Use data to tell you how decentralized BTC is?

Summary

Bitcoin’s decentralization can be quantified by indicators such as supply dispersion, distribution of computing power, and exchange integration.

Key indicators such as the number of active-zce addresses and network hash rate continue to rise.

The supply of Bitcoin is becoming more balanced, and the mining and trading markets remain competitive.

Introduction

Over the past eleven years, Bitcoin has been able to operate relatively stably in the face of a plethora of threats, largely because of its lack of a single controlling entity. This feature is called decentralization, and it includes a large number of loosely coupled features. Some of these characteristics are difficult to describe and measure, but others are well suited for direct analysis.

One directly observable feature is the dispersion of funds among different addresses. The distribution of wealth is a crucial factor in any economy, and it roughly coincides with the distribution of economic influence. For cryptoassets that routinely distribute large numbers of tokens to founding teams, asset decentralization is woefully inadequate.

Another feature, the distribution of computing power, is arguably more important. Bitcoin relies on decentralization at this level to achieve its goal of maintaining a secure, censorship-resistant payment and savings system.

Optimism will launch Call Data Compression this Thursday: On March 22, according to the official Twitter, the Ethereum Layer 2 expansion network Optimism will launch Call Data Compression (calldatacompression) this Thursday. Before that, if syncing from L1, DTL needs to be upgraded to at least version 0.5.20. Earlier news, Optimism announced plans to deploy call data compression to reduce costs by 30% to 40%. [2022/3/22 14:10:34]

Bitcoin is also highly subject to the market share distribution of exchanges, a feature that greatly affects the network economy. The distribution of volumes on fiat-quoted spot pairs is particularly important, as they represent gateways to and from the real world.

In this week’s feature, we’ll quantify Bitcoin’s decentralization along these three verticals and track its progress over time.

Dispersion of addresses

The existence of whales, or users who hold large amounts of money in assets, is a concern for many cryptocurrency holders about their own viability. A particularly unequal distribution of funds could give a small group of users significant influence over the direction of the asset market and protocol, and call into question the viability of the asset as a store of value or medium of exchange.

Expert: China needs to use the data element regulatory sandbox to empower data governance: Zhong Hong, director of the Tsinghua x-lab Digital Economics Laboratory, recently proposed that China should use the "data element regulatory sandbox" to empower data governance. Currently, data collection, authorization It is imminent to accelerate the development of data governance and data supervision by using incomplete laws and regulations, regulatory systems and system guarantees. At present, drawing on the experience of the financial regulatory sandbox that has been implemented on a global scale and gradually matured, referring to the idea of the EU data regulatory sandbox, and using technological means to delineate a test field for policy, judicial, and market coordination, in the regulatory sandbox Discovering new models and new technologies in the industry, and exploring regulatory models that match technological development, market demand, and regulatory requirements, are new ideas to speed up the resolution of current contradictions. [2020/10/1]

Since Bitcoin balances are easily auditable, on-chain data can be used to assess decentralization. Since funds held by custodians in omnibus accounts cannot be attributed to their owners, and address reuse is generally discouraged, these estimates are imprecise. However, the level of transparency it offers remains unprecedented compared to traditional financial systems.

Bitcoin still has whales, but its supply has slowly become more evenly distributed since the network’s inception, with smaller accounts accounting for an increasing proportion of the total supply.

Huobi Research Institute: The Filecoin economic model encourages miners to treat "self-trading" rationally and encourages useful data storage: On August 28, Filecoin disclosed a series of parameter details of its economic model. The network storage benchmark is 1EiB and the annual growth rate is 200%. Simple mining (released according to time exponential decay) and benchmark mining (released according to storage benchmark linearly) with a 3:7 ratio of mixed mechanism release, before the network benchmark is reached, the release speed of block rewards is reduced; for sectors, the space is set according to the quality of stored data The weight is high or low, and a specific mortgage token function and sector fault and termination fee mechanism are introduced.

Lu Jun, a senior researcher at Huobi Research Institute, believes that the economic model of Filecoin still needs to be verified by practice. Recently, the Filecoin big miner space race has started. As the final preparation stage for the mainnet launch, the results of the competition will also be the official final launch of the mainnet economic model. The parameters are adjusted to provide reference. The details of Filecoin’s public economic model can reflect Filecoin’s official positioning of the value of storage mining and storage services. The core goal of setting parameters is to encourage and drive miners to provide verified real storage users with high-quality and long-term Periodic storage services, rather than short-term irrational "self-filling data" mining competition behavior. To create a safe, reliable and competitive distributed storage economy, Filecoin needs to encourage more miners to participate in ecological construction according to this value proposition. [2020/8/28]

Sound|Expert: BitMEX may face huge fines under the General Data Protection Regulation: According to Cointelegraph’s news today, in response to BitMEX’s disclosure of user information, Ray Walsh, a digital privacy expert at the education platform ProPrivacy, believes that according to the General Data Protection Regulation (General Data Protection Regulation) Data Protection Regulation), BitMEX may face huge fines. Not only that, the Federal Trade Commission can investigate the matter, and BitMEX users can also file a class action lawsuit. [2019/11/6]

In addition to controlling an increasing proportion of the supply, addresses with smaller balances still account for the majority of accounts. Most addresses still control less than $100 worth of Bitcoin in the face of dollar-denominated price volatility.

A closely related metric, the number of unique valid addresses, also hints at usage by more network participants. Because a single user can control multiple addresses, this metric is not a perfect proxy for the number of participants, but we generally consider it relevant. Recently, the number of active-zce Bitcoin addresses has begun to approach all-time highs.

News | Apple CEO supports European General Data Protection Law: According to bitcoinexchangeguide, Apple CEO Tim Cook warned at the 40th International Data Protection and Privacy Committee (ICDPPC) meeting that the "data industry complex ", and expressed support for Europe's General Data Protection Law (GDPR). What Cook said is very important to the entire blockchain market. Developers are currently working on building transparent, decentralized, and secure systems for users to control their data and digital identities. The cryptocurrency community also expressed support for Cook's comments. Vitalik Buterin, the co-founder of Ethereum, said that he is very happy that Apple is taking privacy seriously. [2018/10/26]

Mining

In addition to the degree of dispersion and activity on the chain, the effective decentralization of Bitcoin also depends on the distribution of computing power among miners.

Bitcoin relies on miners to secure the network and add new blocks to the blockchain. These miners compete to find the next block by computing large numbers of hashes, and often gather into what is called a mining pool.

Throughout the history of the network, the computing power required to secure the Bitcoin network has generally grown exponentially.

Although bitcoin mining is distributed, there is still a risk of centralization through coercive means at the national level and criss-cross integration. Several exchanges, including Binance, OKEx, and Huobi, operate mining pools. Hardware manufacturer BitMAIN owns both BTC.com and AntPool, and is the sole investor in ViaBTC.

Even a reasonable, well-resourced mining pool would have difficulty coordinating a 51% attack, since miners may choose to leave the pool if the operator decides to attack the network. New coordination protocols like Stratum V2 could dramatically increase the decentralization of the network by shifting control of block composition from pool operators to miners.

A useful measure of hash power decentralization is the Nakamoto coefficient, which measures the number of mining pools that need to collude in order to 51% attack a network. While Bitcoin has never been successfully 51% attacked, in 2014 the mining pool GHash.io controlled more than half of the network's computing power for about a day. During this time period, Bitcoin’s Nakamoto coefficient was 1.

Today, Bitcoin has a Nakamoto coefficient of 4, indicating that Bitcoin is highly decentralized.

Exchange

Exchanges have less direct impact on Bitcoin's decentralization than miners, since the role of miners is written into the protocol. Still, as the primary market for acquiring and using Bitcoin, their impact on the network is also enormous.

Excessive centralization among exchanges will expose the market to systemic risk when it goes bankrupt. The most famous example in the cryptocurrency space is the 2013 Mt. Gox crisis.

Often mergers also increase the likelihood of censorship, negating one of the main benefits of using Bitcoin. As the main conduit from currency to Bitcoin, the BTC/USD market is particularly important in this regard. While stablecoins have recently emerged as an alternative quote asset, fiat gateways remain an important route for new capital to enter the market.

While several exchanges offer trading in the BTC/USD market, the space is usually dominated by a few large players.

An effective indicator for analyzing market concentration is the Herfindahl-Hirschman Index (HHI), which increases with the monopolistic nature of the market. While our estimates are subject to survivorship bias, the HHI for the BTC/USD spot market covered by Coin Metrics has remained flat over the past year. Currently, based on this indicator, we believe the market is moderately consolidated.

In addition to reported transaction volume, on-chain holdings provide another glimpse into the state of the industry. The comparative balances of the spot exchanges tracked by Coin Metrics’ Exchange Flow are shown below. Since Coinbase avoids the reuse of hot wallet addresses, Coinbase is conspicuously excluded from these estimates.

Source: Coin Metrics Network Data Pro

Likewise, tracking the on-chain flow of exchanges allows us to gain a more complete picture of the market and confirm reported activity. These indicators also paint a picture of a relatively competitive market. Inflows to spot exchanges tracked by Coin Metrics’ Exchange Flow are shown below; outflows behave very similarly.

Conclusion

Bitcoin is decentralized in terms of concentration of miners and exchanges, and its supply is becoming more and more evenly distributed. This analysis of Bitcoin’s degree of decentralization is far from comprehensive, and various other metrics, such as the number of nodes and the market share of hardware manufacturers, should also be considered when assessing the health of the network. Overall, however, the performance of the Bitcoin network across these key verticals gives us reason to be cautiously optimistic.

Author Karim Helmy & the Coin Metric Team

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