It was long assumed that banking and currency policies had to be defined by central banks, governments and authorities. Those powerful entities take critical decisions with an often-criticized lack of transparency, and are subject to corruption, and are costly, and usually take less than optimal decisions because they cannot aggregate/process enough information to operate.
Through clever use of the blockchain technology, Bitcoin proved that anyone could safely store and transfer value without relying on the existing banking infrastructure. Subsequent blockchain technologies further expanded the scope of this revolution by introducing decentralized voting, ownership and finance. By following the principles of “Code is Law”, open-source blockchain technologies bring unmatched transparency to their users. Anyone can understand and verify the rules of the game, and even act upon them through decentralized voting systems.
Decentralization sets a trust-free environment without central authorities, in which censorship is avoided, and costly middlemen are not needed. Users of decentralized platforms play an actual role in their function and governance, instead of following rules they have no say about. However, Blockchain comes in multiple flavors, each with its own twist.
Not all blockchains are made equal
In late 2017, after another large crypto rush, it became crystal clear that Bitcoin and Ethereum had scaling issues. All-time high congestion and fees gave birth to a trend focused on creating new crypto-currencies capable of processing more transactions per second. Very quickly, it was found that protocols sustaining thousands of transactions per second somehow had to sacrifice either security or decentralization. This phenomenon was coined the scalability trilemma — which is not a theorem, and as Vitalik Butterin said, “the trilemma was never an impossibility result, it was claiming that getting 3 of 3 is *hard*”.
Recently a series of events highlighted the consequence of such sacrifice:
- In February 2020, IOTA was shut down by the team when a vulnerability was exploited in the IOTA wallet. This is a clear example that their system is not decentralized and is controlled by the developers.
- On Thursday, February 25 2021, the Fantom Network stopped producing blocks for 7 hours. As stated by the Fantom Foundation, “One of the biggest validators slowed down the block emission, which caused a second big validator to slow down as well. The other validators kept producing blocks, but the two lagging ones were not able to catch up. These two validators are big enough to represent more than one third of stake, and they caused a domino effect that halted new block confirmations”. This issue showcases the need to increase decentralization through both more nodes and a better distribution of coins.
- Solana, one of the supposedly fastest blockchains, recently suffered from a series of attacks. Those attacks exploited flaws in the system introduced as a result of sacrificing decentralization and security for speed.
Issues with current chains
All these events highlight the importance of decentralization. Overall, decentralization can be compromised at several levels:
- Coin centralization: In Proof-of-Stake systems, the coin distribution is particularly important as it allows people to earn rewards but also to vote on the evolution of the protocol (as in Tezos). In many systems a small number of entities is sufficient to control the whole network.
- Centralization of power:Since rewards are extremely infrequent for small miners in Proof-of-Work systems, people tend to pool together in order to smooth the rewards over time. This leads to indirect centralization. As of now, the 4 largest mining pools of Bitcoin and the first two of Ethereum are enough to reach 51% and jeopardize the whole system. Proof-of-Work systems also favor hardware manufacturers that are able to create more efficient hardware. Proof-of-Stake can also suffer from a form of centralization of power through delegation or custodian staking. For instance, the three largest bakers in Tezos are exchange platforms, and delegators can have as much as 10 times the amount they own delegated to them. Those actors get a disproportionate amount of power over the network.
- Entry price: As Vitalik rightly points out, it is crucial that anyone can run a node. Many current protocols require a large initial investment from node runners, in hardware and coins. For example, running a node on the Fantom network currently requires 500,000 FTM, more than $175,000 and 2,000 AVAX on Avalanche, around $48,000.
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