Decentralization is one of the explicit aims of the cryptosphere — one might say, the central premise. No matter how long you’ve been engaging with the space, you’re bound to have come across the term. So what does it mean? And why does it matter?
Decentralization can mean many things. In the most abstract sense, decentralization refers to the architecture of a given system. If something is more “decentralized”, it means there’s a more “distributed” structure (things are more spread out). In contrast, if something is more centralized, the structure is less distributed, meaning more power — whether money / knowledge etc. — is concentrated in fewer hands (“nodes”, in network-speak).
Decentralization is an important property in blockchain networks for two principal reasons. Firstly, the more decentralized a blockchain is, the less likely collusion is likely to take place and the harder the chain is to attack. Since the “immutability” of public blockchains is one of their greatest virtues — their most sacred properties — reducing the probability of collusion, and vulnerability to attack, is an important thing. In order for a blockchain to have real economic value, there needs to be trust that the ledger — the public record of accounts — won’t change arbitrarily. If you have $10 in your account, you should have faith that that $10 will remain in your account, until which time you decide to spend it. If any particular group could arbitrarily change the ledger, modifying your account without your permission — whether by attack or collusion — then the balance of your account isn’t worth much.
Decentralization, in this sense, is ultimately about security. The more decentralized a blockchain is, the more secure your funds are. In other words, the more decentralized a blockchain is, the less you need to trust your funds will remain in your account until you spend them. Instead of trusting the blockchain, so long as you have your private key, you simply know your account will show the correct balance — the existence of your funds aren’t, in this case, an article of faith; it’s a self-evident fact of Reality, akin to the wetness of water.
Security isn’t the only reason decentralization matters. Economic decentralization — the distribution of wealth — is also a feature of any healthy economic system. And cryptoeconomic systems, as a subset of economic systems, are no exception. In the physical world and crypto alike, we don’t, as a rule, want a few people to control the overwhelming majority of economic / political resources. Instead, we want the love — and money — to be spread around (as equitably as possible). When people speak about decentralization, in the crypto context, they’re often referring to economic distribution. While it plays into the security piece, and is important for that reason, economic decentralization — “economic equality” — is also generally considered an intrinsic good. All other things being equal, we want the power within our social / economic systems to be fairly distributed (whatever that means).
None of this should strike the reader as especially controversial. Decentralization, in the sense outlined above, is in fact an important — and indeed desirable — property of blockchain networks (and really political / economic systems, generally). Where the claims of crypto evangelists and decentralization “maxis” get a little less straightforward, however, is when they begin to eschew all forms of centralization — rejecting, as they do, the very notion as almost intrinsically evil.
Beyond the self-evident features of decentralization, there’s a whole bunch of other philosophical and political views that have become conflated, or associated with, the concept. Take, for instance, the issue of crypto custody. When it comes to holding crypto, there are two ways you can manage your funds. You can either a) have someone else manage them i.e. a company; or b) manage them yourself. The former is referred to as “custodial” — because someone else is holding your funds — whereas the latter is known as “non-custodial”, because, well, you are.
To the uninitiated, this might seem like a relatively trivial consideration. If you can’t be bothered to manage your keys, simply go the custody route; whereas if you don’t mind the inconvenience / additional pressure (if you lose your key you lose your funds :/), then do the self-custody thing. Simple enough. Right?
In cryptoland, however, using a custodial service is something of a cardinal sin (or simply an admission of one’s ignorance). The whole point of crypto, the diehards reason, is to disintermediate the world and reclaim our sovereignty as individuals. Thus any amount of centralization — which custodial services, at this point*, necessarily entail — is tantamount to a betrayal of the very principle that underlies crypto.
Here, self-sovereignty and decentralization get lumped together. And yet they’re not one and the same. Indeed, it’s entirely reasonable for one to subscribe to one without subscribing to the other. One might, for instance, value decentralization, as it pertains to economic distribution and blockchain security, without taking issue with some amount of centralization in other respects (for custody, say).*
In the case of custody, specifically, it’s perfectly understandable that one might prefer to have someone else ensure the security of their assets over the proverbial ‘cash under the mattress’ option that is hardware wallets (the only real safe solution to personally holding substantial amounts of crypto, at this point).
While I’m sympathetic to the sovereign individual sentiment, the real value of crypto is not that it undermines the value proposition of centralized, “non-sovereign” services — because it doesn’t. The actual value self-custody provides is simply the option. The fact that we can — if we so desire and if we so need — take possession of our own assets is a powerful form of leverage we shall now forever have, which we can exercise — again, if we so need — against our financial institutions. We shall use centralized services if — and only if — their value proposition makes sense. For we now have a viable alternative, however imperfect.
The real power of crypto, in the end, is that it has fundamentally altered the power relation between individuals and institutions. The separation of money from the state and the increasing convenience of self-custody bestows upon the individual substantially more bargaining power. Having balanced the previously asymmetric dynamic between the people and the state (and all its institutional machinery), crypto empowers the individual to demand more from their institutions. Where even the most “democratic” institutions have for so long relied on some form of artificial advantage for their power, thanks to tools such as crypto, they will be increasingly forced to compete (or die). For what might just be the first time in the modern era, if we aren’t happy with the powers that be, we can take our business elsewhere. We can exit.
For all the rhetoric to the contrary, centralization is not inherently evil. It’s simply a mode of coordination, a certain kind of network architecture. Where decentralization is important — i.e. economic distribution / blockchain infrastructure — we should seek to maximize it. But we must appreciate that there will always be certain kinds of tasks where decentralization is an inappropriate coordination structure or network architecture, and where some amount of centralization is both necessary and preferable.
Crypto is an interesting industry for a variety of reasons, one of which is the degree to which theory — rather than empirical evidence — influences the culture. And while this might be a valuable corrective against the otherwise empirically-oriented culture we find ourselves in, it creates an environment particularly susceptible to dogma. Instead of reducing things to overly simplistic ideology — i.e. “centralization is bad” — we ought to reason carefully about where and why exactly centralization is bad (if indeed it is).
Tempting though binary classifications may be, in order to scale crypto to the world, it’s necessary we develop a more nuanced conception of centralization / decentralization, and the interplay between the two. As proponents of the space, in particular, we ought to have a clearer sense of precisely why we might prefer one over the other, in any given instance, so that we might more effectively spread the good word to the world.
1. Entropy.xyz are working on solving this equation such that custodial != centralized.