One of the perceived goals of cryptocurrencies such as Bitcoin is decentralization. This term refers to the process in which the financial activities are performed in a distributed manner, and no central authority can intervene in the process. The current form of financial system is more or less centralized as entities such as banks can intervene in the financial transactions and activities. The blockchain technology, in particular Bitcoin, is seen as a solution towards decentralization. However, the question is, in the long run, will Bitcoin bring complete decentralization to our financial system?
In this post, I'm going to provide my answer to this question through simple calculations and without going into details of Bitcoin or the current financial system. To do so, let's see how valuable a bank can be in the current financial system, or an entity can be in the Bitcoin network:
1) Estimating a bank's value: Although it's not straightforward to measure a bank's "value", a popular quantity that's used as a proxy to determine how big a bank is is its assets under management (aum). Let's compute the value of, Goldman Sachs, a relatively big bank in the U.S., in the global financial system through its aum. According to the Wikipedia, in 2019, Goldman Sachs' aum is ~$1.8 trillion. According to MarketWatch, "all the money in the world" can be estimated $1000 trillion. By dividing these two numbers, we would get a proxy for the value of Goldman Sachs in the current financial system:
Goldman Sachs proxy value = $1.8 trillion / $1000 trillion = 1.8×10-3
2) Estimating an entity's value in the Bitcoin network: Bitcoin's system is backed by hardware and an entity that controls more computers is more powerful in this system (higher mining power, etc.). Now, let's define the proxy value of an entity in the network as the portion of computers that it controls. As a relatively big technology company, Google, owns lots of computers. What would have been the value of Google if it was an entity in the Bitcoin network? According to the Wikipedia, in 2016, Google had an estimated 2.5 million servers around the world. According to the Worldometer, in 2015, there was over 2 billion computers in use around the world. By dividing these two numbers, we have:
Google proxy value = 2.5 million computers / 2 billion computers = 1.25×10-3
These estimated ratios are actually pretty close. They're not even different in the order of magnitudes. What these numbers show is that, if Google's business was to solely participate in the Bitcoin network, its overall value in the Bitcoin network would have been as high as the overall value of Goldman Sachs in the current financial system! In other words, it is unlikely that, in the longer term future, the Bitcoin network is managed by so many nodes distributed across the world, and we shall see entities as big as banks to be participators of it. Although, every transaction in the network may still be processed by a distributed set of entities, I think the idea of Bitcoin also paves the way for new kind of banks to emerge in its perceived decentralized financial system.