This article gives an overview of What is Decentralization, Challenges Of Decentralization, Advantages and Methods.
Decentralization is the idea that power and control are shared by several nodes or network members as opposed to being centralized in one place. Decentralization is said to as a fundamental idea, advantage, and strength of blockchain technology. It is regarded as a method that offers a means of creating new apps or redesigning current ones to grant users complete control. Blockchain’s core tenet is that the network is not governed by a single central authority. In general, blockchains are utilized as decentralized platforms and are intended to be such. Transparency is the goal of this move away from conventional trust agents.
Decentralization is frequently compared to
Centralized Systems: These are traditional IT systems that are controlled and handled by a single server or authority. Every user is reliant on this one source. Traditional banking systems, Google, Amazon, and social media sites like Facebook and Twitter are a few examples of places where user data is governed by a central authority. Although centralized systems are easier to design, they have a single point of failure, are vulnerable to widespread hacking, have a large load, and have a monopoly that raises prices. They may be persuaded to divulge personal information by entities.
Distributed Systems: Components of these systems are situated on various computer resources, with processing and data dispersed across several nodes, frequently in several places. End users are intended to see them as a single, logical platform. Fault tolerance allows the system to frequently function even in the event that some nodes or connections fail. A distributed system can still have a central authority that controls the entire system, which is a crucial distinction from decentralised systems. Even though data may be dispersed, a central authority nonetheless manages and controls it. Several databases housed on cloud services such as AWS are among the examples.
In a decentralized system, several people share power and several individuals jointly own the ecosystem. Nodes do not rely on a single master node for support. There is no central authority; instead, decisions are made by the dispersed players. This is comparable to how departments within a company distribute power away from a central server to manage their own databases. Because a centralized server may be taken down somewhat easily, a decentralized system is more difficult to halt than a centralized one.
Why is Decentralization Needed?
The inherent issues with centralized systems need decentralization:
Single Point of Failure: Operations may come to a standstill if central systems malfunction. Decentralization spreads control and data, lowering this risk.
Lack of Trust and Transparency: Users’ data and transactions must be trusted to a central authority. Attacks or malevolent actors can undermine faith in centralized systems, which can be opaque. Decentralization builds confidence without the need for a reliable third party and offers transparency because transactions are frequently visible to participants.
Censorship and Control: Data and access are under the authority of central authorities, which may result in censorship or limited access. By eliminating this control, decentralization seeks to make systems unrestricted and impervious to outside influences.
High Costs and Inefficiency: In centralized systems, intermediaries frequently impose fees and cause delays. By eliminating these middlemen, decentralization might result in cheaper prices and quicker processes.
How Blockchain Enables Decentralization
One way to provide decentralization is using blockchain technology.
Distributed Ledger Technology (DLT): DLT includes blockchain technology. Every node in the network holds and maintains the ledger (database); no central authority is in charge of keeping it up to date. Every node maintains its own ledger and processes blocks on its own. Every actor has a copy of the database file. A copy of the ledger can be kept up to date by each user.
Decentralized Consensus: One significant improvement is that, instead of requiring a central, reliable third party, individuals may use a consensus mechanism to agree on a single version of the truth. This system controls the competition between nodes to determine the ledger’s current state and the legitimacy of transactions.
Peer-to-Peer Network: Without a central controller, participants speak with one another directly. This enables peer-to-peer transactions to take place directly.
Methods of Decentralization (Blockchain-Based)
There are two main ways to use blockchain to achieve decentralization:
Disintermediation: By doing this, third-party regulatory agencies are removed, enabling direct transactions between organizations. For instance, handling medical data without a central hospital system or delivering money without a bank. This deletion lowers expenses, boosts productivity, and protects privacy and security.
Competition: Authorized service providers are vying for clients in this situation. It avoids monopolies but falls short of complete decentralization. Smart contracts on blockchain may choose outside data sources according to their standing or level of service quality. One potential tiebreaker is the consensus process.
There are many levels of decentralization, ranging from traditional centralized systems to total disintermediation. Systems that are partially dispersed or centralized are sometimes referred to as decentralized. Partial decentralization is exemplified by competing intermediates.
Decentralization’s Levels and Features
Not everything is “all or nothing” when it comes to decentralization. Choosing the right degree requires trade-offs, especially when it comes to usability. Ethereum co-founder Vitalik Buterin examines decentralization from three perspectives:
Architectural: How many actual computers make up the system? Even if the majority of nodes are eliminated, a system that is decentralized along this axis can still operate. On this axis, Ethereum is decentralized.
Political: How many people or groups are in charge of the system? One organization or authority does not govern a system that is decentralized along this axis. Since the Ethereum Foundation cannot compel users to use their clients or adhere to a protocol, Ethereum is decentralized on this axis.
Logical: Does the interface/protocol seem to be one cohesive unit? If a system decentralised along this axis were divided, each component would continue to operate. Ethereum functions as a single computer and is not decentralised on the logical axis; separating it would prevent it from doing its purpose.
Another way to classify Blockchains
Another way to classify blockchains is by their permission mechanism, which affects decentralization.
Permissionless (Public) Blockchains: Anyone can read, write, and publish blocks to the ledger without requiring authorization from a higher authority. Decentralized consensus techniques, such as Proof of Work (PoW) or Proof of Stake (PoS), are frequently employed to incentivize non-malicious activity. Ethereum and Bitcoin are two examples. Parties with no prior knowledge or trust can participate in these systems. Most people agree that permissionless blockchains are very decentralised.
Permissioned (Private/Consortium) Blockchains: Only certain, approved users are able to contribute to the consensus process or publish blocks. Usually, an owner or consortia controls access. These networks can have different degrees of access and be either private or public. Permitted blockchains, which are sometimes compared to corporate intranets, are sometimes seen as partially decentralized or possessing a modifiable degree of decentralization. Compared to permissionless chains, they could be less decentralized.
Decentralization’s advantages
In blockchain technology, decentralization has many advantages:
- Trustless Environment: It is not necessary for participants to have faith in a central authority or in one another. Because altering one ledger copy would be rejected by others, integrity is preserved.
- Reduced Single Point of Failure: Because data is spread, the availability and security of the entire system are unaffected by the failure of a single node.
- Transparency: The system is subject to inspection since transactions are accessible to pertinent individuals (although not necessarily anonymous).
- Efficiency and Cost Savings: Eliminating middlemen can expedite procedures and lower related expenses.
- Increased Security: Because control is not centralized, decentralized networks are less vulnerable to specific assaults like DDoS or mass hacking. An attacker normally needs to control a majority (51%) of the network in order to breach a permissionless network.
- Fair Execution: Smart contract-encoded agreements can be automatically and equitably carried out under certain circumstances.
- Self-Managed Identity: Instead than depending on a central authority to issue and manage their digital identity, participants can create their own unique digital identity using cryptographic keys.
Challenges of Decentralization
Notwithstanding its advantages, decentralization is not without its difficulties:
- Scalability: Scalability/throughput and decentralization are inherently at odds. The transaction throughput of highly decentralized systems, such as Bitcoin, is lower than that of centralized systems. The Blockchain Trilemma (Correctness, Decentralization, Scalability) includes this. Although they have their own complications and possible security trade-offs, solutions like sharding are investigated to solve this.
- Designing Efficient Consensus Mechanisms: It is difficult to design scalable and effective consensus methods for a large number of dispersed, perhaps unreliable nodes.
- Storage Costs: Storage needs may grow substantial in networks where each node maintains a complete copy of the ledger.
- Balancing Privacy and Transparency: Transparency has advantages, but too much of it might compromise individual privacy. Complex cryptographic approaches are frequently needed to implement privacy features.
- Fraud Tracking: It might be challenging to trace fraudulent activities in decentralized systems that are very anonymous.
- Complexity: Compared to centralized systems, decentralized systems and DApps might be more difficult to design, set up, create, and manage. For users, managing private keys can also be difficult.
- Regulation and Governance: In decentralized systems, it might be difficult to define clear governance and adhere to laws.
Decentralization in the Wider Ecosystem
Decentralization encompasses not just the blockchain but also the components of the surrounding ecosystem.
Decentralized Applications (DApps): Programs that operate on a decentralized network. They frequently need users to operate a node or communicate with a decentralized network since they do not have a single central server. DApps are characterized by their use of native tokens, open source nature, lack of a single point of failure, and proof-of-value methods.
Decentralized Organizations (DOs), Decentralized Autonomous Organizations (DAOs), Decentralized Autonomous Corporations (DACs), Decentralized Autonomous Societies (DASes): This are blockchain-based software applications or organizations with variable levels of automation and governance rules built into the code.
Decentralized Finance (DeFi): A blockchain-based financial services ecosystem that functions without the use of conventional middlemen like banks. Decentralized exchanges (DEXes) are one example.
Decentralized Identity (DID): Gives people authority over their identification credentials, giving them the freedom to choose how and when to disclose information.
Decentralized Web (Web 3.0): A vision of the internet in which ordinary users regain control and are not dominated by a small number of powerful corporations.
Decentralized Storage: Instead of storing data on centralised servers, peer-to-peer networks may now store data because to technologies like Swarm and IPFS.
Decentralized Communication: Peer-to-peer communications is made possible by protocols like Whisper, which eliminate the need for a central service provider.