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Elon Musk Doesn’t Understand Decentralization – But You Should

Decentralization is hard and Elon Musk clearly doesn’t understand it. Not only that he has a childish view on blockchain scaling and chooses to disregard the existing research on the topic, but he is also blatantly ignorant when it comes to wealth concentration (yet another factor which makes a project decentralized) and doesn’t seem to get incentives in a Proof of Work system. In a nutshell, he is the epitome of the “I just heard about Bitcoin, I’m here to fix it” meme.

Maybe that we shouldn’t expect much from a company CEO who excels at receiving government subsidies while criticizing them and has also been involved in the creation of PayPal – a centralized internet payment system which uses infinitely inflationary government money and relies on a revenue system that can make profits even if it stops charging transaction fees (the fact that it’s rigging conversion rates and collects user data is already enough).

But just because the world’s richest man doesn’t understand Bitcoin (or his meme-able fork of choice, Dogecoin), it doesn’t mean that you also shouldn’t. As a matter of fact, I will make sure that by the time you will have finished reading this article, you will understand decentralization and Bitcoin a lot better than Elon Musk.

Decentralization means that anyone should be able to participate in the network

On May 16th 2021, Elon Musk tweeted: “Ideally, Doge speeds up block time 10X, increases block size 10X & drops fee 100X. Then it wins hands down.” (link to a cryptographic timestamp of the tweet, just in case he decides to delete it)

Before we begin analyzing the intricate implications of this tweet, I must start by saying that Bitcoin and Dogecoin have a fairly similar architecture. After all, Dogecoin is a more inflationary copy of Litecoin (which in turns is a slightly modified Bitcoin fork). So even though some parameters such as block size, block time, and supply are different from one coin to another, the underlying principles are the exact same – especially when we focus on decentralization.

Now let’s get back to Elon Musk’s tweet, which mentions 3 parameters of cryptocurrencies: block time, block size, and transaction fee. The first two are extremely important for defining decentralization, while the third criterion is essential for security and long-term sustainability (and therefore, also indirectly consequential for decentralization).

The block time is the factor which decides who can validate the blockchain on the basis of internet speed. Most famously, the Bitcoin network mines a new block at an approximated rate of one every 10 minutes.

This means that nodes from all around the world can get in sync if they are able to download 1-2 megabytes every 10 minutes. And this is especially great in cases when users come from authoritarian countries where the access to internet is limited or restricted. It’s also great for people living in the rural areas of lesser developed countries, who may not have access to high-speed connections. Anyone around the world can validate the blocks that get generated in the Bitcoin network. And theoretically, miners could even undergo their operations in the middle of nowhere while accessing the signal from Blockstream’s satellites. I’ve explained this in greater detail in my article “Bitcoin Is Not Slow – It’s Highly Secure“.

Dogecoin already has a block time of 1 minute – and this design favors internet users with broadband connections and faster access speeds. Billions of people get denied the chance to sync their nodes, as only city dwellers are able to get all the data in real time. The situation is also bad for interplanetary transmission (one of Musk’s ambitions), as sending a radio signal from Earth to Mars can take anywhere from 4.2 to 21 minutes (depending on the momentary distance). In most cases, Bitcoin would be better suited for this use case.

And yet Dogecoin’s block time is fairly reasonable given the amazingly-low demand for block space. As a matter of fact, this $63 billion project only processes a handful of transactions per block – which is indicative of centralized ownership and excessive retail trading on the exchanges’ balance sheets. The amount of Dogecoin empty blocks in the middle of a bull market (and clear bubble) is staggering – keep in mind that 1 transaction means that only the block reward was sent to the successful miner.

This leads us to the part about increasing Dogecoin’s block size 10X times. Though it seems unnecessary given empirical data, let’s assume that somehow the users start using the blockchain. If DOGE transactions were to fill 10 megabyte blocks every 6 seconds, then the public ledger would grow by 100 megabytes per minute, 6 gigabytes per hour, 144 gigabytes per day, and 4.32 terrabytes per month. Almost as bad as Chia, Bram Cohen’s terrible yet overhyped Proof of Work Frankenstein.

Sure, this scenario is unlikely, as even in the case of Bitcoin there are times when the blocks don’t get entirely filled. But even if an average of a quarter of block space gets filled, then the Dogecoin blockchain expands by 252 gigabytes per week. To put this into perspective, it took the Bitcoin blockchain 12 years to reach 350 gigabytes in size.

For most people around the world, a 1 TB hard drive is fairly expensive. But if Dogecoin issued 10 megabyte blocks every minute, then the capacity of the terrabyte SSD would get filled in a week. In comparison, the Bitcoin blockchain adds about 51.32 gigabytes of data every year, so the same 1 TB hard drive should cover 19 more years of running a full archival node.

When designing a decentralized system, you must make sure that you don’t price out anyone with discriminatory network upgrades. If you can’t validate your own transactions and check the state of the entire network with your own node, then the system is centralized.

The internet definitely doesn’t ask you to get a high-end computer to access webpages – and as a money system, Bitcoin aims to be as inclusive and open to the greatest number of people around the world. Elon Musk clearly doesn’t understand this and aims to centralize an abandoned yet meme-able project under his own unpredictable dictatorship which seeks to turn something universal and open into a pet project.

To recap: if you can’t join the network as a validating node, then the project is not decentralized. Decreasing the time interval between blocks excludes the people running slow internet connections, while increasing the block size will boost the storage and computation costs of all participants (therefore phasing out those who don’t upgrade regularly). This is why second layers like the Lightning Network exist. But it seems like Elon Musk wants to build another PayPal.

Decentralization requires incentives (including mining fees)

Though Dogecoin is momentarily extremely inflationary, its halving schedule should reduce mining rewards significantly over the next few years. The same happens with Bitcoin, which raises the stakes of the disinflationary game of scarcity every 210,000 blocks (approximately every 4 years).

As the reward for discovering a block gets lower, miners should become incentivized to keep on securing the network. On the fourth page of his seminal whitepaper, Satoshi Nakamoto described a system which eventually becomes inflation-free and whose miners get incentivized to keep going by virtue of transaction fees.

Without these fees, the incentives get broken and it’s likely that many miners will stop supporting the network. But the 100X fee reduction that Elon Musk described might be ideal for him to take over the network and keep on mining blocks at a financial loss while retaining control.

Arbitrarily lowering the fees will result in reducing the amount of miners. And fewer miners means less decentralization and greater odds at controlling the network. While this might be what Elon Musk is after, it’s a terrible idea. There’s nothing revolutionary or disruptive in a system that the world’s wealthiest man can censor – after all, it’s the dynamics of geopolitics that make Bitcoin and Dogecoin more fungible and resistant to blacklisting transactions.

Paying 100 times fewer fees sounds great in practice, but in the long term it will only erode the system and lead to more control/centralization or more inflation. Also, fees are great for preventing spam transactions – if there’s a cost involved, then people are less likely to clog the network with lots of small transactions because they must pay for each one of them. Musk’s vision for Dogecoin is technically flawed.

Decentralization and wealth distribution

On May 17th 2021, Elon Musk responded to Pranay Pathole’s concerns about the wealth concentration of Dogecoin. According to Bitinfocharts, there are 107 Dogecoin addresses that own more than 66.7% of the supply. Also, there is one address which owns 28.34% of the entire supply – a disproportionate amount, given the supposed ambitions of the project. Elon Musk chooses not to look into the issue with nuance, by offering a generic response about Robin Hood potentially being the biggest whale. While it might be true, it’s not confirmed.

But let’s compare this situation to Bitcoin’s. The top 3 addresses are clearly identified as the cold storage funds of Huobi, Binance, and Bitfinex. And cumulatively, they own 2.68% of the users’ funds – that’s right, the biggest entities are actually custodians which store the funds of hundreds of thousands of customers.

In Bitcoin, there are currently about 16,000 addresses which own 62.95% of the supply. Not ideal, but still better than Dogecoin’s situation where 107 addresses hold over one third of the currency units. Ethereum also looks worse, with large individual wallets holding too many coins (most likely a consequence of their 60% premine and early investors or cofounders who didn’t sell).

So why does wealth distribution matter for decentralization? It’s also about incentives and inclusiveness. Nobody would want to take part in a project where a small number of elites control most of the money. The investors wouldn’t want to become subjected to such a risk, the developers wouldn’t want to be under the control of a few actors, and miners would also find the centralization displeasing and unsustainable on the long-term.

These large holders are single points of failure that rig the game for everyone else around them. Holding a bigger stash might also imply a greater influence on development and some political power in the network. Which is definitely a threat for an unmaintained network like Dogecoin.

Don’t tell Elon: Dogecoin is a minority hashrate chain which gets merge mined with Litecoin

Dogecoin’s continued existence as a network is due to pure benevolence on behalf of some actors. Most importantly, the Litecoin miners have decided to save Dogecoin in 2014 by allowing it to get merge mined. So instead of becoming vulnerable to malevolent attackers, it’s protected by some of the same Scrypt miners who secure the majority hashrate chain.

Litecoin’s mining is nearly as energy-intensive as Bitcoin’s, but differs in some regards which concern technical specifications (Bitcoin’s SHA 256 is processing-intensive, while Litecoin’s and Dogecoin’s Scrypt is rather memory-intensive).

But if Elon Musk decides to criticize Bitcoin mining while turning a blind eye to the way in which Dogecoin gets produced, then he’s a textbook hypocrite who virtue signals with cherry-picked data to appeal to an angry (and woke mob) while covering his Dogecoin dealings under a veil of ignorance.

To say the least, Elon Musk is intelectually-dishonest, inconsistent, and strongly biased. If left alone, Dogecoin would fall prey to attackers who can afford to rent some mining gears for a few hours. And if the project gets co-opted by Tesla or SpaceX, then it loses its value proposition.

The changes proposed by Elon Musk require a centralizing hard fork

Hard forks are network changes which require all participants to join a new blockchain. They create an incompatibility between the old blockchain and the new one, and therefore rely on the consensus that everyone should migrate.

The easier it is to pull off a hard fork, the more centralized the project is. Ideally, sovereign node operators and miners should be susceptible of new changes, reject leadership, and choose to verify every line of code individually and selfishly. But when the world’s richest man shows up and says he wants to take on a leadership role, it’s already a bad sign that will only lead to more centralization. And yes, I am also a critic of Michael Saylor’s involvement.

Will the exchanges support a hard fork just because Elon Musk is involved? That’s questionable, since lots of them are principled and really try to analyze the long-term fundamentals (as opposed to Binance, which seems to support anything that generates trading volume).

Will the users migrate to Dogecoin Elon’s Vision? Well, there aren’t so many users in the Bitcoin sense (sovereign nodes). So it’s up to exchanges and the entities that do have an incentive to run a node to decide. There’s too much centralization involved, though.

For reference, the Bitcoin developers are doing their best to avoid hard forks. The recent Taproot trial only proves that the network is mature enough to decide in a decentralized way on a soft fork (an upgrade which doesn’t change the consensus rules and is optional for the entire network).

There’s a reason why Bitcoin development is so conservative: the decentralization works

Decentralization is hard. And if you’re new in the space and you’re accustomed to a world where phone application updates get deployed and installed within minutes, you’re going to have a hard time understanding a system like Bitcoin which relies on lengthy deliberation and tends to get ossified over time.

If improving blockchains was so easy, wouldn’t Bitcoin already have bigger blocks, faster block times, and lower fees? It’s a little naive to assume that these proposals are new and nobody has ever thought about putting them into practice. And a Silicon Valley “move fast and break things” mentality certainly doesn’t help a money system that’s supposed to make everyone’s savings secure rather than fast and easy to transfer.

Dogecoin was never supposed to get such a high valuation and wasn’t created for the purpose of increasing the wealth and influence of the world’s richest man. But here we are talking about this topic and trying to define what decentralization should look like – as opposed to Elon Musk’s poorly-informed musings.

Decentralization is hard – and I hope that this lengthy article of mine has helped you understand it better than Elon Musk. If you’re looking for a shorter version, then read this thread that I published on Twitter.

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I'm here for the freedom, censorship-resistance, and unconfiscatability. What about you?

2 Comments

2 Comments

  1. Romeo

    June 7, 2021 at 12:27 PM

    What about the finite supply of BTV who will verify the blocks ones 21m BTC be mined

    • Vlad Costea

      June 8, 2021 at 2:18 PM

      The same nodes will verify the blocks and the same miners will discover new blocks. It’s the fees that will subsidize their activity. And by 2028, the fees will already become the main source of revenue for miners as the block reward goes down to 1.5625 BTC.

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