Is Blockstream a peril to Bitcoin's decentralization?

There are few companies doing as much for Bitcoin as Blockstream. The Canadian blockchain developer is prominent in building out the ecosystem for the world’s biggest cryptocurrency, with a core mission of delivering sidechains to enable Bitcoin to scale.

It’s also behind other prominent initiatives: providing early funding for Bitcoin’s scaling solution, the Lightning Network, and launching a Blockstream satellite system, to name but two.

But since it was founded in 2014, Blockstream has been dogged by accusations of conflict of interest. Critics claim that the sole sidechain it’s developed to date, the Liquid Network, doesn’t meet community needs, and they warn that Blockstream Satellite and Blockstream Mining could lead to the company extending its hold over Bitcoin—a process that could, however inadvertently, centralize some of the Bitcoin ecosystem, compromising its founding principle of decentralization.

Blockstream, for its part, firmly rejects its critics' assertions. "Since 2014, Blockstream has developed and collaborated on multiple tracks of decentralization," founder Adam Back told Decrypt. He emphasized that the company has no ability to dictate to miners or Blockstream Satellite users.

Centralization is a touchy issue for the community as a whole, but particularly for the industry’s most decentralized cryptocurrency. Whether Blockstream's interests and ubiquity in the industry threaten Bitcoin and its users, however, likely depends on which camp you’re in.

A sterling pedigree

There’s no doubt that Blockstream has a sterling pedigree, which has helped the startup raise around $100 million, from investors such as Reid Hoffman, Blockchain Capital, and Digital Currency Group, since it launched in 2014.

Back is behind Hashcash, forerunner of the proof-of-work consensus design used by Satoshi Nakamoto for Bitcoin. Cofounder Gregory Maxwell is a leading contributor to Bitcoin’s protocol, and a long time open-source and cryptography champion. 

Blockstream provided early funding for the Lightning Network. Launched in 2015, this “layer 2” solution allows peer-to-peer, instant, and almost free payments to be made with Bitcoin. 

But the bulk of Blockstream’s development is directed at other projects. First up, there’s the Liquid Network, a sidechain intended to give institutions and crypto exchanges more privacy, faster finality, and tokenized assets while using Bitcoin.

Blockstream Satellite is a project aimed at reducing Bitcoin’s dependency on Internet access by broadcasting the Bitcoin blockchain via satellite. And Blockstream Mining enables Bitcoin-focused business and individuals to more easily mine the cryptocurrency themselves, to help maintain the decentralized security of the Bitcoin network.

It’s these latter two initiatives that have, most recently, attracted criticism.

Blockstream Mining and Blockstream Satellite

Last month, French crypto publication Cryptoast warned that Blockstream had begun to accumulate significant power over Bitcoin. One concern the article raised was with Blockstream's satellite operations, which it said could "grab the cryptocurrency monopoly in space."

Blockstream rebutted those claims, stating its objective with Blockstream Satellite is simply "to enable many more people globally to participate directly in the Bitcoin network, by radically reducing bandwidth cost to further global reach of Bitcoin into every corner of the world."

Cryptoast also claimed that Blockstream Mining could “theoretically” allow Blockstream to dictate to its customers, and enable it to control a substantial part of the hashrate, competing with larger mining operations, such as Bitmain.

Blockstream has pushed back firmly against these allegations. “Blockstream Mining lowers the barriers to entry for businesses to engage in Bitcoin mining, rather than raises them,” Neil Woodfine, the company’s marketing director told Decrypt. “We have comprehensive contracts with our customers and could not dictate what they do with their equipment.” 

The startup claims that its use of the BetterHash protocol, developed by co-founder Matt Corallo, promotes further decentralization by allowing individual miners, rather than mining pool operators, to choose which transactions go into new blocks.

Woodfine added that, even if it was possible for Blockstream to influence miners’ decisions, events in 2017, known as the “User Activated Soft Fork,” had demonstrated that they actually have very little power in influencing the Bitcoin network. 

“The real power,” he said, “lies in the users with their full nodes, and with investors (hodlers).”

In respect of Blockstream Satellite monopolizing space-based Bitcoin, Woodfine shot down the idea, explaining that the company was keen to encourage competition: “We'd love to see more alternatives for connecting to the Bitcoin network,” he said. 

Claims by competing protocols

But the issue is also wrapped up with the highly contentious claims of competing protocols, notably Bitcoin Cash and Bitcoin SV—the results of a hard fork from Bitcoin core. 

Their proponents have accused Blockstream of dishonesty; of manipulating the community; of silently hiring people within it to work on Blockstream products, and of promoting Liquid at the expense of Lightning.

The Lightning Network, now five years in development, remains at an early stage; it’s been criticized for the time it’s taken to develop, and for encroaching centralization.  

Critics have also argued that developers funded by the company want to keep the Bitcoin block size small to suit Blockstream’s scaling efforts. Since the startup’s plan is to sell sidechains to big business, they say this encourages maintaining a status quo of small, congested blocks on the Bitcoin blockchain.

“The criticisms just come from a very small and very noisy minority of people,” said Woodfine. He added that Blockstream currently funds three full-time Lightning engineers, and is the leading contributor in c-lightning, one of the three main Lightning implementations.

"It is a bit surprising that a few people are still reminiscing about large blocks, given that it is clear from network complexity theory that layer 2's like Lightning are massively more scalable, and that the market overwhelmingly rejected forks," added Back. "I think the economic factors that people fail to understand are that investors favor security and predictability above all else."

But criticism of the Liquid Network refuses to go away.

The Liquid Network: much loved but unwanted? 

Liquid relies on a group of “trusted federates,” largely cryptocurrency exchanges, to create trust. That means it hardly differs from the traditional banking system, critics say. 

It is not a decentralized network, they insist, pointing out that not only does each transaction go through the trusted federates, but the federation also decides who can join; it has custody of the Bitcoin used for the Liquid bridge, and Blockstream holds multisig recovery keys (for emergency situations.)

Eric Wall, Chief Investment Officer at cryptocurrency investment firm Arcane Assets, is among those who have questioned its integrity. 

“Despite only coming up with a permissioned system, [Blockstream] never misses an opportunity to portray Liquid as being ‘Bitcoin-based,’ as if it inherits the strengths of the powerful Bitcoin blockchain when it doesn’t,” he explained to Decrypt on a recent call. 

Wall isn’t too concerned about Blockstream’s satellite operations, which he said are a bonus, with no centralization risks. Neither do its mining operations pose a threat, “as long as they don’t get too big.”

But Liquid’s attempt to emulate Ethereum’s decentralized finance (DeFi, which is called LiFi on Liquid)  falls short of the mark, said Wall, who pointed out that it doesn’t support many of the tokens traded in DeFi. It also, he argued, lacks real developer appeal. But worst of all, said Wall, Blockstream is guilty of a “particular kind of groupthink,” that has blinded the company to market needs, prevented it from delivering on its original trust-minimized sidechain promise, and insulated it from all criticism. 

"New layer 2 technologies take time for even a technical audience to get to grips with and understand intuitively, " countered Back.

He said that Liquid assets are "quite trust-minimized," and the technology is designed simply to provide traders with a more efficient trading experience—faster, cheaper Bitcoin transactions with confidentiality—while retaining a certain level of decentralization and verifiability that are not available in competing custodial solutions. 

"There is no downside to traders as they are always relying on exchange custody anyway," said Back. He added that, as blockchain congestion and fee increases are mostly created during periods of intense trading, "Liquid helps that by freeing up the Bitcoin mainchain for transactions that actually require its unique value propositions: censorship resistance and cold storage."

The customer is always right 

“Generally I don't think Blockstream has bad intentions, but I do think a fair criticism could be that the company has become somewhat out of touch with the market,” said Wall. “As an outside observer, it seems to me as if it's that strain of groupthink that has prevented Blockstream from launching a product with wide market appeal during the last five years. Liquid, for example, is a product that appears to be immensely loved internally within the firm, but is generally a bit out of touch with what the market is looking for.” 

Unsurprisingly, Woodfine disagreed: “Genuine criticisms we take seriously, but there's a lot of noise out there, with people arguing from positions of vested interests or in bad faith,” he insisted.

But there are a growing number of voices who are not so much critical of Blockstream itself, but of its seeming inability to take criticism onboard.

In one infamous example, last year, The Block reporter Larry Cermak found himself blocked by Blockstream, after publishing an article questioning the startup’s relationship with the BitFinex exchange. 

Criticism is key to the development of any great project, and the Bitcoin community is not an easy group to please. Regardless of what Blockstream does—or what critics say about it—the pressure for permissionless sidechains, which Bitcoin needs to clone the properties of other cryptocurrencies, and disable its competition, is unlikely to diminish.