Bitcoin Wasn't as Decentralized or Anonymous as Crypto Bros Told You, Study Finds

Just 64 bitcoin owners were responsible for the vast majority of mining in the cryptocurrency's early days.

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A new study on bitcoin calls into question whether the digital currency is truly as decentralized and anonymous as its biggest devotees would have you believe.

Researchers from several universities recently analyzed data from the top cryptocurrency’s early days and found that, contrary to the claims made by Web3 apologists, the “wealth, income, and resources” during that period “were highly centralized.” On top of this, the techniques used to parse and analyze the study’s data had the ability to “de-anonymize” users in some cases, meaning that bitcoin’s claims of anonymity aren’t quite what they’re chalked up to be.

While the study has yet to been published in a peer-reviewed journal, it has seen significant support from a number of prominent academics and technologists, including VR guru and longtime Microsoft researcher Jaron Lanier, who wrote an op-ed in Coindesk on Tuesday in support of its findings. Here’s a quick rundown on what the new study has to say.


Surprise #1: Decentralized Finance Is Actually Pretty Centralized

Cryptocurrency is supposed to be decentralized. The idea is that a “trustless,” peer-to-peer network of anonymous users, tied together by blockchain technology, are able to securely trade digital assets without the need for a mitigating third-party like a bank or a financial agency. Crypto evangelists promised an egalitarian, democratized financial system divorced from traditional gatekeepers, allowing people who wouldn’t otherwise be able to access financial systems to gain and accumulate wealth. Crypto hype men also promised an alternative to the accumulation of wealth by a small minority. This is the utopian view of what crypto is supposed to be.

However, by looking at data on the blockchain from bitcoin’s early days, the researchers found that, when it launched, it was less a truly decentralized network than it was a system propped up by a small minority.


To uncover this, researchers looked at “mining” activity between the period when the currency first launched in 2009 and when it reached parity with the U.S. dollar in 2011. Mining is the critical process by which new tokens are created using complex math equations. In contrast to the myth of bitcoin’s “democratizing” effect on finance, the study found that only 64 owners were responsible for a vast majority of the bitcoin mining that occurred during these early years. Together, those 64 “agents” mined 2,676,800 bitcoin, equal in present-day value to some $84 billion.

The study shows that while Bitcoin was supposed to be a decentralized network from the get-go, it was effectively propped up by a small elite, the likes of which controlled a majority of the “computational resources” that supported the community. Researchers found that it would have been easy for these early adopters to exploit the network using financial attacks and thereby gain tremendous amounts of wealth, but that those attacks would have effectively doomed bitcoin’s reputation and its future. Instead, the early adopters restrained themselves from indulging in this avaricious and destructive behavior, and thus managed to preserve the community around the currency.


The research casts a slightly new perspective on bitcoin, chipping away at the myth that digital currency is the freewheeling financial medium its acolytes claim it is.

Granted, a lot of people have been saying that crypto isn’t actually decentralized for quite some time. In 2018, researchers at Cornell University put out their own peer-reviewed study noting that bitcoin wasn’t nearly as decentralized as users had been led to believe. Researchers observed a high concentration of mining activity in the hands of a very few. Meanwhile, other commentators in the techie and academic spheres have routinely made note of the fact that Web3 decentralization is more ideology than reality, and that users ultimately have to rely on an assortment of Web3 institutions, be they exchanges, DAOs, or whatever new trendy entity is currently having its DeFi glow-up.


“We all kind of knew that mining was fairly centralized,” said Sarah Meiklejohn, a University College London cryptography expert, in an interview with the New York Times about the study. “There aren’t that many miners. This is true even today, of course, and it was even more true at the beginning.”

Surprise #2: ‘Anonymous’ Crypto Actually Probably a Really Good Vehicle for Surveillance

Another thing you’ve probably heard about bitcoin is that it’s supposed to be an anonymous system of exchange. But the new study demonstrates that there are a host of data-parsing techniques that can now be used to all but totally unmask the people trading the currency.


Specifically, researchers used what are called “address-linking” techniques, that look at networks of crypto addresses and try to tie them back to the people using them. The study notes that these analyses can “potentially facilitate deanonymization.” By using these complex data-sifting techniques, the researchers were actually able to untangle the web of addresses and transactions associated with specific individuals who were prominently involved in bitcoin between 2009 and 2011. The paper doesn’t say who those people are, with the exception of two who have already been publicly outed and convicted of crimes: Ross Ulbricht, also known by his dark web pseudonym “DreadPirateRoberts,” who ran the notorious Silk Road darknet market until his arrest in 2013, and Michael Mancil Brown, or “Dr. Evil,” a Tennessee man who attempted to extort Mitt Romney in a bizarre bitcoin-related plot in 2012.

Again, the notion of de-anonymizing crypto users isn’t exactly new—though the public seems to be slowly waking up to the fact that police can now use blockchain analysis tools of the kind sold by firms like Chainanalysis to track down crypto-using e-criminals.


In his Coindesk op-ed, Jaron Lanier writes that it seems highly likely that intelligence agencies have previously exploited these kind of security and privacy deficiencies to track the activities of crypto users.

Bitcoin seems to have, in sharp contrast to its common reputation, become something of a perfect tool of state surveillance, revealing activities that many users believed to be protected by pseudonymity to sophisticated state security agencies while hiding transactions from communities of peers such as other developers, friends or community credit unions that would have been better placed to monitor them in context,” Lanier writes.


Lanier notes that it is “plausible that organizations like the National Security Agency, China’s Ministry of State Security and Israel’s Unit 8200 have long had access to this information and chosen not to reveal this capability to preserve the mystique of pseudonymity and the assumed-private financial records it gives them access to.”

In other words, a system that was designed to provide anonymity and privacy may have actually been used for government surveillance of the highest order.