What is decentralization, and why is it important?

In cryptoeconomics we often see the word “decentralization” bounded around. Many think that cryptoecnomics is synonymous with decentralization, it isn’t and we consistently see examples that demonstrate this.

There seems to be some confusion around what “decentralization” means. Lets break this down.

There are three different axis of centralization/decentralization. They may be combined, or operate independently. The axis include:

• Architectural centralization/decentralization — How many computers from the system. How many can the system tolerate breaking in a single moment?
• Political centralization/decentralization — How many individuals or organizations does the system consist of?
• Logical centralization/decentralization — Can the systems interface and data structure continue to function if the users and providers were split in half?

The very kind Vitalik has provided an example for us to visualise these dimensional axis.

Lets go through a few of them:

• Civil law — This relies on the centralization of power via a law-making body. It consists of many individual judges. However, it does have an element of architectural decentralization to it due to having many courts that function within the system with each of them having a great degree of discretion.
• Languages — These tend to be logically decentralized. For example, the English spoken between different groups needs no agreeance. No centralized infrastructure exists or needs to exist. There is simply the rules of grammar that is controlled by no single group.
• Blockchains — When decentralised, these are politically decentralized (no single person controls them) and architecturally decentralized (no single point of failure due to centralized infrastructure). However, they are logically centralized (due to having a commonly agreed state in which the system behaves).

Although many tote the convenience of having a central database, this require a logical centralization. Arguably this should be advocated against. For areas and regions of poor connectivity or in the event of large network partitions logical decentralization is desired.

In the past an architectural centralization was needed to form a political centralized system, such as a formal democracy. Politicians would need to meet, discuss, debate and vote on matter in a physical location. In the modern world if this was done online, say via a forum or discord for convenience and the owners of said forum or server acted manipulatively or maliciously then the community now has the option to move to a different forum or server.

Although architectural decentralization and/or political decentralization is hard to form with logical centralization, it is possible. We have seen networks of decentralized consensus function, albeit they are difficult to maintain.

Next lets break down some of the main reasons for decentralization. There are three main arguments:

• Attack resilience — A decentralized system is far more costly to attack, destroy or manipulate, this is due to their lack of centralized points of vulnerability.
• Fault tolerance — Due to having a system comprised of many separate components the system is less likely to fail.
• Collusion resistance — Opposed to centralized systems such as corporations and governments which frequently collude in ways to benefit themselves at the cost of the public, decentralized systems are much harder to collude within. Part if this is due to the partial inhibition of “public choice theory”.

Lets look at each of these arguments and break them down.

Attack resilience. Some economic models do not require and decentralization. The reason being that if there is large enough margin of economic security then game theory dictates that an effort should be made to maximize this, then it doesn’t matter who controls the validators. For example, if validators are guaranteed to lose $75 million if a 51% attack occurs.

The above point is fine. However, if we add the risk of coercion then decentralization becomes important. Threats of physical harm or death will quickly put the loss of that $75 million into perspective, suddenly it doesn’t matter so much. But, if that $75 million is distributed between 100 people the game changes, you would have to execute the same coercion across all of those people at the same time. This decentralization creates an asymmetric disadvantage to a would be attacker.

What does the two points above have to do with blockchain? The argument of proof of stake (PoS) over proof of work (PoW) can be inserted here. While hardware is easy to attack, destroy, regulate, detect and monitor, coins are much less so. Blockchains also tend to have globally distributed teams.

Now, lets explore a little of fault tolerance. The obvious point to be made here is of probability. What is more probable, one computer failing, or ten, or one hundred? The principle of fault tolerance is used everywhere, you only have to look around yourself for examples such as a national power grid and the numerous back up stations to see this or a hospital and the backup generators. We see examples across all sectors, health, military, economic, etc.

Though this is not a panacea. It is effective, it is importance. But, it is not a cure all. Let us again consider blockchains. Consider common mode failure.

• All nodes in a blockchain run the same bugged client software.
• All nodes in a blockchain run the same client software but the developers are manipulative, malicious and corrupt.
• The protocol improvement update is corrupted.
• A majority of a PoW blockchain mining is being conducted in the same country and that country’s government seizes and controls all mining farms.
• A majority of a PoS blockchain coins are held within one exchange or protocol.

The risk of the above points should be actively minimized if possible. The following are obvious examples that each protocol that desire to lower this risk should aim for:

• Encourage multiple competing implementations (for example Ethereum implementations include C++, Go, Java, Python, etc).
• Competence and careful consideration behind protocol upgrades in a democratized fashion.
• Developers and researchers should have multiple positions of employment to reduce coercion risk and lower vested interest/bias.
• Effort should be made to move towards PoS to minimize hardware centralization risk.

When considering collusion resistance it is important to recognise how difficult a subject it is to break down. Firstly, “collusion” is defined as “coordination that we do not like”. There are always group that will be able to operate and coordinate whiles other groups cannot. Likely collusion cannot be eliminated but rather reduced.

When considering collusion in blockchain protocols, consensus is placed on the uncoordinated choice model and/or the assumption that there are many participants making independent decisions. When considering PoW blockchains, if one entity or group can acquire more than 33% of the mining power then they can employ selfish-mining. We do not see that in Bitcoin, however it is important to note that the majority of Bitcoin network’s mining power can show up at the same conference…

The point is that these systems should not act as self-interested monopolies. Blockchains may be more secure when discoordination. This is a paradox however. How can you foster and improve “good coordination” while simultaneously prevent or deter “bad coordination”.

• Build to resist the undesirable “bad coordination”.
• Balance the coordination to enable protocol evolution and iteration while not opening or wherever possible limiting avenues for exploitation and attack.
• Create a way to differentiate from “good coordination” and “bad coordination”, then create operate in a fashion that make the desirable easy and the undesirable difficult and less rewarding.
• Enable social interventions that increase participant loyalty to the blockchain while discouraging groups/individuals becoming directly loyal to each other.
• Promote social inclusion, communication and interaction between the different sectors of the market so that class differentiation is not created.
• Cultivate clear fundamental principles and properties that the blockchain, protocol and community is striving for, what should be done, valued and worked towards, and what should be discouraged or only done under extenuating situations.

When considering different combinations of decentralization a trade-off seems unavoidable and inevitable. We may yet see different combinations and applications emerge for specific use cases. It should be valued and strived for.

Decentralization matters.

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains. You also affirm that the sole purpose of reading this article is for expanding your educational awareness and nothing more.