What Is Decentralization?

Decentralization (the absence of an authority or of a vulnerable single point of failure) is one of the major benefits of Bitcoin. But what is this feature good for? It is not an end in itself. It is only a means to an end – unstoppability and robustness of the whole system. There is no single point (human, company, server) that can be attacked, coerced or influenced in order to stop, destroy or change the system.

Centralized vs decentralized structure. Red node = risk, if we destroy it, the network will break down.

Why should we care about decentralization?

The central key points of the systems, however well-secured, are always a weakness. Central databases are the target of hackers, central authorities that concentrate power are prone to corruption, central planning is often inefficient and slow, and vulnerable to attacks.

A decentralized system is one that does not have any particular leader, society, state, or other authority that controls and makes decisions about it. Trying to hack into a truly decentralized system is about as effective as shooting a gun in a swarm of bees.

If decentralization is so good, why everything is not decentralized? Centralized systems have advantages. In most cases, they are more organized because they are easier to control and control. It is easier to change the writing in a centralized database than to synchronize multiple nodes in a decentralized one (it is better to have all the applications in one mobile phone than having one for each separately).

There are several types of decentralization (such as geographic, political, development, protocol) and multiple levels. Decentralization is a scale: some systems are more decentralized, others less. For example, the German government is less centralized than the government of North Korea, but more than the government of Switzerland (in which a direct democracy works to a large extent).

Here are a few examples of decentralized and centralized systems:

Centralized Decentralized
Kraken Bisq
Windows Linux
Amazon Cloud IPFS
Encyclopedia Britannica Wikipedia
Euro Bitcoin
Bank account Cash
corporate intranets Internet
Mega BitTorrent
North Korea Switzerland

For example, intranets are internal communications networks for businesses. Intranet access is only available to employees of the company and serves for internal information sharing. However, the Internet is relatively decentralized and equally accessible to everyone (except for possible censorship on the part of some states, which is a sign of efforts to centralize the Internet). Or such Wikipedia – is partially centralized technically because it runs on a central server that can be attacked in theory. But the creation of Wikipedia content per se is decentralized: adding and changing articles can be done by all users.

Is Bitcoin really decentralized?

Visualization – The first 10 years of Bitcoin code development

Bitcoin as a decentralized monetary system, or digital gold for that matter, has to have the most stable and secure software to defend against risks, attacks, regulations, and gain people’s trust. To be robust and unstoppable, decentralization is of key importance. Let’s look at some forms of decentralization that are important for Bitcoin.

Geographic decentralization Bitcoin community, companies, nodes, and miners are all over the world, of course, but they are much more present in developed countries, of course. It is also true that miners are not evenly dispersed. For example, China enjoys some advantages thanks to subsidies for electricity.

Decentralization of mining (consensus) – Not a single mining pool or a large miner controls more than 25% of the network. Miners too are kept in check by nodes and the entire community. The centralization of ASIC mining was a slightly peskier problem: most of the market was dominated by chinese company Bitmain. Although recently, Bitmain is losing it’s market share to competitors and is not such a powerful force as it used to be. 

Development decentralizationThe Bitcoin code is open source, freely available on GitHub, so it is possible to freely participate in the development (although the community is very conservative, every suggestion for improvement must go through a very thorough examination of many independent programmers and experts and there is no guarantee that nodes will indeed accept the change). However, it is possible to fork and work on a custom Bitcoin-like cryptocurrency with tweaked parameters (such as Litecoin), or even fork from the Bitcoin chain itself (such as Bitcoin Cash).

Peer-to-peer protocolP2P means that the system works without intermediaries. Transactions can take place directly between users (similarly peer-to-peer is physical cash, but it’s not money on a bank account – the bank is an intermediary). Although the Bitcoin system recognizes and uses intermediaries (because it is sometimes more effective, e.g. centralized exchanges), it is not dependent on them and will be dealt with without them. This gives the user the choice whether or not to use the middleman.

Why do we want Bitcoin to be decentralized?

A standard example of a centrally managed system is the state-issued money (especially since the abolition of the gold standard when central banks became absolute rulers over money supply).

Increase in USD in supply 1984 – 2018. We are not claiming that inflationary monetary policy is apriori bad.  The problem is that relatively small group of people is making decisions about monetary policy and the rest of the society is held hostage. We are being forced to use the inflationary monetary system even in cases when it goes awry. 

Monetary policy is therefore taken care of by states and central banks, influencing interest rates, intervening in the currency markets and planning inflation. Most of the time, it works well, but sometimes it happens that the centrally controlled system fails epically, as happened in Zimbabwe, India, Venezuela, or during the Great Depression in the US and Germany.

In the traditional financial environment, trusted third parties operate as financial transaction brokers banks and other institutions. These regulated authorities mediate electronic transactions and take care of the operation of the system under state supervision.

Hyperinflation – one of the biggest fails of state monetary policy. Value of venezuelan Bolivar against USD fell from January 2018 more than 80 thousand times. At the same time, demand for Bitcoin in Venezuela is rising. Venezuelan people sú za použitie alternatívnych mien ako Bitcoin trestaní.

These financial institutions, therefore, play an important role in our world, but sometimes they fail. Banks with entrusted money often risk too much (as happened during the crisis in 2008), sometimes states are forced to stop transactions, or freeze people’s accounts. They also charge relatively high fees for transactions, especially if they are international transfers. For example, a payment from the EU to China can take up to a few weeks, require high fees, and the bank might require the underlying payment documents, otherwise it will refuse to process it.

And we are not even getting into the fact that up to 2 billion people in developing countries still have no access to traditional banking and financial services.

Compared to centralized systems that always have hidden risks and single points of failure, Bitcoin is robust: resistant to many types of attacks. Although it is not 100% resistant, some attacks would certainly slow down and hurt the adoption of Bitcoin (for example, a large-scale ban of large states, or a network overload with transactions), but it has already shown that it can overcome attacks and its proliferation can not be completely halted.

Thanks to its decentralization, Bitcoin offers:

collective verification of transactions by nodes and miners in a public ledger

a system based on volunteering and openness

a transparent monetary policy, unchanged and known in advance

a payment system available 24/7/365

a world community that knows no state borders

a system that does not discriminate and does not require that its user discloses his or her personal data

stability and robustness of the safest blockchain protocol in the world

freedom, control and responsibility for the capital (be your own bank)

resistance to censorship, adverse regulations

speed and low fees (mainly in international trade)

the ability to write unencrypted data over the network

liquid and easily portable storage of values

a deflationary alternative to inflationary names

One of the technologies that can help us to become more decentralized is the blockchain – read more about it. Resources for further study:

Resources for further study: