Unlike Bitcoin, these days we have cryptocurrency projects that start off relatively centralized, and claim that they will gradually decentralize over time. While this is indeed the ideal outcome, the problem is that many of us humans are naturally drawn to power, and don't like the idea of relinquishing it to the community, like Satoshi did.

For a cryptocurrency to be sufficiently decentralized it must satisfy a few criteria. Although there are other aspects to decentralization (such as geographically disperse developers/nodes, and stake/mining pool distribution), in this post we will cover three key elements of decentralization in a cryptocurrency.

Token Supply

While practically impossible to divide the token supply equally among all community members, it should be distributed proportional to each participant's efforts. It's hard to imagine a project having long-term success when a privileged venture capitalist owns 20% of the supply, and the hardest working community contributor only has 0.01% of it.

Bitcoin is a good example of fair token distribution. Some people bring up the fact that Satoshi Nakamoto owns 5% of the Bitcoin supply, and therefore it isn't equally spread out. While Satoshi did end up with over 1 million Bitcoins, he mined them honestly with his own electricity and compute equipment, along with other volunteers.

Keep in mind that an uneven token supply can be redistributed over time. Some people will lose their private keys, whales will sell to new investors into a bull-run, and new contributors will arrive. Also, a community-led hard fork could eliminate unproductive whale accounts, and reallocate power to active community members.

Fair Governance

Governance is another critical aspect of decentralization. For example, if only a few developers control client updates, community proposals will be ignored. Think about how some early adopters wanted to add smart contract capabilities to Bitcoin, but were completely dismissed by the core developers. This led to the creation of Ethereum.

Tezos is a good example of a blockchain that has implemented robust governance procedures. Not only can any community member submit a proposal to upgrade the protocol, but the update will be installed automatically when enough of the community votes in favor of it, eliminating the need for core developers.

Governance becomes more important as a project becomes established. At the beginning, a project leader or team will likely need to make decisions quickly, and not wait days or weeks for members to vote on an emergency situation. The question is, will the team surrender power to the community after the project has sufficiently grown?

Independent Validators

Unlike Bitcoin, which anyone in the world with a computer and an Internet connection could have mined from launch, a lot of modern day blockchains start off with a limited number of permissioned validators. The idea being that more independent validators will join the network as time goes on.

For example, in the Cosmos SDK (which anyone can use to launch their own Cosmos-based blockchain) there is a parameter that defines how many validators are allowed to join the network. As time passes, the community can submit a proposal to increase this parameter if they think the network is becoming too centralized.

The point is, we don't want a single person or small group to control the majority of the validators. Although the team itself may not take advantage of such power, they could theoretically be compelled by force to suspend accounts or censor transactions, which would defeat the purpose of a censorship-resistant cryptocurrency.

Until next time...

In addition to geographically dispersed developers/nodes, an evenly distributed token distribution, robust governance system, and independent validators are crucial components to a decentralized cryptocurrency. We can work towards this objective together by holding project leaders, teams, and communities to account.

If you learned something new from this article, be sure to check out my other posts on crypto and finance here on the Hive blockchain. You can also follow me on InLeo for more frequent updates.

Further Reading

- How An Uneven Initial Token Distribution Could Negatively Impact a Cryptocurrency
- Why Innovative DePIN Projects Should Avoid Tempting Premines
- The Evolution Of Blockchain Governance Featuring Telos