The performance of these key properties of decentralization is crucial when constructing and maintaining long-term themes related to the value and utility of the network, making it highly important to monitor the security and decentralization levels of Bitcoin.
Security Analysis
Bitcoin as an emerging open-source technology has a very strong security record, but it is not flawless. As I wrote in “Broken Money,” here are some notable technical issues it has faced so far:
In 2010, when Bitcoin was still new and had almost no market value, a node client experienced an inflation bug, which was fixed by a soft fork by Satoshi Nakamoto.
In 2013, due to an oversight, a Bitcoin node client update unexpectedly became incompatible with the previous (and widely used) node clients, leading to an accidental chain split. Developers analyzed the problem within a few hours and 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 time, even Fedwire has experienced disruptions and failed to achieve 100% uptime.
In 2018, a Bitcoin node client inadvertently added 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 began using the SegWit and Taproot soft fork upgrades in ways that developers had not anticipated, including inserting images into the signature part of the Bitcoin blockchain. While this itself is not an error, it demonstrates the risk of certain aspects of the code being used in unexpected ways, which means a cautious approach is needed when implementing upgrades in the future.
Bitcoin can indeed recover from technical issues. The fundamental solution is for node operators on the decentralized network to roll back to the previous update before the error existed and reject the new update causing 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 is then discovered and exploited, it becomes a more serious and potentially catastrophic problem. While not irrecoverable, it would be a significant blow.
With Bitcoin’s code repository existing for several years, even decades, 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 noteworthy.
Decentralization Analysis
We can measure decentralization through 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 challenging 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 about 6,000 Ethereum nodes, with about half of them hosted by cloud providers rather than running locally. And due to Ethereum nodes being bandwidth-intensive for running privately, this number may be close to the actual count.
So, 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 do not enter the network, increasing the possibility of transaction censorship.
The largest publicly listed miner, Marathon Digital Holdings (MARA), has less than 5% of the network’s hash rate. There are several other private miners of similar scale. Various public and private miners own 1-2%, and many miners with less hashing power exist. In other words, mining is indeed quite decentralized; even the largest participants only allocate a small portion of network resources.
Since China banned Bitcoin mining in 2021, the United States has been the largest mining jurisdiction, but its mining power is estimated to be less than half of the total hash rate. Ironically, China remains the second-largest mining jurisdiction, as it is difficult to eliminate the mining industry even with its high level of authoritarianism. Other resource-rich countries like Canada and Russia have significant mining infrastructure, with dozens of countries having small-scale mining operations.
Mining companies typically allocate their hashing power to mining pools. Currently, mining pools are relatively centralized, with two pools collectively controlling about half of the transaction processing, and the top ten pools controlling almost all transaction processing. I believe this is an area that needs improvement:
However, there are some important considerations. First, mining pools do not custody the mining machines, which is a crucial distinction. If one pool encounters issues, miners can easily switch to another pool. So, while a few pools can temporarily conduct a 51% attack on the network together, their ability to sustain such attacks may be very weak. Second, Stratum V2 has recently been introduced, allowing miners to have better control over the block construction process instead of leaving all the work to the mining pools.
The physical mining supply chain is also quite centralized. TSMC and a few other foundries worldwide are key bottlenecks for producing most types of chips, including the specialized chips used by Bitcoin miners. In fact, I would even argue that mining pool centralization is an overrated risk, while semiconductor foundry centralization is an underrated risk.
Overall, ownership of active mining machines is highly decentralized, but in reality, some countries have a significant number of miners, certain mining pools have a significant amount 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 more development and attention, fortunately, the most important variables (ownership of mining machines 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 easily spread to the general population.
When I look back at cryptocurrency exchanges from 2013-2015, they looked very rough. Today, purchasing Bitcoin from reputable exchanges and brokers is usually easier, with simple interfaces. In the early days, there were no dedicated Bitcoin hardware wallets; people often had to figure out how to manage keys on their computers. Most of the “lost Bitcoin” stories you hear in the media come from the early days when Bitcoin’s value was not significant enough to capture people’s attention, and key management was more challenging.
Over the past decade, hardware wallets have become more prevalent and easier to use. Software wallets and interfaces have also seen significant improvements.
One of my recent favorite combinations is Nunchuk+Tapsigner, which works well for small amounts of Bitcoin. Tapsigner is a $30 NFC wallet that can store private keys offline at a low cost, while Nunchuk is a mobile and desktop wallet that can be used with various types of hardware wallets, including Tapsigner for moderate amounts of Bitcoin or a full-featured hardware wallet for larger amounts.
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 key pairs could become a more routine part of life, used not only for managing funds but also for signing to distinguish genuine social content from fake content. It is easy to learn, and many people will grow up with the surrounding technology.
According to Statista, the global number of Bitcoin ATMs has increased over 100 times from 2015 to 2022:
In addition to ATMs, voucher purchasing methods have also seen an increase, which I believe is one of the reasons why the number of ATMs has recently reached a plateau. 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 (especially in developing countries) and then redeemed for Bitcoin.
The Lightning Network has been continuously expanding over the past six years, reaching significant liquidity levels by the end of 2020.
Websites like Stacker News and communication protocols like Nostr have also integrated the Lightning Network, ultimately combining value transfer with information transfer. Innovative browser extensions like Alby make it easy to use the Lightning Network across multiple websites with just one wallet, replacing usernames/passwords as a method of signing for many scenarios.
Overall, over time, the use of the Bitcoin network has become easier and more intuitive. From what I have observed as a risk investor in this field, the situation will continue to improve in the coming years.
Legal Acceptance and Global Recognition
“But what if governments ban it?” Since Bitcoin’s birth, it has been something widely opposed by people. 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 inviting people to build together. El Salvador has now even recognized Bitcoin as legal tender, and some other countries are using their sovereign wealth fund’s funds for Bitcoin mining.
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 out of the US, the US federal government launched a criminal investigation against Zimmerman for “exporting munitions without a license.”
In response, Zimmerman released his complete open-source code in a book and received protection under the First Amendment. After all, it was just a collection of words and digits that he chose to express to others. Some people, including Adam Back (the creator of Hashcash, ultimately used as the proof-of-work mechanism in Bitcoin), even started printing various encryption codes on T-shirts, with a warning on the shirt:
The US federal government did indeed drop its criminal investigation against Zimmerman and made changes to encryption regulations. Encryption technology became a crucial part of e-commerce as online payments required secure encryption, so if the US federal government attempted to overreach, much economic value could be delayed or shifted to other countries.
In other words, these types of protest activities have been successful and have used the rule of law to oppose government overreach, pointing out the absurdity and impracticality of trying to restrict information that is concise and easily disseminated. Open-source code is simply information, and information is difficult to suppress.
Likewise, Bitcoin is free open-source code, making it difficult to eliminate. Even limiting it on the hardware side is challenging; China banned Bitcoin mining in 2021, yet it remains the second-largest mining jurisdiction, showing that attempting to ban it is not easy. The software aspect is even stickier.
Further reading:
China’s Crypto Ban Unsolved? Pan Gongsheng Tipped as Central Bank Governor, Previously Criticized Bitcoin as “Dead Body”
Many countries have been inconsistent in banning Bitcoin or have gotten caught in their own rule of law and power divisions. 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 prohibited banks from engaging in cryptocurrency-related businesses and lobbied for a complete ban on the use of cryptocurrencies. However, in 2020, the Supreme Court of India made a ruling against the ban, restoring the rights of the private sector to innovate using the technology.
In early 2021, amidst a decade-long double-digit inflation in 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 is challenging to enforce. Instead, they introduced the eNaira as a central bank digital currency.
Many countries have gone back and forth on banning Bitcoin or have found themselves in their own rule of law and power divisions. In relatively free countries, the government is not a monolith. Some government officials or representatives like Bitcoin, while others do not.The Central Bank of Iran (CBI) is introducing a digital currency, IRA, in an attempt to bring people into their centralized digital payment system and restrict physical cash by implementing stricter withdrawal limits. During the ban, Chainalysis assessed that Nigeria had the second-highest adoption rate of cryptocurrencies in the world (mainly stablecoins and Bitcoin), particularly with the highest peer-to-peer trading volume, which was their way of bypassing the banking blockade. By the end of 2023, after nearly three years of ineffective ban implementation, the Central Bank of Nigeria changed its decision and allowed banks to interact with cryptocurrencies under specified conditions.
In 2022, Argentina saw a high demand for cryptocurrencies as a defense against triple-digit inflation, and some major banks were intensifying their efforts to offer cryptocurrencies to customers, but the Argentine government prohibited banks from providing such services to customers. They cited typical reasons such as volatility, cybersecurity, and money laundering, but in reality, it was to slow down the outflow of their own currency. Then, in 2023, they went further and also banned fintech payment applications from offering digital assets to customers. But with Javier Milei being elected president, the situation started to reverse, as he supported Bitcoin and supported the market in deciding what it wanted to use as currency. During Milei’s campaign, economist Diani Mondino (now Argentina’s Foreign Minister) wrote, “Argentina will soon be 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, as the Commodity Futures Trading Commission allows Bitcoin futures trading, and the SEC allows futures-based ETFs. The SEC even allowed the launch of leveraged futures Bitcoin ETFs. But they repeatedly blocked all spot ETFs, which are the simplest type and what the market wants. In 2023, the Washington, D.C. 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 (such as cash and gold) can enter through ports of entry and impose strict restrictions. They can control which currencies banks can operate with, which domestic and international bank transfers can occur, and which currency accounts they can offer to customers.
Even if developing market jurisdictions do allow access to U.S. dollar accounts, they can still be risky for holders. They are partially reserve-based and not FDIC-insured by the U.S. government and the Federal Reserve. In other words, U.S. dollar deposits in foreign banks in developing countries are essentially junk-grade and uninsured leveraged bond funds. In times of currency shortages, U.S. dollar accounts can be forcibly exchanged for local currency at fake exchange rates 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 currencies. 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 rapidly depreciating local 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 artificial exchange rates. Financial control is strict:
But if that designer chooses to be paid in Bitcoin or a stablecoin pegged to the dollar, I can send them a QR code through a video call, or through private messages or emails, and it will propagate in their banking system. For legal reasons, I wouldn’t send it to sanctioned countries (that would be too risky for me), but if their country allows Americans to send money legally, I’m happy to do so, with most of the friction on their end, as they represent the majority of countries.
Additionally, someone can carry an unlimited amount of Bitcoin and stablecoins worldwide as long as they have the private keys. They can write it down, store it on a device, remember the twelve words representing the key, or temporarily paste it in an encrypted cloud file protected by a password, bringing unlimited value density through any entry point.
At the airport, I saw a sign that said “No more than $10,000 in cash allowed,” and I chuckled to myself, knowing that they couldn’t know which person in line has $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 block the tide. The ability to transfer funds between banks, and any parties connected to the internet, has opened up global competition between currencies.
This is a good thing for most people. It is bad for those who seek rent-seeking from top-down approaches, continuously dilute people’s savings and wages, siphon off value for themselves and their cronies, and rely on obfuscation rather than transparency to finance themselves. Capital naturally flows to places with good legal protection and rule of law, and technology makes this process faster, smoother, and accessible to the working class and middle class, not just the wealthy.
If governments attempt to ban Bitcoin, holding and using Bitcoin will put them in an awkward position, especially for governments that claim to uphold the rule of law. They have to argue that having a currency that cannot be devalued is a bad thing, that people can hold and send to others. In other words, they have to prove that decentralized spreadsheets pose a threat to national security and must be banned under the threat of imprisonment.
On the contrary, the biggest legal challenge for the future of the Bitcoin network may come from the privacy realm, and from major governments like the United States. Governments indeed do not want people to have any form of financial privacy, especially on a large scale. The idea is that to prevent 1% of bad actors from engaging in terrorist financing, human trafficking, or other illicit activities, 100% of people must give up their financial privacy rights and allow governments to monitor all transactions between parties. Additionally, governments have become heavily reliant on income from income taxes, and income tax enforcement relies on ubiquitous monitoring of all payment flows. But of course, such practices can lead to widespread abuses and serious consequences.
Furthermore, we live in an era of surveillance capitalism. If we give up our digital souls, which is all our data, companies will offer us countless free services. What we see and consume is highly valuable business information. Governments have amplified this and helped normalize it, as they also have their hands in the backend and collect this data. Sometimes it may be for national security reasons, 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 a way that corporations cannot monitor and governments cannot monitor or devalue is an important check on power. For corporations, there are many reasons why they would not want to surveil us, especially considering they are frequently targeted by hackers and have their data leaked on the dark web. For governments, such technology prevents comprehensive surveillance and freezing of funds in a manner that favors them, forcing them to have reasonable cause before engaging in targeted enforcement, which comes with costs and legal procedures.
Privacy in finance was the norm until the 19th century and earlier, as most transactions were conducted with physical cash, and there were no significant technologies to monitor it. The idea of monitoring every person’s transaction was a science fiction concept. From the late 19th century onwards, 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 telecommunications era and its ushering in of the modern banking era made ubiquitous financial surveillance the norm. Governments did not have to enforce privacy controls on individuals as much; they primarily needed to enforce it on banks, which was easy and happened behind the scenes. The rise of factories and corporations led people to leave farms for cities, earning wages in bank accounts with tax deductions automatically taken out, and all their financial activities became easily monitored.
However, with the continuous improvement of computer processing, encryption, and telecommunications technology, Bitcoin was eventually created, allowing peer-to-peer anonymous value transfers. Bitcoin and related technologies became more widespread, especially with the privacy layers and methods built on top of them, challenging the dominance of existing centralized surveillance by governments. People could now choose to opt out, but governments won’t easily relinquish control. They are now attempting to enforce banking-style surveillance and reporting requirements on individuals, which is orders of magnitude more difficult than enforcing it on institutions.
I suspect we will see more conflicts similar to Zimmerman in the coming years, but this time over financial privacy. Governments will increasingly push against the use of various privacy-preserving methods, even attempting to criminalize these methods, and the defense of such privacy is that many of these methods are open-source and simply information. To restrict the creation and use of those that do not engage in criminal behavior, there needs to be an orderly process of criminalizing the use of words and digits. It is challenging to legally justify this in jurisdictions with freedom of speech, and enforcement is also challenging in practice due to the ease of spreading open-source code. In the United States and certain other jurisdictions, well-funded litigation can overturn such laws on constitutional grounds. So, I expect that period to be messy.
Overall Score: A-
Rating the Bitcoin network is a bit of a joke because it is not something that can truly be quantified, but essentially, most aspects of the network have either improved or remained roughly the same.
We can subtract points to bring it down to an A- instead of an A or A+ in the areas where miner decentralization could be better (especially in mining pools and ASIC production) and the overall user experience and development of Layer 2 applications/ecosystem could be further advanced. For the latter, I would like to see more and better wallets, more seamless usage of higher layers, greater adoption of built-in privacy features, and so on.
If Bitcoin enters a prolonged period of high fees, as we have recently seen, I believe the development of Layer 2 will accelerate. When fees are low, people are more likely to use the base layer, and there is no reason to use higher-layer solutions. When fees are high, various existing use cases will face stress tests, and users and capital will lean towards efficient or needed solutions.
Additionally, governments are generally forced to accept it to some extent, sometimes voluntarily and sometimes passively. However, future battles may revolve around privacy and, in my view, that battle is far from over.
In conclusion, I still believe the Bitcoin network has a 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 for potential improvement and contributions. The strength of the Bitcoin network lies in its openness, allowing anyone to audit the code and propose improvements, anyone to build additional layers on top of it, and anyone to develop interactive applications and continuously improve it.
Related Reports
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