Published On: September 21, 2022Categories: articleTags:

“Decentralization” is a popular term used to bracket a set of interrelated technologies including blockchain, crypto tokens, NFTs.

It’s also a fuzzy term that has been used in subtly different ways in different disciplines throughout history, so the question “what is a decentralized system?”, or, more to the point, “is this particular system really decentralized?” can be quite difficult to answer unless we have a clear definition by which we can measure ourselves.

Decentralization and control

Decentralization is ultimately about where to locate the control over a system within a system. The widely used definition of “decentralization” used in political science usually means the devolution of some measure of control from a central actor to multiple actors distributed within the system.

But it’s easy to see that the decentralized system maintains one major disadvantage of the centralized system: remove the central node and the system falls apart. Indeed, the graph on the right could simply be rearranged to depict the supposedly decentralized system as a multi-level hierarchy.

Also, this kind of devolution usually keeps the power to resolve disputes firmly within the central node. “National law breaks state law” is a common expression of such a system.

Even if some projects clearly have this definition in mind, our definition of decentralization goes beyond this devolution of control under a single central authority.

Decentralization and mutuality

For us, decentralized systems are systems of mutual control. No single actor has privileged rights over the system, to add or remove data, to make unilateral decisions, to disconnect or replace other actors. No single actor has information or decision making advantages. No single actor controls information flow.

A single truth without a single source

In computer science, a single source of truth is any actor that, if there is disagreement about the state of the system, can overrule all others. Notably, the definition of “truth” in this context is not “what is true” but “what is held to be true”. So a controlling actor could perfectly well seed false information and make all others adopt it.

Decentralized systems are designed to avoid this scenario.

This means in practice that decentralized systems allow every actor to propose new information to be included, but all other actors will test this new information for consistency before they accept it. And only new information that is consistent for all actors will be accepted.

Depending on the setup this mutual up-front filtering of incoming information can be quite costly and resource intensive — a common critique of decentralized systems.

But the key to understanding the economic motivation for decentralized systems is that this process shifts the cost of dispute resolution from after the fact (often a long time after the fact when dispute resolution becomes a very costly endeavor) to before the fact (when information gets entered into the system).

The result is a system state that is known and accepted by all actors to reflect consistent real-time information, with no single actor having the privilege to unilaterally control information flow.

Decentralized systems for decentralized scenarios

Clearly, this kind of a setup is not a catch-all for all scenarios.

To discover the right scenarios, we have to find situations where these premises hold true: we don’t want a single actor to be able to overrule everyone else, and we want information flow to be non-excludable where this information is critical to the operation of the system, but excludable where the right to privacy trumps the right to transparency.

Luckily, over the last years value creation has gradually shifted from orchestrating production (inside firms) to orchestrating exchange (in-between firms). There are many reasons for this

One reason is the increasing vertical disintegration of production. Where companies used to produce everything in-house, they now rely on globally distributed multi-tier supply networks.

How important it is to have full transparency across tiers and across continents is something we get to see on an almost daily basis now, and not only since the Ever Given got stuck in the Suez Canal.

Economically speaking, a decentralized system makes sense wherever the additional cost of providing consistent real-time information to all participants reduces the cost of intransparency and the increased cost of dispute resolution in all its forms, from customer complaints to multi-million dollar lawsuits.

The current solution to this problem, platforms, tends to be very lucrative for the platform owner but costly for everyone else because they ultimately create a hierarchical structure for orchestrating exchange: the platform owner retains control over access and dispute resolution and critically, the ultimate information advantage.

If we want to alleviate these problems, we should be thinking about decentralized systems. This is what we do at Warren Brandeis.