Decentralization of Blockchain Protocols
The topic of decentralization of Web3 networks such as Bitcoin, Ethereum and Solana is the subject of a lot of debate, especially among protocol maximalists on Twitter who ardently believe that the particular protocol they believe in is truly decentralized, whilst the others are wrong. Some of these arguments put forward by proponents are well-founded, others are less so, but looking at some of these public protocols, we can see different themes and approaches to decentralization emerging.
Decentralization in this context can be viewed through multiple lenses, be it
- based on where the network's nodes are running,
- the ease with which nodes can be added,
- how it's governed, or
- who its token holders are
Decentralization in Bitcoin, Ethereum and Solana networks
The Bitcoin network is considered the original decentralized network, having been bootstrapped by individuals running the Bitcoin client software to mine bitcoin. There were no investors or companies who helped get the network off the ground. Hence the distribution of the cryptocurrency was completely dictated by those individuals running the software. This is considered the gold standard of decentralization by some.
However, with the advent of dedicated bitcoin mining hardware and electricity costs being primer drivers for the profitability of mining bitcoin, a degree of centralization has emerged, as miners do benefit from economies of scale — hardware and electricity is cheaper when purchased in bulk.
The Ethereum network was launched via a crowd sale where investors deposited bitcoin into a wallet, in exchange for Ether that would be realised once the network launched. Critics do argue that because the Ethereum project took investments in this manner makes it less decentralized, but pragmatically speaking, anyone who owned Bitcoin could contribute to the crowd sale which made it a very transparent and fair process.
At the time of writing the Ethereum network relied on dedicated hardware and electricity like the Bitcoin network, but later this year will be transitioning to being a proof of stake based network where participants will pledge Ether to verify transactions. This approach doesn't benefit from economies of scale like the Bitcoin network's, so one could argue it is less centralized.
However, as there are no barriers to entry in terms of the hardware to participate on the network, it's likely that a significant portion of nodes on the Ethereum network could exist on centralized cloud provider infrastructures which brings its own centralization risk. Whereas the Bitcoin network nodes are likely running in their own dedicated data centres which are unlikely to be exposed to the cloud providers.
Whilst there are recommended hardware requirements used for running nodes on the Ethereum and Bitcoin networks, they are not forced upon users. Anyone can run the relevant client software and be a legitimate node on the network, relaying transactions to other nodes and potentially contributing to the overall state.
This software-based approach to decentralization, which allows anyone to run a node on the network comes with limitations to network throughput. Some other blockchain protocols have embraced hardware solutions at the expense of decentralization to increase the network throughput. Solana is a prominent example of this.
What this means is that users have to invest in some fairly hefty hardware to participate in the network. These sorts of optimisations will come with tradeoffs, but there is no right or wrong approach here, they are different approaches to solving problems that people have.
The Solana network is still relatively young, and its main network is still in beta according to its team (it's experienced some high profile outages), but I doubt the majority will care that it sacrifices some decentralization at the expense of higher transaction throughput and lower fees, provided the network reaches a point of stability.
Approach taken to govern blockchain networks
Whilst less contentious an issue than other areas of decentralization is interesting to also consider. Many Web3 protocols that have issued a token also have a non-profit foundation associated with them. This foundation is responsible for maintaining a treasury that is used to fund the development of the protocol. Often, especially in the earlier days of a protocol's development, there will be a single commercial company that is getting paid by the foundation to do the majority of the development. Then over time as the protocol gains traction (and the token appreciates in price…), more people and organisations will contribute to the protocol and funds will be allocated by this foundation.
The foundation is not responsible for governance or control of the protocol, merely supporting its overall development. The governance of the protocol is typically performed by individuals and companies who are invested in the success of the protocol.
Historically protocols including Bitcoin and Ethereum collaborate over governance using tools such as GitHub, which is considered an off-chain approach as these discussions take place using established Web2 platforms and are weighted by the reputations of the individuals or companies contributing to the conversation, rather than their actual holdings in the network. Hence whilst it is decentralized, it's not really using Web3 technology to perform the governance.
The Web3 community is acutely aware of these challenges, and there are Web3 approaches to governance that have evolved. The Polkadot network is notable for its approach to governance which takes place on-chain, where token holders vote on proposals that are weighted by their stake in the network.
Decentralized autonomous organisations (DAOs) also use on-chain governance models, where token holders who govern DAOs vote on proposals. Other platforms have sprung up to support this such as Snapshot which is used by a number of the major DAOs which have been established by Web3 protocols such as ENS, Aave and Uniswap.
These examples help illustrate how there are many different lenses through which the decentralization of blockchain protocols can be viewed. Whilst some of the driving forces for decentralization of these networks may be to eliminate centralized data silos, or provide resilience against bad actors, the most important thing is that they remain stable for the users who build valuable products and services on top of them and that a single person or entity cannot exert undue control over them.
Hence when we examine the types of decentralization trade-offs there is no superior, one size fits all approach, different platforms and services address different wants and needs of their users, regardless of what some of the maximalists may lead you to believe.
Have any questions or comments? We’d love to hear from you! If you want to find out more about blockchain technology, its growth, and newest developments, then check our blog or listen to our enlightening Blockchain Innovators podcast.
