“Decentralization” is an ubiquitous word in the discussion, marketing, and governance of crypto, but I find it to be confusing — and confused. Sometimes people tout decentralization as a primary benefit when they seem to care about a different characteristic instead. I’m not sure decentralization is important for its own sake; instead, it seems good for other things. I think we should speak simply about those other things, rather than using “decentralization” as a catch-all.
In this blog post, I identify those other things. We can speak more precisely about the nature and benefits of decentralized systems, whether they be smart contract protocols, blockchain networks, or anything else. Many of these characteristics are the primary advantages of the new financial system being built on public blockchains — a system perhaps misnomered “DeFi.”
These are my independent thoughts and do not necessarily represent the views of my employer.
Fairness. Sometimes, people mean that decentralized systems are fair. Fair systems preserve no privileged positions. Satoshi has the same rights within the Bitcoin network as you or I. Fairness is good because it sets everyone equal, empowering everyone with maximum agency.
In a regulatory context, the extent to which someone has a privileged position in a system is essential to evaluating their “control.” If someone has control, it may be reasonable to give them regulatory obligations; but if everyone is equal, singling out a single actor may be arbitrary.
Information symmetry. Relatedly, people sometimes mean that decentralized systems naturally provide symmetric information to everyone. The Hinman Speech explains that the centrality of an issuer or promoter to the success of an enterprise implies disclosure obligations. However, the cause of the obligation is that the central party has asymmetric information that is likely of material importance to investors. It’s information asymmetry that is most relevant, not decentralization purely.
Openness. Sometimes, people mean that decentralized systems are open. Everyone can run a Bitcoin node, compete in the proof of work competition, and broadcast transactions. There are no gatekeepers.
Open systems are more accessible to more people. Lower barriers to entry also facilitate innovation, increasing the pace and possibility of user-beneficial improvement.
Verifiability. Sometimes, people mean that decentralized systems are easily verifiable. When decentralized systems allow anyone to participate in the network, every user can verify the results of a transaction for himself. This increases the trustworthiness of the system.
Relatedly, decentralized systems are often verifiably open source, which means users can know exactly what will happen when they use a program. This enables better risk management and safer, community-reviewed software. “Transparent” could be a synonym for “verifiable.”
Resilience. Sometimes, people mean that a decentralized system is more resilient because it does not require a specific actor to function. If one actor fails, another can take its place. For example, the Bitcoin network continues while just two node operators run the software. Or, users can continue to use the system without the failed actor: users of many Ethereum L2s can withdraw funds and effect transactions on the L2 without having to rely on the sequencer. When there is no single point of failure, systems have higher uptime.
Lack of intermediation. Traditionally, people mean that decentralized systems lack intermediaries. Such systems can decrease costs, trust requirements, and time delays when compared to traditional systems. Many decentralized systems, like Ethereum or Aave, enable complex transactions that are still peer-to-peer.
Immutability. Decentralized systems must also be immutable, because if no one has a privileged position then no one can upgrade the protocol without everyone else’s concurrent adoption. This kind of software is more reliable for users, who can trust that the rules of the game won’t change on them.
Censorship resistant. Perhaps the most important derivative of decentralization is censorship-resistance, which is the ability to execute a transaction in adverse conditions. Because Bitcoin has abundant and diverse node operators, it’s easy to execute a transaction in the face of censorship by finding a few friendly node operators to submit your transaction. This is important for maximizing human freedom.
Decentralization is a spectrum. It’s probably the case that all of The Other Things are necessary for something to be ‘truly’ decentralized, but nothing is sufficient alone.
But who cares? Decentralization is not good for its own sake — it’s good for The Other Things. If a system has intermediaries, such as an intent-based bridge, it may not be purely “decentralized.” But it’s still good for users if it’s fast, cheap, and resilient. Or, if a blockchain has a permissioned validator set (i.e., it is not maximally “open”), it is still safe if users can re-execute transactions with their own full node (i.e., it is “verifiable”) or overcome L2 censorship with an L1 contract call (i.e., it is “censorship resistant”).
It’s also the case that many projects claim to be decentralized when they really aren’t. The full assessment of a project’s technical decentralization is complex and intensive, but it may not even be necessary. Focusing on the specific benefits provided by decentralization, like immutability, verifiability, fairness, openness, and censorship-resistance is a more consumable exercise, and I think it’s more helpful for users. We should focus on whether systems provide users with those benefits rather than whether systems meet some Platonic ideal of “true decentralization.”
These are my independent thoughts and do not necessarily represent the views of my employer. Thank you to some friends who provided comments.
Gyges Lydias
