Core Principles of Decentralization

How Cryptocurrency-Based Marketplaces Work

In history, centralization has generally been strong and decentralization has been weak. Metaphorical language about how power is gained gives you an immediate impression of centrality — phrases like amassing power or aggregating power, evokes the “centerness” of power.

But centrality is also weak in it’s own way typically due to lack of scalability of trust-at-a-distance as well as being poor at representing the interests of people who tend to be geographically decentralized. Hence the emergence of the pattern of Federation where we superimpose a “central centrality” on top of a set of “regional centralities”, as we have in the United States (and many other nations.)

In the world of data, the relational database has been the technological heart of centralization of power, enabling extreme scaling of centralized transaction processing ledgers.

The topic of decentralization is big in crypto, but in many ways poorly understood. For example, the topic of “decentralized exchanges” in crypto often veers into distributed computing topologies when in fact the decentralization of where the computers are is not the most important topic. The decentralization that matters is the decentralization of power. In the case of exchanges it can be seen simply by asking the question “who controls the private key to your wallet”. That is who has the power.

So henceforth when I use the term “Decentralization” I am talking about the decentralization of power, not compute resources, not the location of data. Obviously the permission of who can access the data is what matters, not where it’s stored.

If you want to decentralize power, you have to solve the problems Satoshi Nakamoto solved, which include:

Enable Trust-at-a-Distance: How can you trust someone you can’t see? Different forms of power require different forms of trust, and there is not a general solution the the problem of Trust-at-a-Distance. In the case of Bitcoin, one important principle of trustworthiness is the consensus protocol itself that creates a mutually agreeable common “reality”. Interestingly the partial anonymity of Bitcoin can decrease trust-at-a-distance, although this is solved by other privacy coins such as ZCash or Monero. Secure the Network: Essential for securing Bitcoin is the immutability of the ledger as well as the use of hash power “proof-of-work” to ensure cryptographic security of the blockchain. Providing security is of course a way to discourage certain classes of free-riders such as hackers, but these categories are broken out here because some token projects may have separate features for securing the network and for discouraging free-riders. Penalize or Discourage Free-Riders: Economic free-riders are those who take value out of your network and are the causes of externalities (costs borne without consent). If you are seeking to rid a network of free-riders, it helps to identify a measurable externality. The quantification of a measurable externality begins the process of understanding the cost of disenfranchisement and the value of participation in the network. Without measurability it’s difficult to create a fair system. One of the easy targets for decentralization are simply externalities associated with centralization. Examples include insider-dealing or corruption, centralized data vulnerable to mass hacking, simple inefficiencies at scale, and many others. Incentivize Heterogeneous Value Adding Groups: Creation of a market requires incentivization of those who add value to the marketplace as a whole. In Bitcoin this includes users who transact, users who invest longer term and miners. It also includes developers. Provide a way to Evolve the Platform: This includes the realm of governance over the code base, updates to the protocol and reference implementation (for Bitcoin in the form of BIPs) and forking.

There are other problems solved but these are the high level problems that need solving at a minimum for any decentralization of power. This could be used as an analytic framework for understanding the eventual value of any ICO token.