Blockchain - Decentralization

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Decentralization is a well-established concept that has been implemented in strategy, management, and government for an extended period. The fundamental principle of decentralization involves sharing control and power with the outer regions of an organization rather than having one central entity solely in-charge. This structure offers numerous advantages to organizations, including improved efficiency, quicker decision-making processes, enhanced motivation, and decreased pressure on senior management.

What is Decentralization in Blockchain?

Decentralization is a fundamental advantage and feature offered by blockchain technology. The design of blockchain enables it to serve as a platform that eliminates the need for intermediaries, and can operate with multiple leaders selected through consensus mechanisms. This structure permits individuals to vote for the position of decision-making authority. The competition is overseen by a consensus mechanism, with the most well-known being Proof of Work (PoW).

The extent of decentralization ranges from a partially decentralized model to a fully decentralized one, depending on the specific requirements and circumstances. From a blockchain standpoint, decentralization can be seen as a tool that allows for the transformation of existing application, or the creation of new applications, in order to grant users complete control.

Types of Networks Systems

Traditionally, information and communication technology (ICT) has been centralized, with database or application servers controlled by a central entity, such as a system administrator. However, with the emergence of Bitcoin and blockchain technology, this model has shifted. Now, technology exists that enables anyone to establish and operate a decentralized system without a single point of failure or a sole trusted authority. The decentralized application running on the blockchain can function autonomously or with some level of human intervention, depending on the governance type and model in place.

The main network systems that exist in todays fintech industries are as follows −

1. Centralized Network
2. Decentralized Network
3. Distributed Network

These networks are explained in detail in the following paragraphs −

1. Centralized Systems

Centralized Systems, also known as traditional IT systems, are characterized by a single authority overseeing all operations and services. Users depend on this central source for all their needs, a model adopted by major online service providers such as Google, Amazon, eBay, and Apple's App Store.

2. Decentralized Systems

In Decentralized Systems, control is not centralized to one main node but is instead distributed among multiple nodes on a network. This setup is similar to organizations where each department manages its own database server, reducing the central server's authority and empowering sub-departments to handle their databases.

3. Distributed Systems

Distributed Systems involve the distribution of data and computation across various nodes within a network. While often confused with parallel computing, the key distinction lies in the fact that parallel computing systems perform computations simultaneously across all nodes to achieve results. This approach is commonly used in weather research, simulations, and financial modelling.

Methods of Decentralization

Two methods can be used to achieve decentralization: disintermediation and competition. These methods will be discussed in detail in the sections that follow −

Disintermediation

The concept of disintermediation can be elucidated through an example. Consider the scenario where you intend to transfer money to a friend in a different country. Traditionally, you would approach a bank, which, in exchange for a fee, would facilitate the transfer to the recipient's bank in the other country. The bank acts as an intermediary by maintaining a centralized database that records and confirms the transaction. However, with the utilization of blockchain technology, it becomes feasible to directly transfer the money to your friend without the involvement of a bank. All that is required is your friend's blockchain address.

By bypassing the intermediary, disintermediation is achieved, leading to decentralization. This disintermediation model is not limited to the financial sector but can also be applied across various industries such as healthcare, legal, and public services.

Contest-Driven Decentralization

It involves a competitive approach where multiple service providers vie for the opportunity to offer services within a system. While this method does not achieve complete decentralization, it does prevent any single intermediary or service provider from monopolizing the service. In the context of blockchain technology, a system can be envisioned where smart contracts autonomously select an external data provider from a pool of providers based on factors such as reputation, past performance, reviews, and service quality.

Although this approach may not lead to absolute decentralization, it empowers smart contracts to make independent choices based on the specified criteria.

Pertinent Terminology

The subsequent ideas are noteworthy in the context of decentralization. The terminology presented here is frequently used while pertaining to decentralization and its implementations.

Smart Contracts

A smart contract is a software program typically operating on a blockchain. While smart contracts do not necessarily require a blockchain to function, the security advantages provided by blockchain technology have made it a standard decentralized execution platform for smart contracts.

Smart contracts generally encompass business logic and a limited amount of data. The business logic is executed when specific criteria are met. These smart contracts are utilized by actors or participants in the blockchain, or they operate autonomously on behalf of the network participants.

Autonomous Agents

An Autonomous Agent (AA) is an artificially intelligent software entity that acts on behalf of its owner to accomplish certain objectives without necessitating significant intervention from its owner.

Decentralized Organizations

Decentralized Organizations (DOs) are software programs running on a blockchain and are founded on the concept of real organizations with individuals and protocols. Once a DO is incorporated into the blockchain in the form of a smart contract or a series of smart contracts, it becomes decentralized, and parties interact with each other based on the code defined within the DO software.

Decentralized Autonomous Organizations

Decentralized Autonomous Organizations (DAOs) operate as computer programs on blockchain technology, encompassing governance and business logic rules within their structure. Unlike DOs, DAOs are fully automated and incorporate artificial intelligence, distinguishing them from their human-dependent counterparts.

Ethereum blockchain pioneered the concept of DAOs, where the code itself governs the organization instead of traditional human or contractual oversight. Despite their autonomous nature, DAOs may still have human curators overseeing the code and evaluating proposals from the community, ensuring a balance between automation and human involvement. Additionally, DAOs have the ability to engage external contractors based on input from token holders, enhancing their operational capabilities.

Decentralized Corporations and Societies

Decentralized Autonomous Corporations

DACs are often seen as a subset of DAOs, sharing a similar concept. While their definitions may overlap, the key difference lies in the fact that DAOs are typically nonprofit, whereas DACs can generate profits through shares distributed to participants who may receive dividends.

With the ability to operate autonomously based on pre-programmed logic, DACs can effectively run a business without the need for human intervention.

Decentralized Autonomous Societies

DASes represent a unique concept where an entire society operates on a blockchain using a combination of complex smart contracts, DAOs, and DApps. This model does not advocate for a completely unregulated approach, nor is it solely based on libertarian principles. Instead, essential government services like identity card systems, passports, and records of deeds, marriages, and births can be efficiently managed through blockchain technology.

In cases where traditional systems fail to provide the necessary trust, societies have the option to establish their own virtual governance on a blockchain, driven by decentralized consensus and transparency. While this idea may seem like a dream for libertarians or cypherpunks, it is a feasible reality within the realm of blockchain technology.