Two Minute Crypto – Key Concepts 8 – Decentralization

Click the tab below to listen to the 48th episode of my weekly crypto podcast ‘Two Minute Crypto.’ These are intended to be short, single-topic ramblings on some aspect of the cryptosphere. Consider dropping a like and or a review on iTunes or Podbean if you enjoy the podcast. Comments and critiques welcome.

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Two Minute Crypto – Key Concepts 8 – Decentralization

Welcome to Two Minute Crypto. This instalment of the Key Concepts series focuses on explaining crypto decentralization and the challenge of achieving it. While decentralization can be a very nuanced reality across a wide range of important metrics this discussion will dwell on a high-level explanation of the term as generally used in the crypto space. It is certainly one of the key components to understanding the appeal and potential of blockchain.

When a cryptocurrency is described as decentralized the core of that claim is that it has no single point of failure and no over-arching authority. There is no controlling entity, no headquarters, no management team, no single set of servers or data repository and no- permission is required in order to use that crypto in any way an individual or business might choose. It is live in the wild and free – at once accessible and unassailable. You cannot shut down a distributed network precisely because it is very widely dispersed and easily propagated.

On paper, a decentralized network has obvious appeal. It is robust and inherently democratizing. Each participant in a decentralized network has the same set of ‘rights’ as every other user of that system and access to the network is permissionless -if you want to use it you can – there is no-one to ask and critically no individual with the power to deny you.

However, key to understanding decentralization in terms of crypto is an awareness of how incredibly difficult it is to achieve. Talk is cheap – the moniker of decentralized on the vast majority of blockchain projects is just a title – smoke and mirrors intended to gloss over a centralized reality.

At best, most crypto projects exhibit only one or two qualities of decentralization – they may be open-sourced or the network may be secured by thousands of distributed nodes. However, the vast majority of these projects are subject to points of failure. For example, there is a founder or founders who control development, or there is a small team of active developers who in reality drive the project without whom it would die. Perhaps the supply is controlled by a small number of individuals who effectively own the system or network validators are centrally appointed. To date, in reality, only a veneer of decentralization is achieved by the vast majority of projects.

The primary example of a decentralized crypto in practice is, of course, Bitcoin. There is no founder to target, no company, no centralized record keepers, permission to use is not required, supply is fixed and though development can and does take place it requires the acceptance of a majority of the distributed nodes for these proposals to actually be enacted on the mainchain.

However, even Bitcoin is an imperfect version of a decentralized network. Miners validate the currencies transactions; these miners tend to congregate into mining pools (groups) for greater efficiency and the majority of these pools are located in China. This is a clear centralization of a key component of the network creating a pinch point for Bitcoin should China enforce a ban or move to shut-down these mining pools. Would this kill BTC, absolutely not but it would adversely affect it in the short-term as the network moved to rebalance its mining system.

To recap decentralization offers many advantages but attaining such a state is incredibly challenging and to date very rarely achieved.

Thanks for listening. 

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