernie Sanders runs for President in 2020 and tells his supporters that he will accept Bitcoin donations. China, in an effort to flex its influence, could easily issue and enforce a ban on verifying any transactions that are addressed to whatever key “Bernie Sanders for President 2020” uses, preventing the tech-savvy, small-dollar supporters so strongly associated with the “Feel the Bern” movement from donating.

If that’s not election meddling, nothing is.

So how do we ensure a truly decentralized ledger, free of hostile foreign interference? That is a question that Ripple, whose associated XRP is the third-largest coin by market capitalization, is trying to answer.

In a recently published paper, Ripple opened up the structure of its ledger to make the case that XRP is more decentralized than Bitcoin or Ethereum, explaining how the diversity of its validators allows no single entity ever to control more than 50 percent—the industry-acknowledged danger zone—allowing for a more legitimate chain of transactions. David Schwartz, CTO of Ripple, described the difference between the “proof-of-work” consensus utilized by Bitcoin and Ethereum that made sense at the inception of the technology, but have evolved to create incentives that miners can take advantage of, versus the globally-based “consensus protocol” model implemented in consensus models like those used by XRP or Stellar that rely on “proof of stake.” These currencies, argue the companies that brought them to market, are far less vulnerable to centralization by the “cheapest electricity wins” scheme. (They also consumer far less power, but that’s another story.)

According to the Politico story (behind a paywall), the federal government remains on the fence about the extent to which XRP, and hundreds of other currencies, are really decentralized, as they hem and haw over whether these cryptocurrencies are tradeable securities or not.

Meanwhile, halfway across the world, Chinese mining farms hum away. As the Politico article notes, “Because high-speed computers are needed to mine cryptocurrencies, miners seek cheap electricity. And the costs are particularly low in China.” Ripple’s Johnson told the site, “The basic technology behind Bitcoin and Ether will always accrue power to those with the most electrical power and those with the most computing power. And the cheapest electrical power and the cheapest computing power is available in one place, and that’s China.”

In an industry where the principle of decentralization is king, the tea leaves are clear: China is seizing the means of production by embracing both old technology that the American government has spent years trying to regulate out of existence (cheap power), and the new technology that the American government can’t quite figure out how to regulate (digital currency). If American regulators don’t act quickly to unleash the innovation behind crypto and blockchain technology, China’s position as a global leader in this industry will be cemented.

One of the bedrock clichés of journalism is that a single story about a phenomenon is a fluke. A second story raises eyebrows. A third story and you’ve got a trend. With the Forbes story, the Schwartz whitepaper and now yesterday’s Politico story, the media has finally caught on to the myth of bitcoin and ethereum decentralization. It remains to be seen whether US government regulators wake up in time to save America’s digital future.

Candice Greaux is a strategic public affairs and communications specialist in Washington. Her writing has appeared in the New York Observer and elsewhere.

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