The True Meaning of Decentralization

People that join cryptocurrency usually do so because they share a strong set of values. Many get in for the technological appeal or the potential financial returns, or a combination of both. Some participants are attracted by the ideals and vision that crypto promises: improving digital rights, gaining data ownership, or increasing the security of their online activities.

Most of these promises are pretty straight forward and are shared across crypto — who wouldn’t like improvements in digital rights? But there is one matter that creates huge division in the space, breaking up once strong communities and causing financial unrest in many investors. That topic is decentralization.

In this article, we’ll look at the role of leadership in decentralized networks and why we believe that cryptocurrency is an open competition for governance. This can be a complex topic for some, so let’s start with the basics.

What Decentralization Means.

Decentralization means developing a network that is virtually impossible to take down. The more centralized a system is, the easier is to be attacked. This is the problem that decentralization aims to solve.

Decentralized networks evolved along with the internet, a good example is a peer-to-peer file-sharing network like BitTorrent, which is almost impossible to take down. When Satoshi Nakamoto wrote a whitepaper envisioning peer-to-peer digital cash, Bitcoin came to existence, a decentralized form of money.

The rules of the Bitcoin protocol were coded and implemented by anonymous nodes all over the planet, guaranteeing the security of the network. The more nodes joined, the harder it became to attack.

2) What Decentralization Does NOT Mean.

Because decentralized networks are by design more horizontal than centralized systems, some people believe that there should be no leaders or public faces representing their networks. However, decentralization does not mean the absence of leadership. We’ve witnessed during the last ten years how lack of leadership ultimately results in power vacuums, leaving entire networks up for grabs until a strong enough faction claims control of it.

The factions that usually gain control of networks today are huge mining farms and pool operators, large exchanges, well-funded private interest groups, or an early development group that has led maintainer control of a project’s Github repository. The Bitcoin network has fallen victim to its lack of leadership many times. Because it had no defined governance or leadership, it was deemed to be truly decentralized, but now we see how a handful of mining pools control most of the production of Bitcoin, making it highly centralized.

3) Lessons From Crypto History.

Claiming there should be nobody in control ultimately leads to the events where leadership is required, and factions battle to gain power. At best, that battle leads to fractured and weaker communities. At worst, it can lead to the tragic fall of small tribes against a unified foe. In crypto, we don’t have to look far to see the same type of crisis periodically arises, where the lack of leadership results in fractured communities. Let’s have a look at how the two biggest decentralized networks suffered from lack of leadership:

Exhibit A: The DAO Hack

The Decentralized Autonomous Organization (DAO) was a decentralized and democratic corporation-like organization that existed only in code on the Ethereum blockchain. A mix of a corporation, a crowdfunding platform, and a venture capital fund. The DAO’s promise was to revolutionize and democratize business structure, offering total transparency and shareholder control, as well as flexible and autonomous governance.

The DAO was crowdfunded via a token sale in May 2016, making it the most massive crowdfunding campaign in history up until then. Over 11,000 investors put together a combined fund of more than $150 million worth of Ether at the time — 14% of all Ether in existence was invested in the DAO.

In June, an attack against the DAO exploited a combination of vulnerabilities, mostly the one concerning recursive calls. The attackers extracted about a third of the DAO reserve fund (3.6 million Ether).

The DAO and Ethereum communities were divided, debating the next course of action. The leading proposed solutions were to re-appropriate the Ether or shutting down the DAO completely. To get the Ethereum back, the whole network would have to go back in time to a date before the attack.

The community split between those who defended that investors should assume the loss on the grounds of blockchain immutability, and those who feared that the hack would cause damage to trust in the Ethereum project if funds were not recovered.

In the heated debates that followed the attack, the main two arguments were “code is law” versus “conflict resolution.” On 20 July 2016 at Block 1920000, the Ethereum community decided to hard-fork the Ethereum blockchain and restore all funds to the original contract.

With no governance protocol in place, the Ethereum foundation resorted to a carbon vote, basing voting power on the amount of Ether owned, to try to determine the best route for the network. Though the vote was in favor of returning the 14% of stolen funds to the affected, the lack of pre-existing procedure in place led to an enormous rise in negative energy.

At that time, it felt as if the house was burning down, it was a very toxic environment never seen before in the Ethereum community and never seen since to that degree. Ethereum’s problem of lack of governance has still not been solved, and if there’s another DAO-like event, it could be disastrous for Ethereum and crypto as a whole.

Those who fiercely defended immutability kept the original unforked blockchain as Ethereum Classic, thus breaking Ethereum into two separate blockchains, each with its cryptocurrency. Many characters (including some big names in the cryptocurrency space), attacked Ethereum for its decision, and pushed for Ethereum Classic to usurp Ethereum and become the primary network — however, as we can see now years later, their actions failed to gain long-term traction. Nonetheless, it was a very stressful time for Ethereum for months to come.

Exhibit B: Bitcoin Forks

One of the main debates within the Bitcoin community about how to enable the blockchain to scale came to a dramatic conclusion in July 2017. The discussion came from as far as 2015, with members of the community like Roger Ver arguing that the original purpose of Bitcoin as a medium of exchange was being betrayed by those who rather use it as a store of value. Again, the lack of leadership enabled two factions to fight for it.

With Bitcoin’s popularity and price going up, the fees on the Bitcoin network increased, which contributed to a push by some in the community to create a hard fork to increase the block size. They claimed that the best way for Bitcoin to scale up would be to increase the block size. This was met with lots of resistance, with another faction of the community proposing to implement the Segregated Witness protocol.

Eventually, a group of Bitcoin activists, investors, entrepreneurs, developers, and largely China-based miners were unhappy with Bitcoin’s proposed SegWit. The improvement plans meant to increase capacity and pushed forward alternative plans for a split that created Bitcoin Cash in July 2017. And eventually another dispute of leadership led to Bitcoin SV, a third fork.

As we can see, it’s obvious that decentralization without leadership can be fatal to the members of the network, but how to solve this issue?

4) Diversity in Counsel. Unity in Command.

In the 6th century BCE, Cyrus the Great established the Persian Empire, at the time the largest the world had ever seen. The empire extended across most of the established world, and ruled over 80% of the world population.

Cyrus developed the first “Bill of Rights” in human history, known as the Cyrus Cylinder. He implemented a governance system that incorporated people from all the empire territories into his counsel and delegated powers into regional leaders, known as satraps. This way, he made sure that different voices were taken into account, adding fresh ideas from all his dominions to the decision-making process, while maintaining the ability to execute them in a united matter.

This system enabled the establishment of the first great empire in history, and its governance was later mirrored by Alexander the Great, the Romans, and even the American Founding Fathers, who carried a Cyrusopedia in their hands as they were forming the American Constitution.

The advantages are clear: by decentralizing governance to regional leaders, different people under the empire could express their voices while maintaining their own cultural legacy. By having a central authority that commanded over the regional leaders, the empire could react quickly and defend against external influence, while keeping in check internal diversions, or even malicious behaviors.

Saving the historical distance, this idea of diversity in counsel and unity in command is what inspired Energi’s governance. We are inspired by this battle-tested way of organizing different voices and perspectives, and look up to it when developing our proof-of-stake and masternode voting system.

We seek to attract people of our same values to Energi. Our network is formed by people with shared virtues and values, those are the leaders and decision-makers in Energi.

We are aware that some people in the crypto world are skeptical of anything that remotely resembles centralization, so let’s look into this a bit deeper.

5) Energi’s Decentralized Governance

After the migration to Gen 3, Energi moved to a 2 layer proof-of-stake and masternode system with smart contracts. This system rewards holders who stake their coins and set up masternodes to maintain the network. It also enables our self-funding treasury model with which we fund a team of more than 70 people that work to develop Energi.

Additionally, Energi’s masternode system permits stakeholders who have skin in the game to participate in voting proposals. Recently, we significantly reduced the minimum amount of NRG needed to run a masternode, from 10,000 NRG to 1,000 NRG, further decentralizing the network and allowing for more participation.

The more NRG that a masternode holds as collateral, the more voting power it has. This makes sense, and is similar to practically every organization’s governance model where large shareholders are represented on the Board of Directors, and they ultimately decide on the leadership of an organization. Energi does not need to reinvent the wheel on this and there is a reason why it is the standard model for the majority of organizations today. Energi’s governance system functions similarly and allows for those with the most skin in the game, to have the most say.

To expand on how Energi’s governance and voting system works:

• Proposals require a fee of 100 NRG to be submitted.
• If the proposal is accepted by the masternodes, the user who proposed it gets the NRG returned.
• If rejected, the money goes to the Treasury. The 100 NRG proposal fee exists to avoid spam, and only allow serious and well thought proposals to be entertained.

Anyone with an Energi wallet can submit a proposal, at which point masternodes can vote on them. Initiatives require a 10% quorum to pass, and if so, the initiative is adopted by the network. This ensures that the network is serving the best interest of the network, and respects those who have the most skin in the game.

6) The Competition for Governance.

We’ve gone through quite a few hard concepts in this article, so let’s wrap up a few concepts:

1. Decentralization means a safer network with no single point of failure, it does not mean a lack of leadership.
2. Lack of leadership usually results in factions fighting for control, and one ultimately gets control over the networks resulting in fractured communities, as we’ve seen in Bitcoin or Ethereum.
3. Decentralized networks require a governance structure. Diversity in counsel, unity in command is the best way of organizing a global, decentralized network.
4. Decentralization makes leadership more efficient, it doesn’t contradict it.

At Energi, we’ve taken into account all these aspects and came up with our governance system. We’ve aligned incentives of all the network participants, and established processes to keep them safe and listen to their ideas. We have also put in place a voting system that rewards those who truly believe in the project, and only they can change the rules.

Cryptocurrency is in itself a competition for governance. You may not be able to choose how the government of your country is organized, the structure of your company, or which fiat coin to use, but you can move your money from one crypto to another. It’s a truly free market for private money. Users are able to choose their favorite coin based on their rewards, their values, or a better form of management.

We welcome this competition and encourage you to find the governance system that fits your goals and values better. Let the best projects rise!