Decentralization: How to Know if Your Crypto is Decentralized
Decentralization is a core value of blockchain technology. Its primary tenant is that the blockchain platform is run by a collective of people who are invested in the platform rather than governed by a small team. Many blockchain protocols tout decentralization as their governing system but many of the protocols sit on a spectrum of decentralization.
We’ll explain how decentralization works and how to measure whether a blockchain platform is genuinely decentralized. By understanding this concept, you’ll be able to assess a cryptocurrency protocol’s governance and decide if it is a cryptocurrency you want to invest in for the long HODL.
What is Decentralization?
In blockchain technology, decentralization is part of the platform’s governance and how the technology supervises the blockchain. As for governance, decentralization requires that decision-making for the protocol is decided by a majority rule of all token holders.
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In a centralized governance system, a small development team or a few individuals make all the decisions for the platform without input from their shareholders. By utilizing a decentralized system, all token holders have voting rights on all significant decisions made by the platform. This is designed to keep the platform from being corrupted by individuals with ulterior interests.
But not all platforms can be completely decentralized. In reality, it is more like a sliding scale depending on the application. Some applications benefit from decentralized governance, but it can make management difficult in other situations. It makes sense to utilize a decentralized model for:
- Solution components
- Data management
For example, if the network hardware resources were in a decentralized system, then the resources would be owned and shared by all the members, but it would be challenging to manage because it isn’t maintained in a single location. In this situation, a distributed network would be a better solution because it is spread across multiple data centers that a designated provider can manage.
Why is Decentralization Important to Blockchain Technology?
Decentralization is critical to blockchain technology because it enables:
A Trustless Environment for Heightened Security
Members are not required to trust each other for validating contracts on the blockchain because the contract must pass through several members, all with the same information. Thus the majority will rule on validity and isn’t reliant on a few reliable, trustworthy members.
Improved Data Reconciliation
All members have access to the data in a real-time, shared view because it goes to a general storehouse, keeping everyone in the loop equally. By doing this, there is less chance of the information becoming modified, distorted, or lost.
Reduced Points of Weakness
Because decentralization doesn’t rely on specific actors in the system, it can reduce points of weakness that could cause systemic failures because of a lack of resources, outages, bottlenecks, or insufficient incentives.
Optimized Resource Distribution
Decentralization enables the distribution of resources for better consistency and performance. The system doesn’t rely on a single source that could fail.
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How To Know If Your Crypto Platform is Decentralized?
While most blockchain technology, decentralized applications (dApps), and decentralized autonomous organizations (DAOs) adopt various levels of decentralization, most are not entirely decentralized. Each crypto project tries to find the right balance to maintain performance, reliability, security, and consensus.
We’ll explain how to assess a crypto platform to determine its level of decentralization. Most blockchain technologies run on two types of platforms:
- Proof-of-work: The decentralization is dependent on how high the hash rate is and how many mining entities the hash rate is distributed between. The higher the hash rate distribution among larger mining pools, the more decentralized the network is from attack. Example: Bitcoin and Ethereum.
- Proof-of-stake: The decentralization is measured by the number of validators (stake pools), distribution of the token supply across the validators, and the percentage of staked token supply. The higher the percentage, the higher decentralization. Example: Binance Smart Chain, Solana, and Avalanche.
Distribution of Token Supply
Token supply distribution is critical in proof-of-stake blockchains because it illuminates how decentralized the platform is based on how many validators are staking the majority of tokens.
For example, Binance has 21 approved validators that hold all staked BNB tokens. In contrast, Cardano has over 2,200 single pool validators that control 22% of the total stake. While Binance is less decentralized, it has higher performance, which keeps gas prices lower.
Accessibility also affects decentralization because it determines who can actually become a miner or validator for the blockchain platforms. In proof-of-work platforms, mining rigs can be cost-prohibitive because the more processing power you have, the more transactions you win. Bigger miners will win out in this situation, making it less decentralized because smaller miners can’t compete.
For proof-of-stake, accessibility is determined by how many tokens your validator has in its pool. Many of the platforms have minimums for becoming validators, which can be cost-prohibitive for ordinary people. But enterprising individuals can pool together tokens from other investors to become a validator, making it more accessible.
Governance and Development Distribution
When researching a crypto platform, you should evaluate how they govern the protocol. Do they control the decision-making, or do they allow the community to vote on the direction of the protocol? Some projects may start more centralized and become more decentralized as the project matures.
Most proof-of-work platforms embrace more decentralized governance, allowing their members to propose changes and vote for the majority. Many proof-of-stake blockchains opt to keep governance to the founding developers to achieve goals for their protocols.
Decentralization is a Powerful Feature of Blockchain Technology
As an investor, you’ll want to decide how much decentralization you would like to see in a crypto platform. You may prefer that the development team keeps governance rights but allows smart contracts to be validated by a large pool of validators. Or you may want voting power in the direction of the protocol. There isn’t a wrong answer. As an investor, you’ll have to decide what’s important to you.
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