What is Decentralization In Crypto & Where to find it.
Centralization — the concentration of administrative power in a central government, authority, etc.
Decentralization — the dispersion or distribution of functions and powers
Did you know that there is actually no established universal measurement of decentralization? What one person may consider decentralized, another might not. That is why, whenever in dealing with decentralization in crypto, the right question to ask is not whether something is “decentralized”, but whether something is sufficiently decentralized enough.
To understand this better, we should first understand what centralization is.
Centralization is whenever there is one ultimate authority governing over a system. As an example, we can take a bank. Whenever you use Chase’s banking system, you simply store your money on their servers & Chase controls it. Should they want to, they can erase your records & exclude you from their system.
Whenever you think of something being centralized think of it as having a single-point-of-failure & being out of your control. In a centralized system, everybody is a participant and the server plays the role of god.
At a high level, Decentralization is simply the absence of a single ultimate authority/point of failure from a system.
Whenever people look to “decentralize something” they essentially want to spread the control over a system, from one entity to multiple independent entities. In Cryptocurrency, decentralization is the ability to establish intelligent, autonomous, fairly governed, monetary ecosystems without a single overarching authority.
As an ideal example, we can look at Bitcoin.
Where Chase has 1 entity maintaining its system, Bitcoin has over 10,000 independent entities maintain its system. This means that anytime anything has to happen on the Bitcoin Network, over 10,000 entities must agree on the happening. At the same time, if one actor wants to act maliciously there would be 9,999 entities with the same amount of influence deterring the bad acting.
When we decentralize something, we make it more robust, resilient, and fair.
Imagine you need to send mail to your grandmother in another country. You write a letter and when you go to send it, the government-owned central postal services tell you “No can do, sorry we don’t like you”. What do you do in this kind of situation? You turn to a postal service that is owned not by just your government, but a postal service owned by a multitude of independent economically incentivized actors whose seeking to provide as much service as possible. At that postal service, nobody will deny your request [within reason] & your grandmother will get that letter.
Now that we have a loose sense of what Decentralization might feel like, its time to identify where we can find it.
Decentralization can exist at any point in a system when a consensus must be reached and within the scope of the cryptocurrency industry, consensus must be reached at 3 foundational levels:
- The Crypto-asset itself
- Exchanges & Trading
- Storage / Custody
- Crypto Assets -
Whenever thinking about decentralized crypto-assets it is important to understand WHERE the control over the asset is being distributed; and that, is found through understanding what roles participants are able to fill.
The roles of highest power for a crypto-asset exist in 2 areas:
On-Chain & Off-Chain.
When looking to gauge the decentralization of a crypto-asset Off-chain, one needs to look at the community & codebase. The Off-chain role of power is essentially the project’s code, operators & participants.
- Is the asset’s code publically available?
- How many developers are working on maintaining the core code?
- How easily can new developers join the core team?
- Do asset holders participate in governance decisions?
- To what degree do asset holders influence governance decisions?
When looking to gauge the decentralization of a crypto-asset On-chain, attention must be paid to levels of permissibility & node role.
Permissibility is the difficulty associated with joining the network and is identified by one of three: 1) Permissionless 2) Permissioned 3) Consortium. If anyone can join at anytime its permissionless; if there is a selected group of authoritarian operators that do not change it is permission; if there is a group of leaders that can and does change it is consortium.
Node role is the functions that are associated with joining the network. A new node joining can simply be an actor that reads the network’s updates and accordingly updates itself, thus having no actual influence on the network. Or. A node can be an actor that does some form of computation and actually writes to the network. Writing means updating the ledger & whoever gets the right to write to the network controls its direction. After all, a cryptocurrency is as true as is its ledger.
* * * There are also other hybrid methods to distributing the functions of nodes, where roles are further granulated and split up. For example, a network with nodes that validate activity/nodes that package blocks/nodes that validate the packages blocks & nodes that publish updates.
- Crypto Exchanges & Trading -
Identifying the decentralization of an Exchange is rather straight-forward; who holds the funds while they are being traded.
Decentralizing an exchange would mean that whenever coming to consensus about some activity happens, it happens across a multitude of servers. By decentralizing exchanges we are able to bring about a more resilient & secure financial environment. In the event of a centralized exchange being hacked all customer funds are susceptible to being stolen; if a Decentralized exchange gets hacked only the hacked portion is susceptible.
Decentralized exchanges have a few aspects that must be addressed:
- How many nodes validate and upkeep the orderbook?
- How many nodes are providing secure liquidity channels?
- How many nodes are Tasked with Matching orders?
- What happens to a user’s funds in the event of a hack?
- Is the exchange holding the crypto-assets or is it some non-custodial platform?
- Crypto Storage & Custody -
The crypto-sphere is full of solutions to store one’s crypto assets known as wallets & the vast majority of these public commercial-grade wallets are in fact centralized. This goes against the very core principle embodied by Crypto of sovereign money. Decentralization at the storage level of crypto is essential for not only its short term wellbeing but its long term existence.
Decentralized custody directly means more security.
What is the point of owning decentralized money if you still end up having to give control over it to somebody else?
Thus, whenever inspecting the decentralization of storage services attention must be paid to at which points consensus must be established. Consensus is established in the:
- global balance state (How much is locked in the wallets services altogether)
- local balance state (How much each account has at any given moment)
- Transferring Funds In
- Transferring Funds Out
This draws out a slew of questions to explore:
- Can anybody lock you out of your funds?
- Can anybody freeze your funds?
- How do you actually interact with the funds?
- How is bad acting deterred?
- How are breaches handled
All things said and done, we haven’t fairly addressed that decentralization incurs tradeoffs. Decentralized environments are more complex to set up and very difficult to reverse. Moreover, increasing levels of decentralization come with increasing levels of computational & time consumption, making processes slower. This is where the benefits begin to be weighed against the tradeoffs & ultimate-true-pure decentralization is not sought.
This brings us back to the beginning;
When in dealing with crypto, the better question is asking not whether something is decentralized or not, but rather is this something decentralized enough?
The more points at which a crypto project is decentralized the better!
Does everything in crypto have to be decentralized in order to be good? Not necessarily, but the more points at which a crypto project is decentralized the better! 😉
