“Decentralization” typically refers to a system run by the majority of stakeholders, rather than a central authority. In blockchain, it affects privacy, censorship resistance, and resilience—often overlooked by casual users. Although it’s the raison d’être of the crypto industry, we still lack a clear consensus on its meaning, making it difficult for newcomers to understand its importance. Let’s take a look at the concept of decentralization, and see if we can help clear things up a bit.
When discussing decentralization in the context of crypto, the emphasis is on the total absence of a central governing body. However, things are more complicated than that. First and foremost, decentralization is a spectrum, and there are no universal criteria to determine which end a protocol belongs to. Second, the level of decentralization is not set in stone, rather it changes pretty dynamically. Third, as the Columbia professor Tim Roughgarden says, the term decentralization is one of the most loaded words in the entire world of blockchain protocols, and if you ask 20 blockchain researchers what it means, you’ll get 42 different answers.
So why is the notion of decentralization so ambiguous and fluid in Web3? Join us in breaking down a few of the main definitions of decentralization.
Depending on the Sybil resistance mechanism the chain is using, i.e., Proof-of-Work (PoW) or Proof-of-Stake (PoS), the chain operators would be either miners or validators. In PoW chains, like Bitcoin for example, the decentralization in that sense can be measured by the cumulative hashrate and the number of entities it is divided into. Accordingly, that metric is proportional to how easy it is to acquire enough hashing (computational) power to join. In the case of Bitcoin, mining equipment is notoriously expensive, whereas profitability continues to decline, especially since the last halving event in April. In consequence, there is a growing trend of BTC miners pivoting to AI in pursuit of larger earnings, which contributes to Bitcoin’s centralization.
For PoS chains, that metric depends on the amount of the protocol’s native coin locked in a staking contract, and the number of entities that stake is divided into. Different protocol design decisions may influence the level of decentralization and even incentivize concentration of power, and Ethereum can serve as a great example. Even though it is considered one of the most decentralized and widely used chains, it installed enormous barriers to entry for validators when it switched to PoS in 2022.
This metric concerns the minimum hardware or computing requirements for verifying the correctness of the chain, without necessarily contributing to block production. In more details, it has to do with the CPU, memory, and storage needed in order to run a full node and keep up with the rate of transaction processing of a given blockchain.
With respect to this metric, Bitcoin is very decentralized, since it produces transactions and new blocks relatively slowly. On the other hand, Byzantine Fault Tolerance (BFT)-type protocols, like the Cosmos chains, require much more coordination between those running the protocol and may not be as decentralized.
The decentralization with respect to this metric depends on various factors, including the complexity of the technology, marketing efforts, and network effects. Not surprisingly, Ethereum and its Layer-2 chains have been consistently ranking at the top with the highest number of active developers. Having in mind that it is comparatively easier to build and get a chain off the ground on Cosmos than on Ethereum, it seems like the network effects are what tips the scales.
Yet, we should face the fact that the existing pool of blockchain developers is rather limited, and the industry simply cannot progress without onboarding Web2 professionals. That’s why building a smart contract platform in JavaScript, one of the most commonly used programming languages in the world, is Agoric’s trump card.
After a certain point in a blockchain’s lifecycle, the decision-making process should ideally be outsourced to the community. However, crypto protocols have been consistently struggling with low community participation and under-represented votes.
The most popular on-chain governance scheme assigns one vote per coin – a mechanism that creates several problems. First, it gives more power to the “whales”, and puts minority holders in an unfair position. Second, holders might have been airdropped and not even know they are in possession of a given coin. Finally, with the complex nature of blockchains, the decisions put to votes may require technical knowledge most holders are not privy to.
It can be argued that it shouldn’t be expected of a cryptocurrency to be evenly distributed, since wealth naturally concentrates. However, poor design decisions may lead to wealth concentration.
According to that metric, PoS chains are generally considered as incentivizing concentration, or making the rich richer. But, that’s not really true. In absolute terms, the staking reward is getting bigger as the stake gets bigger. Yet, if everyone is either staking or delegating, the currency distribution will remain absolutely the same.
This metric depends on various factors, including network capacity and congestion, supply and demand for transactions, malicious MEV extractors, etc. It suffices to say, though, that if users can’t afford to transact, the crypto industry loses its appeal as a viable alternative to the traditional financial system.
Arguably, the most important metric when measuring a chain’s decentralization is the distribution of control. It is the main characteristic that puts blockchains in obvious counterpoint to centralized systems’ single point of failure, and highlights their resilience and rigidity. Yet, the rest of the definitions listed above are equally important and should not be ignored.
The main question before us remains: While trying to onboard the next one million people into Web3, how to explain all these nuances to a newcomer? We should either come up with different terms for each of these concepts, or risk remain misunderstood forever.
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