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

7 min readJul 2, 2021


My thesis in this article is that cryptocurrencies relying on Proof of Work (PoW) or Proof of Stake (PoS) for consensus centralize over time, leading to degraded security. An expanding money supply, fees, and staking encourage a loss in stall resistance and a loss in security. Very few crypto, amongst which Nano, are likely to stay secure over time.

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.

Bitcoin mining is a business. A big one, with daily revenue of ~$30 mln. It’s a business focused on ruthless cost efficiency, because the revenue side (Bitcoin’s price) is largely unchangeable by Bitcoin miners. Miners’ total costs consist of energy costs, ASIC (mining equipment) purchases/writedowns, capital costs, rent of the location, maintenance, etc.

Almost all these costs have economies of scale associated with them. A larger miner has a stronger negotiating position for ASICs. They have a stronger negotiating position for energy contracts. They have access to cheaper capital. They can more efficiently maintain their ASICs.

Combine mining rewards with economies of scale for mining, and what you get is centralization over time. The largest miners have the lowest cost-base, make the most profit, are able to reinvest more in ASICs, and increase their share of consensus over time.

This isn’t some radical, unsupported take. The theory is quite clear for more sectors than just Bitcoin mining, and is why we tend to have anti-trust legislation in most countries. Research on Bitcoin specifically corroborates this, see some of the papers linked at the bottom of this article.

FUD, China is banning mining so miners will disperse more broadly, we have Stratum V2 coming, miners will join different mining pools, nodes are the ones that matter not miners, we don’t see 80% belonging to one miner now!

None of the above changes the centralization in consensus power over time. It doesn’t change the economic rationale. China banning mining means there is less dispersion in the long run, as there are now fewer locations where mining is possible. Stratum doesn’t fix the incentives. Miners can join different mining pools (though history shows they don’t) to increase apparent decentralization, but it won’t fix centralization over time of the underlying miners. Not to mention that mining pools themselves are far more centralized than most people think (see “A Deep Dive into Bitcoin Mining Pools”).

Nodes can check and verify the chain, but those with the consensus power decide whether to include transactions. If I owned a majority of mining power, I wouldn’t shout it off the rooftops. I would send in increasingly higher fee transactions, forcing people to “overbid me” to process their transaction. Unbelievable? See Miner Collusion and the Bitcoin Protocol to learn how hundreds of millions in excess fees are already being paid.

Those invested in PoW-based coins other than Bitcoin might think that their cryptocurrency solves this. Maybe it does, however generally this is not the case. The incentives and the trend are the same for all cryptocurrencies with PoW consensus. Bitcoin is the most visible, the one that most research has been done on, but the underlying incentives are the same for other PoW coins.

Perhaps you’re invested in a PoS coin. Mining is terrible for the planet anyway, so why not? While PoS has its advantages (and disadvantages) relative to PoW, it is definitely not immune from centralization over time. The largest stake-holders grow fastest through several avenues. A large holder is able to lock up a larger percentage of their coins, since one only needs so many coins for daily usage. The higher the percentage of coins you can stake, the higher your return will be.

Most staking is done using pools. Setting up a pool tends to come with some costs, making it impossible for small holders to set up their own pool. As an example, Ethereum requires 32 ETH staked (~$60,000) to participate in validation. If you do not have 32 ETH, you have to join a pool to stake. These pools typically charge either a fixed fee per month or a percentage (10–25%). This fee again goes to larger holders.

Finally, large holders lose a lower percentage of their coins to transaction fees, which are denominated in absolute terms rather than relative to amount transacted. When you hold $100 and pay a transaction fee of $1 this has a far larger impact than someone holding $100,000 having to pay a transaction fee of $1.

Some PoS cryptocurrencies try to make the network seem more decentralized through maximizing the size of a single pool, which is a bit like saying that we can increase Bitcoin’s decentralization by splitting AntPool into Ant and Pool. Nothing has changed. If anything, this muddies the waters by obscuring how centralized the system really is.

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.

The simplest solution then is to remove these monetary rewards. Remove block subsidies, remove fees, and there is no centralization over time inherent in the protocol as the big do not get bigger. While this would likely get rid of centralization over time, it would also make Bitcoin and other PoW/PoS coins insecure. Miners would stop mining, stakers would stop staking. Hashrate would drop, leaving Bitcoin vulnerable to any miners turning their ASICs back on. However, the cryptocurrency space does not end at Bitcoin.

Nano is a cryptocurrency that tried such a radically different design. With zero fees and zero inflation, direct monetary rewards for validation are absent. Without these monetary rewards, the inherent pressure of centralization over time is removed. The challenge of ensuring security is solved by creating a network that is valuable in and of itself, that adds value to those using it. Nano offers instant and feeless transfers, it offers a green, decentralized and fixed supply store of value.

So how does this incentivize people and businesses to secure the network? Instant and feeless payments are attractive for merchants. For trustless and direct access to the network, they need to run a node (at ~$20 a month). For exchanges to be able to confirm that the Nano deposit that was made to them is actually valid, they would prefer to not rely on any third party. They run their own node. Large Nano holders want to ensure the continued security of the network, and run a node.

This theory has played out well for over five years already. Exchanges such as Binance, Kraken, Huobi and Kucoin run nodes. Nano wallets, such as Natrium, WeNano and Atomic Wallet run nodes. Businesses building on the Nano network such as Wirex, Kappture and 465 DI run nodes. Hundreds of other nodes are also run, by small businesses, enthusiasts or large holders. Through a combination of incentives and nodes being relatively cheap, there has never been a lack of validators in Nano.

Validators are not all treated equally. If 1 node was 1 vote, a malicious entity could spin up a lot of nodes to control consensus. Nano employs a voting-weight system to protect against this. Just like anyone can run a node and become a validator, any Nano holder can use their Nano to vote for any node. Votes can be changed at any time. To get to consensus on a transaction, 67% of total online voting power must confirm a transaction. Simply setting up a node therefore does nothing. You need to have Nano voting weight, where 1 Nano = 1 vote.

On the voting level, incentives are again clear and aligned. Without fees and without monetary rewards, there is no reason for any validator to want a large share of voting power. As a Nano holder, there is no reason to vote for a representative with a lot of votes already — the incentive is to spread out voting power. Doing so increases stall resistance, increases security, and increases the value of their own investment. Nano holders have no reason to vote for those with large amounts of voting weight, and any node trying to gain a large amount of consensus power would rightly be looked upon with suspicion and see votes flow away.

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.

Without mining and without staking in Nano, centralization over time is absent from Nano at a core level, leading me to believe that unlike 99% of cryptocurrencies it has its incentive structure properly aligned.

The fact that Nano offers green, instant and feeless payments is a nice bonus.

To learn more about Nano, I’d recommend The Basics of Nano, an article I wrote. The article explains how Nano manages to be instant, feeless and eco-friendly, and shows how to try Nano for free yourself.

Thank you for reading, any comments and feedback are much appreciated.

  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.