Decentralization is a core benefit and service provided by blockchain technology. By design, blockchain is a perfect vehicle for providing a platform that does not need any intermediaries and that can function with many different leaders chosen via consensus mechanisms. This model allows anyone to compete to become the decision-making authority. A consensus mechanism governs this competition, and the most famous method is known as Proof of Work (PoW).

Decentralization is applied in varying degrees from a semi-decentralized model to a fully decentralized one depending on the requirements and circumstances. Decentralization can be viewed from a blockchain perspective as a mechanism that provides a way to remodel existing applications and paradigms, or to build new applications, to give full control to users.

Information and communication technology (ICT) has conventionally been based on a centralized paradigm whereby database or application servers are under the control of a central authority, such as a system administrator. With Bitcoin and the advent of blockchain technology, this model has changed, and now the technology exists to allow anyone to start a decentralized system and operate it with no single point of failure or single trusted authority. It can either be run autonomously or by requiring some human intervention, depending on the type and model of governance used in the decentralized application running on the blockchain.

The following diagram shows the different types of systems that currently exist: central, distributed, and decentralized. This concept was first published by Paul Baran in On Distributed Communications: I. Introduction to Distributed Communications Networks (Rand Corporation, 1964):

Figure 2.1: Different types of networks/systems

Centralized systems are conventional (client-server) IT systems in which there is a single authority that controls the system, and who is solely in charge of all operations on the system. All users of a centralized system are dependent on a single source of service. The majority of online service providers, including Google, Amazon, eBay, and Apple's App Store, use this conventional model to deliver services.

In a distributed system, data and computation are spread across multiple nodes in the network. Sometimes, this term is confused with parallel computing. While there is some overlap in the definition, the main difference between these systems is that in a parallel computing system, computation is performed by all nodes simultaneously in order to achieve the result; for example, parallel computing platforms are used in weather research and forecasting, simulation, and financial modeling. On the other hand, in a distributed system, computation may not happen in parallel and data is replicated across multiple nodes that users view as a single, coherent system. Variations of both of these models are used to achieve fault tolerance and speed. In the parallel system model, there is still a central authority that has control over all nodes and governs processing. This means that the system is still centralized in nature.

The critical difference between a decentralized system and distributed system is that in a distributed system, there is still a central authority that governs the entire system, whereas in a decentralized system, no such authority exists.

A decentralized system is a type of network where nodes are not dependent on a single master node; instead, control is distributed among many nodes. This is analogous to a model where each department in an organization is in charge of its own database server, thus taking away the power from the central server and distributing it to the sub-departments, who manage their own databases.

A significant innovation in the decentralized paradigm that has given rise to this new era of decentralization of applications is decentralized consensus. This mechanism came into play with Bitcoin, and it enables a user to agree on something via a consensus algorithm without the need for a central, trusted third party, intermediary, or service provider.

We can also now view the different types of networks shown earlier from a different perspective, where we highlight the controlling authority of these networks as a symbolic hand, as shown in the following diagram. This model provides a clearer understanding of the differences between these networks from a decentralization point of view:

Figure 2.2: Different types of networks/systems depicting decentralization from a modern perspective

The preceding diagram shows that the centralized model is the traditional one in which a central controller exists, and it can be viewed as a depiction of the usual client/server model. In the middle we have distributed systems, where we still have a central controller but the system comprises many dispersed nodes. On the right-hand side, notice that there is no hand/controller controlling the networks.

This is the key difference between decentralized and distributed networks. A decentralized system may look like a distributed system from a topological point of view, but it doesn't have a central authority that controls the network.

The differences between distributed and decentralized systems can also be viewed at a practical level in the following diagrams:

Figure 2.3: A traditional distributed system comprises many servers performing different roles

The following diagram shows a decentralized system (based on blockchain) where an exact replica of the applications and data is maintained across the entire network on each participating node:

Figure 2.4: A blockchain-based decentralized system (notice the direct P2P connections and the exact replicas of blocks)

A comparison between centralized and decentralized systems (networks/applications) is shown in the following table:

The comparison in the table only covers some main features and is not an exhaustive list of all features. There may be other features of interest that can be compared too, but this list should provide a good level of comparison.

Now we will discuss what methods can be used to achieve decentralization.

Two methods can be used to achieve decentralization: disintermediation and competition. These methods will be discussed in detail in the sections that follow.

Disintermediation

The concept of disintermediation can be explained with the aid of an example. Imagine that you want to send money to a friend in another country. You go to a bank, which, for a fee, will transfer your money to the bank in that country. In this case, the bank maintains 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 (that is, the bank) is no longer required, and decentralization is achieved by disintermediation. It is debatable, however, how practical decentralization through disintermediation is in the financial sector due to the massive regulatory and compliance requirements. Nevertheless, this model can be used not only in finance but in many other industries as well, such as health, law, and the public sector. In the health industry, where patients, instead of relying on a trusted third party (such as the hospital record system) can be in full control of their own identity and their data that they can share directly with only those entities that they trust. As a general solution, blockchain can serve as a decentralized health record management system where health records can be exchanged securely and directly between different entities (hospitals, pharmaceutical companies, patients) globally without any central authority.

Contest-driven decentralization

In the method involving competition, different 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. However, to a certain degree, it 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 method will not result in full decentralization, but it allows smart contracts to make a free choice based on the criteria just mentioned. This way, an environment of competition is cultivated among service providers where 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 side, the conventional approach is shown where a central system is in control; on the right side, complete disintermediation is achieved, as intermediaries are entirely removed. Competing intermediaries or service providers are shown in the center. At that level, intermediaries or service providers are selected based on reputation or voting, thus achieving partial decentralization:

Figure 2.5: Scale of decentralization

There are many benefits of decentralization, including 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 error, need to be examined thoroughly.

For example, in a decentralized system such as Bitcoin or Ethereum where security is normally provided by private keys, how can we ensure that an asset or a token associated with these private keys cannot be rendered useless due to negligence or bugs in the code? What if the private keys are lost due to user negligence? What if due to a bug in the smart contract code the decentralized application becomes vulnerable to attack?

This view raises some fundamental questions. Is a blockchain really needed? When is a blockchain required? In what circumstances is blockchain preferable to traditional databases? To answer these questions, go through the simple set of questions presented below:

Answering all of these questions can help you decide whether or not a blockchain is required or suitable for solving the problem. Beyond the questions posed in this model, there are many other issues to consider, such as latency, choice of consensus mechanisms, whether consensus is required or not, and where consensus is going to be achieved. If consensus is maintained internally by a consortium, then a private blockchain should be used; otherwise, if consensus is required publicly among multiple entities, then a public blockchain solution should be considered. Other aspects, such as immutability, should also be considered when deciding whether to use a blockchain or a traditional database. If strict data immutability is required, then a public blockchain should be used; otherwise, a central database may be an option.

As blockchain technology matures, there will be more questions raised regarding this selection model. For now, however, this set of questions is sufficient for deciding whether a blockchain-based solution is suitable or not.

Now we understand different methods of decentralization and have looked at how to decide whether a blockchain is required or not in a particular scenario. Let's now look at the process of decentralization, that is, how we can take an existing system and decentralize it. First, we'll briefly look at the different ways to achieve decentralization.

There are systems that pre-date blockchain and Bitcoin, including BitTorrent and the Gnutella file-sharing system, which to a certain degree could be classified as decentralized, but due to a lack of any incentivization mechanism, participation from the community gradually decreased. There wasn't any incentive to keep the users interested in participating in the growth of the network. With the advent of blockchain technology, many initiatives are being taken to leverage this new technology to achieve decentralization. The Bitcoin blockchain is typically the first choice for many, as it has proven to be the most resilient and secure blockchain and has a market cap of nearly $166 billion at the time of writing. Alternatively, other blockchains, such as Ethereum, serve as the tool of choice for many developers for building decentralized applications. Compared to Bitcoin, Ethereum has become a more prominent choice because of the flexibility it allows for programming any business logic into the blockchain by using smart contracts.

How to decentralize

Arvind Narayanan and others have proposed a framework in their book Bitcoin and Cryptocurrency Technologies that can be used to evaluate the decentralization requirements of a variety of issues in the context of blockchain technology. The framework raises four questions whose answers provide a clear understanding of how a system can be decentralized:

1. What is being decentralized?
2. What level of decentralization is required?
3. What blockchain is used?
4. What security mechanism is used?

The first question simply asks you to identify what system is being decentralized. This can be any system, such as an identity system or a trading system.

The second question asks you to specify the level of decentralization required by examining the scale of decentralization, as discussed earlier. It can be full disintermediation or partial disintermediation.

The third question asks developers to determine which blockchain is suitable for a particular application. It can be Bitcoin blockchain, Ethereum blockchain, or any other blockchain that is deemed fit for the specific application.

Finally, a fundamental question that needs to be addressed is how the security of a decentralized system will be guaranteed. For example, the security mechanism can be atomicity-based, where either the transaction executes in full or does not execute at all. This deterministic approach ensures the integrity of the system. Other mechanisms may include one based on reputation, which allows for varying degrees of trust in a system.

In the following section, let's evaluate a money transfer system as an example of an application selected to be decentralized.

Decentralization framework example

The four questions discussed previously are used to evaluate the decentralization requirements of this application. The answers to these questions are as follows:

1. Money transfer system
2. Disintermediation
3. Bitcoin
4. Atomicity

The responses indicate that the money transfer system can be decentralized by removing the intermediary, implemented on the Bitcoin blockchain, and that a security guarantee will be provided via atomicity. Atomicity will ensure that transactions execute successfully in full or do not execute at all. We have chosen the Bitcoin blockchain because it is the longest established blockchain and has stood the test of time.

Similarly, this framework can be used for any other system that needs to be evaluated in terms of decentralization. The answers to these four simple questions help clarify what approach to take to decentralize the system.

To achieve complete decentralization, it is necessary that the environment around the blockchain also be decentralized. We'll look at the full ecosystem of decentralization next.