Cryptocurrencies are currently learning what a bear market is, while the economy is on the verge of a recession. Ethereum is going through its second bear market, while Bitcoin has already done this five times. Many of the altcoins have fallen by 90% or more, and we have just witnessed the collapse of an entire blockchain ecosystem and the elimination of a top-5 coin.
In this article, we focus on what is central to the blockchain and its applications: decentralisation. The architecture that is at the heart of and part of so many buzzwords such as decentralised governance, decentralised finance (DeFi), decentralised exchanges (DEX) and decentralised applications (dApps).
What decentralisation means
Decentralisation is about ownership and control. When something is decentralised, it cannot be owned or controlled by one or a few people. It also cannot be controlled by large entities such as companies or regulated by a state.
Decentralisation brings two important properties: security and stability. We can trust that the system functions as expected and in the best interest of most users, since a majority would otherwise not accept changes. However, this comes at the price of a rigid system in which decisions can only be implemented slowly and with difficulty, and throughput is limited.
Decentralised protocols are therefore suitable for things that represent fundamental infrastructure for many people, such as public goods like money, payment systems and smart contracts. Centralised systems, on the other hand, need to be regulated in order to function.
The decentralisation hierarchy
In decentralisation, there is a hierarchy of importance. The more power a stakeholder group has, the more important it is that it is decentralised. Since all power ultimately depends on the market price, the token holders, who ultimately make the price decision, are the most important. Next come the miners or validators who operate the system, then the software, the wallets and all ecosystem builders.
The cost of decentralisation
Decentralisation is a means to an end. It is something you cannot see, but without it blockchains cannot function. If we want to trust a blockchain, we need to know that its mechanics work and that it is sufficiently decentralised so that it cannot be attacked or manipulated.
Decentralisation is, however, quite expensive, meaning that a decentralised system comes with some costs and inefficiencies. This is referred to as the blockchain trilemma, where there is a relationship between decentralisation, security and scalability. To achieve scalability, either security, decentralisation or both must be sacrificed.
Decentralisation has proven its worth
The current market cycle is being driven by many problems in the crypto world, including the collapse of a top-5 blockchain and the insolvencies of several crypto companies. Critically, in all cases customer funds were lost or stuck in lengthy bankruptcy proceedings. DeFi had no problems during the downturn. The difference lies in the transparency that results from decentralisation and blockchains, where all transactions and ledgers are public.
Conclusion: Does decentralisation really matter?
Blockchains without decentralisation make little sense, because it is decentralisation that provides the main advantage over traditional finance, even if it is only under the bonnet – like the engine of your car: you don't see it, but it generates the main part of the vehicle's value.
Decentralisation in our blockchains is not perfect, but it is heading in the right direction. Above all, acceptance by many users creates the basic prerequisites for further development. More and more people are taking an interest in cryptocurrency, and its tools and technological foundations are becoming ever stronger.