The perennial hot topic of the cryptocurrency world is decentralization, a term which has virtually become synonymous with the field itself. The term has been thrown out there so frequently, and used with such reverence, that it’s important explore what it actually means, why it’s important, and if its existence can even be reliably proven.
What Is Decentralization?
First, when discussing decentralization, we have to break down exactly what that means. As it turns out, it can mean quite a few different things with a lot of nuance.
Decentralized infrastructure vs. leadership
When talking about decentralization we have to keep in mind two different categories: infrastructure and leadership. Decentralized infrastructure means that no one entity failing, whether it be a server farm, development team, company, power plant, etc. failing would bring down the network. Decentralized leadership means that no one individual, or entity, controls the decision-making process over the entire network. An example of decentralized leadership is a true cryptocurrency, where the lead developers can’t arbitrarily make decisions for the network without consent of the miners, nodes, etc. A centralized leadership structure, on the other hand, is a company or corporation: even though a board or shareholders may diffuse the decision-making process among many individuals, a single order, from a government for example, can influence the entire entity.
An example of centralized leadership with decentralized infrastructure would be a global company with branches and servers in multiple locations, however all of which answer to the same top-down orders. Decentralized leadership with centralized infrastructure would be a cryptocurrency with a single mining pool controlling the majority of the hashpower.
Decentralization is both an absolute and a sliding scale
It’s important to remember that the term “decentralized” is both absolute and relative. A system with two or more points of leadership/infrastructural failure is decentralized in absolute terms. However, it’s possible to be “more” or “less” decentralized as well, as extra points of failure make a system more decentralized. Generally speaking, the more decentralized a system is, the more systems and decision-makers can fail while still maintaining the absolute “decentralized” value. In a decentralized system with only two points of failure, for example, the loss of one would turn said system centralized.
The law of diminishing returns applies
The value proposition of decentralization is to reduce chances of total failure. Adding extra points of failure diffuses this risk. At a certain point, however, the improvements offered by additional decentralization become negligible. Additionally, introducing further points of decentralization can actually reduce efficiency. As always, the law of diminishing returns applies, where at a certain points the return for the investment diminishes, to the point where you can actually get negative returns.
“Decentralized” and “distributed” are often confused
In cryptocurrency, “decentralization” is often used mistakenly to refer to distributed computing. In a philosophical sense, “decentralized” simply means multiple centers, regardless of their size. A network that runs on 1,000 data centers around the world, each independently controlled, is decentralized, even though every single individual with a computer is not able to participate in the running of the network.
Why Does It Matter?
In the cryptospace, “decentralization” is often thrown around as a term of universal benefit. Before we simply agree that decentralization is good, we have to know exactly why, and what kinds of problems it prevents.
Central points of failure are a problem
The overarching goal of decentralized systems is to remove central points of failure. Under a centralized system, a single attack vector can be effective in destroying an entire network. The main point of a decentralized system is to harden the network against being taken down or significantly altered, maintaining the experience for those who depend on it regularly. Designing and maintaining a decentralized network should keep in mind the goal behind the commitment to decentralization.
An example of a decentralized network that nonetheless experienced conditions that its decentralization was designed to prevent is Bitcoin. During late 2017, Bitcoin’s transaction times and fees skyrocketed, and while the network still technically operated for all users, sending and receiving transactions was practically very difficult. This caused the decentralized network without a single point of failure to behave practically like a centralized network that had either been taken down or had been changed, and the experience of using Bitcoin was radically altered.
Central control can lead to arbitrary changes or censorship
The second, most often-touted benefit of decentralization is censorship resistance. A network with a thoroughly decentralized infrastructure but a centralized command structure can be subject to censorship of transactions. There have been many cases of this in present-day financial systems of censorship being a problem, from account freezes/seizures to regulatory environments causing certain services to not function in certain parts of the world. Additionally, even a financial tool such as cash, which can be used and traded without censorship, is still subject to certain central controls, including inflation and reissuance. Decentralized control over the entire network prevents such a circumstance.
Can It Be Proven?
Decentralization is also a focal point of many arguments in the cryptoverse, with proponents and detractors of various projects disagreeing on their respective levels of decentralization, both in theory and practice. Is it really possible to prove or disprove the decentralization of a network?
Lack of central control means much can’t be proven
In a word, no, it’s not entirely possible to prove the decentralization of a network. A requirement of decentralization is open participation, meaning no one party can control who else participates in running the network. This means that, in theory, one individual or group could end up with iron-fisted control over a supposedly decentralized network. The various addresses, wallets, nodes, mining pools, and developers can all theoretically be under the control of a secret cabal of nefarious people. While this is a bit of a ridiculous assumption in most cases, in pure theory such a situation can’t be entirely prevented, or fully disproved.
Even full AML/KYC systems have a degree of uncertainty
Now, it should be mentioned that such a situation can still arise even with strict identity checks. Identity theft, shell corporations, behind-the-scenes deals, etc. are all factors in the old world of centralized systems. Decentralized systems simply make power structures more difficult to identify and prove, however shenanigans and obscuring secret centralization have always been possible.
Strong inferences can still provide overwhelming evidence
Despite underlying uncertainty, however, decentralization is still something that can be demonstrated by overwhelming evidence beyond any reasonable doubt, even if not absolute proof. A coin supply’s distribution, the number and location of nodes, identification of various decision-making bodies, etc. can all be used to provide evidence of a decentralized ecosystem and network. Just as decentralization can’t guarantee that the network won’t fail or be censored, but can reduce the probability of this occurrence to statistical insignificance, evidence of a network’s decentralization can reduce the chances that it’s secretly centralized to the point of practical impossibility.