Is Blockchain Truly Decentralized? (Part I)
Blockchain and decentralization are synonymous. They are coexisting partners and play a significant role in ensuring anonymity and security to their stakeholders, eliminating the barriers of a central authority, and entrusting control to its users. But is blockchain truly decentralized or are there certain loopholes? To understand the subject, we must dig a bit further and get to the bottom of it.
The History Behind Blockchain
Blockchain has revolutionized the world economy. Financial institutions, supply-chain industry, and companies are thinking of exploring this next-generation technology and there is no doubt that blockchain is going to replace the traditional investment platforms in no time.
Blockchain technology first came into the limelight in 2008 when a man named Satoshi Nakamoto along with his team members developed blockchain technology and later in 2009 introduced “Bitcoin” as the first electronic currency based on digital ledger technology.
Nakamoto conceptualized the idea and released his first white paper describing the decentralization aspect of blockchain technology and how it will eliminate the idea of a central authority and provide full anonymity to its users.
Bitcoin paved the way for the birth of hundreds of other cryptocurrencies like Monero, Ethereum, Litecoin, Dogecoin, etc. The cryptocurrency boom was quite evident but the significance of blockchain or Distributed Ledger Technology (DLT) was far-reaching and there was a worldwide application of blockchain.
Understanding Decentralization
In simple words, Blockchain is a distributed database. It is an open-source distributed ledger system that records transactions across a network of computers called “nodes”. These nodes store information and validate data through a “consensus mechanism” when it attains 51% votes of its stakeholders. The peer-to-peer network further authenticates and manages the database making all transactions completely transparent and fully accessible to its users.
So, how is a blockchain decentralized? The main idea of decentralization in the blockchain is that it is completely permission-less. It is based on state-of-the-art cryptography that stores real-time transactions that are virtually immutable and does not rely on a third-party trust.
In this context, we need to understand that blockchain can be either Private or Public.
In Private blockchains, people need to get permission before participating in any transaction on the platform. It is centrally controlled by one or more authorities and is subject to third-party regulations. The transactions are only visible to the participants. Ripple and Hyperledger are some examples of the private blockchain.
On the other hand, Public blockchain is completely permission-less and anyone can participate in the transactions of the platform. All participants can view the transactions. Bitcoin and Ethereum are some examples of the public blockchain.
So, the main idea of decentralization is to:
· Entrust power to its stakeholders.
· Ensure privacy and security for its users.
· Reduce cost.
· Improve scalability.
· Allow transparency through open ledgers.
· Reduce the volatility of the platform.
Factors Determining Blockchain Decentralization
Blockchain security is based on three important protocols:
· Decentralization ensures blockchain transactions are distributed in a wide network of nodes and it requires a great deal of power to hack the entire network.
· Consensus mechanism which gives power to the entire blockchain community and eliminates the infiltration of any third party.
· Cryptographic fingerprint or hashpower which verifies whether the miner has generated the block.
The main idea of decentralization is to safeguard the interests and security of the stakeholders. But, is blockchain purely decentralized? The answer is no.
True decentralization is next to impossible. The decentralization of blockchain services depends on several factors such as:
Size of the Organization
Centralization is generally beneficial in smaller companies. However, if the size of the company is large and its operations are dispersed in different geographical locations, then decentralization is the only option.
Nature of the Organization
A centralized network is helpful in government sectors, banks, and financial institutions where there is a need for a legal framework to ensure security for the investors. The volatility of decentralization can cause a financial crisis and also increase criminal activities.
The Communication System in the Organization
To initiate decentralization, there must be an effective communication system that coordinates with all the functional units of the organization.
Company Policy
In some organizations, the top management prefers to hold control of its operating units. In such cases, decentralization is literally impossible.
Country Laws
Decentralization also depends on the country you are residing in. In many countries, blockchain companies can operate without any government regulations. However, in some other parts of the world, the government is still skeptical about blockchain and has imposed several restrictions that can damage the “decentralization” aspect of the blockchain technology.
(Note to Readers: In the next part of the article (Part II), we will discuss some other aspects of decentralization like “Bitcoin Halving”, and “Centralization versus Decentralization”, and how it will impact decentralization in the future.)
