In discussions about blockchain, several concepts come up regularly. One of which is the distribution of decision-making power.
This can be understood in the umbrella term,
Decentralisation is one of the core principles of blockchain, a distributed ledger technology, that allows for peer-to-peer transactions of various value exchange instruments.
Oh my gosh - jargon overload. Let’s break it down.
What does decentralisation mean?
What does decentralisation mean in the context of blockchain?
Now that we’ve established the philosophical concept behind decentralisation, let’s look at it through the lens of technology.
The deeper I’ve dived into network infrastructure, the more I see the fabric of our digital rights.
Decentralisation is not a new concept when it comes to network architecture. They are often broken into the following categories:
Blockchain technologies are often grouped with philosophies around decentralisation, but nuance is important here. Decentralisation is a spectrum due to the tradeoffs such as lower transaction throughput and speed.
What is the correlation between decentralisation and transactions per second (TPS)?
When you send your friend some money using a banking app, the bank is the custodian of the funds and the trusted party that ensures the transaction is fulfilled and your friend’s wallet gets topped up with whatever amount you’re sending them.
With blockchain, we do away with the need for middlemen for transactions. You “hold your crypto” and the blockchain serves as a public ledger of transactions between the network.
How? The nature of blockchain is such that there is a transfer of control and decision-making from a centralised entity (your bank, internet service provider, etc) to a distributed network.
Different distributed networks are supported and defined by different consensus mechanisms. A simple way to think about the correlation between decentralisation and transaction speed is: The more secure the network, the smaller the TPS. Consensus mechanisms in blockchains directly impact how secure they are.
A consensus mechanism refers to any number of methodologies used to achieve agreement, trust, and security across a decentralized computer network.
Take for example the consensus mechanism of the Bitcoin network. To add a new block to the chain, a node has to make a calculation. This is known as proof of work. The Bitcoin consensus is structured around transaction rules, transaction states across the network and Bitcoin values.
One important concept to remember, there are many blockchains out there with varying degrees of consensus mechanisms, transactions per section potential, and other value propositions. Binance Smart Chain is in no way, shape, or form, decentralised.
But hey, much cheaper transactions - so again, it boils down to the use case.
Choosing which blockchain you want to build your dapp or web3 service on really depends on the use-case, speed, and level of decentralisation necessary for your service.
We have to take steps towards true decentralisation
Decentralized networks strive to reduce the level of trust network participants must place in one another, and deter their ability to exert authority or control over one another in ways that degrade the functionality of the network.
Moving from an overtly centralised internet, financial, and broadly global system means that several decentralised projects are building on extremely centralised infrastructure. This can be seen cross dimensionally from the banks that you need to connect your exchange account to, decentralised applications hosted on AWS, through to the regulators the industry continues to bend its knees to.
You can try go full crypto, but some of your employees will still want payroll.
This means that cryptocurrency projects will have to continue to navigate playing well and integrating with traditional systems so as to offer frictionless and seamless access to their services.
WTF is DeFi (Decentralised Finance) then?
Decentralised Finance (DeFi) is one of the most exciting innovations within the cryptocurrency industry. DeFi is a system whereby financial products become available on a public decentralised blockchain network. This opens them up to everyone, removing the need for middlemen such as banks or brokerages.
Think about it as a permissionless system where software is written on blockchain enable buyers, sellers, lenders, and borrowers to interact peer to peer.
But are these decentralised finance projects truly decentralised? And what does true decentralisation even mean?
First let’s understand the DeFi Stack
When thinking about DeFi, it is important to separate the stack out and understand where we are attempting to apply concepts such as decentralisation to.
Settlement
This is the base layer. Ethereum is an example of a settlement layer. This settlement layer can also have tokenised representatives of assets such as the US dollar (USDC, USDT, DAI) Singapore dollar (XSGD), and more.
Protocol
Here standards and rules are coded to govern specific tasks and interactions. Participants agree to follow a prerequisite to operating in the industry. This is where projects like Compound, Aave, Synthetix, and other lending, borrowing, and overcollateralising logic is placed over the settlement layer.
Application
This, is the consumer-facing applications that abstract underlying protocols into retail or institution-friendly services. This is where decentralised exchanges and lending services exist.
Aggregation
Aggregators help end-users more clearly understand what’s happening across all the different services they are running. Crypto wallets, portfolio trackers live in this category.
When do we apply concepts such as decentralisation?
Generally, a commitment to decentralisation in the first two of the four is key given this is where trustlessness and permissionless-ness create the most impact. As we abstract out to the application and aggregation layer, we are often looking at a hybrid model of centralised and decentralised services plugged together to create ease for the end consumer.
One example is Revolut and other challenger banks offering their end-users exposure to cryptocurrencies in their digital wallets. Without access to private keys, these subset of consumers continue to be able to interact with the industry, with Revolut custody-ing their cryptocurrencies.
Now some hard core fringe players in the crowd who may go on about not your keys, not your coins - you don’t really understand how zoom works but you still use it to take meetings, don’t you?
Decentralisation in web3 and beyond.
Decentralisation is not purely a concept tied to blockchain. This framework can be applied to several different processes associated with the internet. Anywhere there is value transfer, a certain degree of decentralisation can bring benefits to actors within the network. Take for example privacy.
An article came out recently about the consolidation of the VPN industry, and what that means for the average consumer.
TL;DR - Most VPN companies, and VPN review sites are owned by two - three mega parent companies. Smell funny? Hell yeah.
Starting to see why decentralisation of power is necessary? Especially with services that tie to our basic human need to function and thrive in a digital economy?
Blockchain offers a unique opportunity for parties to transact trustlessly without a third party, and this is leading to a rethinking of the way several organisations and industries function. We are seeing this first take the financial world by storm, as it is one of the most immediately recognisable forms of value.
But value transfer doesn’t stop here, there are several projects building in web3 to decentralise power structures and ownership of the internet - be it through decentralising storage, privacy or computing - so that access to information and freedom of expression can continue to be a sovereign human right.
A quick, really relatable example - think about social media platforms whose entire business model is based on the sale of data that we blindly share with them. In this network, the individual doesn’t see any benefit. A decentralized approach would help make it equitable for all.
Listen to Amy and me discuss decentralisation in detail on the Hackernoon podcast:
Let’s optimise towards positive delta shifts in humanity
In summary - decentralisation as a concept and philosophy is one of the impulses of the cryptocurrency and digital assets industry. Yet as the industry matures from the fringe and counter-cultural early days towards the institutional inflow of 2021, it is clear that decentralisation and even the rails towards true decentralisation are yet to exist and must be built in collaboration with incumbents.
There will continue to be hybrid models of centralised and decentralised products and services that evolve depending on the specific use cases and the target markets that the business is solving for.
That's one small step for man, one giant leap for mankind
For more of my musings on technology, philosophy, and beyond:
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Disclaimer:
All opinions are mine and don’t represent the organisations I work with or advise.