The Decentralization Spectrum

A New Kind of System

The idea of having a fully-functioning system where no trust is necessary is compelling. I’m describing a system that is able to codify the laws which, in some systems, we take to be unspoken and unenforced. Blockchain gives us the ability to codify these laws. If you want to participate in a blockchain-based protocol, you must follow the rules. More importantly, if you do follow them, then there should be no worry as to whether your transaction, your message, or your vote goes through.

This is a pretty clear break from many of the traditional systems we have today, from voting, to social media, to financial services. For example, every Bitcoin node subscribes to the same rules, and those rules must be followed in order to transact. There’s no scope for favorable treatment for nodes that have more BTC than others, or ones that have greater influence in real life. Bitcoin epitomizes the meaning of equality. Miners can gain influence on the network, but only so far as to outcompete less-efficient miners. In the end, this results in hyper-competitiveness and a faster network for all participants. But for regular users, no one can be actively discriminated against.

Think in Spectrums, Not Ultimatums

When we talk about decentralization, we are talking about a spectrum. It is not a binary attribute, though some may refer to it as such. The question is not “Is this network decentralized?”, but “How decentralized is this network?” One could claim that both Bitcoin and are decentralized, but to limit one’s understanding to this is a little better than meaningless. From a slightly more granular perspective, it becomes clear that Bitcoin is governed by 10,000+ nodes, whereas Eos is governed by 21 nodes.

It’s very similar to how the term “democracy” has developed over time, and how it is implemented today. There are three types of democracy:

1. Direct Democracy: A system where every individual votes on every issue.

2. Representative Democracy: A system where individuals elect a group of representatives to vote on their behalf.

3. Constitutional Democracy: A system where the Representative Democracy only gets to vote on certain issues, while other issues remain part of the constitution, and are exempt from being voted upon.

Bitcoin is an example of a direct democracy; Eos is an example of a representative democracy. Is one better than the other in terms of blockchain governance? Given various governance schemes, such as Proof-of-Work, Proof-of-Stake, delegated Proof-of-Stake, Proof-of-Authority, etc., one begins to wonder whether there is a “right” blockchain governance structure that is better than the rest, or whether each one serves its own unique and advantageous purpose.

The Rule of Code

In our mind, at NeonVest, we do believe that a fully decentralized system governed by code is fundamentally revolutionary. Never before have humans coordinated themselves on a system that is governed on nothing but algorithms which were created at the systems’ inception. For time immemorial, we have relied on some central party, some intermediary, to coordinate and maintain integrity within a community.

From a philosophical perspective, Bitcoin is revolutionary because an individual can now transact with a counterpart across the world, without knowing his name, personal details, or even trusting him, as long as he too is on the network. None of these factors are necessary, including trust. In every previous system, trust has been the crucial factor in tying us together. Why do we let our new hairdresser cut out hair? Theoretically, they could take those scissors and stab us. Why do we get into cars driven by people we’ve never met in our lives? We don’t know whether they’ll go where we want them to go. We don’t even know what mental state they’re in.

The beauty of Bitcoin, or any other fully decentralized system, is that it does away with the trust. No longer does there need to be any trust involved in order to make the system function. If someone is part of the network, they’re automatically bought into the rules of the network. If they don’t comply, they will be physically prevented from being part of the network. If you look at a smart contract on Ethereum, a transaction cannot physically go through until the terms or conditions of the contract have been met. Yes, this is similar to the real world, however there is no subjectivity, and more importantly, no party deciding whether the conditions have been met. If they are met, they’re met, and the contract is fulfilled.

The Man with the Hammer

This argument becomes a little murkier with partially decentralized systems. They too have their advantages, primarily in terms of speed and cost, but as soon as you begin to make some nodes more influential than the others, the system is no longer fully equal. And if it’s not fully equal, then there is always a way to gain more influence over the entire system, causing the fundamental principle of decentralization to be marginalized. We still like some partially decentralized systems for other reasons, but it’s important to keep this in mind. Bitcoin compromises on energy efficiency, cost and speed, all because it has a rigorous focus on decentralization. There are no founders of Bitcoin. There is no one who is considered the owner of Bitcoin. There are no venture capitalists that have funded the Bitcoin project. And that’s what is important.

Even partial decentralization is arguably better than complete centralization in some cases. The point of this post is to highlight the fact that full decentralization governed by a blockchain protocol is a fundamentally powerful concept, and has the potential to re-work many of our systems today. If we think, for a second, about the systems that should be fully democratized and not rely on a central party, we think of voting systems, social media systems, exchanges, and payment systems. There is room for different levels of decentralization, including fully centralized systems, depending on the use-case and implementation.

It’s common to see blockchain enthusiasts harshly reject many kinds of centralized networks now that we have “progressed”, but the reality is that there are some instances where centralization works best. For chit funds in India (similar to ROSCAs in the U.S.), borrowers would not trust a decentralized system wherein they’re dependent on monthly payments from other borrowers in the fund. But, they do have faith in the chit fund manager, whose job is to underwrite borrowers, follow up with delinquent borrowers, and manage the fund. The next time you evaluate a system, think about how much trust the community must have in the mediating entity in order for it to function successfully, if any.