Jan 22. 2015 for BitcoinMagazine.com

Those within the industry understand that one of Bitcoin’s most important features—and perhaps its true core innovation—is its decentralized structure.

Bitcoin has no central control: no central repository of information, no central management, and, crucially, no central point of failure. And yet, most of the actual services and businesses built within the Bitcoin ecosystem are centralized. They are run by specific people, in specific locations, with specific computer systems, and they are susceptible to specific legal entanglements.

This situation creates tension and certainly a little irony—we have a decentralized technology, yet most things existing upon it are centralized.

To a casual observer, and even more to a cynical one, it may appear that the claim of Bitcoin’s decentralization is a myth—an overstated feature conjured up as a bullet point in Bitcoin’s marketing brochure, but suspiciously not apparent in the actual product.

Consider the structure of CoinBase, which is arguably the most successful Bitcoin wallet and payment service in existence. There is nothing decentralized about it.

Consider CoinBase’s internal policies—they resemble PayPal’s, not the distributed utopia Bitcoiners imagine. Coinbase wants to know who you are. They want to know what you’re doing with your money, and they’ll block you if they disapprove. They spy on you and control you as much as any traditional financial institution (and to be fair, it’s not really their fault—enforcers with guns will throw them in a cage if they don’t do these things; it occurs under duress).

So the question arises: How can Bitcoiners claim decentralization when the premier Bitcoin service has essentially become a bank itself?

Critics point to centralized exchanges, wallets, and payment processors to condemn Bitcoin’s claims of decentralization. When Mt. Gox exploded, losing half a billion dollars of customer money, critics expressed immense skepticism that Bitcoin was really anything unique at all—to them, it looked like just another new medium by which people are spied on at best, and ripped off, scammed, and defrauded at worst.

So isn’t Bitcoin’s claim of decentralization a lie?

No.

And here’s why: to understand Bitcoin one must understand the difference between coercive centralization and market-based centralization. Bitcoin possesses the latter, but avoids the former, and that is a crucial distinction.

Coercive centralization is what we all experience in the legacy financial industry. The world’s monetary system, based upon national fiat currencies created and managed by government-sponsored central banks, is coercive. It is coercive because the entities with the power over money’s creation, regulation, and transfer have the will and the power to hurt you if you disobey. Not only that, but you are coerced into it in the first place, being forced to pay taxes and settle debts using only your government’s anointed currency.

If you’d like to experience the coercion first-hand, try creating some dollars, and you will find yourself thrown in prison, your property taken from you. Or try transferring dollars in any way that is “unauthorized.” Then you will see what coercion means.

The entire financial system as it exists today rests upon this anti-market model of coercion—money moves only with the permission of those in control, and they’re not in control by mutual contract, but by the privilege of violence. The various poisons such coercion bestows upon society are a topic for another essay, but the only reason people suffer this system is because it’s been the only game in town.

Market-based centralization is fundamentally different. Its key feature is the ability to opt out.

Yes, CoinBase is a centralized entity. But you needn’t use CoinBase to use Bitcoin. Yes, a Bitcoin exchange or web wallet is centralized, but you can always trade coins with a friend directly over the blockchain, or store it in a local wallet, without the permission of any third party.

A user of fiat is always forced to utilize a centralized service. A user of Bitcoin is never forced to utilize a centralized service. This is the key distinction between centralization found in Bitcoin (which is market-based) and centralization found in the traditional banking industry (which is coercive).

And this ability to opt out, while it may seem modest, enables wonderful things to happen, for the discipline of the marketplace can be realized. Consider: since every CoinBase user can opt out and leave the platform, this presents a natural check on CoinBase’s ability to act with impropriety, and makes coercion impossible. Compare this to the model of a bank, which is able to burden its customers to a far more significant degree because it knows that if the customers want to participate in a meaningful way in the financial system, they have to use a bank and its associated fiat currency system.

It should thus be clear that Bitcoin enables users to withdraw into the neutral pasture of decentralized finance at any time, which means that any centralized service within the sphere exists only at the pleasure of its customers.

And thus the forms of market-based centralization found within Bitcoinland needn’t be feared or condemned as one would the coercive centralization of the legacy financial system. What we have is indeed something fundamentally different, which is wholly compatible with the free-market structure and intent of Bitcoin’s genesis. Indeed, a free market will inevitably lead to some points of market-based centralization when economic efficiencies can be found. Every voluntary organization of people or resources is market-based centralization, and by definition, there’s an inability to coerce those who partake.

The key to judging the legitimacy of centralization is always the ability of users to opt out. Bitcoin provides this, while fiat and central banks do not.

That is the difference, and it is one that the world will soon come to appreciate.