Digital decentralization: a lingering revolution

While all over the world, people marvel at self-driving cars and 3D-printers, a less glamorous yet much more far-reaching change emerges in the background of digitalization. Technological innovation will fundamentally convert our understanding of institutions.

In fall 2014, thousands of young people were demonstrating for free elections in Hongkong. Even though the mobile communication network became heavily overloaded, the protesters were able to communicate without any problem, by using the smartphone app FireChat. The app gets along without Internet or mobile reception, as it connects the devices utilizing their Bluetooth interfaces to build a large-area network. This digital tool, a so called peer-to-peer (p2p) network, made the protesters independent from communication network providers and security authorities. The above case is just one example how the digitalization simultaneously comes along with a decentralization of power. Systems like FireChat make centralized institutions — in our example network providers — redundant.

Institutions and power

In economic theory, institutions not only describe physical structures like ministries or administrative departments, but primarily the rules, which structure the interactions of all individuals within a society. In doing so, they often concentrate power; and most of the time that’s perfectly fine. Eventually, we expect government and jurisdiction to guarantee and enforce our rights and freedom. On the other hand, we don’t want the government to abuse its institutional power in order to restrain the communication of system-critical protestors.

Technically, the governmental monopoly of power should be protected from abuse by several mechanisms. Democratic processes like elections or referendums call policy makers to account. The separation of power between legislative, executive and judiciary prevents power concentration towards certain authorities or individuals. However, we still find ourselves confronted with centralized institutions in many areas of life. That’s because the supply of some goods and services, such as network industries, is organized most efficiently using centralized systems. The operation of supraregional railroad connections for instance, requires a fully developed, nationwide rail network. Constructing this kind of infrastructure is not only very expensive, but also implicates that once the network has been established no further competitors enter the market, since it isn’t profitable to create a second rail network beside the already existing one. Consequently, public authorities adopt its construction and development, while also controlling the network in order to prevent exploitation of the operator’s monopoly power.

Decentralization and the Internet

The Internet and increasing digitalization will burst centralized structures in all areas — or have done so already.

Although, when we think about power in the Internet, far different pictures come to our minds. Big cooperations like Google or Facebook are today’s centers of power. Especially casual users hardly get around using their services. The often free products like world’s biggest instant messaging service, Facebook’s WhatsApp or Google’s video platform YouTube, are simply too convenient. Both services use proprietary software, limiting consumer insight and applicability. Its source codes cannot be reviewed publicly and also the free of charge use is only at first sight: instead of money, users pay for those services with their personal user data.

The data collectors however, only show one side of digitalization. There are several decentralized projects emerging, oftentimes competing with well-established companies, which aim at offering an alternative to its centralized counterparts. The Open Source movement provides software, compiled by a collective of programmers from all over the world, making its source code transparent and available for everybody. Open Office or LibreOffice offer free software on a same quality level as Microsoft’s Office package. Instead of the Internet Explorer or Google Chrome, many users utilize the Firefox browser. Open Source technology is even leading the market it some fields, including the smartphone operating system Android.
And decentralization even takes one step beyond: as a result of digital technology, goods and services, which previously could only be provided centralized, are made accessible for decentralized supply. Using p2p-networks, messenger app FireChat no longer requires centralized institutions such as communication network providers. Another example is the digital currency Bitcoin, which is also based upon p2p-technology and doesn’t require a central bank to issue money. Market transactions in the Bitcoin network are carried out without the need for commercial banks as financial intermediaries. Rather, transactions are registered and validated within the Blockchain, a decentralized, distributed ledger. Bitcoin and other digital currencies are the technologically enabled alternative draft to our current monetary system.

Trusted third parties

FireChat and Bitcoin both solve the institutional problem of trusted third parties (TTP) using digital technology. A TTP is an institution, which controls and verifies the interactions between two individuals. For instance, commercial banks act as a TTP for the credit transfer process. They identify the sender, execute the transaction and record the new account balances. Thus, they serve both as an intermediary and a confidant. Simultaneously, TTP’s however also cause charges for their clients. Banks demand transaction fees just as mobile providers charge fees for access to communication networks. Additionally TTP’s concentrate power, which can be severely harmful if it is abused. So far, these structures have often been inevitable, though p2p-programmes like FireChat or Bitcoin indicate how formerly centralized systems can become decentralized and concentration of power can be avoided.

While centralized systems always require an agent to mediate between individuals, decentralized systems interconnect all parties directly with each other, enabling communication and interaction without a TTP. The infrastructure for those p2p-networks is facilitated by the World Wide Web and the physical devices of the Internet of things. Distinct identification of participating individuals may be accomplished using distribute ledgers like the Blockchain. Since here new entries need to be verified by multiple nodes, no single agent can control the register. Users no longer need to trust in centralized institutions.

Looking ahead

In the next few years decentralization will affect more and more areas of society and our daily lives.
Even though many technologies are still in their early, experimental stages, they foreshadow fundamental change.
From voting to cloud computing — almost anything can be decentralized. And this trend doesn’t stop at politics. Markus Söder, finance minister of the German state Bavaria, acknowledges decentralized public administration as a consequence of digitalization. As a result of modern communication technology, the location of department offices becomes less and less important. Instead, the regionalization of public administration enables active structural politics for rural areas. Likewise, the European Union organizes their startup assistance programs using a decentralized structure. The different projects are connected via an Open Source software package, which aims at establishing European software globally.

The one thing that might delay the digital revolution is the resistance of those institutions, which fear to lose their current power. However, from a market economy perspective, the decentralized solutions are at the front.

Photo credit: arianta - http://www.flickr.com/photos/75434641@N00/18371726669