The Fundamentals of Decentralization

Decentralization stands as the cornerstone of Bitcoin and other cryptocurrencies, necessitating a paradigm shift in how we perceive monetary systems. It refers to the process whereby control, governance, and operational power are distributed amongst a network of participants instead of being vested in a single, central entity. The function and characteristics of Bitcoin, including the finite total supply, rely on a consensus among a majority of participants in the network.

This decentralized design ensures robust resistance to censorship and manipulation, particularly significant in an age where governments and powerful entities continually attempt to exert control over cryptocurrencies. By dispersing authority across a network, cryptocurrencies like Bitcoin remain resilient against single points of failure, thereby increasing network stability.

Transactions executed on a decentralized network are recorded on a transparent, public ledger known as the blockchain, maintained by this network of users. This transparency engenders accountability within the system. It also provides users with heightened autonomy and privacy, removing the need for third-party intermediaries. Moreover, decentralization promotes open access and participation, allowing anyone to join and contribute to the network's growth and evolution.

Bitcoin

Bitcoin removes the need for trust in a transaction between strangers. Previously, we paid banks to be the arbiters of trust. Your bank would ensure that the opposite party had enough funds to pay you and make sure you received those funds. They would keep track of who has what money, how much, and who to send it to and fro. Now, we have an infallible, non-discriminatory internet protocol capable of the same thing instead of a profit-seeking corporation run by a board of directors looking to maximize profits at your expense!

This is what we mean when we say Bitcoin is decentralized. It is a peer-to-peer network with no centralized entity in charge and thus, no central point in which to attack.

In pre-Bitcoin projects, competitors and governments alike were able to pinpoint the people in charge and either run them out of business or force them to shut down. Satoshi Nakamoto, the creator(s) of Bitcoin, recognized this weakness and thus architected Bitcoin to be an open-source, permissionless network. This means that anyone, anywhere, may own bitcoins, help “run the network,” or even contribute to the code.

Three important factors impact the ability of the average person to run a node in a decentralized network such as Bitcoin:

Bandwidth: The cost of downloading and broadcasting any blockchain-related data
Compute: The cost of running the computations
Storage: the cost of storing “state” (data) in order to continue processing new blocks of transactions

Deciphering Operational Decentralization

In an increasingly digitized world, the evaluation of operational decentralization in Proof-of-Stake (PoS) networks becomes a non-negotiable criterion. The distribution of validators and stake across geographical jurisdictions, node hosting infrastructure, and fundamental software components forms the cornerstone of such evaluation. A network's level of decentralization is invariably linked to its resilience against unanticipated software bugs, corporate and political adversities, and physical infrastructure failures.

Moreover, a thoroughly decentralized network ensures a secure, robust, and reliable system capable of enduring potential challenges. The role of such a network then extends beyond its primary function, thus contributing to its overall credibility and enhancing stakeholder trust.

The Significance of Decentralization

Decentralization is paramount for several key reasons:

Enhanced Security: More decentralized systems demonstrate a superior defense against network attacks, offering more robust security guarantees.
Reduced Risk of Manipulation: Higher levels of centralization could increase the risk of malicious community members taking control or exploiting decentralized applications (dApps).
Resilience Against Regulatory Capture: Less decentralized systems could become victims of regulatory capture.
Greater Transparency: The decentralized model facilitates less conflict of interest and more transparency, as changes cannot be enacted unless a majority of participating parties concur.

Moreover, proponents of Bitcoin argue that traditional monetary systems can exacerbate the disenfranchisement of specific populations, particularly in countries where financial product access is scarce or non-existent. Traditional financial products often demand two or more forms of government-issued identification, verifiable addresses, credit checks, and more, creating barriers to access for many. Cryptocurrencies, while criticized by some for potentially facilitating illicit activity, offer a solution for financial inclusivity, leading to a net positive impact regardless of such activity.

Why Do We Want Decentralization?

Bitcoin blossomed from the CypherPunk Movement and was born amidst the Great Financial Crisis of 2008, a time when banks were bailed out and the Fed deployed quantitative easing in an attempt toward economic recovery. This caused many people to question and criticize our monetary system: Why should the Fed have the power to expand/contract the money supply and decide who gets “bailed out”?

After all, inflation has destroyed the purchasing power of the USD over decades of money printing. There are still millions of people living paycheck to paycheck worldwide, many of whom do not have access to productive financial services. Theft and violence are also commonplace in these cash-based economies. Many Bitcoiners and Crypto fans are disturbed by this inequality and aim to serve this audience.

Bitcoin and many cryptocurrencies strive to circumvent the power of central banks and eliminate the requirements of the financial world through decentralization. Because they have no central entity that could censor transactions, charge fees, alter the existing rules, or be attacked or extorted by governments or bad entities, citizens of the world have the opportunity to gain a new form of freedom of speech. Additionally, this process of decentralization also removes the need for two forms of government ID, verifiable addresses, credit rating, and other requirements that are regularly needed in the financial services industry. People are tired of putting up with governmental monetary damage, various bank fees, and the growing degree of censorship when conducting their financial activity. Decentralized blockchains give everyone the chance to take back their privacy.

Why Is Decentralization Harder than Centralization?

In an increasingly centralized world, 100% decentralization is a difficult goal to achieve, if not impossible. Widely considered to be the most decentralized blockchain today, Bitcoin did not start off by being completely censorship-resistant. Satoshi Nakamoto was the creator and sole user in the beginning. It was not until years later that it became regarded as the most secure and decentralized blockchain thanks to its prolific user base, absence of administrators, and strong proof-of-work (PoW) protocol. Although nothing can be purely decentralized to start, it is certainly possible for a system to gain this vital feature as time goes on. However, establishing a sustainable blockchain while maintaining a strong level of decentralization is no small task.

The scalability trilemma, illustrated. Credits: Vitalik Buterin

The image above displays Buterin's Scalability Trilemma. The idea is that a blockchain can only have two of the three features while sacrificing the third. With the dominance of Bitcoin and Ethereum, many newer blockchains have gone in favor of scalability and security while attempting to maintain a sufficient amount of decentralization.

Decentralization is more difficult to achieve than centralization as it typically involves forfeiting scalability or security. For this reason, most blockchains do not even attempt to compete with the likes of Bitcoin and Ethereum, which have market dominance. Instead, they push their scalability features while labeling their qualities of decentralization as “good enough.” Decentralization is a valuable product and a noble goal, which is why it is important to consider the various metrics available.

Decentralization Checks

Who runs the network and controls the coins/supply?

In the current paradigm, founding entities wield significant influence over network upgrades. Any proposed changes necessitate the acceptance and subsequent implementation by the network's validators. This mechanism underscores the pivotal role of validator count and distribution.

With few validators, particularly if a founding entity controls a significant portion, the said entity gains the power to single-handedly introduce changes. Conversely, increased validator count and dispersion across diverse entities democratize protocol amendments. This dynamic demonstrates the direct correlation between the number of validators and the level of decentralization in the network.

In most instances, there is a central figure or core team behind the project that has a tremendous amount of influence. For example, the Ethereum Foundation, C.Z. of Binance, and Charles Hoskinson of Cardano. The power and control of these groups should be considered as this can lead to strong levels of decentralization. Ideally, more power is held in the hands of network participants as opposed to a select few insiders.

Pre-launch Token Allocations — Source: Messari

In addition, it is just as vital to acknowledge who controls the supply. Specifically in PoS systems where a greater stake means more influence within the application. For the same reason, if large stakes are held by only a couple large players, how decentralized can a blockchain be?

Who Makes the Decisions?

At the beginning of a project's life cycle, central authorities simply have to make unilateral decisions in order to survive. But as time goes on, power and decision-making responsibilities can be passed along through more equal coin distribution, voting mechanisms, and democratic governance models. All of these details are key when evaluating various blockchains. A sole authoritative body could potentially go against the interests of the user majority.

Can the Chain Be “Turned off/reset?

Some platforms have experienced outages and network issues. Solana, for example, suffered from numerous outages in 2022. In September 2021, Solana validators grouped to reset the chain due to network problems. Although having these validators is helpful to make improvements, it also signifies the dominant central authority of many chains. An even clearer example was when Binance halted the BNB Chain in October 2022 following a hack. This was a clear example that the centralized company controlled the chain.

Is It Accessible to Run or Participate in the Network?

Almost anyone can buy the coins and tokens of these projects, but what about other ways to participate? Not everyone has the expensive equipment or know-how to mine efficiently. You would also need in-depth technical knowledge to interact with or make proposals to a project’s development teams. In PoS systems, users need a minimum stake which is another barrier to entry. The higher the participation cost, the less diversity to participate in running the network. Thus centralizing the blockchain or dApp.

Does the Chain or dApp Have Emergency Powers?

Some blockchains/dApps have ‘back door’ capabilities in case of a bug or catastrophic network event. Although this is common with newly released projects, it is important to check the fine print as a chain develops over time. A well-established chain with emergency powers may be a cause for concern for those seeking applications with decentralized qualities. One prime example in 2023 was the Maker/Oasis "counter exploit," in which Jump Crypto worked with the government and Oasis, a separate front-end for the boring and lending protocol, Maker, to upgrade smart contract code in order to claw back hacked funds. While ethics can be debated, this was one of the most brazen examples of individuals being able to change and/or "trick" the code to their advantage or by decree of a government agency.

Can the Chain Be Easily Attacked?

There have been many instances of malicious attackers targeting projects, big and small, through various mechanisms. One of the most well-known cryptocurrency attacks is the 51% attack, which states that any one entity that controls greater than 51% of the network's hash rate has the ability to corrupt the chain and transactional history to a certain extent. This pertains to Proof of Work chains, like Bitcoin, Litecoin, Ethereum Classic, and others.

While major PoW networks like Bitcoin and Litecoin have never been 51% attacked, smaller PoW chains like Ethereum Classic (ETC) have. ETC was first successfully 51 percent attacked in 2019 making it one of the first top 20 coins (at the time) to suffer such an attack. First identified by Chinese security company SlowMist and exchange Coinbase, a private mining pool was able to surge in hash power to more than 51 percent of the network’s total, stealing nearly $200k from exchange Gate.io and approximately $1.1 million in total.

To date, ETC has suffered at least four successful 51% attacks, deteriorating trust in the network and requiring weeks for a transaction to be successfully completed and validated. The cost to execute a 51% attack on ETC is estimated to only cost ~$4,300 per hour. Comparatively, the same attack on Bitcoin would cost~1,000+ more.

A separate type of attack can target the admin keys of a project. Many DeFi dApps, bridges, and smaller PoS chains have admin keys. In March 2022, in which Ronin was the victim of a $625M attack due to a sophisticated phishing scheme to compromise five validator nodes–the threshold needed to approve a transaction.

Also in 2022, Beanstalk (an Ethereum DeFi protocol) lost $182M due to a flash loan attack in which the project’s protocol governance mechanism was exploited. The malicious actors obtained extensive voting rights through the loan and abused the power to send funds to a wallet they controlled.

Another example of centralization gone bad came when Solend (a Solana-based lending protocol) used emergency powers and an unfairly weighted vote to take control of a user’s funds locked on the platform; one user having 90% of the voting power. Thankfully this did not pass due to community backlash. But this does highlight the threat of poor governance and tyrannical emergency powers.

A Balance of Trade-offs

In order for a network to be considered a blockchain, it must offer key features such as security, openness, and most importantly, credible neutrality. These networks must not privilege insiders or permit the exclusion of certain groups or actions. The core attribute underlying these features is decentralization.

While systems naturally tend towards centralization in the pursuit of efficiency, such a model can also lead to fragility. Centralized systems, although nimble due to a small group of actors, are susceptible to their whims. It's simpler to corrupt a small group than a large one, and a single point of failure is far more vulnerable than multiple distributed nodes.

On the other hand, decentralized systems, which are devoid of central intermediaries, show a high level of resilience to disruption. Decentralization helps prevent control concentration, making it harder for value-extracting intermediaries to emerge. Such systems can expand access to goods and services while decreasing the likelihood of censorship and exclusion. However, it's essential to note that while decentralization may seem inconvenient, its true value shines in times of duress. In essence, the importance of decentralization may not be readily apparent until it's critically needed.

Decentralization and Scalability

Blockchains like Bitcoin and Ethereum strive for maximum decentralization and censorship-resistance while remaining totally open and inclusive networks. However, they also want to scale to accommodate billions of users. As they stand right now, their limited capacity to process transactions at the base layer (~7 and ~20 TPS, respectively) are in direct opposition to achieving that goal.

The question is “What is the best method of scaling a blockchain?” Nearly every new “next generation” blockchain since 2016 boasts sky-high transactions per second (TPS) as a selling point. However, the issue that persists is that TPS is not the sole metric with which to compare blockchain scaling. Generally, the truth is that the higher the TPS, the higher the cost (financially and computationally) to run the network. Given this, the question arises: Are these new “next-generation” blockchains actually scaling, or just simply increasing TPS while shrinking the network in other regards?

The primary means by which to accomplish sustainable scaling are minimizing the hardware requirements needed to participate in the network and, also, ensuring the state of the network (data) does not balloon to unsustainable levels.

Network nodes are what enforce the rules of the chain and ensure no one is cheating the system. Therefore, having a robust, geographically-dispersed, and anti-fragile network of nodes is ideal for the decentralization and security of the network. In order to attain this system, the costs to run a node (hardware, bandwidth, energy, and storage) should be as little as possible. This allows the greatest number of people the option to join the network if they so choose. Keeping costs low ensures no one is priced out and your network is not solely controlled by a wealthy, elite few.

Hardware requirements

Bitcoin¹: 350GB HDD disk space, 5 Mbit/s connection, 1GB RAM, CPU >1 Ghz. Number of nodes: ~10,000
Ethereum²: 500GB+ SSD disk space, 25 Mbit/s connection, 4–8GB RAM, CPU 2–4 cores. Number of nodes: ~6,000
Solana³: 1.5TB+ SSD disk space, 300 Mbit/s connection, 128GB RAM CPU 12+ cores. Number of nodes: ~1,200

Below is empirical data experienced by cryptocurrency and cybersecurity expert, Jameson Lopp, from a 2020 Bitcoin Node and 2021 Node Sync Tests. The table compares the time it takes to sync a full node of Bitcoin vs. Ethereum vs. Solana on an average consumer-grade PC.

SOL node sync times vs BTC and ETH — Blockchain throughput and node-sync comparison

The Lower the Validator Cost, the Better

In the Ethereum ecosystem, serving as a validator on the Beacon Chain requires staking 32 ETH (~$60,000 in Q2 2023). While this sounds quite expensive and exclusionary on the surface, relative to other top blockchains like Bitcoin, Avalanche, Solana, Binance Smart Chain, Ripple, and others, it actually compares quite well. Additionally, liquid staking services like Lido and RocketPool enable users to participate with as little as 0.1 ETH. Finally, by removing PoW and a capped gas limit/block size, Ethereum enables any user with average hardware to profitably run an Ethereum validator.

L1 validator requirements — Source: Galaxy Digital Research

State Bloat Must Be Kept at Bay

The other variable to consider is state growth, i.e. how quickly the blockchain’s computational load grows. Full nodes store the network’s entire history from genesis and must be able to validate the entirety of the network’s state. Blockchains that scale by simply increasing the block space and throughput per unit of time (Binance Smart Chain and EOS), also greatly increase their state growth. Those chains are short-term solutions that lead to long-term unsustainable networks.

Blockchains like Solana, which are designed for greater TPS via specialized hardware, also run into state growth and centralization issues. To be fair, Solana did introduce some new technological innovations to improve sequencing like Proof of History and a parallel execution environment. However, like the “Ethereum killers” of the 2017 era, this design is not long-term scalable/sustainable. Solana already boasts some of the most expensive and specialized hardware requirements of any top 20 cryptocurrencies, and as Solana transactions and price increase, the hardware costs to run a node, be a validator, and process transactions also increase.

Example: BNB Chain

BSC's approach to scalability also has its limitations. BSC enables faster transactions and cheaper fees by increasing the gas limit in each block (40M versus 15M in Ethereum) and having faster block times (5 seconds versus ~15 seconds in Ethereum). This approach has seemingly helped create cheap fees, which have led to BSC being the number one chain based on transactions/day. However, even just briefly evaluating the transactions, it becomes clear that a large portion of transactions is simple spam/spoof transactions meant to boost network usage metrics.

Additionally, the combination of these two scaling approaches only improves performance in the short term (at the expense of decentralization) but has long-term consequences. Over time, the blockchain state size becomes so large that only a few mega-corporations can afford to run a node due to hardware constraints. The active state size of the chain (state that smart contracts need access to) and hardware computer performance have physical limitations and can create a bottleneck if BSC continues to grow at its ongoing rate.

For now, Binance just continues to increase the gas limit whenever the chain gets congested, but there could come a time when that is not an option. The chain's demands could surpass even what the most powerful servers are capable of computing, and chain performance will suffer with no real solution.

BNB gas limit june 2023 — Image credit: BSCscan

The Price of Decentralization

The pursuit of decentralization within the blockchain ecosystem often inadvertently compromises security. This compromise, however, is not inherent to decentralization. Rather, it arises from a lack of understanding of fundamental economic designs and incentive structures. Entrusting the community with direct control over key elements such as the treasury, security parameters, or pivotal smart contracts in a bid for decentralization can invite catastrophe.

To explain this conundrum, consider this: if protocols allow community control, they inadvertently create opportunities for malevolent entities to seize control. From the perspective of a potential exploiter, one must consider the cost of acquiring enough governance tokens to manipulate a vote for transferring treasury assets.

Measuring Operational Decentralization: Quantitative and Qualitative Analysis

Decentralization is not a one-size-fits-all concept; rather, it's a complex construct that can be assessed through various lenses. Several key factors come into play when examining the decentralization spectrum:

The network's operation and its level of distribution.
Ownership and control of the coins.
Decision-making process.
Presence of a central team.
Accessibility for running or participating in the network.
Possibility of emergency powers within the chain or decentralized application (dApp).

With the potential for failures stemming from differing facets of centralization, delineating the exact nature of decentralization, measuring it precisely, or identifying what signifies 'sufficient' decentralization is challenging. The complexity compounds when considering various attack vectors - including geographical, political, direct, or infrastructure-based assaults - and the unique consensus mechanisms and protocols employed by different Layer 1 networks. These complexities make comparisons of decentralization levels a daunting task.

Moreover, networks are not static; they are ever-evolving entities. As such, a network that might initially be more centralized can gradually achieve decentralization, implying that any evaluation can rapidly become obsolete. However, there are certain metrics that can provide a snapshot of decentralization at a given moment.

How can one measure decentralization?

Gino Coefficient

As mentioned previously, decentralization is much more of a spectrum as opposed to a fixed state. Blockchains can have different designs so it can prove difficult to measure this feature. However, the first aspect one should consider is if a project is truly distributed. The Gini Coefficient and Lorenz Curve are economic measurements of a population’s wealth distribution and inequality. Some have used these traditional metrics to be applied towards blockchains.

The Nakamoto Coefficient: A Snapshot of Decentralization

Currently, the most popular and widely utilized metric for decentralization is the Nakamoto coefficient. Named after the pseudonymous creator of Bitcoin, the Nakamoto Coefficient represents the amount of validators (nodes) that would be needed to collude in order to successfully slow down or block any blockchain from properly functioning. The higher the NC, the higher the reliability/safety of a blockchain becomes. In essence, it quantifies the number of colluding nodes (be they validators or miners) required to disrupt, halt, or alter the chain's protocol rules.

nakamoto coefficient — A prior attempt to calculate the Nakamoto Coefficient of several top blockchains. Source

Because Bitcoin is the oldest and most established blockchain, it predictably has the highest degree of reliability through the NC lens. In order to change the chain, 51% of Bitcoin nodes would have to be in agreement. Although this means that an attack is possible, it will certainly be costly and unlikely. Although the Nakamoto Coefficient is certainly helpful, it remains imperfect as comparing alternative consensus mechanisms requires context. Chains operate on different life cycles, governance models, and can have varying costs.So below are other major factors to consider when evaluating a project’s decentralization.

However, the Nakamoto coefficient is not a flawless measure. Comparing coefficients between chains often necessitates context, as it's more complex than a direct comparison. Comparisons that overlook alternative consensus mechanisms, distinct validation costs, varying manufacturing infrastructure, and unequal geographical node distribution, render the metric ineffective.

Blockchain networks may process trillions of dollars in transactions per day due to low transaction fees. However, if the network's security relies on a low dollar value of staked assets (because people are hesitant to hold the network's tokens), this leads to an inherently unstable network that is vulnerable to attacks. Sustaining high market caps is possible in the short-term based on speculative bets for future growth, but expanding significantly beyond this level requires attracting substantial, stable capital.

The amount of stake weight in dollar terms is crucial for security. Solana, for example, defines security as the cost to destroy all replicas of the chain. In this case, decentralization (important for censorship resistance and network uptime) aims to maximize the Nakamoto coefficient, i.e., the number of colluding validators required to halt the network. Theoretically, a high Nakamoto coefficient makes an attack on the network unfeasible.

However, the Nakamoto coefficient alone doesn't give the full picture. Even if the coefficient were astronomically high, if the total stake of those validators were only a small amount, an attacker could easily overtake them. The number of validators alone, particularly if a large attacker is assumed to be disguising itself behind multiple entities, does little to prevent an economic attack. Hence, Solana's aim of maximizing the Nakamoto coefficient seems contradictory to its disregard for token value capture, as one without the other is insufficient for true security.

Solana's design may be particularly vulnerable to this kind of attack. While anyone can validate Solana, doing so requires significant capital and effort, something beyond the reach of most users. Other networks, like Ethereum or Celestia, adhere to the principle of allowing everyday users to rely on near full node security with relatively low capital and hardware requirements. They are, therefore, better equipped to deal with and recover from a 51% attack. Cryptographic assurances are always preferred to cryptoeconomic ones, and if all light clients know not to accept an invalid chain under attack, the damage can be greatly mitigated.

It's important to note that even for networks with relatively lower market caps, overtaking the network might be challenging to make personally profitable. It seems improbable that someone would spend tens of billions of dollars to attack a blockchain in the hope of making a quick profit. More likely, a state actor with malicious intent could potentially take down a globally significant network for a relatively low economic cost, causing disproportionate damage. The intersection of staked value, the Nakamoto coefficient, and the ability of everyday users to validate and secure a network are all essential considerations in the ongoing exploration of blockchain security and decentralization.

Contextual Considerations in Measuring Decentralization

Given the intricacy of measuring decentralization amidst a constantly evolving blockchain landscape, quantitatively assessing a network's current level of decentralization can be challenging. Nevertheless, Nakamoto coefficients can provide some insight into the current state of different Layer 1 platforms. It's important to underscore, however, that comparing Nakamoto coefficients of various chains without context can be misleading, particularly when juxtaposing Proof of Work (PoW) and PoS chains.

Geographical Decentralization

Geographic decentralization is critical to the success and security of blockchain and cryptocurrency networks for several reasons:

Regulations: Different jurisdictions are implementing varying regulatory frameworks that can impose censorship onto blockchain ecosystems. To construct a decentralized, permissionless system that withstands such pressures, it needs to be global.

Neutrality: In the world of cryptocurrencies, there is much talk about maintaining neutrality. However, if a system is biased towards a particular region, it's hard to claim neutrality. Hence, achieving global fairness is essential.

Building Global Systems: Cryptocurrencies are fundamentally global, aiming to offer an alternative to existing financial systems, enable cross-border transactions, and provide financial access to those excluded from current systems. Creating systems that lean towards localization contradicts these goals.

Consensus Safety: A geographically distributed system enhances the safety and availability of the network. For instance, Ethereum's half-serious goal is to survive a nuclear war, underscoring the importance of a global system when considering extremes and black-swan events.

Fairness: An ideal cryptocurrency system should be fair for users. A system that gives certain geographies an upper hand can't be called "fair". While the real-world context of centralization will always confer some geographical advantages, the goal should be to minimize, not exacerbate, these effects.

Decentralization: The power of decentralization lies in its potential to create a sum that's greater than its parts. The cooperation enabled by these network effects forms the core argument for cryptocurrencies.

So, what does geographic decentralization mean, and how can we define it to avoid disputes over who is more decentralized? In the abstract, there are several fundamental truths:

The only decentralization that matters is the decentralization of power.
Architectural or technical decentralization will arise if power is decentralized.
The goal of technical decentralization should be to serve and protect the decentralization of power.
Decentralization of power must be global.

From a technical perspective, protocols should aim to ensure that a rational player's profit, both under the conditions of some latency and minimum latency to other players, should be nearly the same. This means that the protocol supports geographic decentralization if it's minimally sensitive to latency.

This is a critical concern as the existing power dynamics of global finance already incentivize colocation. Exacerbating this by providing additional advantages will hinder the potential of cryptocurrencies to achieve a truly decentralized, permissionless, and global network.

By focusing on geographic decentralization, we have a unifying goal for all decentralized systems. A system where actors can participate, regardless of their geographical location, aligns better with the fundamental principles of decentralization.

Threats to Decentralization

Even as we strive for geographic decentralization in cryptocurrency networks, several factors threaten to undermine this utopian ideal:

MEV (Miner Extractable Value)

MEV refers to the maximum amount of value that can be extracted by deciding the transaction order of any given block. As discussed previously, a block proposer (or miner) in a traditional blockchain can choose which transactions to include from the memepool into the next block based on the highest transaction fees. This essentially opens up the possibility of coordinated censoring of transactions and promotes an increasing degree of centralization within the Ethereum ecosystem.

This also negatively impacts users in some pretty damaging ways. For instance, MEV instigates the concept of gas bidding wars as users attempt to outduel one another to get transactions confirmed on the blockchain. This can create significant spikes in gas costs for users and price out everyday users from accessing the Ethereum network.

To circumvent this problem, DS relies on a concept called Proposer-Builder Separation (PBS).

There are three entities in the new PBS Ethereum:

1. Builders - highly sophisticated actors that physically build the blocks maximizing for MEV and then bid them out to validators

2. Relayers- known middle-men with reputational risk to receive blocks from Builders, hash it, and relay on to the validators

3. Validators -simply accept the block with the highest bid and block rewards (without knowing the contents)

To combat the risks of consensus networks getting centralized due to the economics of maximal extractable value (MEV), a solution like Proposal-builder separation (PBS) is needed. PBS also prevents transactions from being censored by validators. To learn how PBS works, read here.

Latency

While the incentive to optimize for latency in cryptocurrencies is less than in traditional finance, it's still non-zero. Any latency optimization incentives translate into geographic centralizing pressures. Protocol designs must be tailored to avoid this, making it a major challenge in consensus design for the coming decade.

Regulatory Capture

Regulatory frameworks can create silos that impose restrictions and rules on a geographic basis. These silos can create friction on global systems, particularly at their interfaces. It's vital to consider this when designing these interfaces.

Proposals to Enhance Safety and Promote Decentralization

While the operational Nakamoto coefficient provides a snapshot of network vulnerabilities, it falls short in accounting for the constant evolution and growth of a network. The responsibility to ensure the network's resilience against possible infrastructure failures and external threats falls on the network's stakeholders. Operational decentralization is paramount to a network's long-term sustainability, and stakeholders can play a significant role in enhancing and incentivizing the dispersion of validators and stakes.

Suggestions for Validator Operators

Validator operators can mitigate risks associated with political instability, corporate animosity, infrastructure failure, and natural disasters by self-hosting nodes wherever possible. If that's not feasible, using a non-dominant server solution or, at a minimum, running validators in data centers located in varied geographical areas with the same hosting provider should be considered.

Another option is enhancing infrastructure redundancy via Distributed Validator Technology (DVT).

Distributed Validator Technology (DVT) is similar to multisig for validators, as it distributes validator keys among multiple distinct nodes. DVT enables several nodes to share the responsibilities of an Ethereum validator, boosting fault tolerance and resiliency. In doing so, it increases validator uptime and reliability by decentralizing failure points and decreasing the likelihood of slashing events. With DVT, solo-stakers no longer need to worry (as much) about maintenance concerns that might reduce their long-term gains. SSV, Obol, and Diva are the three leading DVT options, and both are live on testnet. By distributing the operation of a validator across multiple setups, DVT bolsters the security and reliability of a network. It also expands the number of operators beyond current thresholds, making the network more resilient to technical failures, social disruptions, and attacks.

Loading...