The Merits of Decentralization
“Decentralization” — now there’s a buzzword for you. It seems to be on everybody’s tongue alongside disruptive technology, distributed ledger and blockchain. I firmly believe that decentralization is going to play a major role in our lives during the years to come, as it will penetrate more and more levels of everyday activities and at the same time, it will take the power away from a single entity (centralization) and distribute it to the masses. But what does it actually mean? Let’s try to clear up the fog.
What Decentralization Is NOT
Decentralization is viewed as the backbone and the purpose of the blockchain but as even Vitalik Buterin puts it, “there is often a lot of confusion as to what this word actually means”. What is clear is that it is not a perfect system, and has given birth to a number of myths or misconceptions over time:
A decentralized system is unhackable. Although these systems are harder and more expensive to hack, a 51% attack could happen if enough people coordinate their efforts. This may seem like a lot (and it is) but consider that 70% of miners are in the same country and the majority of mining hardware is produced by the same company. Is it so farfetched to think that somehow these people could coordinate a 51% attack?
A decentralized system cannot be shut down. Speaking of the majority of miners being in the same country, what would happen if the central authorities of that country would decide to make mining illegal or to seize all hardware? Maybe mining farms could relocate fast enough, but that’s not a certainty. If 70% of miners would stop mining, the transaction times as well as transaction fees would drastically increase, making the blockchain almost unusable.
A decentralized system cannot be disrupted. Yes it can! Just look back at CryptoKitties: in late 2017 this breeding game took up more than 13% of the entire Ethereum traffic and was dubbed “Ethereum’s Killer App”. It created network congestion and hugely increased transaction fees to a point that many traders and users started to avoid Ethereum. The blockchain was disrupted for several weeks and reportedly the most expensive crypto-kitty cost $120,000… talk about intrinsic value.
The blockchain is 100% decentralized. Well, hate to disappoint you but that’s another myth. According to Emin Gun Sirer, Associate professor at Cornell University, Co-director of IC3, “90 % of the mining power is owned by 16 miners in Bitcoin and 11 in Ethereum”. Hmm, that seems an awful lot like some form of centralization but fear not, all is not as grim as it may seem.
What Decentralization IS
“Decentralization is the process by which the activities of an organization, particularly those regarding planning and decision-making, are distributed or delegated away from a central, authoritative location or group” — Wikipedia.
Power To The Individual
When it comes to cryptocurrency, decentralization is almost synonym with the blockchain itself and it means that digital assets are not controlled by a single entity or authority as is the case with Fiat currency, which is controlled by Central Banks. In other words, decision-making is out of the hands of the few and distributed among blockchain users, much like in a democracy.
Inevitably, when power belongs to the few (Central Banks in this case), they will make decisions that are not welcomed by all, not even by the majority. To understand that, we have to look no further than January 2015 when the Swiss National Bank removed the artificial floor that kept the EUR/CHF tethered at the 1.20 level. This drastically increased the price of the Swiss Franc, resulted in a Swiss stock market crash and panic among people with bank loans in Francs.
Same year, during the Greek Debt Crisis, banks restricted ATM withdrawals to 60 euros per day, so once again, the few decided for the many. This can never happen in a decentralized system because decision power doesn’t belong to a single entity.
Secure and Trustless
Apart from its non-dependency on a single authority, decentralization offers increased data security by eliminating single point failure. Take cloud storage for example: although your data is not on a single device, it is still stored on a server somewhere and that server is controlled by a company that you will have to trust on two major issues:
A- to keep a high security standard, otherwise cyber attacks will corrupt your data. A few examples of huge companies being hacked include Home Depot (over 50 million credit cards affected), eBay (145 million users affected), JP Morgan Chase (83 million accounts), Yahoo (3 billion accounts breached) and the list goes on.
B- to not access your data themselves. Just recently, Facebook was in the middle of a huge scandal because they indirectly allowed Cambridge Analytica to gain access to user information. Although it was an informed consent process, Cambridge Analytica collected more information than initially agreed upon. While this is borderline scam, there are other examples out there that are full on scams.
On the other hand, a decentralized system is not prone to single point failure because the data is distributed on a peer to peer network of nodes, it is not stored on a server, so if one node is compromised, the integrity of the data is not affected. Multiple locations means increased security — think of it this way: 100 computers are less likely to fail than one. At the same time, the environment is trustless because a single company doesn’t control the data and instead the network participants are validating each transaction or by case, securing the data.
Just Decentralize It!
Decentralized systems and peer to peer networks are the future, and we should look forward to embracing technology that can make things efficient. Just how a backup generator is used in case the main power line goes down, just how airplanes have more than one engine in case one of them fails, we should fully embrace solutions that don’t feel like putting all your eggs in one basket.
