Is Pure Decentralization a myth?

Bitcoin emerged with decentralization as its top priority and provided a breakthrough from the traditional finance industry. By emphasizing a “peer-to-peer network” and the atrocious bailouts of banks, this is a revolution bound to shift a long engraved perspective towards how financial interactions are done. But constructing a decentralized network comes with trade-offs. For Bitcoin to prioritize the pure connection between two people, it has to give up scalability. This is explained nicely by the scalability trilemma, which states that a blockchain project is bound to encounter three problems: scalability, decentralization, and security, of which it can solve only two issues. Bitcoin upholds the value of self-sovereignty, so its greatest strengths are decentralization and security.

Of the 20,000+ cryptocurrencies that emerged after Bitcoin (95% are useless), 5% of which cater to a need that is specific to a unique use case. How much are they decentralized? Are they different from traditional financial instruments? Don’t centralized bodies run the Internet, so doesn’t that make Bitcoin centralized? To answer these, let’s understand what decentralization is and dissect it layer by layer.

Decentralization is the transfer of control to a distributed set of nodes rather than a single entity. These nodes are trust-less and are responsible for the network’s progress using a voting mechanism. A few large corporations dominate the internet we use today. These include Google- for everything we browse; Facebook- to control our social interactions; and Microsoft, to provide the hardware we use. There are competitors, but these companies’ dominance allows centralized control and decisions to be concentrated in their board rooms. Being decentralized means emancipation from the power of these bodies and using distribution and delegation to achieve consensus on decisions — bitcoin decentralized finance by providing a ledger free from censorship and regulation, allowing maximum security. The protocols further developed by blockchain technology aim to decentralize corporations and make the ownership of assets in one’s control. Ethereum gives us the operating system where decentralized applications can be built, thereby providing a breakthrough as a hub for developers for uninterrupted innovation.

The core of our decentralized onion is the developer layer. This pertains to how much the people working on the project are distributed and trust-less. Does the success of the project depend on a single developer? Is his contribution vital to the project’s success, and would his absence destroy the network? Satoshi disappeared after creating Bitcoin, and the remote developers maintained the software efficiently. Even if Satoshi became active today, his contribution to the network would be negligible.

In contrast, the departure of Andre Cronje from the Fantom ecosystem caused ripples in the whole ecosystem that were reflected in the price of FTM and YFI, developed primarily by Andre. Decentralization at the developer level is necessary for the longevity of the blockchain project. If the developers are not dependent on each other, the project can build on the actual fundamentals of the project rather than any additional incentive or personal gain.

The next layer is the coin or token layer. As the blockchain displays transaction data publicly and is open for anyone to analyze, the number of tokens or coins of the protocol belonging to each wallet is visible. The coins are the incentive mechanism of the network, while the tokens can be perceived as a means of governance for the protocol built on the blockchain. Tokens, when created, are often allocated according to a fixed plan. Satoshi did no pre-mine, and everyone was able to get bitcoin by expending his resources for the sake of the network. In contrast, when a team is behind a project, the people building the network will likely demand their share. In addition, tokens will be set aside for future developments. This influences the spending of a large amount of the tokens, all in the hands of the foundation running the treasury.

When the founders of Ethereum were planning to hold a crowd sale in its early days, there were many regulatory concerns because it was similar to an IPO, which must be registered with the concerned authorities. The founders were also hesitant to get their fair share. This did, indeed, spark concern among regulators. They can raise the point that dependence on a single enterprise for profit can be what the ETH token and the Ethereum Foundation behind it portray. This claim was clarified after ETH was sufficiently decentralized. Still, the point of concern is that a project can fall under the scrutiny of regulators if they do not deem it better for the distributed network.

The third layer encountered in a decentralized setup is the infrastructure layer. A blockchain is a ledger maintained by nodes. These nodes need to communicate with each other and present their suggestions and improvements to the protocol. Implementation of these changes must also be done through different gateways and frameworks. Hence, the providers of these services must not be a single company that derives profits from these network interactions. Instead, they must be constructed keeping in view the longevity of the blockchain. One such event occurred when Infura blocked its services to sanctioned countries outside the USA. Metamask, the go-to crypto wallet for Ethereum, accesses the blockchain by Infura, which acts as a node provider and API. Hence, both Metamask and Infura were unavailable at the time, and Concensys, the software company behind Infura, was bound to take legal action.

…the industry needs to focus on crypto infrastructures like data centers, connectivity, computations, semiconductors and the actual plumbing that makes any technology function.

-Meltem Demirors, chief strategy officer of CoinShares.

For the blockchain to function, either in a proof of stake or proof of work consensus mechanism, miners or validators are needed to verify the transaction data of the ledger. Here we come to the blockchain layer. Decentralization at this layer is necessary to prevent tampering with the leger and allow the participation of many independent entities. In addition, regulators can easily take control of the transaction data, blocking them or restricting them if the number of validators or miners is limited. Bitcoin was run by 64 miners in its early days, which have now been identified as altruistic to the network for its betterment. Today, this network is the most secure financial system because of miners present worldwide.

In contrast, Solana has often been bashed on its centralized approach to achieving mass scalability. This is achieved by 1700 validators. A lower number of validators and the high hardware requirement makes it harder for everyone to become a validator. This increases the risks of centralization on the blockchain layer.

The final layer on top of our decentralization onion is the external layer. This includes all the services, routes, and networks with which miners or validators communicate. These are the internet service providers for the blockchain ledger to be publicly available. Most of the protocols run today are run on websites hosted by a centralized provider. This was evident when DYDX, a popular decentralized exchange on Ethereum, went down because of the outage of Amazon Web Services(AWS). AWS provides cloud services to many decentralized projects, so maintaining decentralization is a primary concern to prevent AWS from concentrating on the development. Bitcoin also relies on the internet, which centralized corporations dominate. But the claim that Bitcoin would go down with the internet is not justified. The miners need a way to communicate with each other, and they will adopt any communication channel that is better for the network. In addition, there has been development in this area by decentralizing the internet as a whole, with the users owning a part rather than giving away their data for revenue models to work.

Cryptocurrencies, Defi, blockchain, and web3, all the buzz words we hear, are meant to provide a breakthrough to the traditional models, meant to extract information from its users and benefit from it. The crypto industry can only thrive if it maintains the ethos and morals that Satoshi and the early cypherpunks upheld. Privacy, decentralization, self-sovereignty, and open-source software drive a free market efficiently. To preserve these values, developers and users must opt for regulation in this direction. Decentralization is challenging to achieve and requires many trade-offs but to bring about a fruitful outcome, reliance on decentralization in one area is necessary: the users.

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Azeem Malik

Azeem Malik

Committed to decentralized and open-source software. Challenging myself and the norms around us.