In the previous week, a lot of talk has been generated on the decentralized/centralized nature of XRP after David Schwartz, the chief technological officer (CTO) at Ripple Inc., released a report on the state of XRP governance. The overall sentiments towards the article, “The Inherently Decentralized Nature of XRP Ledger” has continued to be positive as most community members embrace XRP Ledger consensus mechanism explained by David. However, while reading through pieces across the internet, I read through an article that questioned the overall importance of the XRP Ledger being termed “decentralized” at the moment.
Does centralization matter if you buy Ripple (XRP)?
In the article, the author reasoned out that the concern of XRP Ledger being decentralized or centralized does not matter at the moment with investors only focused on the price. The centralization, which is caused by the large amounts of XRP held by Ripple Inc. will cause regulatory issues but it will not affect the price volatility experienced in the market.
Furthermore, the author explained that the technology underlying XRP will only matter in affecting the value of XRP in the long term as most investors only care about the charts and the price analysis of the coin. The statements were by a long mile opinionated and in no way embodied the true nature and benefits of a decentralized ledger.
The current trend of investors only focusing on the charts and price is a short vision from an investor’s point of view as the idea of centralization affects the overall image of Ripple and XRP as regulation is placed on the digital asset. Hence, before buying or trading in XRP it is crucial for the investor to understand about the centralization issues of XRP not only for the long term but the short term price change too.
Decentralization: XRP Ledger vs Bitcoin
In the world of cryptocurrency, Bitcoin is set as the gold standard regarding decentralization and development of technology. The former uses a proof of work (PoW) consensus mechanism to confirm transactions in a process called “mining” across a network of nodes.
The process however, is susceptible to a 51% hack where a small group of miners take up a large portion of the hashing power ensuring the mining power is left to them. This squeezes the decentralize nature of mining on the platform back to a centralized nature making the system unsecure for transactions. One problem seen from a 51% attack, is the ability by the small group to change confirmed transactions to unconfirmed ones allowing theft of funds.
Compared to the XRP Ledger, which uses a consensus protocol that requires majority number of validators to confirm these transactions without being rewarded as it is done with Bitcoin. The validators are different from miners because they aren’t paid when they order and validate transactions. This ensures the XRP Ledger remains a decentralized and democratic consensus mechanism that kills centralization in governance.
Finally, the influence on Ripple Inc. on XRP is set at a mere 7% (with 10 of the 150 validators across the network coming from Ripple) while Bitcoin’s majority control, over 57% of mining is carried out by 4 mining groups. This shows the level of centralization Bitcoin faces compared to XRP Ledger. The most shocking part is Bitcoin’s mining will continue to be more centralized in the future as XRP’s becomes more decentralized.