Decentralization, a widely misunderstood concept

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This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

The concept of decentralization has taken a central place in the context of Bitcoin, blockchain, digital currency and Web3.

But it has also caused some of the most consequential misconceptions about Bitcoin and blockchain, leading to a common belief that Bitcoin or any other blockchain must restrict its scalability in order to be ‘decentralized.’ The misconceptions have provided the basis for justifying initially the existence of BTC, Ethereum and other alt chains, and subsequently all kinds of layer-2 (L2) developments when BTC, Ethereum and other chains failed to scale.

Background

Decentralization has different meaning in different contexts. Consider at least the following:

(1) in the context of peer-to-peer user transactions (payments, value transfers, or data deliveries).

(2) in the context of network nodes participation.

(3) in the context of data/information freedom.

In the context of peer-to-peer user transactions, decentralization means the system does not rely on an intermediary to conduct a transaction. This as a general concept is fairly well understood, but confusion level is still high due to people’s lack of understanding of the inevitable involvement of various third parties in a transaction.

In the context of network nodes participation, decentralization means something different, and the level of confusion and misunderstanding is extremely high.

In the context of information/data freedom, yet another dimension is opened up which most Bitcoin-related discussions about decentralization do not even touch upon, but this article makes an effort to introduce.

As a basis of any analysis on the concept of decentralization, it should be pointed out that the most popular definitions of decentralization related to blockchain is originated from and promulgated by individuals who considered a blockchain system in an abstract viewpoint and defined the key concept of “decentralization” accordingly.

But the real Bitcoin is an economic system based on rules designed according to human reality, not an abstract machine system. It is of foremost importance to analyze the Bitcoin network as such.

Decentralization and intermediaries

Decentralization in the context of peer-to-peer user transactions means the system does not rely on an intermediary to conduct a transaction. This idea of ‘disintermediation’ as a general concept is familiar to everyone who is interested in Bitcoin and blockchain. The Bitcoin white paper’s title is even “Bitcoin: A Peer-to-Peer Electronic Cash System.” The benefits of decentralization with this respect, including privacy, convenience, banking of the unbanked, and low cost, are also well understood.

However, the confusion level even with this basic aspect of ‘decentralization’ is still high, due to a lack of understanding of the inevitable involvement of various third parties in a transaction.

User transactions, even those appear to be direct peer-to-peer, do not happen in a vacuum but in most cases involve other third parties. Even in a pure physical cash transaction, there are multiple third parties that lurk behind (e.g., in the U.S., BEP – the Treasury Department’s Bureau of Engraving and Printing). All digital transactions most certainly rely on multiple third parties.

Therefore, to understand decentralization in this context requires more than just being able to count the number of parties seem to be involved, but a sufficient understanding of the technical and economic nature of the involvements of the various parties.

Physical cash transactions are undoubtedly a legitimate example of disintermediation. This is not because these transactions absolutely involve no third party, but because the third party that is inevitably involved is legally, technologically, economically, administratively and functionally distanced from the transaction.

In contrast, Bitcoin transactions that use layer-2 (L2) solutions do not qualify as decentralized peer-to-peer transactions. This is because their rely on a centralized L2 platform/channel which legally, technologically, economically, administratively and functionally bears upon the transactions directly. That these transactions may use a bona fide decentralized blockchain at L1 does not change this fact at all, although it has been quite successfully, and unfortunately, used to camouflage it. For more detail, see Web3, NFT’s and DeFi are a sham without a blockchain scalable at L1.

The same logical conclusion extends to any layer-1 (L1) transactions on a blockchain that is based on Proof-of-Stake (PoS). For more detail, see Proof-of-Work (PoW) is the Only Way to Prevent Corruption.

Only L1 transactions on a proven public blockchain based on Proof-of-Work (PoW) qualify as true decentralization with respect to peer-to-peer transactions.

Decentralization of Nodes

Common narratives promote an idea of decentralization as a wide distribution among a large or even unlimited number of participants (people, entities or machines), as if it were an abstract mathematical concept, as well as an absolute “good” in itself.

But the need for decentralization is based on its utility in solving some of the problems created by centralized systems.

The decentralisation aspect assumes that you are more decentralised having a thousand people rather than ten large companies all competing. The reality here is the opposite. Ten competitive companies under rules that stop them colluding and act against monopolies create an environment that is far more decentralised and secure and robust than you get with a thousand individuals. – Dr. Craig S. Wright, private correspondence

The kind of decentralization that is really effective is not a mathematical distribution among a large or even unlimited number of nodes, which is not only unachievable (as BTC has inadvertently demonstrated), but is also unnecessary, or even undesirable.

What is desirable is not decentralization for the sake of decentralization, but that has an optimal ability to avoid a single point of failure or an effective collusion of a majority.

In this regard, the way Bitcoin blockchain’s PoW consensus is designed, even if the system were dominated by a single miner (the worst-case scenario), the system would still be far more secure than the traditional centralized systems. This is because (1) there is a separation of a miner’s economic interest from the individual transactions, and the miner is generally more incentivized to build the chain as a whole than to create a particular interest in specific transactions; and (2) there is a high level of transparency and openness which tends to quickly expose any wrongdoing. These factors together make the Bitcoin blockchain, even in its worst scenario where there is only one dominating mining node, akin to a single-party democracy with transparent media and public scrutiny (e.g., Singapore), which has proven more successful than an opaque authoritarian system.

But still, the system controlled by a single dominating party always has security vulnerabilities, because even if the party itself is not motivated to do evil, its system could be hacked by a third party intending to do evil. In this sense, decentralization matters because it improves security.

In that, just two major mining nodes balancing each other would result in a system that is far more secure than a system that is controlled by just one party. This has a twofold reason:

(1) Decentralization with independent parties exponentially decreases the chance that a controlling portion of the system can be simultaneously hacked. For example, if there is 1/1000 a chance for one system to be hacked during a given period of time, there would be only 1/1,000,000 a chance for two independent systems to be hacked during the same period of time, and 1/1,000,000,000 a chance for three independent systems to be hacked during the same period of time, and so on. In real life, the existence of correlation tends to make the odds of simultaneous failure of seemingly independent systems greater, but the general exponential trend is still operative as long as the systems are not significantly codependent or colluding.

(2) The way Bitcoin mining is designed makes it very hard for parties to commit a collusion, because although two parties might agree upon a plan to cheat the system, one party is always more economically incentivized to betray the other party by not following the collusion but instead remain faithful to the system. This is the effect of a gaming mechanism according to the game theory. The odds of forming a collusion among the parties also decreases exponentially as the number of parties increases.

The above combined exponential nature quickly leads to a practically secure system as the number of independent systems (nodes) increases, such that there exists a point beyond which a further increase would no longer be needed in a practical sense, especially when the cost of doing so is considered.

This is not to argue that just two mining nodes will be enough, but to illustrate that the Bitcoin system does not require tens of thousands or even unlimited number of nodes, even if that is achievable at all.

Furthermore, there is clearly a point beyond which having more active nodes becomes wasteful. Every node is supposed to keep a full copy of the blockchain, as well as to perform an appreciable amount of hashing. With Bitcoin blockchain, all this storage and hashing power are redundant by design. Within a certain range, the redundancy is worth it for the sake of a higher level of decentralization and security, but there is certainly a limit beyond which it becomes purely wasteful, as the world cannot possibly benefit from unlimited amount of redundancy in storage and computational power.

In this regard, the real Bitcoin BSV’s bitcoin blockchain manifests another advantage over BTC’s, in that BSV’s mining resources are increasingly not just hashing power but also diverse transaction processing capabilities which do not all require redundancy among miners. Some still do (e.g., all miners always need to verify all transactions even if the transactions are initially assembled and processed by another miner), but an increasing number of them do not, such as transaction sourcing, assembling, and compiling (in fact a lot of that cannot be made redundant among miners due to competition even if one wants to). This would allow much higher-level redundancies of the hashing power to exist in BSV without making the system overly wasteful. For example, if hashing power counts only 10% of the total mining resources, a 20x redundancy in hashing power would only result in a 2x redundancy of the total mining resources. For more detail, see the Economics of Bitcoin Mining.

The above matter of resource allocation and redundancy has another important consequence: the real Bitcoin is green, because it is energy efficient when measured by utility, while BTC is not. As the system scales, the differences in energy efficiency further enlarges. For more detail, see “The real Bitcoin is green” and “Is PoW Wasteful?”

Exactly where the optimal balance exists may still need more time to prove. Clearly it must be at least two independent nodes, but also clearly it does not need more than 100, as presently BTC and BSV each has about 4 major miners controlling over 51% of the hash power yet the systems are running without fundamental security concerns. It would not be surprising if the system ultimately settles with 4-12 independent mining nodes globally controlling the network. This would prove that BTC has completely sacrificed scalability to gain nothing in effective decentralization and real security (even though it has indeed enjoyed a temporary tactic advantage by enabling a misleading and seductive narrative, but it is an unjust advantage gained by a small group of people at the expense of the world).

In this analysis, it is important to realize that the whole thing isn’t about an appearance of decentralization itself. Beyond two nodes, the economics (transparent and competitive nature) of the network becomes increasingly more important than just the number of nodes, even if they are true full mining nodes.

In fact, strong arguments can be made to support that it is the type of fake decentralization promoted by BTC that not only unnecessarily sacrifices scalability, but also will eventually harm the real effect of decentralization and security. The aspect of the decentralization that really contributes to security is not the number of participants, but the open competition among the independently incentivized nodes. Artificially limiting the block size and what the nodes can do to freely compete restricts innovations, distorts the economic reality and results in an environment that promotes collusion. Encouraging anonymity and discouraging network communications among the nodes increase the risk of Sybil attacks.

The real bitcoin (BSV) does not suffer from any of these ills.

Decentralization and control

Furthermore, decentralization isn’t just about miners. A blockchain that has high-level decentralization among miners but leaves power to several core developers, is in essence a highly centralized system, only with a decentralized façade. This is the case with BTC. With an unlocked protocol, the core developers of BTC, altogether about a 5-7 of them, have the power to make changes to the blockchain protocol, and have in fact made numerous major changes in the past, causing not only backward incompatibility but in fact has also changed the very nature of the Bitcoin blockchain.

In contrast, BSV has further decentralized the control by locking the base protocol and placing it under the supervision of Bitcoin Association, a Switzerland-based nonprofit global industry organization. All future development will be at the application layers with guaranteed compatibility with the base protocol, following the pattern of the Internet’s TCP/IP protocol. This way to maximize the effect of decentralization is far superior to BTC’s way by sacrificing scalability.

You may question, what is the difference between trusting a Switzerland-based nonprofit organization and trusting several BTC Core developers?

The difference is essential.

First, there is a legal mandate with BSV, but a total lack of the same with BTC. In the case of Bitcoin SV (BSV), there are ironclad and transparent rules regarding the base protocol of Bitcoin being “set in stone,” that is, locked. No one has authority to change the locked base protocol. Not even Satoshi himself, the inventor of Bitcoin. The Bitcoin Association’s job is not to study what in the base protocol can be changed, but to make sure that nothing is changed in the base protocol¹. This isn’t a mere aspiration or a public goodwill, but the legal mandate of the Association. There is none of this kind of legal mandate with the BTC Core.

Second, the Bitcoin Association and the BTC Core have entirely different kinds of interest positions. The Bitcoin Association is separated from the economic effects of Bitcoin by a legally mandated and publicly visible firewall. The separation is even far more complete than the most trusted global business associations based on industrial coalitions. The BTC Core is the opposite. Not only are the Core developers themselves directly connected with the economic effects of BTC, but they are also further supported and incentivized by groups that hide behind BTC to push their own agendas.

Third, the rule of law versus anarchy agendas. Human society always needs trust. The goal is to minimize and optimize the trust, by placing the minimally necessary trust on entities that do not have a conflict of interest. Thousands of years of human organizational development, especially that of the Western civilization, has learned one valuable lesson about this, and further developed a system and tools to achieve this optimization. That system is the rule of law, and those tools include the most effective one which is incorporation of legal entities operating under the rule of law. The Bitcoin Association makes full use of the system and the tools, while BTC Core is the opposite. The Bitcoin Association promotes the rule of law and economic utility under the rule of law, while the BTC Core promotes anarchy. The BTC Core functions as a partnership-in-fact but hides its real function and purpose from the public, and at the same time enjoys the mysticism and esteem created by a carefully social-engineered narrative that they are “all Satoshi.”

Fourth, some argue that the BTC core developers do not make changes freely but only do that with a public vote. But there are several problems with that argument. (1) It relies on the altruism of the BTC Core developers. What they have done is not necessarily what they will do in the future, and that is a fundamental systemic risk. (2) The public voting has been mostly optics, because the truth is that the Core developers (and the forces behind them) set the goal, and then use a variety of network means to influence the participants, not only the miners, but also the exchanges (whose powers are hidden but have an even greater say in the outcome through their control of the ticker and price), and of course the public, which essentially follows a carefully social-engineered narrative with no ability nor motivation to disagree. It is a highly manipulative and manipulable system. (3) It is a fact that all the major changes initiated and successfully implemented by the BTC Core in the past were driven by this ideology-based value: anarchism. Escaping the control of the rule of law is both the cornerstone and capstone of the system. It has been the case since the choice of small blocks to the recent Taproot.

There is true effective decentralization with BSV; but there is only shifting from one type of centralization to a different, and very likely much more harmful and pernicious, kind of centralization with BTC (the present form of centralization with Web2 being at least obvious and made public with little pretense to be otherwise).

We need a proper definition of decentralization with a view of actual utilities benefiting the common people and the broader society, not one that is being pinned under the hidden ideology of a small group of people.

Decentralization and security

In the context of Bitcoin blockchain, decentralization and security are not a dilemma as commonly misunderstood according to the doctrine of Bitcoin trilemma. Although conceptually distinguishable from each other (the former referring to control, while the latter to hacking resistance), decentralization and security are not contradictory to each other in any way suggested by the doctrine of Bitcoin trilemma.

Decentralization and security on Bitcoin blockchain come more closely hand-in-hand. This is because the security with respect to how easily a single party can be hacked is almost irrelevant to blockchain, and it is only the security with respect to how much impact it would have on the system as a whole when a party is hacked that matters, but the latter is closely related to decentralization. Better decentralization leads to better security.

That is, with Bitcoin blockchain, decentralization essentially subsumes security.

As a result, what we really are looking at is a potential dilemma between decentralization and scalability, rather than a more complicated trilemma.

Meanwhile, considering decentralization in view of security further highlights the distinction between real effective decentralization and nominal decentralization. In theory, all open networks are subject to Sybil attacks in which an individual identity masquerades as numerous identities on the network to conduct simultaneous activities aiming to paralyze or otherwise harm the network. Nominal decentralization itself is not a protection against Sybil attacks. In fact, in certain circumstances, it could have an opposite effect. It is the effective decentralization enabled by network’s transparency, de-anonymization, and unrestricted PoW competition among independent full-mining nodes, not the nominal decentralization, that effectively counters Sybil attacks, as well as collusion.

Decentralization and scalability

Given that security is subsumed under decentralization, what remains important is the relationship between decentralization and scalability.

Does a dilemma exist between decentralization and scalability, and if yes, what kind of contradiction does it present?

The answer is, there may be some level of contradiction, but not in the way suggested by BTC and some parts of the Bitcoin community.

First, decentralization and scalability are not a true dilemma. In a true dilemma between A and B, shifting to one end (A or B) means the total loss of the other end. This is clearly not the case with Bitcoin, because BSV has demonstrated unbounded scalability without apparent loss of decentralization (even as compared to BTC), let alone a total loss of that.

Second, in a true dilemma between A and B, shifting completely to an end is at least achievable even if it is not desirable. But this is not the case with Bitcoin. Even by completely sacrificing scalability, BTC could not achieve perfect decentralization. It boasts tens of thousands voluntary nodes, but a vast majority of them are not real nodes as they contribute nothing to the creation of blocks, and therefore contribute nothing to actual decentralization. Today, over 50% of the hashing power are concentrated on just 4 BTC miners. In addition, before China outlawed the mining, the vast majority of BTC mining power was concentrated in that country. This type of geographic concentration was not accidental, but is inherently related to how mining is designed with BTC. See BTC and BSV, what is the real difference?

Third, in a true dilemma, the effect of shifting to one end is always reciprocal and symmetrical, operating as a hard restrain preventing from shifting too far to any of the two sides. But this is not the case with Bitcoin. While BTC has demonstrated that a complete shift to decentralization is unachievable, BSV has demonstrated that a shift to unbounded scalability is not only achievable, but also does not result in a total loss of decentralization. Clearly, decentralization and scalability are not a symmetrical pair in a dilemma, and there is an advantage in shifting to one end rather than the other.

Fourth, with the BSV shifting to unbounded scalability, the resultant level of decentralization is not significantly different from that of BTC’s, strongly suggesting all the following simultaneously: (1) there exists a highest threshold level of decentralization that can be achieved by sacrificing scalability, such that further shifting beyond the threshold causes only a loss in scalability but no gain on decentralization; (2) there exists an optimal level of decentralization that can be achieved while maintaining unbounded scalability; and (3) the above threshold level and the optimal level are surprisingly close to each other without a significant difference in terms of security.

Fifth, perhaps more important, as discussed above, the kind of decentralization that is really effective is not a mathematical type of even distribution among unlimited number of nodes, which is not only unachievable (as BTC has demonstrated), but is also unnecessary, or even undesirable.

It isn’t about an appearance of decentralization itself. Beyond two miners, the economics (transparent and competitive nature) of the network becomes increasingly more important than just the number of miners.

Sixth, the reality of multiple miners competing on the Bitcoin blockchain is very different from the Byzantine generals. The Byzantine fault tolerance as a mathematical problem assumes total lack of communication and transparency among the generals. But the situation among the bitcoin miners is the opposite. On BSV, not only do major miners communicate (network) with each other, it is always possible for both the miners and the users (the public) to tell who are the “good miners” and who are the bad actors. This results in a very robust self-defense system against even a 51% attack, because the good miners and the users simply follow what they know is good and ignore the malicious actor even if it has over 51% hash power. This is “Proof of Good Work” (PoGW).

This has already been proven in year 2021 when BSV community successfully defended a 51% hash power attack.

Every blockchain is subject to 51% attacks in theory, but that does not mean it would necessarily be the end of the blockchain once a 51% attack happens. What matters is not whether a 51% attack might happen nor even if it has indeed happened, but whether the attack has actually resulted in either a double spend or a hard fork. Neither has happened in the case of BSV.

Because every blockchain is subject to 51% attacks in theory, we should ask ourselves this more meaningful question:

Which blockchain has been tested with a real one and defeated the attack?

The answer: It is the Bitcoin blockchain that has unbounded scalability.

Decentralization and ideology

As pointed out above, the most common understanding of the decentralization of blockchain originated from and has been promulgated by individuals who considered the blockchain system in an abstract view. This view coincides with an anarchic viewpoint and defines the key concept of “decentralization” accordingly.

Such anarchic viewpoint is quite clearly shown in its treatment of blockchain system using the Byzantine fault tolerance, a mathematical problem assumes total lack of rules, communication and transparency among the generals.

The anarchy views share one common core belief: order can be created without any governing rules. For this reason, the believers and followers of these views strongly oppose any idea of rules governing human behavior, especially rules based on knowledge, reasoning, economics, equity, justice and morality. 

The anarchy views are attractive because they appeal to people’s common disappointment of both the existing government and social systems that are governed by rules. 

But as discussed above, in reality the bitcoin economic system is based on rules, communications and transparency. Not only do major miners communicate (network) with each other, it is always possible for both the miners and the users (the public) to tell who are the “good miners” and who are the bad actors, because there always exists a transparent, rule-based, and business ethics-constrained consensus. The good miners and the users simply follow what they know is good and ignore the malicious actor even if it has over 51% hash power. This is “Proof of Good Work” (PoGW). This results in a very robust self-defense system against even a 51% attack with a small-world-network without a large number of noncompeting nodes.

People fail to see the fallacy of anarchic philosophy and ignore the fact that human systems (social or economic) all derive stability and value from the existence of governing rules, especially rules based on knowledge, reasoning, economics, equity, justice and morality. Without rules, the system always collapses or finds temporary stability under a different set of rules. 

Anarchists may fervently promote the idea of liberty and self-organization without governing rules, but their purpose is always to replace the existing rules with their own rules. All this is evident in systems like Bitcoin Core (BTC) and Ethereum where the pursuit of a false appearance of “decentralization” has led to not only a nonscalable system but also a hidden form of control in reality by a small group.

But the real Bitcoin is an economic system based on rules designed according to human reality to support normal governing and the rule of law, not an abstract machine system to support anarchy.

Decentralization and data/information freedom

Decentralization in the context of data/information freedom goes beyond the blockchain system itself, but is still closely related to blockchain because a truly scalable public blockchain is the only hope to realize data/information freedom.

The problem of the current Internet is that the ownership of data and information is essentially centralized. Consumers are given a seemingly unrestricted access to the information, but don’t realize that they, including the creators of the information, do not have ownership nor control over the information. The ostensible free access of information has worked effectively as a bribe for people to overlook or even be blind to the problem of the deprived data ownership and freedom.

Although this problem is widely recognized among the commentators and many entrepreneurs, and such recognition has become even a basis for the web3 hype, the following remains the truth:

(1) BTC, while ostensibly championing for decentralization, does not even pretend to offer a solution to this problem, because BTC is just about the coins, not about data/information.

(2) The rest of the blockchain world has created a hype of Web3, NFT’s and DeFi, but is offering a fake solution by introducing recentralization at so-called layer 2. See Web3, NFT’s and DeFi are a sham without a blockchain scalable at L1.

BSV is the only hope for true decentralization of data and information. The current BSV blockchain infrastructure is fully ready for all Web3, NFT’s and DeFi applications with true L1 decentralized model rooted in an on-chain decentralized ledger.

But the capacity of BSV is even far beyond that. In the near future, the Metanet and Teranode based on the BSV blockchain will integrate IPv6 with Bitcoin blockchain to create the next generation Internet. Not blockchain on Internet. But blockchain with the Internet, or even Internet on the blockchain. See for example, IEEE UAE Blockchain Symposium Craig Wright keynote: Creating secure internet with Bitcoin & IPv6.

You will hear more about this soon. When you do, it is when the debate over “decentralization” is over, with a clear winner. The winning will not be based on a narrative that was designed to mislead the public, but based on the reality that was designed to benefit the public.

Summary

Overall, when it comes to decentralization, it is important to realize that Bitcoin is not a techno system, but an economic system. With a proper economic design, BSV achieves unbounded scalability without losing effective decentralization or security, at least not to a degree that might outweigh the benefit of scalability.

Taking into consideration the full effect of human behavior in the context of collaboration and competition (coopetition), an argument can even be made that the scalable professional Small-World Network (SWN) architecture of Bitcoin SV has effective decentralization that is superior to that of a nonscalable network of nonperforming members whose existence is only for the purpose of showing an appearance of decentralization.

The real Bitcoin blockchain (BSV) is scalable, even with unbounded scalability, and without sacrificing effective decentralization.

Furthermore, it has no need to play tricks on layer-2 which defeat the purpose of blockchain by causing re-centralization.

Therefore, there is no justification to say that Bitcoin must sacrifice scalability in order to maintain decentralization.

For a related discussion, please read BTC and BSV, what is the real difference?

Concerning the question of layer 2 (L2) scalability, please see: Lightning Network on BTC is a dead end even if it works as claimed.

For other misunderstandings of Bitcoin, such as “Bitcoin Blockchain does not have smart contract capabilities,” see “Misunderstandings about blockchain & bitcoin.”

Notes:

[1] The protocol is still subject to the law. However, “[t]he protocol includes law, hence, law does not change the protocol.” – Dr. Craig S. Wright, private correspondence.

Watch: CoinGeek New York panel, BSV vs. Other Blockchains: Differences that Matter for Developers & Businesses