Bitcoin Series 2. Decentralization is the key characteristic of bitcoin

Decentralization is not an important characteristic of bitcoin; it is the be-all and end-all important characteristic.   Without decentralization, bitcoin would not survive.

Decentralization provides two critical benefits to bitcoin that no digital or private currencies have previously had.

(a)    Bitcoin can make credible promises about money supply because there is no central party that can renege on its promises to keep money supply stable. Any centralized issuer of a digital currency poses the risk that the rules of the road regarding money supply will change later on.   Even the central banks of traditional currencies present this risk.

It is impossible to overestimate how important this is in building confidence in bitcoin.

(b)   Bitcoin is more or less invulnerable to regulatory shutdown.   Any particular bitcoin business in any particular jurisdiction can be shut down and certainly a more negative regulatory environment would slow down bitcoin adoption.   No regulator, however, can make bitcoin itself go away.    Like a new solution to a mathematical problem or email or P2P file sharing, bitcoin is here to stay.   You would have to shut down ‘the internet’ to really put a dent in it and that still will just put it into hibernation until you have to turn the internet back on.

So, decentralization should be the key characteristic by which proposals regarding digital currencies should be measured.   If someone says “I can solve this problem in bitcoin by making bitcoin v2 that has [centralized party] doing [x]”, it is almost certainly a bad idea.

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Posted on December 28, 2013 and filed under Bitcoin.