Why Decentralization Matters

11.22.2022-By — Joshua Eustis
  • Insights
post image

The emergence of any technology brings with it new language, and changes or expands the possible meanings of existing terms. Blockchain, of course, is no exception—and almost any discussion of it will include lots of talk about decentralization. 

We should probably start with a definition. In the context of blockchain, decentralization denotes the transfer of ownership and governance to the many from the few. Think of the differences between Prince, a solo songwriter and performer who insisted on absolute and final control over his artistic output, and the Beatles, a band that (despite their well-known internal power struggles) had no designated “lead” singer or sole songwriter. While decentralization may not require absolute accord, it does locate power across a system rather than in one designated point. 

It’s worth noting that many in the Web3 world use the terms decentralized and distributed interchangeably, but this is technically incorrect. In the context of the blockchain, distributed refers not to ownership or governance, but only to the distribution of parties (in most cases, servers) across a physical or digital space.

In this context, decentralization isn't a binary value. Instead, it describes the values and characteristics of a system that deliberately locates significant aspects of power across a defined system, rather than at a single point within it. 

But, like, what does decentralization do?

Decentralization is one of the primary innovations that powers blockchains. As the number of parties participating in the consensus mechanism of a blockchain increases, so does its level of decentralization. Participants' consensus about a given digital truth replaces the need for individual trust agreements, while establishing credible censorship resistance for anyone who wants to do something on that blockchain. Any transaction is agreed upon by all, which allows any two parties to transact without first establishing a specific shared trust. This removes the need for oversight by a third party—for example, a "financial panopticon" established to prevent fraud—and reduces associated privacy and security risk. 

Decentralization plays a key role in the Blockchain Trilemma—the need to balance decentralization, security, and scalability. A blockchain's level of decentralization is directly proportional to its ability to withstand attacks from inside or outside the network, and directly correlated with its level of neutrality, with greater decentralization linked to stronger censorship resistance and spam-resistant pricing. 

One of the most exciting things about decentralization is that the digital truth agreed upon via consensus may be proven by anyone running a node. Network participants must uphold the established consensus when making new blocks, or their stake will be slashed—they'll lose a significant portion of the benefits of entry. And while block producers are referred to as validators, they perform no defined validation action. Instead, they have a financial incentive to act upon the truth determined by a decentralized quorum of participants.

As the number of participants in a blockchain increases, so does the power of decentralization, preventing participants from stealing someone else’s assets by manipulating transactions submitted for block inclusion. Each member controls the private key for a specific address, so no one can censor or manipulate a transaction once it’s been submitted. In the broadest sense, this system operates counter to centralized payment protocols such as PayPal, which censors transactions and even levies fines on users for not obeying a set of internally derived rules.

Until recently, says Laconic cofounder and chief protocol designer Rick Dudley, “we’ve mostly been concerned with usurious intermediaries. So maybe it’s best to think about disintermediation as a primary goal within a decentralized system." Profit-driven intermediation, he notes, "is also far more difficult to add to a well-decentralized system, which resists usury by nature.”

Look, I don’t care about jpegs or digital Monopoly money. What’s in it for me?

Decentralization doesn't just increase the security of financial assets ... or ape GIFs No one party controls the decentralized network, so your pedigree information can't be given or sold to corporations, governments, or any other third parties without your consent, as is dismayingly common on Web2 platforms. Decentralization can also protect network members from arbitrary moralities of a market subset—think the ejection of sex workers from Craigslist, protesters losing their financial platforms under political pressure, or citizens prevented from transacting by their government.

Anything else?

Decentralization also maximizes data reliability. A single point of failure can affect huge swaths of the public; imagine the effects of destroying the only server farm servicing a specific bank. Of course, to mitigate the risks associated with power outages, simple server failures, or even terrorist attacks, banks geographically distribute their servers, with multiple parties storing multiple copies of data in multiple places across a decentralized network. Even if a large portion of its participants were to go dark, the network would still function.

In this scenario, the bank is protected—though you, as a user of the bank, are vulnerable to having your transactions watched, censored, or thrown out altogether. The contents of your account can also be seized for potentially arbitrary or extralegal reasons. As the recent FTX meltdown made all too clear, centralized cryptocurrency exchanges are even more precarious—and because of their inherent lack of regulation, prone to leave retail investors holding the bag. A more decentralized system could offer individual users far more protection against institutional controls, not to mention far less potential for reckless mismanagement by those holding the keys.

Still a long way to go

Decentralizing a protocol or network still poses many challenges. Foremost among them is the fact that markets tend to direct capital to the few and not the many. Our current way of life is undergirded by a system that counters decentralization at every level, moving power away from the majority. Accepting decentralized systems in the physical world would require changing much of how we think about how society is arranged, and about rapidly shrinking access to competition under late capitalism.

Another key point: Governments that cannot monitor private transactions often attempt to sanction users of protocols that protect the anonymity afforded by robust, decentralized censorship resistance. Such moves can be used to uphold international sanctions—or oppress a government’s own citizenry

One of the most glaring problems of decentralization is Web3 spaces' level of volatility. While money laundering has existed since the beginning of money (and would continue even if all the blockchains in the world were to vanish), there's enough money laundering, wash trading, and socially engineered theft on blockchain networks to lead regulators to sanction, or even imprison, participants and even developers—while hinders true decentralization across the ecosystem. If we want to make the ecosystem safe for everyone, we've got a lot of housecleaning to do.

So where does Laconic come in?

Decentralization is a core feature of the Laconic Network, delivering all of the benefits we've described—uptime, security, affordability, censorship resistance, and fair, consensus-driven governance. The network's seven founding Members, and 60+ additional Members spread across multiple jurisdictions, each run their own hardware, making it highly resistant to concentrated server failures, tampering by individual bad actors, and hostile takeovers.

Each Member serves the network by running Watchers, smaller caches of specific data commonly used by, for example, DApp developers. There's no single point of failure—if any one Service Provider fails, other Members can ensure Watcher uptime.

Decentralization will drive even more benefits as the network matures. Laconic Network customers can purchase data directly from Service Providers, which compete to win customers through low prices, at the same time exerting downward pressure on data prices across the industry.

Finally, while geographically diverse traditional networks can be subject to an incredibly complex web of national and local laws, participants in the decentralized Laconic Network need comply only with those laws governing their own jurisdictions. “In each jurisdiction," explains Dudley, "varying and often contradictory regulations or sanctions can interfere with or contradict one another, making global compliance difficult. The goal is to be compliant in our jurisdiction, while allowing our users to be compliant in each of theirs.” Each Laconic Stack user decides how best to comply with the laws of their jurisdiction. The biggest benefit here, though, is that under this model, no single governing body has the power to determine a specific flow of data.

Decentralization is at the heart of Web3, and key to all major benefits of the blockchain. As a structure, it has the power to offer the most benefit to the largest group of people, making it more difficult for the few to hoard power or capital at the expense of the many. But for blockchain, and the larger Web3 ecosystem, to reach its full potential, we must work toward broad understanding of the benefits and pitfalls of decentralized networks. Only then can we begin to calm the waters of Web3, and remove the sharks for the next billion users we hope to bring with us.