Centralization Risk

Bitcoin weakness results from centralization and from pooling. Forces that produce aggregated mining are called pooling pressures. While pooling weakens confirmation security, centralization weakens the security of consensus rules. Weakness is the result of fewer people with whom to share risk.

Consensus risk is shared among active merchants only, as they are the people who have the ability to refuse trade of property for units that fail to conform to their rules. Financial forces that reduce the number of merchants are called centralization pressures. The problem of delegation is that it is commonly coupled with centralization, as is typical in web wallets. The wallet not only owns the saved units but typically also controls validation of units received in trade. The latter reduces power over consensus rules to one person for all of the wallets of the service.

Centralization pressures include:

• Difficulty of use discount.
• On-chain settlement discount.

If exchange is difficult for a customer, the merchant must discount merchandise in order to accept the coin. If exchange is difficult for the merchant, an additional cost is incurred. When referring payments to a trusted third party reduces the size of this discount and/or cost, return on capital is increased.

Transfer incurs fees which also requires a merchant to discount merchandise. When using a trusted intermediary to settle transfers off-chain reduces fees and thereby the discount, return on capital is increased.

Centralization manifests as:

• Payment processors
• Web and other trusting wallets
• Hosted APIs for accessing chain

In a low threat environment the merchant has diminished financial incentive to subsidize Bitcoin security. As the cost of alternatives increases the discount becomes unavoidable. At this point the customer decides the pay a higher price or the merchant closes the business as capital seeks market rates of return.