There are two main weaknesses of Bitcoin:
- Centralization (discussed here)
- Pooling of miners (discussed later)
Centralization weakens the rules of Bitcoin, whereas pooling weakens censorship resistance. Both of these can be avoided if more people start sharing the risks.
Centralization happens mainly due to two reasons:
- Bitcoin is too difficult to use
- On chain transactions requires fees
To reduce difficulty, people tend to use easy centralized tools like
- Wallets
- Explorers
- Payment processors
- Exchanges
Using these tools delegates both the control of coins and validation of Bitcoin rules. Avoiding this delegation is not easy.
It's not enough to have a self custodial wallet if you don't use your own node. (Think Phoenix)
It's not enough to have your own node if you don't verify every update. (Think Umbrel)
It's not enough to use an open source payment processor if it's running on someone else's computer. (Think BTCpay on Voltage)
It's not enough to run all of them in your computer if you don't understand the software (and hardware).
These steps make it increasingly difficult to use Bitcoin securely, so people tend to gravitate to centralized solutions. This is especially true when the threat levels are low (bull market).
It's not enough to do this on your own. You have to either find like-minded trading partners or train the existing ones.
If you are a merchant, you have to either make it easy to pay in Bitcoin or offer discounts to justify the difficulty. Both of these efforts take time and money. If you are using on-chain transactions, you have to consider fees and confirmation time. On top of these, government controls will either increase costs or force the merchant to shutdown (think Wasabi).
PS: This is an attempt to write a simplified version of Eric Voskuil's Cryptoeconomics one chapter at a time. Read the last chapter: #528771