How Decentralised Is Decentralised?

Across the blockchain industry, decentralisation has long been touted as the core tenet. A promise of a future where power is distributed among the masses and control is wrested from the hands of centralised authorities. A vision that has captured the imagination of countless entrepreneurs, developers, and enthusiasts, all working towards a common goal of creating a more equitable and transparent world. But as we dive deeper into the intricacies of the top blockchains, it becomes clear that the reality of decentralisation is far more complex and nuanced than the rhetoric suggests.

The first and most well-known blockchain, Bitcoin Bitcoin is a decentralised electronic cash system built on a Proof-of-Work (PoW) mechanism. Under PoW, miners compete to solve complex mathematical problems to validate transactions, add new blocks to the chain, and earn newly mined bitcoins as a reward. In theory, this system should promote a decentralised network where no single entity has control.

But the high costs associated with mining, including expensive hardware and significant amounts of electricity, have led to the rise of large-scale mining pools and operations. If a majority of the mining power concentrated in the hands of a few players, there is a risk of 51% attacks, where a single miner or mining entity controls enough mining power to manipulate the blockchain. This could lead to double-spending, censorship, and other forms of network manipulation.

To address the centralisation and environmental concerns associated with PoW, Ethereum Ethereum , the second-largest blockchain by market capitalisation, transitioned from PoW to a Proof-of-Stake (PoS) system in 2022.

In Ethereum’s PoS consensus, users can become validators by staking exactly 32 ETH per validator node, which validates transactions on the chain. For example, if you have 96 ETH, you can run three nodes, each with 32 ETH staked.

However, even after the Merge, Ethereum has struggled to solve its scalability issues. Plus, the rise of liquid staking, where users can stake their ETH through a third-party provider while maintaining liquidity to invest elsewhere, has led to a significant concentration of staking power among a few dominant liquid staking providers.

Researchers at the Ethereum Foundation have warned that if the majority of Ether is deposited in liquid staking protocols, tokens like Lido’s stETH or Rocket Pool’s rETH could become the defacto currency of Ethereum, surpassing Ether in liquidity. To address this issue, there have been discussions about capping the amount of Ether that can be staked to prevent liquid staking from overwhelming the network.

Aside from the two major blockchains, newer networks like Solana Solana are showing promising signs of further decentralisation. Despite the high concentration of token ownership among early investors and reliance on a small core development team, a closer look at Solana reveals that it may be more decentralised than many people think.

Unlike PoW, which favours large mining operations and Ethereum’s substantial staking threshold of 32 ETH, Solana’s approach to consensus, a unique blend of Proof-of-History (PoH) and PoS, requires no minimum stake, although it does require much more hardware to get started.

The lack of a staking minimum creates a lower barrier to entry for staking and encourages a diverse and distributed network of validators and rewards, leading to a more decentralised ecosystem.

According to a recent analysis by the Solana Foundation, the network has nearly 2,000 block-producing consensus nodes and a Nakamoto coefficient score of 31, while being one of the most evenly geographically distributed blockchain networks in the world.

But this raises a larger question: How do we measure decentralisation in the first place?

Measuring decentralisation can’t be boiled down to a single metric or benchmark, but one approach is the Nakamoto coefficient. Named after the pseudonymous Bitcoin founder, Satoshi Nakamoto, it measures the minimum number of nodes required to disrupt a blockchain network. A high Nakamoto coefficient indicates a more decentralised network, while a low coefficient suggests greater centralisation.

But even this quantitative measure has its limitations.

Nakamoto doesnt look at dependence on protocol-organisations and presently Solana is seen as having strong dependence on Solana Foundation and Solana Labs to solve protocol issues. Another issue is that the Nakamoto coefficient only focuses on validator stakes, without considering the distribution of wealth, the geographic distribution of nodes, or the level of community engagement within the network — all crucial factors contributing to the overall health of the ecosystem.

As a snapshot metric, Nakamoto fails to capture changes in power distribution over time and fails to provide context into who the validators are, where validators are located, and differences between various networks’ node structures and upgrade procedures. This makes it challenging to turn to the Nakamoto Coefficient as an accurate representation of decentralisation.

Other non-blockchain mathematical methods of measuring decentralisation include statistical representations used far beyond the blockchain industry such as the Gini Coefficient and Lorenz Curve. The Lorenz curve is a graphical representation of the cumulative distribution of income or wealth, while the Gini coefficient is a single number that quantifies the level of inequality based on the area between the Lorenz curve and the line of perfect equality. Measured on a scale from 0 to 1, a value closer to 1 indicates higher inequality.

An aspect of decentralisation is geographical diversity, which evaluates the distribution of the network of participants across different regions and cloud providers, reducing the risk of localised disruptions or control. This has come into sharper focus this month after Google accidentally deleted the entire database for one of the largest pension funds in Australia, of $125bn, UniSuper.

Another mode of measurement is censorship resistance, which evaluates a blockchain network’s ability to withstand attempts to control or censor transactions and information flow, ensuring that no single entity can manipulate access.

While measuring decentralisation is a complex, multi-faceted subject, one thing is clear: it’s not a binary state, but rather a spectrum. Not all decentralised networks are equally decentralised, and extreme decentralisation may not always be necessary or desirable.

Some decentralisation comes at a sacrifice for scalability and efficiency, which may not be the most suitable trade-off for every ecosystem. That being the case, it’s important to find the right balance between scalability and decentralisation, while ensuring that core security principles are not compromised – something that most networks have yet to figure out.

While third generation blockchains have made massive strides in solving the blockchain trilemma, the definition and priorities of decentralisation, scalability, and security continue to evolve based on the needs and values of each network and its community.

As one of my colleagues Jakob Stammler said to me recently: True decentralisation, for example, extends beyond the technical architecture to include considerations of governance, economic inclusivity, and the equitable distribution of power and control within the network. As decentralisation continues to evolve and new consensus mechanisms and governance models emerge, we must continually reassess what it means to be decentralised.

It’s only by challenging our assumptions and staying critical that we can create a blockchain ecosystem that truly lives up to the promise of a more equitable and decentralised future.

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