The Capital
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The Capital

Why Is Decentralization So Difficult?

Before me sits a cup of piping hot coffee, it smells like coffee, it looks like coffee and it tastes like coffee. But for the coffee aficionados, they would turn their noses at the stuff, because for the love of convenience, what I have in my cup is instant 3-in-1 coffee — a caffeine abomination, if you will. For lovers of gourmet coffee, 3-in-1 coffee — a convenient substitute of creamer, freeze-dried coffee and sugar crystals — represents a loss of control, the only thing you can control is the temperature of the water you pour into your instant mix, but little else. Whereas any coffee gourmand will tell you that the temperature of the water needs to be precisely controlled to bring out the full flavor of the selected beans, the temperature of the milk makes a difference as well as the volume and choice of sugar — all affect the enjoyment of your cappuccino. Yet when it comes to our digital interfaces, most of us are quite content to go with the 3-in-1 option.

Public service announcements took on a sinister look.

Online applications such as Facebook, Amazon and Google bundle user interface, code and data into one exceedingly easy-to-use app or website. But while most users have opted for this convenience (and quite understandably), they’ve also opted for a lack of control — just like a 3-in-1 coffee mix. Most of the software and all of the data that keeps these companies running is in the cloud and worse still, many of these companies don’t even run their own cloud computing systems. Take Netflix for instance. It’s alleged to be responsible for as much as a quarter of the internet’s total traffic, but it sits on servers managed and owned by Amazon Web Services. And controlling a user’s data gives these companies tremendous clout — yes you could leave and move over to another service, but what about all your photos uploaded? What about those videos? And your memories? Plus the network effect of incumbents means that the cost of leaving becomes progressively higher the longer we stay on a network (think of it as AT&T for your digital self).


Which is where blockchain technology is supposed to come in. The concept is simple, by separating interface (e.g. digital wallets), code (e.g. decentralized applications) and data (e.g. a user’s inputs), ideally, power should be decentralized back in favor of users, who contribute so much to the power of the centralized digital behemoths that currently rule the landscape. The idea is that users can now dictate how and when they share their data and how much (if at all) they should be recompensed for doing so. Individually a user is not worth much in data terms, but imagine if every user now had an option to decide how his or her data were manipulated — as a bloc, users would now wield tremendous power. Under such decentralization, a user could port their data with them when they switch platforms, arguably increasing the incentive for decentralized application makers to act in the best interest of users as well as treat them well. In addition, because the application is decentralized, users could be able to interact directly with one another, negating the need for data-gathering and hoarding intermediaries such as the social media and e-commerce giants of today.


Feeling a little bit of déjà vu? That’s because we’ve seen this before. Decentralized services, then called peer-to-peer flourished in the early days of the internet — Napster (ask your grandparents) was one of the most popular. But back in those days, no one had yet figured out how to build a robust decentralized database — one that was open and immutable and solved the Byzantine General’s problem (an agreement problem between generals who are about to attack a city, with some being loyal generals and some being disloyal and with no guarantee that he messages that are transferred are ever transferred correctly to each general or even arrive safely). But all that changed in 2008 with Satoshi Nakamato’s Bitcoin whitepaper. And although the use case for Nakamoto’s creation was of a financial nature, it paved the way for a slew of concerted attempts to decentralize the digital sphere as we know it.

And while building the right tools and applications for a decentralized internet will take time, that is far from the hardest element of decentralization — rewriting legacy institutions to adapt to what is nothing short of a new digital world order is the harder stretch. Because blockchains are not managed with centralized administrators, they need to be managed by communities and achieve consensus with its unavoidable problems. As the Bitcoin Cash hard fork (which wiped off billions of dollars worth of market cap in cryptocurrencies) clearly demonstrates, consensus can be hard to find and when there is no clear consensus, the results can be disastrous. Compound that with the fact that the interests of stakeholders are not always aligned, be they miners who maintain the blockchain, users of the digital tokens, speculators or developers of applications as well as blockchain core developers — it is not always that the interests of all are aligned.

But as difficult as it may seem, at the very least, cryptocurrencies and the blockchain are taking the push towards decentralization that bit forward. Whereas previous attempts at decentralization failed because the economics were found wanting, including the father of the modern internet, Sir Tim Berners Lee, blockchain and cryptocurrencies are finally one where the economic incentive to maintain the ecosystem is present. In the past, protocols were developed by researchers and subsequently maintained by non-profit organizations. Which is why the World Wide Web, which sits atop the internet layer was an era with fewer protocols, but myriad applications. With blockchain and cryptocurrencies, what we’re seeing is myriad protocols and eventually (it is hoped) myriad applications. Money as it seems, always complicates matters. When the internet started to gain widespread adoption, money started pouring in and commercial interests made finding consensus that much more difficult. Instead of contributing to maintain the protocol, engineers found more lucrative prospects in building the applications sitting atop those protocols and with incentives to maintain those protocols absent, who could blame them?

Professor was having difficulty getting the slideshow to play.

Many of the decentralized projects (especially those which were not scams) sought to develop their own economic models through cryptocurrency. The idea was to replace a centralized firm with a decentralized organization, held together by incentives created through the issuance of a digital token — a token “co-operative” if you will. And unlike in Web 2.0, where much of the monetary benefit of that ecosystem inured to the application developer, the decentralized project would ensure that all stakeholders have a stake in the enterprise, including users, and get their fair share of the value created by the protocol and therein lies another key problem with decentralization that will take time to address.

In the early 20th century, the Xinhai Revolution brought down centuries of dynastic rule and ended forever the Chinese Qing Dynasty. The fledgling Republic of China, born from that unrest, was intended to be a representative democracy and found its first President in Sun Yat-sen. One of Sun’s biggest problems (and he had many) however was that under dynastic rule for so long, the Chinese couldn’t grasp the concept of democracy — they had no understanding or concept of either the significance or importance of their vote. According to one anecdote, when Sun traveled to a small town to check on mayoral elections to the town, he found that voters were being bribed or offering to sell their votes, or they were were voting randomly, not entirely sure of the implications of their exercise in democracy. The issue was that China had never experienced democracy before and the concept was alien to them — that their vote could make a difference was lost on them. Today, in America we face the same struggle. Among developed countries, the United States stands out for having one of the lowest voter turnouts. Whether its sloth or disillusionment, engagement takes time and effort and when voters believe that ultimately their vote won’t make a difference, stakeholders no longer feel that they have any influence over the process.

Someone mixed up the portrait of Mao Zedong and Sun Yat Sen, heads would roll.

That this can happen in the political system is precisely why the challenges to decentralization are obvious as well — unless users are incentivized to engage and participate in the protocol, they will necessarily select the path of least resistance. At least for cryptocurrency protocols, the cryptocurrency is a reward in and of itself and insofar as the cryptocurrency holds a certain value, the economic incentive for engagement is at least present.

Furthermore, governance systems in almost all blockchain projects are either absent or evolving. Just as democracy required such fundamental concepts such as the rule of law and the separation of powers, most blockchain projects also require dispute resolution mechanisms as well as constitutions enshrining decision-making process. Even Satoshi Nakamoto who created Bitcoin failed to provide any such guidance.

To be sure the effort to decentralize is laudable and as we have witnessed in our own age, is a continuing endeavor. For now at least, the allegations that the existing blockchain structures themselves are quite centralized is a fair allegation. Almost all Bitcoin mining happens somewhere in China and if not, is managed by pools controlled by Chinese interests. Digital token ownership (which in some projects provides substantial influence) also tends to be concentrated. A quick search of public digital wallet addresses reveals clearly that almost 90% of the world’s supply of Bitcoin is held by only a handful of addresses.

So should we give up trying to decentralize the internet?

I for one would argue that the answer is a resounding “no.” Our generation has been marked by extreme inequality, both between and within nations. Grinding poverty sits alongside opulent displays of wealth and thanks to the 24-hour news cycle, we’ve become desensitized to the affront that such displays ought to have on our psyche. In terms of governance, the Swiss model could perhaps be instructive. Switzerland stands out for being a prosperous nation where minimum living standards are guaranteed. All Swiss men also serve compulsory military service. Swiss citizens are also highly engaged in domestic issues and on certain matters, a min-referendum is required before the Swiss parliament is able to legislate or regulate such issues. The decentralized internet, given its huge diaspora and the non-homogeneity of stakeholders will be hard-pressed to follow the Swiss model, but that doesn’t mean it’s not a step in the right direction to try. We’ve seen repeatedly how the centralization of influence in loosely regulated commercially-motivated technology companies can have serious repercussions in the physical world, to pretend that this is not an issue and to accept the status quo would be to shirk our duty as human beings to leave this place better off than when we entered it. Decentralization is perhaps only the first step, but it is one that I argue we must take.

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Patrick Tan

Patrick Tan

CEO & General Counsel of Novum Alpha, a quantitative digital asset trading firm with regulated funds catering to accredited and institutional investors.