Is Crypto Really Decentralized?

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When a crypto whale makes a move, it gets covered in the news. The coverage starts a flood of purchases from smaller investors, hoping to catch in on the upswing. The large purchase from the whale decreases the supply of the coin, which causes the price to increase. In addition to that, the news coverage and secondary purchases also causes more coins to be purchase, which drives up the price of the coin too.

This is great and all, but how sound is it to have whales in the first place? Cryptocurrency is supposed to be a decentralized currency, freed of the tyrannies of a central bank or federal reserve, who can sway the price of the currency at their whim. However, have we just replaced a central bank with a few wealthy individuals, who are free to act as they please, without any oversight?

In this analysis, we examined 10 leading cryptocurrencies and the amount of coins owned by the top 10 accounts, the amount of coins owned by the top 100 accounts, and their Nakamoto coefficient. We found that Bitcoin is still the gold standard for crypto currencies. Others are less decentralized or not decentralized at all.

The Danger of Whales

Wealth concentration is dangerous in crypto because it goes against the spirit of a decentralized currency. Here’s why:

  1. Concentrating wealth undermines decentralized currencies –  the fact that a few people hold most of a coin makes it more centralized.
  2. Pump and dump schemes – whales can manipulate the market to inflate the price, and sell their shares to smaller investors, who will end up with a loss once the price stablizes.
  3. Increased volatility – buying or selling in large amounts can influence the market’s price a lot.
  4. Governance influence  – in projects with token based governance, whales can take control of the decision making process, which can lead to a decision that’s not in the best interest of the group.

What is the Nakamoto Coefficient?

The Nakamoto Coefficient measures the decentralization of a blockchain network by determining the minimum number of entities (like miners, validators, or developers) needed to disrupt the system or control critical network functions. It highlights how resilient the network is to centralization risks by indicating the concentration of influence or control within a few entities. 

For example, a higher Nakamoto Coefficient means greater decentralization, as more independent entities would be required to compromise the network, while a low coefficient suggests centralization, making it easier for a small number of actors to exert undue influence. This metric is essential for understanding the security and decentralization of blockchain networks, especially in public, permissionless blockchains where trust in the network’s impartiality is paramount.

Findings

The data on the top cryptocurrencies’ ownership distribution and Nakamoto Coefficients reveals significant variation in decentralization across networks, highlighting potential vulnerabilities. Bitcoin stands out as the most decentralized, with a low concentration of ownership and a high Nakamoto Coefficient of 7,349, reflecting a strong resistance to influence from individual entities. Doge, Cardano, and Solana are moderately decentralized whereas Shiba Inu, Toncoin, Etherium, and Ripple are very centralized. This centralization poses risks, as a small number of holders could potentially sway network decisions, influence price stability, or compromise user trust in the network’s fairness.

These findings underscore how coins can be very different depending on their members and shows how Bitcoin is the model that remains the benchmark in the cryptocurrency space. Without similar levels of decentralization, other networks face potential dangers to their security, stability, and user trust.

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Bitcoin (BTC)

Currently, Bitcoin’s distribution shows relatively low centralization, with the top 10 holders owning just 5.64% of the total supply. This level of distribution contributes to Bitcoin’s high Nakamoto Coefficient of 7,349, indicating a resilient and decentralized network. 

Etherium (ETH)

Ethereum’s distribution displays a high level of centralization, with the top 10 holders owning 53% of the total supply, and the top 100 holders controlling 65.44%. This degree of concentrated ownership leads to a low Nakamoto Coefficient of just 2, highlighting Ethereum’s vulnerability to influence from a small number of entities. 

Solana (SOL)

Solana demonstrates moderate decentralization, with 6.58% of the supply held by the top 10 addresses and 22.76% controlled by the top 100. This relatively distributed ownership results in a Nakamoto Coefficient of 19, which signifies a fair level of network resilience and decentralization. 

Ripple (XRP)

Ripple’s network is highly centralized, with the top 10 addresses controlling 39.97% of the supply, and the top 100 holding 72.22%. This significant concentration of ownership contributes to a very low Nakamoto Coefficient of 1, indicating a network heavily reliant on a small number of participants.

Dogecoin (DOGE)

Dogecoin shows a substantial degree of centralization, with the top 10 holders owning 44.88% of the total supply, and the top 100 addresses holding 64.81%. This results in a Nakamoto Coefficient of 20, pointing to moderate decentralization but still considerable concentration among a few holders. 

Tron (TRX)

TRON’s ownership distribution indicates moderate centralization, with 35.07% of the supply held by the top 10 holders, and 40.25% by the top 100. This concentration level yields a Nakamoto Coefficient of 7, suggesting that while TRON is somewhat decentralized, it remains vulnerable to significant influence by a limited number of stakeholders. 

TonCoin (TON)

Toncoin exhibits a high degree of centralization, with the top 10 holders owning 61.22% of the total supply and the top 100 controlling 91.59%. This level of ownership concentration leads to a Nakamoto Coefficient of 9, indicating a network with limited decentralization and a reliance on a small group of entities.  

Cardano (ADA)

Cardano displays relatively low centralization compared to many other cryptocurrencies, with the top 10 holders possessing 9.95% of the supply and the top 100 controlling 22.56%. This balanced distribution results in a Nakamoto Coefficient of 19, reflecting a resilient and decentralized network structure.  

Shiba Inu (SHIB)

Shiba Inu’s distribution is highly centralized, with the top 10 addresses controlling 61.55% of the total supply and the top 100 holders owning 75.38%. This concentrated ownership produces a Nakamoto Coefficient of 9, showing a relatively centralized network structure.  

Methodology and limitations

We analyzed the top 10 and top 100 ownership for each currency listed. We also found their Nakamoto Coefficient. This study was limited, because we didn’t treat exchanges differently from one single owner.

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