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What is Decentralization?

Despite being one of the most discussed terms in the blockchain industry, decentralization is still a fuzzy concept to many. When evaluating a new project or new blockchain, one favourite question of crypto enthusiasts is, "How decentralized is (enter blockchain)?"

Some experts, famously Jimmy Song, argue that decentralization is a binary concept, since “ you either have control over your stuff, or you don’t. It’s a zero or a one.” (Jimmy Song 2019)

Is it really that easy?

Before answering this question, let's have a look at some traditional definitions of decentralization. The concept itself is probably as old as humanity and has several times influenced the course of history.

According to Louis Allen, Decentralization refers to "systematic efforts to delegate to the lowest levels all authority except that which can only be exercised at central points." Similarly, Earl P. Strong stated that decentralization means "the division of a group of functions and activities into relatively autonomous units with overall authority and responsibility for their own operation." The agrarian theorist Borzoi saw decentralization as a "method of implementing ideas and organizing human operations in which individuals are enabled to satisfy their wants and realize their aspirations as far as possible through personal action."

Regardless of some minor differences in the definitions, all of them share one crucial feature: giving control and power from a central point into lower levels/ autonomous units or, how Borsodi says, in the individual's hands.

When looking at decentralization as a process rather than something static, it has to start with a status quo that is not decentralized yet, e.g., centralization. One example is the development in Latinamerica.

While 30 years ago only three countries held direct local elections in Latinamerica, nowadays every country conducts them. Once all control was bundled, very autocratic regimes. The power has been distributed to more than 350 states and 16,000 municipalities in the Southern American countries, strengthened by constitutional or legal changes (Bossuyt 2013:10).

Despite various challenges, it has been a relatively successful process, from authoritarian regimes to more local municipalities and citizens.

Why do we need decentralization?

Most of us living in the Western World consider ourselves to be relatively free, and we like to cling to the illusion of us being in control. However, with more and more centralized authorities failing us, the interest in decentralization is growing. But how did we even get to that point?

“In the modern world — and particularly in technologically advanced societies — the average person feels little need for exercising his personal influence in community decisions. This shedding of responsibility is, of course, what Fromm calls the desire to ‘escape from freedom.’” (Winthrop 1967)

When thinking about your online habits, can you confidently state that you are not sometimes sloppy exercising your right or responsibilities? When was the last time you read the terms and conditions before agreeing to them?

How often have you used your Google or Facebook account to log into several other apps because it was more convenient and faster? We are willing to sacrifice part of our privacy and security to get quick and easy access.

Source

With more and more data breaches, there is slowly awakening to the problems of centralized databases that Google and Facebook have. Not only online, but we also find a lot of centralized systems offline — our political landscape and economics are in a way centralized. If you look at the most prominent global companies, a lot of their economic value is controlled by a small number of players in the center of the network. While centralized systems benefit from speed, flexibility, convenience, and easy reorganization, they pose threats and significant challenges to society. Some of their problems are:

Possibility of Failure: With a centralized network, all control is focused on one location. If fire or water damage, an electric blackout, or any other natural disaster happens, it can shut down the whole network at once. Another danger is that centralized networks often store their backup in the exact location, making them even more vulnerable to failure.

Access & Diversity: Usually, centralized systems follow a one-size-fits-all approach, which is not available for everyone. Using a single operating system automatically rules everyone out from participation, which cannot use that system. For example, if the system includes an NFC reader, everyone with a phone cannot use the system. Furthermore, with this one size fits all approach, centralized systems fail to deliver to their different users' various needs.

Security: Due to its design that all control is focused at a single point, centralized networks are a centralized target and therefore easier to attack than a distributed network and different operating systems. In the recent past, we have experienced several centralized networks being hacked, such as the professional network Linkedin and even the international money transfer system SWIFT did not stay secure.

Decentralization can be an answer to the problems such as security, access, and diversity or failure. But how do we assess a system on its decentralization?

The different aspects of decentralization

According to the genius behind Ethereum Vitalik Buterin, decentralization can be split down into three different aspects of decentralization.

Architectural decentralization: how is the system structured? How many physical computers/node does the system consist of? How many of the nodes can the system tolerate breaking down at any single point in time? This aspect defines how distributed a network is physical.

Political decentralization: how many individuals or organizations does the network function with? Who is ultimately in control of the network? (-> changes to code, who can participate?) The governance model of a system finally has a lot of influence on trust in the system.

Logical decentralization: On how many different points are the network resources focused on? Is there a consensus on the purpose of the platform? Can the system still function if it was cut in half without any negative influence on the interface or data structure? This aspect of decentralization deals with the consensus.

To make these aspects more feasible, here are some examples

Traditional Corporations: Traditional corporations are logically centralized. They cannot be slit in half and continue functioning. Furthermore, They are politically centralized since the executive board exercises all control. Finally, they are architecturally centralized with one Headquarter.

Content Delivery Networks: Content Delivery Networks are a globally distributed network of web servers that provide faster content delivery. Therefore they are architecturally as well as logically decentralized. However, in the end, one single company controls the whole network; hence they are politically centralized.

Languages: The English language is spoken worldwide by millions of people, therefore architecturally decentralized. While an institution imposes grammatical rules, there is no obligation to stick to them, and people use language freely. So, English is also decentralized politically. Finally, it is logically decentralized as the English used between A and B does not agree with the one spoken between C and D.

How about Blockchain?

Source

Blockchains are politically decentralized with no one entity in control of them ( at least that is the idea) and decentralized architecturally without an infrastructural central point of failure. However, they are logically not decentralized due to their nature to behave as one computer and have one common state agreed on.

To get back to one of the favourite questions of blockchain enthusiasts about how decentralized their favourite blockchain is, it might be less decentralized than they think. For anybody, who wants to check how many entities are ultimately in control of their favourite blockchain, are-we-decentralized-yet is a handy tool. It allows anyone to check how many nodes a network consists of, how many entities control more than 50% of the voting/mining power, and the supply being held by the top 100 accounts.

Benefits and drawbacks of decentralization

Like with anything, decentralization can have positive as well as negative sides. To name just a few benefits:

Fault Tolerance/Stability: There will be chaos if you eliminate the authority in control in a centralized system. In a decentralized system, there is no such instance; therefore, they are much more stable. They rely on several components that are not likely to fall out simultaneously, thus less risk to break down accidentally.

Attack Resistance: Usually, blockchains incentivize their nodes for maintaining the system. According to game theory, a player will not attack a system they profit from. Therefore the risk of internal attacks is relatively low. Furthermore, due to the lack of central points of failure, an attack is costly to carry out; the same goes for manipulating the system.

Collusion resistance: In a decentralized system, participants are far less likely to behave selfishly to benefit themselves by damaging others, unlike in centralized organizations where a lobby or a group in higher positions can quickly act to help themselves while harming others.

Some trade-offs include:

Not yet…

Scalability: In a decentralized system, every node in the system must be processed whenever a transaction comes through. Unfortunately, this limits the scalability depending on every single node's capabilities. With a growing network, the requirements for a single node regarding bandwidth, computing power, and storage are increasing, and we face the risk of centralization. Compared to the transaction throughput of a centralized payment provider like Visa or master, blockchain is still very slow to confirm transactions.

However, we see many research creating solutions such as lighting or state channels to solve the scalability issue.

Privacy: With a decentralized system like a blockchain, an open ledger publicly visible to everyone, it is easy to track transactions from one address to another. That does not necessarily imply that one can identify the person behind the wallet address. Still, one could probably get close by carefully analyzing the transactions done by a specific address. I mention privacy here as a drawback of major cryptocurrencies; yet, several privacy-focused currencies will allow untraceable transactions: Monero, Firo, Pirate-Chain, to name a few.

All in all, decentralization is a concept that isn't just useful for technology but can even improve the political landscape and can be the feature of highly resilient organizations. AA is a very decentralized network, successful and with local chapters in each part of the world if you think about it. Another example would be Wikipedia, held up by volunteers worldwide that mostly don't even get paid for contributing. If you're interested in decentralized organizations, read "The Starfish and the Spider."

In regards to blockchain, teams worldwide are working on overcoming the current pitfalls of decentralized ledger technology. One of the most exciting sectors growing rapidly is DeFi — decentralized Finance. We'll cover the leading players in the DeFi ecosystem next week, so stay tuned and until then… have a great start in the new week. 🤗

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Naomi Oba

Naomi Oba

Writer in Crypto — passionate about financial education, blockchain, books, and food.