The Hidden Gatekeepers: Centralization in the Crypto

Insaanity Labs
3 min readJul 2, 2023
Photo by Ibrahim Boran on Unsplash

Decentralization is the key idea that lies at the core of the cryptocurrency movement. It’s about taking control away from big central authorities and giving it back to us, the everyday folks. Sounds fantastic, doesn’t it? But there’s a catch — some parts of the crypto world aren’t as decentralized as you’d think. Let’s dig a little deeper, shall we?

Cryptocurrency Exchanges

Have you heard about cryptocurrency exchanges? They’re our ticket into the crypto world, helping us buy, sell, and trade digital currencies. The catch? Many of them are centralized, which means they hold the reins on our digital assets. This centralization poses risks such as custodial control over user funds, potential security vulnerabilities, and the concentration of power in a few hands. Remember FTX, anyone?

Now, that doesn’t sound too decentralizing, does it? Enter Decentralized Exchanges (DEXs), our knight in shining armor, swapping out control with smart contracts for more user-friendly trading.

Mining Pools and Concentration of Hashpower

Ever wondered who’s validating all those transactions? Meet our pals, the mining pools. But just like with our exchanges, a lot of power is concentrated here too, making some people worried about the integrity of the system.

In proof-of-work (PoW) blockchains, mining pools play a crucial role in validating transactions and securing the network. However, the concentration of hash power in a few mining pools raises concerns about centralization. Large mining pools can potentially collude, control the consensus process, and compromise the security and integrity of the network.

Are there other ways? You bet! Alternatives like proof-of-stake (PoS) aim to decentralize the validation process by removing the reliance on computational power and distributing influence based on token ownership. It’s also possible that in PoS chains, certain groups can end up with a concentration of power. For example, Lido, which controls about 74% of the ETH liquid staking market

Development and Governance

Who makes the decisions in crypto? Often it’s a core team or a foundation, but that can limit community involvement and innovation. While these entities may have good intentions, centralization of decision-making can limit the involvement of the broader community. The lack of transparency and inclusivity can hinder innovation, create dependencies, and raise concerns about the concentration of power.

Wouldn’t it be great if we could all have a say? That’s where Decentralized Autonomous Organizations (DAOs) step in, creating a more inclusive and transparent environment for decision-making.

Stablecoins and Collateralization

Stablecoins, designed to maintain a stable value relative to a specific asset or basket of assets, have gained significant popularity in the crypto ecosystem. But here’s the catch — many rely on centralized entities to manage the collateral, raising questions about transparency.

Decentralized stablecoins are in the works, promising to reduce reliance on centralized control.

Oracles and External Data Sources

Smart contracts on blockchain networks often require external data inputs for their execution. Oracles serve as bridges between the blockchain and real-world data sources. However, reliance on centralized oracles can introduce vulnerabilities and create potential points of manipulation.

The development of decentralized oracle networks aims to provide reliable and tamper-resistant data feeds by leveraging the collective input of multiple participants or utilizing cryptographic mechanisms to ensure data integrity.

So, what’s the takeaway here? While the crypto world is all about decentralization, some areas still need a bit of work. But don’t worry — with innovation, community participation, and the right tech, we’re well on our way to a future where the crypto world can be transparent, inclusive, and truly decentralized. Let’s build that future together, shall we?