Understanding Decentralization — What Makes A Truly Decentralized Blockchain?
Introduction
Blockchain is based on the concepts of decentralization. A decentralized network differs greatly from a centralized network in that, rather than having one server or one party in charge of all data or information, decentralized networks operate on a peer-to-peer basis, where users’ computers communicate and interact directly without the use of an intermediary.
At the moment, users must give up their privacy since major multinational corporations leverage and sell our data to the highest bidder, and we as users have become accustomed to it. A completely decentralized system, on the other hand, is a superior alternative for realising the internet’s full potential.
With the emergence of blockchain technology since 2009, a new internet is being built and developed around the fundamental ideas of decentralization.
However, the term “decentralization” is overused in the blockchain sector, and users need to realise that there are different levels of decentralization. This is crucial now more than ever since not all cryptocurrencies that assert to be decentralized are.
Levels of Decentralization
Decentralization is the process of moving power from a central entity — whether an individual, an organization, or a group — to a distributed network of users. Decentralization in a blockchain is critical for security and resistance to censorship; otherwise, it would be no different from the present day technologies.
Governments can ban or sanction centralized blockchains, large institutions could take them over, and the founders could dictate their future direction and development.
A truly decentralized blockchain is next to impossible to regulate, censor or shut down.
Level 1 — Blockchain Decentralization
This is usually the level that is referred to when you address decentralization in a blockchain. Since there is no centralized authority to administer the network, reaching consensus is the only method for network users to determine whether transactions are valid or not. Network’s nodes accomplish this among users and contribute to the security of a blockchain.
As a result, the quantity and quality of such nodes are critical for achieving network decentralization.
Full Nodes
Full node is a computer in a peer-to-peer network that contains a full copy of the transactions and operations that occurred on the blockchain.
Validator Nodes
A validator node is a special type of full node that participates in “consensus.” By participating in consensus, validator nodes become responsible for verifying and maintaining a record of transactions.
Case Study: Solana
Solana’s blockchain has over 1,900 validators, however all transactions are processed by a significantly smaller number — ‘superminority’ of just 31. This number represents the smallest number of validators that together control more than 33% of the total stake. These entities could theoretically censor or halt the network if they colluded.
Despite a relatively large number of nodes, Solana’s blockchain is hardly decentralized, given that a small minority of validator nodes being able to censor the network transactions.
Node Distribution
The limited geographical distribution of blockchain nodes can be a source for concern. Wider distribution of nodes guarantees that if there is one or several governments willing to use their power within its territory or sphere of influence in order to shut the network down or sanctions certain transactions, they would have to launch a concerted efforts in order to succeed.
Case Study: Ethereum
US and Germany make up more than 50% of all Ethereum nodes as seen below.
Furthermore, consider the block validators below, whereby over 66% of the beacon chain validators have to adhere to Office of Foreign Assets Control (OFAC) regulations.
This raises serious questions in regards to geographical node centralization. Ethereum could be forced to censor transactions at the protocol level if authorities force validators to comply with sanctions by OFAC. Not complying with OFAC sanctions is not an option, especially if you are based in US or EU, which a vast majority of Ethereum’s PoS validators are. We have already witnessed the result of OFAC sanction on a ‘decentralized protocol’ on Ethereum called Torando Cash.
On August 8th, the popular Ethereum smart-contract mixer Tornado Cash was sanctioned by the US Treasury’s OFAC. The day after, the largest Ethereum miner, Ethermine, stopped including Tornado router transactions in its blocks. Considering that Ethereum at the time was still utilizing Proof-of-Work consensus mechanism and is now switched to Proof-of-Stake, which is increasingly easier to control and enforce than the Proof-of-Work, it raises a question on whether Ethereum’s validators can ever be free from regulatory control.
Level 2 — Development
The developer level refers to the individuals or institutions that created and are actively working on developing a blockchain. Decentralization at the developer level is important, as this essentially avoids a situation where founders have a carte blanche to dictate what happens on the blockchain.
Case Study: Cardano
Charles Hoskinson, the CEO and Founder of Cardano, stated that Cardano will become the most decentralized cryptocurrency in the world, 50 to 100 times more decentralized than Bitcoin.
In that statement, Hoskinson was referring to the fact that Cardano’s system includes monetary incentives to diversify the number of evenly distributed stake pools in the system. Indeed, there are over 2,500 stake pools which are exclusively responsible for block production on the Cardano network, which is quite impressive.
In contrast to Cardano, Bitcoin’s blockchain is largely in the hands of the ten largest mining pools, which control over 50% of the network/s total hash rate. However, is this a fair metric for decentralization?
IOHK, Emurgo, and the Cardano Foundation presently govern Cardano. IOHK conducts core scientific research and technological development, Emurgo focuses on integrate businesses to the ecosystem, and the Cardano Foundation, among other things, focuses on community building.
While this is better than a single entity controlling everything, it’s clearly centralized, as only three entities have a full control over the software that these nodes run on, no matter how many staking pools there ever going to be.
Level 3 — Infrastructure layer
Infrastructure refers to the different technologies used to interact with or required to access cryptocurrency blockchains. These include native wallets, decentralized apps, nodes and etc.
Using centralized goliath providers like AWS and Google, or new ones like Infura and Alchemy and others, to power blockchain systems leads to a high degree of centralization.
Infura, a Web3 backend provider, that offers a range of services and tools for blockchain developers, handles billions of code request every day and provides a way for developers to connect to Ethereum without having to run a full node.
A Single Point of Failure
However, Infura relies on cloud servers hosted by Amazon’s AWS data centers. This limits the global distribution of nodes and creates a single point of failure — if AWS goes down all of the dApps that depend on these nodes to communicate with the blockchain go down with it.
Back in December 2021, an Amazon Web Service (AWS) outage forced the decentralized exchange dYdX on Ethereum’s blockchain to halt operations.
Censorship
Centralized providers could directly or indirectly bar users from decentralized apps that use their infrastructure based on location, government sanctions, or other factors.
There are plenty of such cases.
MetaMask, a popular Ethereum wallet, has blocked users from certain jurisdictions from accessing its services and interacting with Ethereum. First instances of bans were noticed on OpenSea, which reportedly locked and deactivated wallets from Iranian users. Users from Venezuela began reporting problems with accessing their own MetaMask wallets soon after, with thousands of messages about the issue popping up on social media.
Centralized providers make it clear in their terms of service that they must comply with all government laws and regulations, which means dApps dependent on them are also subject to censorship.
Level 4 — Coin Distribution
For many blockchains it’s important that the distribution of coin is decentralized and evenly spread out. This is because for coins that are used in voting for changes to a blockchain would imply that a handful of coin holders can easily monopolize major decisions.
Case Study: Polkadot
Polkadot uses a sophisticated governance mechanism with the stated goal to ensure that the majority of the stake can always command the network. DOT tokens are used for voting in governance matters called referenda.
For example, anyone can propose a referendum by depositing the minimum amount of DOT tokens for a certain period. If someone agrees with the proposal, they may deposit the same amount of tokens to support it — this action is called endorsing. The proposal with the highest amount of bonded support will be selected to be a referendum in the next voting cycle.
Such a system of on-chain governance implies that individuals/institutions with greater stakes can manipulate votes and skews the dynamic away from users and developers towards investors, who may be simply interested in maximizing future profits as opposed to developing the protocol towards innovative use cases.
In June 2022, during the Polkadot Decoded conference, the Polkadot core team admitted that its current governance system needed an overhaul as it found it to be too centralized. They stated that the so-called Polkadot Council, a centralized body of executives, had exclusive decision-making power on matters like treasury spending. This, the team argued, ran counter to the ethos of decentralization.
Which Are The Most Decentralized Blockchains?
From our perspective, there is no such thing as a “more” or “less” decentralized blockchain. Definition of decentralization is clear — distribution of power, particularly those regarding planning and decision making, away from a central, authoritative location or group. Blockchain is either decentralized or it is not.
As it stands, Bitcoin remains the only decentralized blockchain today. Consider how Bitcoin functions at each of the levels described above.
Case Study: Bitcoin
Bitcoin’s Blockchain
Bitcoin has the largest number of independent nodes of any major blockchain in existence. The nodes are widely distributed geographically and anyone can run a node on Bitcoin’s blockchain, whether it’s a full node or a mining node. The barriers to entry are quite low to run a full node or even to mine, as an individual miner could simply join a ‘mining pool’.
Furthermore, the block selection process makes use of ‘Nakamoto Consensus,’ which is one of the fundamental features that distinguishes it from other consensus models such as Proof-of-Stake. In certain PoS blockchains that use pBFT (practical Byzantine Fault Tolerance), the block leader is selected through a voting process and replaced in a round-robin style format each round.
In Bitcoin, there is no voting process to determine the block leader. Instead the miners in the network all compete to solve the cryptographic puzzle and the first to find the solution wins the round of the lottery. The miner then propagates the block over the network to the other mining nodes, which verify and accept the block by adding it to the longest chain. Because the procedure is random and the leader cannot be anticipated, this process removes possible third-party influence on a block leader. This is also known as Proof-of-Work consensus mechanism.
Development of Bitcoin’s Software
Bitcoin is also the software that each node runs in order to participate in the network, similar to all the other blockchains. The main version of this software is called Bitcoin Core, and it powers almost all of the nodes on the Bitcoin network, allowing them to enforce the same rules and achieve consensus.
Unlike other centralized blockchain development teams, Bitcoin Core developers are not a centralized group of individuals. There is no leader who instructs developers on what to do or what to build. Instead, Core developers are independent thinkers who choose how they wish to contribute to Bitcoin. They come from all around the world.
In practice, when it comes to Bitcoin Core, anyone is able to view, comment, or propose changes to the code. Although anyone can propose changes, not all proposed code changes are integrated to Bitcoin Core. Instead, the community intensively reviews and discusses each proposed change and then decides to accept or reject the change. Anyone is able to participate in these discussions, and the decisions are settled by consensus, not by voting.
Although there are few individuals, called maintainers, who are trusted by the community to actually integrate the changes to the code that have been agreed upon, these individuals have very little power. This is because, if they breach the trust, they will not compromise anyone’s existing node, and the old Bitcoin Core code can be easily restored by ignoring the malicious changes. Thus, the role of Bitcoin Core maintainer is seen more of a janitorial function than a position of power.
Bitcoin’s Infrastructure
Bitcoin’s nodes are the underlying infrastructure of the Bitcoin network, securing and maintaining it. The Bitcoin network and Bitcoin nodes validate, broadcast, process and store BTC transactions. Since there are no intermediaries or middlemen to enforce consensus rules on the Bitcoin network, the nodes must achieve consensus amongst themselves.
Full BTC Nodes
When a transaction occurs, a full node picks it up. Full nodes store the entire blockchain history and can fully verify all rules of the Bitcoin network using the Bitcoin software. A full node checks the transaction’s validity against the blockchain history and the set of rules encoded in the Bitcoin software.
If the transaction is valid, a full node broadcasts it to other nodes it’s connected to. These nodes go through the same verification process. Once a sufficient number of full nodes agree the transaction is valid, it’s added to a pool of other valid transactions, which are unconfirmed.
As per Bitcoin’s design, full nodes can run on and store full transaction history on most home laptops, even a Raspberry Pi, a small single-board computer. They do not require central servers or cloud storage, avoiding centralized storage providers like AWS or Google.
Consider the current distribution of BTC nodes below:
According to the data, centralized servers such as AWS and Hetzner only account for a small fraction of Bitcoin node storage (4.2% and 6.5%, respectively). The vast majority (51.7%) of nodes run anonymously on TOR, a free, open-source distributed ‘onion’ network.
Mining Nodes
Mining nodes pick up these unconfirmed transactions from this pool and package them into blocks.
Miners run a version of the Bitcoin software that contains special rules for creating and proposing blocks to the Bitcoin network. This encompasses things like the maximum size of a block, how to structure transactions, and how to sign a block.
Miners compete against one another in a race to create the next block. Once a miner creates a valid block, it broadcasts the proposed block to the other nodes on the Bitcoin’s network.
Since Bitcoin uses Proof-of-Work sybil attack mechanism, rather than Proof-of-Stake, the miners must use specialized, powerful hardware designed specifically to mine Bitcoin by creating and proposing new blocks on the network. This hardware, also known as ASIC, are kept in specialized facilities.
Bitcoin’s network is incredibly secure and highly decentralized since its core infrastructure is mostly physical and geographically distributed.
The geographical distribution of nodes across at least 96 countries is shown below. Because the majority of node operators (50.51%) utilize the TOR (The Onion Router) Network, it’s unknown where these users are actually from.
Bitcoin’s Coin Distribution
It’s important to understand that Bitcoin is a software ran by a decentralized network, which means no single party is in control of the set of rules in the software. These rules must be agreed upon by the network participants in order for them to transact.
The fundamental difference is that the decisions are settled by consensus among full nodes, not by voting. Since there is no requirement to hold Bitcoin in order to run a full node, coin distribution, no matter how unequal, is completely irrelevant when it comes to network control, governance, or influence.
What About the Miners?
Even the miners have no control over the network. Bitcoin’s design doesn’t assume mining power has to be widely distributed. It’s simply not a requirement. Instead, it only assumes miners are rational, which is something completely different. Rationality means agents do what is best for them, even if that means colluding with other miners to attack the system.
Consider the New York Agreement, which was a scaling proposal made jointly by over 50 companies, doubling of the Bitcoin’s blocksize by November. It was supported by 58 companies located in 22 countries with 83.28% of hashing power. Even though an overwhelming majority of Bitcoin’s miners and Bitcoin-based companies agreed to the plan, the community itself refused to get on board, and within six months the agreement was dead.
Miner Distribution
Even though Bitcoin miner distribution is not a requirement as per Satoshi Nakamoto’s whitepaper on Bitcoin and ‘Game Theory’, a global Bitcoin mining map has been shifting significantly over the years, becoming much more decentralized.
As it stands today, the leading Bitcoin mining by countries and their hash rates are as follows:
- United States: 35.4%
- Kazakhstan: 18.1%
- Russia: 11.23%
- Canada: 9.55%
- Ireland: 4.68%
- Malaysia: 4.59%
- Germany: 4.48%
- Iran: 3.11%
According to the data above, Bitcoin mining is politically and geographically distributed. Given that nations like Russia and Iran intend to use cryptocurrencies for cross-border transactions, and that major mining farms in such countries are being done by entities with close ties to the government, there is significant political leverage at stake here.
On the other hand, countries like US, Canada, Germany do not want to take the risk of missing out on the potential economic opportunities that may arise from Bitcoin and crypto industry as a whole.
Summary
There can be no compromises when it comes to blockchain decentralization. The controversy surrounding Tornado Cash sanctioning and the arrest of one of its developers, as well as other decentralized apps being forced to ban access to users from specific jurisdictions, may lead to governments pressuring many blockchain’s validators to become sanctioners themselves.
In addition to that, recently SEC lawyers made the unprecedented claim in their court filing against crypto YouTuber Ian Balina, that Ethereum transactions should be considered as originating from the United States, despite the decentralized nature of the blockchain. Gary Gensler, the chair of SEC, has also stated that proof-of-stake blockchains, which generate new coins for inventors who pool their holdings, take on investment contract-like attributes that could bring them under his agency’s purview.
Based on the above, Bitcoin remains the only decentralized blockchain in existence. If a blockchain has a founder, CEO, CFO, CCO, central development team, treasury, initial coin offering, or foundation, it’s not decentralized. It’s a private software company that provides blockchain services.
This is not to suggest that centralized blockchains are destined to fail, but it’s nearly certain that developers or regulators will have complete authority over them.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
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