Methods of decentralization

There are two methods that can be used to achieve decentralization. These methods are discussed in detail in the following sections.

Disintermediation

This can be explained with the help of an example. Imagine you want to send money to your friend in another country. You go to a bank that will transfer your money to the bank in the country of your choice for a fee. In this case, the bank keeps a central database that is updated, confirming that you have sent the money. With blockchain technology, it is possible to send this money directly to your friend without the need for a bank. All you need is the address of your friend on the blockchain. This way, the intermediary is no longer required and decentralization is achieved by disintermediation. However, it is debatable how practical decentralization is in the financial sector by disintermediation due to heavy regulatory and compliance requirements. Nevertheless, this model can be used not only in finance but also in many other different industries.

Through competition

In this method, a group of service providers compete with each other in order to be selected for the provision of services by the system. This paradigm does not achieve complete decentralization, but to a certain degree ensures that an intermediary or service provider is not monopolizing the service. In the context of blockchain technology, a system can be envisioned in which smart contracts can choose an external data provider from a large number of providers based on their reputation, previous score, reviews, and quality of service. This will not result in full decentralization, but it allows smart contracts to make a free choice based on the criteria mentioned earlier. This way, an environment of competition is cultivated among service providers, whereby they compete with each other to become the data provider of choice.

In the following diagram, varying levels of decentralization are shown. On the left-hand side, there is a conventional approach where a central system is in control; on the right-hand side, complete disintermediation is achieved; and in middle, competing intermediaries or service providers are shown. In the middle, intermediaries or service providers are selected based on reputation or voting, thus achieving partial decentralization.

Scale of decentralization

While there are many benefits of decentralization--including but not limited to transparency, efficiency, cost saving, development of trusted ecosystems, and in some cases privacy and anonymity--some challenges, such as security requirements, software bugs, and human errors, also need to be looked at thoroughly. For example, in a decentralized system such as bitcoin or Ethereum, where security is usually provided by private keys, how can it be ensured that a smart property associated with these private keys cannot be rendered useless if, due to a human error, the private keys are lost or if, due to a bug in the smart contract code, the decentralized application is vulnerable to attack by adversaries? Before we embark on a journey to decentralize everything using blockchain and decentralized applications, it is important to understand that not everything is required to (or can be) decentralized.