Primer – Decentralization forms the core focus of blockchain technology and Web 3.0, yet it is a poorly defined and misunderstood concept. In this article, we shall understand decentralization and its importance in the context of blockchains.
What is decentralization?
Decentralization describes a distributed network where power and decision-making are transferred from a centralized entity to all network participants or nodes. Vitalik’s article explains the concept in-depth and highlights the existence of three separate axes of software decentralization. These axes are
- Architectural decentralization describes the number of computers connected to the network and how many it can tolerate breaking down simultaneously. The higher the number, the greater the degree of decentralization.
- Political decentralization is the degree of control an individual or organization exercises over the network’s computers. The network is centralized if a single entity controls over half of the computers.
- Logical decentralization addresses whether the system’s constituent parts could operate as independent units if the system were cut in half; is it managed and maintained as a single monolithic object or resembles an amorphous swarm.
Understanding these axes is imperative to understanding decentralization in the blockchain. Blockchains are politically and architecturally decentralized but logically centralized systems.
- Architectural decentralization – no infrastructural point of failure.
- Political decentralization – no single entity controls blockchains.
- Logical centralization – one commonly agreed state.
The architecture of blockchains is global, implying significant tolerance towards fault, attacks, and collusion. Anyone can join the network as long as the rules are complied with. It is open-source, so maintenance and integrity are shared across the entire network, and there is no single point of failure. However, logically it is centralized as it behaves like a single virtual computer with consensus on an agreed state at any given point.
Why is decentralization important?
Blockchains provide a decentralized solution based on peer-to-peer network architecture. These networks facilitate communication and transactions in a trustless manner without any central point of governance/authority. All information is publicly accessible to the network participants who are entrusted with validating the legitimacy of the data by utilizing cryptography. The arrangement ensures data is distributed among all participants (nodes) who work to achieve consensus over the current state of the ledger. The absence of centralized authority makes them maximally resistant to a single point of failure, meaning the network’s functionality remains unaffected in the event of a hacked/rogue node. Moreover, modifications and alterations aren’t possible unless the majority of the network participants agree, significantly lowering the chances of a coordinated attack or an effective manipulation.
Trustless and Empowering
A decentralized blockchain network doesn’t require network participants to trust each other. Each participant has access to the same data ensuring high levels of transparency and prohibiting malicious acts as any wrongdoing on the network is quickly exposed. If a node’s record has been altered or corrupted, it will be identified and rejected by other nodes on the network, thereby removing trust from the equation.
In addition, every node on the network has equal authority/power facilitating an empowering environment where anyone can be part of the network by simply complying with the defined rules. Unfortunately, traditional centralized systems lack an open environment for participation and collaboration, making them susceptible to collusion.
Secure and Fault-tolerant
The lack of a central authority governing and running the system and the broad distribution of participants makes decentralized blockchain networks difficult and expensive targets to attack and manipulate. Moreover, decentralized systems feature an independent setup of nodes that can communicate with one another. These connected but separate entities provide fault-tolerant properties, so even if one node breaks down or fails, the other nodes will continue to operate and not incapacitate the network.
Disintermediation
With their peer-to-peer architecture, decentralized networks eliminate reliance and interference from third parties, contributing to higher speeds and lower costs. Decentralization helps resource optimization by streamlining the operational process furnishing enhanced performance and consistency.
Limitations of Decentralization
Decentralization has numerous advantages, but one cannot overlook the practicality of its application. In the following section, we shall explore the two major limitations of decentralization.
Scalability
Scalability is a significant challenge affecting blockchain development and its widespread adoption. The extent of the problem is evident in the emergence of an entire sub-sector (Layer 2 solutions) dedicated to optimizing network performance. Unfortunately, a network’s ability to scale, defined by throughput and latency, has limits. Traditional institutions like Visa, with centralized infrastructure, can process 1700 transactions per second (TPS), whereas Bitcoin can process only 7 transactions per second. The vast difference can be attributed to blockchain networks’ utilization of excessive processing power and time to achieve decentralization. Transactions on decentralized networks must go through several steps comprising acceptance, mining, distribution, and eventually validation by a global network of nodes.
A widely held belief popularised by Vitalik Buterin, The Blockchain Trilemma highlights the three essential and organic properties of blockchain – decentralization, security, and scalability cannot perfectly co-exist, implying any network can achieve only two of the three aforementioned properties. Historically, blockchains have prioritized decentralization over the other two properties, reflected in the low transaction volumes. However, some new blockchains offer greater throughput and functionality by focusing on scalability as opposed to decentralization.
Storage
The peer-to-peer nature of decentralized networks requires every network participant to maintain a record of every transaction on their server. To be able to meet this requirement, nodes need to make provisions for heavy storage. The ever-growing storage adds to the cost of maintaining and operating the network. Additionally, this could lead to a loss of nodes if the immutable ledger’s growth surpasses the node’s ability to download and store all necessary data.
Most blockchains that run dApps on the network tend to put only the transaction data on-chain with heavy reliance on off-chain solutions and centralized storage services.
Permissioned and Permissionless Blockchains
Decentralization enables networks to deliver immutability and permissionless participation. However, this feature comes at a cost reflected in the low transaction throughput. The level of decentralization is thus an important concern that needs deliberation of other associated caveats. For example, Is decentralization the goal, or does it operate on a spectrum? Nominal or effective decentralization? Fully decentralized or Partially decentralized?
Different use cases demand different variants of the same technology leading us to the discussion of two fundamentally different blockchain models, Permissionless and Permissioned Blockchains.
Permissionless Blockchains
Anyone can join the network, access information, and participate in consensus validation. Permissionless blockchains are decentralized and open to the public and, as such, referred to as trustless or public blockchains.
Permissioned Blockchains
In contrast to permissionless blockchains, permissioned blockchains are closed networks requiring users to seek permission to participate in the network. Often referred to as private blockchains or permission sandboxes, these blockchains are partially decentralized in that the members ascertain the level of decentralization and the consensus algorithm to be deployed.
Comparison
Permissionless networks are censorship-resistant and offer high levels of transparency which proves beneficial for speed and reconciliation between unknown parties. The decentralized architecture ensures greater security and reliability as there is no central repository to hack. A major drawback associated with their use is limited scalability that stems from the need for significant computational power for network-wide transaction verification.
Permissioned networks are more efficient in comparison. They’re faster as fewer nodes manage verification and consensus. In addition, these private networks are highly customizable. However, these networks do not offer the same level of security as permissionless networks. Like traditional systems, their security is dependent on the integrity of the members and is susceptible to manipulation. Individuals with malicious intent can easily skew the network in their favor. Infiltration of such kind is difficult in the case of public networks as the bad actor would have to take over more than half of the computing or hashing power (~51%) to override the consensus mechanism.
To summarize, permissioned blockchains are private and more centralized when compared to the public and fully decentralized permissionless blockchains. Permissioned blockchains are more suited for applications that demand higher levels of privacy, such as insurance settlement, internal voting, and supply chain management. In contrast, permissionless blockchains have use cases in crowdfunding, digital asset trading, and donations.
A lot of blockchains claim decentralization, but in reality, the storage and scalability limitations have made them heavily dependent on the centralized storage services and other underlying Web2 infrastructure.
Can a blockchain be decentralized on the cloud?
Proponents of decentralization question the reliance of blockchains on centralized cloud servers. For perspective, a significant portion of the Ethereum network is hosted on AWS, a cloud service by Amazon. Let’s examine the implications of this dependence.
Blockchains are often categorized as decentralized networks that operate independently of financial institutions and corporations, but the harsh reality is that several blockchains utilize centralized cloud services for hosting. For example, more than 50% of Ethereum nodes run on the cloud, and the same is true for Solana. One could argue that node distribution eventually contributes to decentralization, but the problem is deepened by the uneven distribution of nodes worldwide.
Centralized cloud servers such as AWS, Azure, Alibaba Cloud, Google Cloud Platform, DigitalOcean, and Hetzner, host nodes of major blockchains. Theoretically, the functioning of dApps on these blockchains could halt if the clouds shut down or face an outage. A major issue today is the development of dApps through centralized services. So what explains blockchains’ overt reliance on such services?
Centralized cloud servers
With their robust data storage capabilities, centralized cloud servers have fostered a system that makes it easy for blockchains to deploy their nodes on the cloud. The setup enables blockchains to enhance their functionality and benefit from the cloud’s unlimited resources and efficient on-demand services. Clouds are the optimal choice because deploying nodes on them is cheaper, more accessible, and doesn’t require dedicated equipment/infrastructure. Still, their use has created an excessive dependency that has serious drawbacks, with the cloud’s centralized architecture of paramount concern.
First and foremost, a centralized structure implies a single point of failure. While current tools help thwart attacks, they aren’t foolproof and are therefore subject to several vulnerabilities, including hacks/breaches and internal leaks. Most dApps running on major blockchains host the front end on centralized cloud servers. These decentralized applications are built mainly on the cloud and interact with the blockchain on the backend via smart contracts. This arrangement introduces another concern with respect to data privacy and integrity as information is collected, transferred, and stored on the cloud, necessitating trust in the cloud’s services. Lastly, downtime/outage cannot be ruled out with centralized servers. Disruption in service is a serious concern that can prohibit real-time access to data.
In summary, what’s at stake is the true decentralization of the blockchain ecosystem.
In the following section, we shall discuss a Layer 1 blockchain aimed at eliminating dependence on cloud servers and re-introducing decentralization into the technology development stack to deliver a genuinely decentralized WORLD COMPUTER where dApps can run fully on-chain.
Aiming for Ultimate Decentralization – Internet Computer
Internet Computer has positioned itself as the only offering that makes it possible to build anything end-to-end on a blockchain.
What is the Internet Computer?
Internet Computer is an infinitely scalable general-purpose blockchain that delivers a decentralized Internet by running smart contracts at web speed. It permits developers to install smart contracts and dApps directly on the blockchain. It can be referred to as a sovereign decentralized network sans cloud computing services (read AWS) to deliver web content. In short, it combines the best of blockchains and decentralized cloud services.
Hosted on node machines and operated by independent parties who’re geographically separated, the internet computer nodes run on ICP (Internet Computer Protocol). ICP is a secure cryptographic protocol that ensures the security of the smart contracts running on the blockchain. The Internet Computer is a network comprising individual subnet blockchains that run parallel to each other and are connected using Chain Key cryptography. This implies canisters (smart contracts on IC) on one subnet can seamlessly call canisters hosted on different subnets of the network. Another notable feature is the network’s decentralized, permissionless governance system NNS (Network Nervous System), which runs on-chain. NNS is designed to scale the network capacity when required. It does so by spinning up new subnet blockchains.
Internet Computer is committed to providing a platform allowing developers to build and host web dApps utilizing built-in mechanisms. Their plan includes making IC a decentralized Certificate Authority and providing a decentralized Domain Name System (DNS) on the IC. IC’s rationale behind this commitment is to achieve true decentralization. Most browsers today use PKI (Public Key Infrastructure) systems that assume centralized trusted third parties to serve as roots of trust (certificate authorities).
An update that will enable IC to march closer toward its goal of decentralization includes integration with Bitcoin and Ethereum. Displacing bridges and the need for wrapping, the Internet Computer, through Chain Key cryptography, establishes a direct connection with the BTC ledger providing a trustless foundation for DeFi projects utilizing Bitcoin. It empowers developers to create canister smart contracts equipped to communicate with Bitcoin. IC plans to leverage this unique offering to Ethereum as well. In simpler words, a smart contract on IC can directly pass messages and not just tokens, between the networks. It thus enables token logic to be on Ethereum while the build front-end middleware on IC. IC’s integration with Ethereum and Bitcoin will eliminate dApps’ dependence on servers like AWS and Azure. Moreover, it will bring advanced smart contract technology onto the Bitcoin network and enable developers to benefit from the massive liquidity of the network.
Conclusion
Blockchain has extended its use cases beyond finance, changing several industries including insurance, healthcare, and gaming for the better. The reliance on Web2 infrastructure has created a massive dependence that goes against the ethos of decentralization. IC is working to be the first blockchain to bring true decentralization.