Is Decentralization Always Important?

A decentralized blockchain facilitates transactions without needing an intermediary. Banks and other financial institutions become unnecessary as transactions become faster and more efficient. Decentralization reduces the risk of failure based on a single weak point. It gives you total control over your own money in the crypto universe. But is decentralization always important or are there times when too much tech does not add anything. This thought occurred to us when we read about a new way to track Bitcoin’s price without consulting a crypto exchange.

Estimates of Bitcoin Price

There is a new open source Python program that you can use to estimate the current Bitcoin price. It uses the Bitcoin Core full node to do this. When you consider that the blockchain is an open book, someone was eventually going to do the work needed to figure this out. All blockchain transactions are available for anyone with the time and tools to sort them out. Even though the identities of those making Bitcoin transactions are private, it is possible to keep track of how many transactions are going on. According to the developer, the new Python tool “reads blocks, analyzes output patterns, and estimates a daily average USD price of Bitcoin.”

Price Data Comes from Crypto Exchanges

The marketplaces where cryptocurrencies are bought and sold are crypto exchanges. This is where prices are set by actual buying and selling. The rationale for having an independent way to check Bitcoin prices is that Bitcoin exchanges can be subject to corruption such as with excessive wash trading. Rather than checking prices at a crypto exchange the idea behind this new app is to put price discovery on-chain. This, the argument goes, will make decentralized finance truly decentralized.

What Is the Value of a Bitcoin Token?

When you want to sell a piece of property, the value of that property is what someone else is willing to pay for it. If there are very few potential buyers, there is liquidity risk. The same is true in the stock market when a stock trades at extremely low volume. However, with a very liquid market such as for Microsoft stock, or Bitcoin, there is a huge amount of trading and never a problem finding buyers and sellers at the current market price. This is why people typically check the price of Bitcoin on their favorite crypto exchange or simply look up Bitcoin on Google Finance.

Is There a Practical Use for Estimating Crypto Exchange Prices?

To our knowledge, nobody is claiming that crypto exchanges themselves are serving up fake Bitcoin prices. There may be a lot of wash trading which tends to distort the market but the current Bitcoin price is still the current Bitcoin price. When someone in the DeFi arena wants to make or receive payment in Bitcoin such transactions stand alone, apart from the world of traditional finance. The dollar price of Bitcoin comes into play when someone wants to cash out their Bitcoin. They will typically want to know the current exchange rate at an exchange before taking the word of someone on the other side of the world that they are getting a fair deal on the Bitcoin to dollar exchange. Most folks will not be interested in using an app that approximates the price of Bitcoin within 1% of the current exchange value as their gold standard for such transactions. This sounds like decentralization for the sake of decentralization and not for the sake of any practical use.

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