What is Decentralization, and Why Does It Matter?

Robb Henshaw
Feb 19, 2019 · 5 min read
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No precept is more sacrosanct to crypto-technologists than decentralization. An idea born out of the 90’s Bay Area “Cypherpunk” movement, decentralization forms the philosophical backbone of Satoshi Nakamoto’s prophetic Bitcoin whitepaper. More than a decade after its publication, Satoshi’s vision for a peer-to-peer, electronic cash system has captivated a generation of innovators, unleashing a wave of decentralized currencies and applications that are reshaping industries across the globe.

While decentralized technology presents an intellectual and commercial novelty to people who live in developed economies, its utility is of revolutionary significance for the 50 percent of the world who live under oppressive regimes. In countries like Venezuela, where people are using bitcoin (despite its volatility) to protect their life savings from hyperinflation and evade authoritarian financial surveillance, decentralization has enabled a censorship-resistant ecosystem for monetary exchange.

Perils of Centralization

This alternative crypto-economy has become vital for Venezuelans reliant on remittance payments from family members who have fled the collapsing nation in search of better opportunity abroad. As remittance inflows from Venezuelan expats have soared, the corrupt and bankrupt regime of President Nicolas Maduro has strongarmed money-transfer markets in an effort to seize desperately needed funds.

By enacting invasive money-transfer laws, which aim to reroute all Venezuelan remittance inflows through state-approved financial institutions, the Maduro government has devised a centralized scheme to aggressively tax all foreign money transfers into the country. The net result of Maduro’s money grab are crippling remittance fees that can climb as high as 56 percent for wire transfers sent from the U.S., according to Alejandro Machado, a cryptocurrency researcher at the Open Money Initiative.

Venezuela’s Orwellian bank legislation also requires domestic financial institutions to disclose the IP addresses, financial details, transaction amounts and locations of all citizens who access their banking services from outside the country. Furthermore, the Maduro regime has even gone as far as blocking access to Venezuelan bank accounts that are being managed from outside of the country. While Venezuelan financial censorship highlights the perils of centralization, it has inadvertently spawned a flourishing underground economy powered by decentralized cryptocurrencies like bitcoin and Dash.

A Liberating Force

Because cryptocurrencies rely on peer-to-peer exchange mechanisms that move digital assets directly from one person’s virtual wallet to another’s, Venezuelan expats have been able to circumvent state-controlled bank intermediaries and send bitcoin to their loved ones at much lower costs. Decentralized technology has thus emerged as a liberating force for the Venezuelan people.

Unlike government-backed fiat currencies, which are minted by central banks, cryptocurrencies like bitcoin are mined by so-called consensus mechanisms that approve transaction blocks and issue new tokens via the majority agreement of networks participants. Therefore, any addition or alteration made to the blockchain, the database ledger distributed across every computer in the bitcoin network, must be approved by the collective. In theory, this protocol design makes it impossible for a central authority to highjack the blockchain network and alter the database to advance its own selfish interests at the expense of the group.

Decentralized Precedents

A cornerstone of an emerging global movement dubbed the Fourth Industrial Revolution (4IR) by the World Economic Forum, distributed ledger technology (DLT) has impacted the 21st Century in much the same way the printing press disrupted information exchange in Renaissance-era Europe.

Before Johannes Gutenberg’s printing press arrived on the market, the Catholic Church held a monopoly on publishing throughout Europe. All Western manuscripts had to be hand-copied by monks, an arduous task that required years of intensive manual labor. Meanwhile, books in those days were scarce, luxury goods, limited to wealthy aristocrats, churches, monasteries and universities. Thus, intellectual capital was ultimately concentrated in the hands of the European elite.

But with the publication of the Gutenberg Bible in 1455, the first mass-produced book in Europe, the German inventor broke the church’s iron grip on the written word and brought the power of low-cost publishing to the people. In the same way blockchain technology is removing oppressive establishment intermediaries from transactional contracts between peers, Gutenberg’s printing press democratized Europeans’ access to information.

The Revolution Will be Decentralized

With some 4 billion people either debilitated by financial exclusion, oppressed by authoritarian rule, or both, decentralized cryptocurrency has the potential to liberate them from suffering. For example, in Sub-Saharan Africa, where millions lack access to bank services, decentralization enables the unbanked to leapfrog the financial void and receive bitcoin remittance payments directly onto their phone.

By the same token, no government controls the bitcoin network. The seminal cryptocurrency is a borderless digital asset independent of state rule. That means authoritarian regimes in countries like Russia, China and Turkey lack the power to freeze a human rights activist’s bitcoin wallet in the same way they could seize their local bank account.

However, with the rise of blockchain forensics tools like Chainalysis and Elliptic, repressive governments can now leverage big-data technologies to trace bitcoin transactions and unmask the owners of virtual wallets. This is relatively easy to do because the bitcoin network permanently records data points like wallet addresses, transaction amounts and other signifiers to the public blockchain ledger.

While bitcoin is no longer ideal for censorship-resistant transactions, decentralized innovation has kept one step ahead of surveillance with the creation of privacy coins like Zcash and Monero. Using complex cryptographic schemes like zero-knowledge proofs and ring signatures, respectively, Zcash and Monero have reinforced privacy controls in decentralized ecosystems.

Just as Eric Hughes, a founding member of the Cypherpunks wrote in his now-famous manifesto 26 years ago, “We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy out of their beneficence,” here at Reserve we see inherent hazard in the centralized control of money.

We believe that the future dominant cryptocurrency will be a decentralized, dollar-independent stablecoin. In fact, we believe that — to truly change the economic situation for people in many countries around the world — the future of money MUST be decentralized.

As we work towards bringing the decentralized Reserve stablecoin to some of the world’s most vulnerable economies, our mission at Reserve is to scale prosperity to those disenfranchised by failed monetary policy and repressive capital controls that keep people locked in poverty. To learn more about the importance of decentralization, join our conversation on Telegram.

Reserve Currency

Reserve is a digital currency with stable, real-world value…

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