Decentralization Ladder: From Fiat to Blockchains, and to DAGs

Decentralization is a broad concept that can be applied to numerous fields. We’re going to focus on the financial sector, and, especially, on the crypto industry. To make it short, a decentralized system is one formed by multiple parties/devices taking their own decisions while following certain rules to reach a common goal (consensus).

Vitalik Buterin (Ethereum founder), divided the concept into three types: architectural, political, and logical. It’s very rare for a blockchain or DAG to have the three types at the same time since they indicate very different things.

Architectural decentralization refers to multiple machines/devices working for the network. Political decentralization goes beyond the machines: it’s about how many parties (individuals or institutions) control those devices. Finally, logical decentralization implies that the software/system can be cut out into numerous parts and still work.

According to Buterin:

“Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer).”

Traditional money (fiat) is, of course, politically centralized everywhere. In the end, that’s maybe the most important aspect of decentralization: snatch total control from a single party or central authority.

Centralization in fiat money

The first step of the ladder is fiat money. National currencies are issued exclusively by central and commercial banks, fully controlled by the country's current government. No individual or another institution has direct control over the emission or policies about that money.

That constitutes a single point of failure, as governments don’t always make the best decisions. The more money is printed (out of nowhere) by the banking system, the more value that currency will lose. Scarcity increases value, while the opposite decreases it. Gold is valuable because its supply is limited while there is persistent demand. If this metal were as common as paper, it wouldn’t be as valuable.

The case of Zimbabwe (an African country) is remarkable in our context. Back in 2000, the government led by Robert Mugabe took an awful decision (among others) to seize white-owned farmlands by force. That caused a deep financial crisis nationwide, and their central bank started to print more bills to deal with it.

Such a move provoked hyperinflation and the eventual demise of the Zimbabwean Dollar (ZWL) in 2009. The nation is now using United States Dollars (USD) for everyday payments. And the action of central banks printing useless money is a meme in the crypto industry.

(De)centralization in blockchains

As we mentioned above, blockchains are architecturally and politically decentralized, which makes them a stronger and fairer system than fiat money. That’s the next step in the ladder of financial decentralization. They’re formed by numerous devices (sometimes thousands), controlled by different parties, working together under common rules.

Those parties, called miners or validators, produce new blocks and coins. None of them has full control of the network. In addition, none of them has control of someone else's funds. While central banks can print money as they please, the system behind most blockchains has a fixed supply or an emission plan.

Likewise, while most private banks and other centralized institutions (under government regulation) can freeze your money at any moment, a blockchain system wouldn’t allow that (if it’s working as it should). It’s controlled by numerous parties, so it's supposed to be censorship resistant. Only legitimate owners have their private keys to manage their assets.

There’s a detail, though. Miners and validators are in charge of adding new blocks and transactions to the network. They can’t control everything, but they still can cherry-pick which transaction will go first or be included at all. They can do so for personal gain or when forced to do so by someone even more powerful, such as a government.

If they collude, they can’t steal someone else's money, but they can apply censorship to specific transactions, and commit double-spending. They’re still an intermediary, like in centralized systems.

Decentralization in a DAG

We can say that Directed Acyclic Graph (DAG) systems are the third step of the decentralization ladder. Or let’s call it post-blockchain. A DAG-based cryptosystem doesn’t have miners or intermediaries at all. It doesn’t have blocks, either. Instead, every block-free transaction will link to their parents and children (the ones that happened before and after), freely. Like a big family tree, always intertwined.

The only other necessary thing is the order: which operation came first is important to avoid the double-spending problem. Some ordering already exists due to parent-child relations between transactions, and to establish the full ordering of transactions, a DAG system has “Order Providers” (like in Obyte). They’re highly recognized individuals/companies whose transactions serve as waypoints for ordering everything else, however, they can’t change the transaction history or reject transactions.

If a user made a transaction referencing previous ones, then it exists on the DAG and nothing can change it. Anyone, indeed, can make a transaction in a DAG —without asking for “acceptance” by the miners or order providers. Even if those providers collude, there’s not much they can do, and not much they can gain from it.

It’s mathematically impossible to rewrite the DAG history and insert a double-spend (spend the same money several times). It’s also impossible to steal funds from users since they don’t have access to private keys. They can’t apply selective censorship either, or discriminate against transactions without also censoring all other transactions that link to the censored ones — that would quickly become all new transactions.

The only thing they can do is stop the network — that’s a “nuclear”, and also suicidal option. It would work, but only until a new network with a new set of Order Providers is restarted from the point where the old network stopped.

A DAG thus provides a system without powerful middlemen. Just the community can decide over it and advance another step into the future.

Check out some related resources here:

Miners and Validators vs Order Providers in Crypto

Blockchain vs DAG in Crypto

DAG vs Blockchain as Individualism vs Collectivism

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