You hear this term thrown around the crypto-sphere a lot, but I wager that 90% of the supposed experts that you ask don’t actually understand the meaning of it, and only serve to continue the cycle of misunderstanding. I hope to clarify the situation and I hope that after you read this, the next time someone says that “[so-and-so] is not decentralized” you will be able to correct them, with the confidence of the Dos Equis man with a half lit cigar and a bourbon.
So what does it mean to be decentralized?
Let’s start with the good ol’ Webster-Merriam definition:
noun de·cen·tral·i·za·tion (ˌ)dē-ˌsen-trə-lə-ˈzā-shən 1: the dispersion or distribution of functions and powers; specifically : the delegation of power from a central authority to regional and local authorities
So with those images in mind lets go over all the different contexts by which we can judge a cryptocurrency in terms of its topology.
Who controls the source code of the project? If it is closed-source, then clearly it is centralized, and opaque. But what if it was open-sourced? Does that mean it is decentralized? Certainly we can’t call a project which is open-sourced centralized in terms of control of its code, as it could be simply copied and forked by others. Though if you look at Bitcoin as an example, although its code is open, the number of people who hold commit rights to the code base are a very select few. Although this control is limited, I would still label an open-sourced project a decentralized one. It may not be as decentralized as say, the internet, but it is certainly not as centralized as say, the code for MS Office.
How do participants join? Who gets to determine who is allowed to participate? How are bad actors handled? Are they expelled by the will of a superuser controller or voted out by a quorum of network peers or simply ignored? As most cryptos are Dynamic Membership Multi-Signature (DMMS) systems, they are all decentralized by nature. We can contrast this with traditional banking and brokerages, which whom you must open up an account with in order to participate. Even the internet is more centralized in this regard, as we discussed earlier, you must register domain names with a registrar which operate under the oversight of ICANN. Although some fine folks are working on changing that. With crypto, you can join the network and create your own accounts without getting anyone’s permission, and indeed this is the basis upon which most ‘cold wallets’ work.
Value distribution (token distribution)
How is the distribution of its token handled? Is it dolled out to groups or early investors from a central repository controlled by an entity? Is it earned or mined by participants themselves? Is it some combination of the two? This is a particularly contentious topic and one that will most likely get at least 3 people in the room embroiled in a heated debate, that may or may not end with a broken nose. That is because the method of value token distribution is at the heart of why many claim crypto-currencies are scams or ponzi schemes. Apparently making a token out of nothing and selling it to people for profit is something that only the government licensed banks are allowed to do. If you make your token yourself and distribute or sell it to people, then you are running a centralized value token. You may or may not be operating a ponzi-scheme. Proof of work is the only way to achieve decentralized distribution of a token without picking favourites.
Validity and Security, immutability
How is security of the data ensured? What prevents bad actors from selectively partitioning the network or promoting their transactions over others? How do they prevent actors from filtering out or delaying certain transactions and isolating victims? How is the data protected from being modified without anyone knowing? Mostly all cryptos have decentralized verification and integrity roles, as they are normally part of the job of every node to validate transactions in the P2P network. Contrast this to the traditional banking system where only the banks could validate and clear cheques, which is a classic centralized system.
How is consensus achieved and ensured? Through a vote, or through a proof of work? This is basically how the network manages to ‘stay in sync’. Which is to say, how it manages to agree on the ordering of transactions which are all asynchronously floating around the P2P network. What does it mean if a proof-of-stake system which depends entirely on the rules of the system to determine who gets to be the ‘forger’ of a new block, to be decentralized? I would argue that in these cases of PoS, where the essential nature of consensus is based on a distribution algorithm, then the algorithm rules themselves being written by developers form a sort of centralized control system. Unlike proof of work, where only the amount of work to be done is controlled and miners are free to maximize their ability to perform the work in order to increase their chances at forging a block, stake systems having no work requirement so anyone’s chances at becoming a forger depend solely on their stake in the system through some formula decided by the developers. This is a form of centralized control.
Some cryptos have a built in exchange protocol or match making engine along with the ability to store an open order book. The orders are stored as part of their blockchain and matchmaking is done via the network transaction mechanism itself. If they can run without the need of a central service hosted in one place, then they can be considered a decentralized exchange. In contrast, there are many exchanges which are run off-chain as a business and these are centralized, as their order books are maintained by them on proprietary databases, and if you open a trading account with them, then you wear all the counterparty risk in the odd chance they were to fold and go under. Not that that happens very often.
Armed with these contexts, you can now start to talk about decentralization in a way which may be meaningful without the discussion degrading into the “You aren’t decentralized!” Yes we are!” mudslinging-fest that they sometimes tend to do.
In the next article, I will go over some of the more popular cryptos and rate their degree of decentralization based on these criteria.
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