Censorship resistance is one of the most crucial topics of discussion in the crypto universe. It is arguably the cornerstone underpinning decentralized finance. Currently, it is at the center of the debate between blockchain companies, legislators and governments about the use and control of money.
This characteristic of blockchain networks refers to the freedom to make transactions, the freedom from confiscation and the immutability of transactions, according to the Bitcoin.com site. Therefore, it goes in the opposite direction to what happens with traditional finance.
The freedom to transact prevents third parties, i.e., intermediaries or regulators, from preventing a person from sending or receiving money. On the other hand, freedom of confiscation is the impossibility for a person or institution to block or freeze funds to a person.
Immutability of transactions, on the other hand, is the impossibility of reversing a transaction. This is very common in traditional finance, where some monetary assets or forms of value are more resistant to censorship than others.
In traditional finance, gold, for example, has a higher resistance to government/institutional censorship than electronic fiat money or money deposited in a bank account.
Cryptos better resist censorship
Cryptocurrencies have a higher degree of resistance to censorship than any other asset. Although this is changing as governments are passing greater regulations in the cryptocurrency and decentralized finance sector.
Even so, cryptocurrencies retain a greater margin of freedom in this regard compared to traditional money. The importance of resistance to censorship in the financial field stems from the freedom of individuals to dispose of their money as they please.
This means not having to rely on intermediaries or space/time constraints to conduct transactions. Thus, resistance to censorship is an advance in that it empowers people financially.
Some of the advantages of censorship resistance for both digital and traditional assets are reflected in real life. Whether it is avoiding capital controls, which are regularly applied by banks to comply with government regulations, or suffering the losses that follow so-called bank runs or economic sanctions.
Resisting censorship in the blockchain
In the cryptocurrency industry, resistance to censorship is possible to achieve depending on the network architecture of the blockchain. However, it is important to keep in mind that the level of censorship resistance will depend on the decision a given blockchain makes with respect to transaction speed and costs.
Generally, the faster and cheaper the blockchain network, the lower the resistance to censorship. The constant innovations and updates that different blockchains are introducing in software in response to criticisms of operability and environmental impact are affecting censorship resistance.
Cryptocurrencies such as Bitcoin (BTC) that still use only Proof of Work (PoW) and a wider network breadth are more resistant to censorship. In contrast Ethereum’ s (ETH) network that migrated to Proof of Stake (PoS) is now less decentralized. Of course, also faster, cheaper and more energy efficient.
Centralized vs. decentralized platforms
Likewise, decentralized exchange platforms offer greater resistance to censorship than traditional centralized systems. This is why they have been so attractive to millions of users over the last decade.
However, centralized exchanges also have some advantages. However, because they are vulnerable to official/corporate control, they are less attractive as an option in the crypto industry.
Decentralized exchanges (DEX) eliminate the need to rely on a centralized third party to hold funds or perform transaction processing. Instead, centralized exchanges make it easier for governments to control or block individual accounts.
Thus, in the event of a financial eventuality, users are blocked from accessing the system and therefore run the risk of losing their funds. Governments or companies can block individual accounts rightly or wrongly.
Censorship of exchanges or transactions
As seen in the last year and a half, when a cryptocurrency exchange is in trouble, the first thing it does – like any bank – is block access to customers to prevent them from making withdrawals.
Other times when there is suspicion of criminal activity, governments censor cryptocurrency exchanges. In decentralized exchanges this is more difficult, because the control over the funds is with the client.
The use of pseudonyms in the cryptographic addresses of cryptocurrency wallets makes it difficult for authorities to link a given account to a person. Especially if the user has made provisions to hide his real identity.
Due to the absence of personal identification data in blockchain addresses, censorship of transactions is very complicated for the authorities. This does not mean that they cannot identify the user and that censorship blocking is absolute.
Governments and companies control internet service provider (ISP) networks through which it is possible to detect from where a transaction has been made or who might be the person handling the blockchain address.
However, new internet options are emerging that will make it increasingly difficult to impose total censorship on cryptocurrency transactions. For example, Elon Musk’s Starlink service will make censorship on the blockchain network more complicated.
While censorship of transactions on any cryptocurrency network is not impossible to achieve, it requires a lot of technological and financial resources. Blockchain networks are exposed to the possibility of 51% hacker attacks and official censorship.
A 51% attack occurs when the hacker has very high mining power. The attacker can intentionally delete, alter or reverse a transaction while causing double-spending problems. That is, the possibility of using digital money more than once, taking advantage of the distributed method of data verification.
This type of attack is not common since the distributed nature of blockchain networks makes them more secure and reduces their vulnerability. The more nodes and active participants there are in the network, the lower the possibility of controlling it.
Therefore, networks with higher hash rates are more secure because they prevent 51% attacks and data corruption in the blockchain. On the other hand, smaller networks are more vulnerable to the action of criminals in the network.
Experts say that Komodo’s delayed proof-of-work (dPoW), represents a solution to this problem. Regardless of the size of the network, because it extends the protection of the data contained in the blockchain.
Where is resistance to censorship necessary?
In countries where governments are applying more restrictive laws to cryptocurrency trading, this is where resistance to censorship is essential. Governments and financial authorities around the world have set themselves the goal of controlling cryptocurrency trading through regulatory laws.
To a greater or lesser extent these laws seek to audit and control the storage and transactions of digital assets. Exchange platforms are aware that a stifling regulation of cryptocurrency trading would end up diminishing the crypto industry.
That is why they have also activated their lobby in Washington and other centers of power to prevent the approval of punitive laws that seriously threaten people’s financial freedom.
Resistance to censorship by blockchain companies will continue to do its job for now. As opposed to the action of governments and banks that see cryptocurrencies as a threat to their financial power.
The International Monetary Fund(IMF) itself has stated that cryptocurrencies are a form of money that is here to stay. Therefore, instead of continuing to encourage their prohibition, it has decided to take advantage of blockchain technology to promote the central bank’s digital currency (CBDC) globally.
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