Bitcoin is widely believed to be an open source egalitarian system that was designed and fully specified by Satoshi and which is decentralized and governed by some sort of majority rule.

The reality is very different. It isn’t any of these. Bitcoin is a murky shadowy system which obeys peculiar rules which nobody fully understands and which has been decided at strange places, sometimes totally outside of bitcoin foundation and developers. It has become excessively centralized and this has not happened overnight, it was a long process in which bitcoin has effectively ceased to resemble anything which Satoshi has imagined.

Satoshi has very clearly postulated in Section 5 of his paper that each bitcoin node should be collecting recent transactions and trying to create new blocks. The original paper is all about CPUs, which was very naive. In practice as soon as ASICs have replaced general-purpose hardware, mining has concentrated in the hands of a restricted group of people: miners. This group actually remains very large, tens of thousands of people which is good. However these people mine under the control of pools. They have relinquished their powers. How did that happen?

The Key Decision

Somewhere in early/mid 2012 a very important decision has been taken. The Stratum protocol was designed by a Czech developer Marek (slush) Palatinus, as an overlay protocol for bitcoin. It was needed in order to replace the old-time getwork method which was unable to handle higher speeds.

Startum took a very serious and deliberate decision to move the power of selecting which transactions are included in blocks from miners to pool managers.
The author has claimed that “99% of real miners don’t care about transaction selection anyway”, cf here.

At this moment bitcoin ceased being a decentralized democratic system.

We can observe that:

• Nobody forced miners to mine in pools: the growing difficulty of mining and large standard deviation in this process made that majority of miners naturally adopted pooled mining.
• People who buy ASIC miners are probably not even aware that they might be some alternatives.
• This was a key point in history where bitcoin became more centralized AND miners lost control of what they mine.
• This decision lies totally outside of Satoshi source code, and even totally outside of the circle of Bitcoin developers and the bitcoin foundation: to this day this widely used protocol was NOT standardised as a well-defined bitcoin BIP.
• To this day it is maintained in the limbo, neither standardized as BIP, nor reformed/banned, in spite of being criticized as “developed behind closed doors […] resulting in various obvious problems”, see the section Criticism here.
• In spite of the fact that according to the same web page, the bitcoin open community has developed another solution GBT (GetBlockTemplate) or BIP022/23 which was claimed more decentralized (is it actually more decentralized?).
• However stratum’s was backed by a major mining pool and GBT adoption suffered.

The Emperor’s New Clothes

We see that:

1. It is people who run pool managers which now decide which transactions are mined. 10 pool manager servers centralize 75% of the mining power.
2. More importantly, we now have a cartel of two sorts of super highly centralized entities: designers of mining ASICs and people who run pool managers. These people together were able to impose a protocol which represents their interest, and which makes 1. above possible, possibly forever.

This was a sort of hold-up: at some moment in bitcoin history, bitcoin became maybe irreversibly centralized by adopting a protocol which shifts the power to pool managers.

Irreversibly? Quite possibly yes, because for example tomorrow if all bitcoin software nodes adopt version 3 of bitcoin protocol, the pool managers can maintain the status quo by rejecting all blocks with version 3, possibly forever, as explained it his video, and if some miners accept them in their blocks, their blocks could be in turn rejected.

This unless a majority of miners revolt against this cartel, and switch to other pools which support another policy. However miners are passive, not always aware of the power they may have, and not well organized.