Why 99% of cryptocurrencies centralize over time (and how it might affect your investment)

Zooming in on Bitcoin’s incentive structure

Bitcoin mining offers rewards. These rewards consist of a block subsidy (supply increase, currently 6.25 BTC per block) and fees (~0.5 BTC per block), and are distributed roughly proportionally to hashrate owners.

Possible solutions to the centralization issue

The common thread in both PoS and PoW is that there are monetary rewards. These rewards are offered in compensation for investing in hash power, for locking up a stake, for securing the network. Monetary rewards are the incentive necessary to make people spend money on mining equipment and energy, to render their coins less usable, or otherwise incur some form of risk or cost.

Does it work?

Nano has had a decentralized mainnet running for over 5 years. Without a cent paid in fees and with the supply fixed since the very start, the incentives have never changed. In that time, over the course of ~120 million transactions, Nano has never had a double-spend nor chain reorg, something many other cryptocurrencies can’t say. Over the course of these years, there have consistently been many validators running, validating the theory that without fees and inflation, there is enough reason to run validators.

  1. Trend of centralization in Bitcoin’s distributed network.
  2. Decentralization in Bitcoin and Ethereum Networks.
  3. A Deep Dive into Bitcoin Mining Pools.
  4. Centralisation in Bitcoin Mining: A Data-Driven Investigation.
  5. Miner Collusion and the Bitcoin Protocol.

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