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AAX Trends

Food for thought: Decentralization Explained

Food for thought: Decentralization Explained

Explainers DeFi

05 Jul 2021

Philosophy aside, the currently commonplace model of centralized governance is highly flawed. The system has abundant loopholes that can be easily exploited for any number of malignant purposes ranging from base corruption to abuse of power.

The concept of centralization, best illustrated by democracy that relies on delegating one’s personal right to decide on critical issues to another is flawed at the core, considering that corruption and deceit for the purpose of gaining such delegated authority are often the underlying driving forces of election campaigns launched by candidates. This is not just in reference to recent elections in the US, but to most contemporary politics ranging from Brazil and Myanmar to Austria.

Practicality and historical evidence show that centralization has seldom worked in favor of the masses answering to a higher authority. In a monarchy, the concept of handing down power through hereditary title has led to a painfully familiar series of events, where the dynasty-founder is a hero, his son – a mediocrity, his grandson – a halfwit, or a monster, and his great grandson – probably both.

Modern democracies also suffer with elected candidates failing to act on their pre-electoral promises, or blatantly acting against the majority, which should be the interest-setting basis of a democratic system.

Towards decentralized governance

Such unfairness and open corruption have spread well beyond the political arena into the financial sector as well, all leading up to the development of decentralized digital environments. These peer-to-peer platforms could act as havens for users seeking fairness, trustless interaction and, most importantly – governance models that allow the combined voting of individuals to have a direct impact on decision-making processes without the involvement of elected authorities for delegation of responsibility.

The advent of the decentralized economy and digital space of interaction has automatically given rise to governance models suitable for such environments. Decentralization has taken on many forms since the development of Bitcoin as the original pioneer of the concept, but the general trend has always been focused on ensuring order and compliance with rule sets embedded in the principle of decentralized governance.

Decentralization is not the same as anarchy, but rather a system that combines the concept of individual voting and execution of majority-based decisions under the control of a technology that would ensure fairness, transparency, compliance, and conduct of the entire process chain.

In a decentralized autonomous organization, or DAO, the participants are bound by a common framework that is based on mutual respect, some degree of anonymity, equal voting rights, and a common goal, which is often the community interest supporting and profitable operation of the DAO as a whole.

Given that the financial aspect is still at the core of most DAOs, voting processes are also largely focused on refining the system for higher profitability. If the same concept were to be transferred from the digital decentralized finance environment into the real-world’s political arena based on the same supporting technologies, then governments with representatives, prime ministers or even presidents would become redundant.

Decentralization versus security and scalability

In the modern financial world, intermediaries are largely opaque, with centralization being the norm. In such an environment, the wishes, preferences or even suggestions for improvement of users are almost meaningless, thus making the system cumbersome, inflexible, inconvenient, and ultimately – costly. In stark contrast, the Bitcoin network is fully decentralized, because it is based solely on the consensus of the miners and does not involve any so-called trust dealers – intermediary organizations supervising the operation of the system and guaranteeing fairness, like the SEC, commissions, banks, etc.

But there is always a tradeoff at the price of blockchain scalability, security, or decentralization itself, since an optimal combination of all three concepts in a single system is difficult to achieve from a technical point of view. That is why many crypto projects claiming to be “fully decentralized” are deceptive in their claims, since high security will require some manner of centralization, full decentralization will lead to scalability problems, while a high degree of scalability will result in low decentralization.

Such is the trilemma of the decentralized environment that always bears the risk of growing into a centralized one if a large set of validating nodes come together based on common interests and limit the ability of individual entities within the system to have any bearing on its functioning, thus negating the power of voting. The Bitcoin network is still largely impervious to such a threat, since the miners are independent and guided by their own motivation to mint coins under the guidance of the system, which determines their profitability through mechanisms like the halving.

Decentralization and security are the key factors that take precedence over scalability, as users are ready to sacrifice it in favor of fairness. Unlike Bitcoin, which adheres to its core principles, the Ethereum network and the many “decentralized” projects operating on it are subject to the inherent vulnerabilities of the system, which are being intensified by unclear development paths, consensus algorithm shifts, and node sync issues.

Bitcoin is a fortress of security and decentralization, albeit poorly scalable, as proven by the lack of any serious attacks on the network or reorganization efforts. The gradual inclusion of upgrades into the Bitcoin network like Taproot and BIP 300, combined with the fact that the network does not suffer from gas price hikes, makes the Bitcoin algorithm the current etalon of a decentralized system that avoids the pitfalls of voting manipulation or financial constraints.

Continue learning: “Cryptocurrency And Regulated Capital Markets: Opportunities Beyond Polarity

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