Many people hear the word decentralized and have a general idea of what it means. There are many misconceptions and incorrect definitions of decentralization.
In this post we take a deeper dive into the topic of decentralisation and explain its importance whilst correctly defining it in relation to cryptocurrency.
Key Terms
Before we begin, let us define a number of important terms:
Centralized — A single authority controlling, directing, and making decisions. Take for an example, the United States government. The U.S. Dollar is printed by the U.S. Mint with the permission of the U.S. Congress. This is declaring that the U.S. Dollar is backed by the government and can therefore be trusted by anyone underneath the government. If the U.S. government disappears, so does the U.S. Dollar. In IT-related terms, this could translate to one machine telling all other machines what to do.
Decentralized — A system in which no single person, institution, or machine is telling others what to do. Ethereum is an example of a decentralized currency, due to the fact that money is no longer printed and given value by an institution, but rather created and given value by the community using it. In IT-related terms, this means there is no specific machine needed for it to work.
Distributed — Essentially the same definition as decentralized, but can now be spread out on multiple machines. This does not mean if a machine stops working the whole system does.
Three Types of Decentralization
Decentralization is complicated and cannot be fully defined in one aspect. Instead, it can be categorized into three different types, as defined by Vitalik Buterin:
Architectural (de)centralization — How many different physical systems make up the network and how many can stop working at any given time without the network shutting down? If we have 10 computers, how likely is it for one computer to go down? How likely is it for 5 computers to go down?
Political (de)centralization — How many individuals or institutions control the network?
Logical (de)centralization — Does the network look like a jumbled mess or does it look like a well-structured design? If the design was cut in half, would the system still be able to function as normal in two separate instances?
Blockchain technology is at the root politically & architecturally decentralized but logically centralized.
Why Decentralization is Important
In the beginning of this blog post, we talked about the U.S. Government and the U.S. Dollar being centralized. Centralization makes it very easy for the controlling party to determine most anything for the system, whether it be for good or malicious intent.
Attack Resistance— Networks that are decentralized are often not economically beneficial to attack. The reason for this is the fact that there are no crucial central control points to attack. The economic size surrounding the system is much larger and therefore much more expensive to attack. Let’s say that an attacker manages to control 51% of a blockchain. It would not be economically beneficial for the attacker to harm the network as the value within the network would plummet.
Collusion Resistance — Since the U.S. Government is centralized and the controlling system for the U.S. Dollar, members and leaders have the ability to collude together to change, disrupt, or destroy the U.S. Dollar depending on their own self-interests. With a decentralized system, colluding together becomes much harder as you would need to control more than half of a network in order to truly control it.
Fault Tolerance — Decentralized networks are less likely to fail due to the fact that there are so many different machines that make it up. It would be hard to target each individual system to bring down an entire network. As we mentioned above, even when cutting as much as half of the network apart, both would still be able to function without the other. If an individual or institution had 51% of control of a network, Attack Resistance would still be a protective factor.
Let’s expand on these a little further.
Attack Resistance is proven to be more secure when combined with Proof-of-Stake rather than Proof-of-Work. With PoW, security can only come from block rewards, which can be heavily regulated by miner pools and ultimately initiate a 51% attack. In PoS, protocols can be written to provide security in terms of punishment rather than rewards. It is theoretically possible for 51% attacks and other malicious attacks to happen with PoS but, in the end, they are futile as they are easily punished or rolled back.
“Take a group of individuals that are sitting in a circle. A bucket is being passed around the room and each individual puts one dollar into the bucket as the bucket passes them. If an individual breaks the pattern and decides to take one dollar out instead of putting one dollar in, his whole house burns down.”
Collusion Resistance can be complex in terms of security as there is no seemingly proper way to entirely avoid it. Collusion, or intent that is not wanted by the majority, can happen in many different ways. Protocols should have multiple security mechanisms in place in order to discourage any coordinated attacks or any potential malicious coordinators from forming. This is where protocols such as Casper in Ethereum aims to find the middle-ground through proper mechanisms for punishing malicious validators and rewarding genuine ones.
Fault Tolerance has one straightforward argument - it is less likely for one computer to fail than a whole network of computers. Even if the likelihood of this happening is minimal, what would happen if an entire network of computers were produced in the same place and had the same bug? A way to prevent this from happening would be to employ developers from a variety of organizations and to accept volunteers working collectively on one project, which a majority of blockchain projects already practice. Another alternative would be to create an algorithm that gives minimal risk of centralization from hardware (Proof of Stake).
This post is part of an Ethfinex contributor series exploring Ethereum, decentralisation and the role of Ethfinex in the decentralised ecosystem.