Impossibility of Full Decentralization in Permissionless Blockchains
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Bitcoin uses blockchain technology and proof-of-work (PoW) mechanism where nodes spend computing resources and earn rewards in return for spending these resources. This incentive system has caused power to be significantly biased towards a few nodes, called mining pools. In fact, poor decentralization appears not only in PoW-based coins but also in coins adopting other mechanisms such as proof-of-stake (PoS) and delegated proof-of-stake (DPoS). In this paper, we target this centralization issue. To this end, we first define (m, ε, δ)-decentralization as a state that satisfies 1) there are at least m participants running a node and 2) the ratio between the total resource power of nodes run by the richest and δ-th percentile participants is less than or equal to 1+ε. To see if it is possible to achieve good decentralization, we introduce sufficient conditions for the incentive system of a blockchain to reach (m, ε, δ)-decentralization. Then we find an incentive system satisfying these conditions. Through this incentive system, a blockchain system can reach full decentralization with probability 1. However, to adopt this incentive system, the blockchain system should be able to assign a positive Sybil cost, where the Sybil cost is defined as the difference between the cost for one participant running multiple nodes and the total cost for multiple participants each running one node. On the other hand, we prove that when there is no Sybil cost, the probability of reaching (m, ε, δ)-decentralization is upper bounded by a value close to 0, considering a large rich-poor gap. To determine the conditions that each system cannot satisfy, we also analyze protocols of all PoW, PoS, and DPoS coins in the top 100 coins according to our conditions. Finally, we conduct data analysis of these coins to validate our theory.
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