Bitcoin’s biggest differentiating factor comes from it’s decentralized nature. Without the need for decentralization, it’s incredibly easy to replicate the functionality of Bitcoin at a much less cost. So it’s important to understand why that decentralization is such an important feature and what we lose without it.

What is Decentralization?

Decentralization is the process of redistributing or dispersing functions, powers, people or things away from a central location or authority.

Bitcoin is a decentralized Peer-to-Peer network that does not rely on a central authority. Any peer of the network is not dependent on any single node for the correct blockchain. Bitcoin works as long as each peer is connected to a single peer telling the truth, even if every other is lying. This is the key feature that distinguishes Bitcoin from other networks, that rely on trusted entities for determining truth.

Why Does it Matter?

To understand why decentralization matters, it’s important to know the flaws that a centralized system has. Decentralization is not cheap, as it requires an expensive (but valuable) proof-of-work mechanism for determining consensus. While transaction fees currently are cheap, the security provided for such transactions is not cheap, as a great deal of it is paid through inflation. This will change, with time, and the true costs will be exposed, or security levels will not match what currently exists. Bitcoin and other decentralized services will lose in competition to centralized services if there were not significant advantages to a decentralized system that offset this cost.

Censorship Resistance

Censorship resistance is one of the most important distinguishing factors of Bitcoin. Centralized systems are notoriously easy to censor. Censoring transactions allows for third parties to prevent the flow of transactions to or from certain sources.

Satoshi realized this when he said the following:

Governments are good at cutting off the heads of a centrally controlled network like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.

While governments are one potential threat of censorship, any system that relies on centralization also is potentially threatened by any controller of the network. Even in the case of a benevolent central authority, this authority could be compelled to act against his wishes through threat of use of force by governments or criminals.

Miners currently have some ability to censor transactions. Notably, Eligius Mining Pool participates in censoring transactions he defines as spam, such as transactions to Dice sites or parasitic protocols that lie on top of the blockchain. However, as long as mining is decentralized, there is sufficient chances for a transaction to be included into a later block. Just as nodes only require a single source of truth, users only need a single miner willing to mine their transaction to avoid censorship. The greater the amount of centralization in a system, the fewer people who could agree (or be forced to agree) with uniform censorship rules. This poses one of the more serious risks with mining centralization.

Seizure Resistance

Centralized systems are extremely easy to seize large amounts of funds from users without their permission. While Bitcoin users would still be individually susceptible to rubber hose attacks, there is no centralized place to attack to seize a massive amount of funds. Even this threat can be mitigated through time-locked transactions or multi-signature transactions that would prevent you from even being able to access your own funds easily. No entity can compel a third party to release your funds to them without your permission, unlike every centralized financial system.

Access Control Resistance

Centralized services are easy to have access blocked by an ISP, government, or other authority. Even with work-arounds such as VPN and Tor, the centralized services can always be shut down at a single choke point.

Bitcoin is incredibly resilient to this type of attack. While ISPs can shut down certain types of traffic, that traffic can be disguised. Even if the internet was completely shut down, Bitcoin could survive through satellites or shortwave radio. Since there is no single point to shut down, every single node would need to be eliminated to kill Bitcoin.

Change Resistance

Bitcoin is also incredibly resistant to change. Bitcoin is not subject to the whims of a few individuals, and any major change requires consensus from the vast majority of participants. While some see this as a disadvantage, predictability and stability is a huge benefit. This can only be done through Bitcoin’s decentralized consensus mechanism. A single rogue developer cannot make a change and affect everyone. A government cannot mandate that the inflation rate should change. Bitcoin resists change unless absolutely necessary.

Is Centralized Bitcoin Valuable?

In the end, the value proposition Bitcoin offers comes through decentralization. A centralized Bitcoin would be a massively expensive version of existing networks and financial systems of today. It would lose the battle, simply because the costs are great without any benefits of decentralization. Sacrificing the decentralization, or at least being aware of the consequenecs of decentralization loss is key for understanding how Bitcoin can and should evolve with time.