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Demystifying the Decentralization Debates Around Blockchain Technologyby@rajioluwaniyi
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Demystifying the Decentralization Debates Around Blockchain Technology

by Raji OluwaniyiOctober 10th, 2022
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About two days ago, the BNB chain halted all operations on its network over a supposed hack. According to news, the hack resulted in around $100 million estimated amount drained from a user's wallet. Now, this news isn't exactly the point of focus here, but how quickly the system could halt operations on a network supposedly tagged "decentralized." Since its inception, the concept of decentralization has been a major debate, and with the recent series of events, it might remain in question for a more extended period.

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Blockchain technology might indeed be the future of finance, but let's be factual, the word decentralization seems rather overused in the crypto landscape than realistic. About two days ago, the BNB chain halted all operations on its network over a supposed hack.


According to news, the hack resulted in around $100 million estimated amount drained from a user's wallet. Now, this news isn't exactly the point of focus here, but how quickly the system could halt operations on a network supposedly tagged "decentralized."


While the halt had to have happened to prevent further loss, it seemed somewhat confusing and concerning to many how easy it was for a group of 19 validators to decide on shutting down an entire blockchain. It doesn't matter how we look at it; this points more toward centralization than decentralization. If an entire blockchain can reach out to a couple of people to shut down a network, what role does the term community-driven play in the system?


Since its inception, the concept of decentralization has been a major debate, and with the recent series of events, it might remain in question for a more extended period. Does true decentralization really exist in the crypto landscape? Let's find out.


Decentralization In Blockchain

The purpose of decentralization in a blockchain is to transfer power from a centralized authority to a dispersed network. And we have seen this approach take root with cryptocurrencies like Bitcoin. Bitcoin is currently the most decentralized blockchain system, with over 12,000 validating computers on the network.


Ethereum has also succeeded in running a decentralized system with its PoW consensus mechanism. However, users are beginning to question the network's decentralization since it migrated to PoS. The situation is quite similar to other PoS blockchains in the ecosystem because they cannot precisely offer the level of immutable operations provided by a decentralized system.


PoW vs PoS

Due to the limitations of the blockchain trilemma, most blockchain networks can only offer two out of three benefits of the ecosystem, including decentralization, scalability, and security. To cater to the increasing number of users and optimize experience as their user base expands, blockchain developers constantly need to focus more on offering scalability and security. And this approach is one that continually leads to the decline of decentralization. Now how is this connected to the PoS and PoW consensus?


Proof of work and Proof of Stake consensus are the mechanisms that most networks use in validating transactions in crypto trading. It is generally believed that most PoS systems are less decentralized than PoW. Since PoS rewards those with a higher token supply over those with a lower one, it is only natural to believe that it promotes centralization. If a set of people can easily acquire authority by having higher stakes, then the premise of decentralization becomes questioned.


Most networks initially built on the PoW mechanism are forced to migrate to the PoS consensus because the transition is energy efficient and would boost scalability. However, it doesn’t change the fact that it introduces a higher degree of centralization. It's a circumstance of killing the goose to lay golden eggs. Blockchain systems often have to sacrifice a level of decentralization to attain scalability and security.


Governance And Development

For PoW systems, the majority of their operations are community-driven. Community members can propose improvements, which the network validators can then debate. If the recommendation is deemed the best course of action by most node operators, it will be implemented. This governance model is also why PoW has been considered a more decentralized system for blockchain networks.


On the flip side, the founding teams are primarily responsible for the governance of PoS networks, which further supports the issue of centralization on PoS systems. In most cases, if a founding entity wishes to apply changes or upgrades on the network, the network's validators must still approve and effect these changes.


The founding entity can solely make changes at will if the network has few validators and they control a significant portion of them. And Binance's acclaim for its ability to rapidly coordinate a consensus among its validators and turn off the network during the hack is evidence of this. Additionally, if a large percentage of token holders and validators on the network are insiders, then it is safe to say there is little to no decentralization at play here.


Bottom Line

Decentralization can be measured majorly through the network's consensus, and with a larger percentage of blockchain systems operating on PoS, it will continue to be a controversial topic. If blockchain systems continue to prioritize performance and scalability, then decentralization might not be the ideal value proposition here. Perhaps it's more appropriate to term the current era semi-decentralized.