Since its inception, blockchain has promised to make trusted third parties redundant. In practice, though, whether blockchain is actually decentralized depends on what is governed and how this governance is enacted. As more businesses explore blockchain this distinction becomes increasingly important. There are many expected benefits from decentralization and those benefits may elude us if decentralization fails in practice.



How blockchain governance is enacted—what people do in practice—can differ considerably from how blockchain governance is envisioned—what people aspire to do. There is no one commonly agreed upon definition of blockchain, but according to one often used in the common discourse, a blockchain is a distributed ledger shared by multiple parties who can add transactions to the ledger. Blockchain’s proponents expect it to be virtually immutable without being centralized, meaning that blockchain would not require a trusted third party that decides upon the ledger’s content. Bitcoin, the first blockchain implementation, has succeeded in allowing for digital payments without having to rely on any trusted third party.



Such decentralization is expected to bring cost savings (through disintermediation), and empowerment to participants, since the parties using the blockchain do not need to trust a powerful third party to act in their best interest. We can understand this contradiction by identifying the different ways Bitcoin– as a prototypical example of blockchain– is governed, both in its envisioned form and in practice.



Four dimensions of Bitcoin governance

Governing new transactions

Millions of people use Bitcoin and anyone can submit a transaction. Users pay sometimes hefty transaction fees to encourage quicker validation of transactions. Consequently, users unwilling to pay high transaction fees may either choose to not transact at all or have to wait longer to get their transactions validated.



Governing consensus

New transactions need to be validated to become part of the blockchain. A consensus mechanism specifies how to get multiple nodes to agree on whether a transaction is valid and should be added to the blockchain. In Bitcoin, it is envisioned that anyone can validate and add transactions.



Despite envisioned decentralization, the high cost of mining has led to considerable centralization of consensus in practice. This resulted in just a few mining pools validating most transactions. At the same time, mining pools charge miners for participation, with larger mining pools charging more. So while in practice achieving consensus is more centralized than it was envisioned, a certain degree of decentralization is still retained.



Governing updates

Once the blockchain is operating, updates to the blockchain protocol may be needed or desirable. In Bitcoin, it is envisioned that anyone can develop and suggest protocol updates. In practice, however, these changes are typically proposed by only a handful of developers and the discussions are highly centralized, with a small number of commenters provide significantly more comments than the rest.



Governing the design

Before, before the blockchain starts operating at all, the blockchain protocol needs to be designed. Second is that there has been little debate on whether the initial design should be decentralized or centralized — which is surprising given the enthusiasm around decentralization in blockchain. In practice, the protocol development is typically highly centralized and coordinated.



Distinguishing between envisioned and enacted blockchain governance



The Bitcoin example shows us how real-life blockchain governance can differ significantly from how it is envisioned. For transaction submission and validation, as well as protocol updates, enacted governance appears to be considerably more centralized than envisioned governance. We can see that in practice the dimensions that are design-related (protocol development and updates) tend to be marked by particularly centralized governance, while those that are related to the actual use of blockchain (transaction validation and submission) tend to be somewhat more decentralized.



Since blockchain technologies debuted, we’ve learned that despite how they were envisioned, governance is often more centralized in practice since decision-making power is often costly to acquire and exercise.



Bitcoin is a permissionless blockchain. For permissioned blockchains such as IBM’s Hyperledger Fabric, which restrict who can propose protocol updates, validate transactions, and submit transactions blockchain governance is envisioned to be more centralized than for permissionless blockchains such as Bitcoin’s.



Weighing the potential for decentralization



The promise of blockchain is decentralized governance. First, decentralized governance is not a necessary feature of blockchain; Second, the benefits of decentralized governance may not always be worth the associated costs. Even the decentralization of transaction validation may not always be superior, as Bitcoin’s slow and energy-intensive consensus mechanism demonstrates.