Why Decentralization Matters — Explained For Dummies

Chris Dixon, an entrepreneur and a private tech startup investor, has recently published a Medium article titled “Why Decentralization Matters”. The post gained much attention in the crypto community, as it gives a thorough answer to a fundamental question, which is a key to understanding the whole blockchain concept. That is, why are cryptonetworks essentially better than the centralized services, provided by the “big four” — Google, Apple, Facebook, and Amazon?

The current piece is intended to give a more detailed explanation of the topic to the crypto newbies and illustrate the benefits, which crypto-economic networks bring to the IT entrepreneurs and end users, with simple real-world examples.

Centralized IT is killing tech innovations

The main point of the article is that centralized internet platforms follow quite a predictable life cycle. When a platform starts out, it usually does its best to attract users and third-party complements like developers, businesses, and media organizations, which are needed to make the product more valuable. But as soon as the platform gets widespread adoption, its power over users and third parties steadily grows. Eventually, it starts to compete with these third-party complements, instead of collaborating with them.

As a result, startups, software developers, creators, and other driving forces of the internet economy are no longer interested in building innovative services on top of these centralized services, as the latter can change the rules of the game anytime to whip out the competitors and take away their audiences and profits. The historical examples of such zero-sum games are Microsoft vs Netscape, Google vs Yelp, Facebook vs Zynga, and Twitter vs its 3rd-party clients.

Cryptonetworks, which are decentralized networks using consensus mechanisms such as blockchains and incentivizing their participants with cryptocurrencies, offer an effective way to settle this issue.

Since cryptonetworks are governed by the communities behind them, not by any single entities, they are incredibly attractive for third-party software developers and entrepreneurs, which no longer need to worry that the game rules would change all of a sudden, instead focusing on the development of innovative tech.

In that sense, cryptonetworks are very much similar to open protocols from the late 1980s, which were later outperformed and displaced by centralized services. But what’s the difference then? Why wouldn’t the history repeat itself?

The matter is, decentralized networks also provide economic incentives to developers, maintainers, and other network participants in the form of cryptocurrencies (coins or tokens). To make the long story short, the better the platform, the more its tokens are valued, so the network participants have an economic interest to work together toward a common goal — the growth of the network and the appreciation of the token.

Would-be Dmail vs Gmail

To get a better understanding of how this new economic model actually works, let us imagine the development process of some decentralized application and see how it is different from the one of a centralized service. For instance, let’s create Dmail — a decentralized version of Gmail, a Google’s email service.

Gmail is built upon open protocol such as SMTP. However, should anyone try to develop a third-party application for Gmail, he or she will inevitably face the risk of it being absorbed by Google services, as that’s just the case with most of the centralized services.

Now, let us see what happens when a mailing service is based on a decentralized protocol — DSMTP, an SMTP analog (the whole case and the namings are totally made up). Basically, there are two ways to develop such a protocol.

The first is building a new blockchain. In this case, one will need to develop the whole network and the consensus mechanism for it from the scratch and then make it attractive enough for the miners to put their computing power in, which is quite a difficult task, in fact, as most miners prefer to maintain more established networks, like Ethereum or Bitcoin.

The second way is to develop a decentralized app (dApp) with the use of out-of-the-box solutions, like Ethereum, Neo, Cardano (soon) etc. Since this method allows developers to use an already existing network with lots of miners involved, the issue of getting them attracted is no longer relevant. All that’s left is to develop an app itself.

Here’s a 19-line example of how SMTP might look like on Ethereum in the Solidity language, proposed by a blockchain entrepreneur Jonathan Brown:

/**

* @title Mailbox

* @author Jonathan Brown [email protected]

*/

contract Mailbox {

event Message(address indexed recipient, bytes message);

/**

* @notice Send message to account `recipient`.

* @param to The address of the account to send the message to.

* @param message The message in MIME type application/pkcs7-mime.

*/

function send(address recipient, bytes message) {

// Store the message in the transaction log.

Message(recipient, message);

}

}

As soon as DSMTP is developed, the next step is to issue tokens, which would become an essential part of the new cryptonetwork and integrate all network participants, including DSMTP developers, third-party developers, investors, service providers (miners), and final users, into a unified economic structure.

Not only these tokens would be a means to raise funds from private investors during an ICO campaign, they would also be required when using the protocol itself and serve as an economic incentive for miners (in case using ethereum — the will get ether), which maintain the network robustness.

In this way, third-party developers willing to build their own applications, like Dmail, on top of DSMTP, would need to buy the protocol tokens first. In return, they can be sure that the game rules wouldn’t change all at once, as the protocol is built on blockchain technology which means that any alteration to it in most cases is only possible with the approval of the majority of network participants. As the protocol adoption grows, its token value goes up as well, thus rewarding the protocol developers, investors, and miners, holding their part of tokens.

And that’s the key: unlike modern centralized services, as well as open protocols from the first internet era, a crypto-economy network provides incentives to all of its participants, which thereby have a vested interest in the network’s growth.

Why 51% attack is not actually a problem

Decentralized nature of cryptonetworks, one of their most admired benefits, may at the same time prove to be their vulnerability as well. What is meant here is the so-called 51% attack, which refers to an attack on a blockchain by a group of miners controlling more than 50% of the network’s computing power.

By controlling the majority of the computing power on the network, an attacker or group of attackers can interfere with the process of recording new blocks. This can be illustrated with a hypothetical case of Bob and Ron using DSMTP protocol for business settlements.

Let’s say, Bob is a builder and Ron supplies him with bricks for his work. The normal process goes like this: Bob asks Ron for a brick supply, and Ron sends him a bill. As soon as Bob sends money to Ron (everything is carried out through Dmail app), Ron sends the brick to Bob, and that’s it.

But Bob might as well turn out to be a swindler. Hypothetically, if Bob gets control over 51% of the mining capacity of DSMTP network, which underlies the Dmail app, he will then have an opportunity to build the longest chain of blocks, and the longest block chain of the network is always adopted by the rest of it.

So Bob can, for instance, send Ron a paid bill and simultaneously start to mine a parallel chain of blocks with no bill ever existed. Then, after getting a brick from Ron, Bob can just write these blocks to the blockchain, and since his chain would be the longest, he will, in fact, get his brick without paying.

That’s important to note, however, that Bob can’t reverse the transaction somehow or remove the parallel blocks with the bill written to them. All he can do is to make the network believe that his version of the events is the true one, and such things are usually revealed by the community very soon.

Moreover, the risk of 51% attack is leveraged by the fact that there is no real incentive to attack the network. First, changing the transactions locked in prior to the start of the attack would be extremely difficult even in the event of controlling 51% of mining power. The further back the transactions are, the more difficult it would be to change them, so one might be able to affect only the next block or two.

And secondly, such an attack could possibly destroy the integrity of the system as a whole, causing the price to crash. This is not something anyone with a vested interest in DSMTP tokens would want — and Bob, whose profit depends largely on the price of these tokens being high, will finally become a loser himself.

Where we are now

While decentralized networks are probably not a silver bullet that will fix all the problems on the internet, they do offer a much better approach than centralized systems. The absence of central bodies in cryptonetworks guarantees fair competition in the market, with no room for huge players smashing their smaller rivals overnight, which obviously lays the ground for best talents flowing into the field to make more advanced and truly innovative products.

It is also true, however, that the development of core infrastructure for cryptonetworks is yet to be finalized. The good news is that recent years have seen much progress. Here’s what the state of the dApp developer stack looked like in 2014, according to a former Coinbase co-founder, Fred Ehrsam:

And here’s what it looks like in 2017:

This clearly demonstrates that cryptonetworks are currently evolving at an unprecedented pace. Decentralized networks combine the best features of all protocol types that have ever existed so far, as they are: 1) community-governed; 3) secure and robust; 2) providing economic benefits to all network participants (including protocol developers and third parties). Given all that, it’s just the matter of time when they outperform centralized services and initiate a complete changeover in the world economy.

About the author:

Kirill Shilov — Founder of Geekforge.io and Howtotoken.com. Interviewing the top 10,000 worldwide experts who reveal the biggest issues on the way to technological singularity. Join my #10kqachallenge: GeekForge Formula.