Newsletter #9 - Decentralization

Decentralization, which has found its place in various fields, has become a concept that we often encounter with its importance in the web3 ecosystem. We will examine this concept with different perspectives by putting it under a magnifying glass.

Decentralization, from a basic perspective, the expansion of delegation at the organizational level; It can be expressed as an organizational structure in which the actions taken by the senior management on behalf of their decision-making responsibilities and daily operations are transferred to the middle and lower subordinates. Wikipedia also defines this word as the process by which an organization's activities, particularly those related to planning and decision-making, are distributed or delegated from a centralized, authoritative place or group. This concept is applied in the fields of private enterprises and organizations, political science, law, economics, technology, and management science. For example, blockchain technologies are one of these areas.

References: 1–2

The concept of decentralization in blockchain refers to the transfer of control and decision-making from a central entity — an individual, company, or group of people — to a distributed network.

Every blockchain protocol, Decentralized Application, Decentralized Autonomous Organization (DAO), or other blockchain-related solutions have varying levels of decentralization. Many DAOs have different components at various stages of decentralization. For instance, third-party services providing external information to smart contracts (oracles) may be partially decentralized; smart contracts themselves can be entirely centralized, while the governance process for adjusting parameters can be community-driven and decentralized. On a broader scale, decentralized blockchain solutions are being explored and adopted by organizations of all types, sizes, and industries.

As a real-life example, the story of Contura Energy can be mentioned. They are using a decentralized blockchain platform in collaboration with Amazon Web Services Cloud Platform to digitize and automate letter of credit processes, manage international trade payments in a more efficient, cost-saving, and less risky system.

Consensus Mechanisms

he understanding of decentralization within blockchain is based on the distribution of decision-making authority from singular executives to groups. Consensus mechanisms, which take on decisions such as validating new transactions in blockchain, come into play.

‘’Proof of Work’’, which is the first distributed consensus mechanism, is a mechanism used in the blockchain and based on mining. Users called "Miners" contribute to the operation of the network by solving a mathematical puzzle called "Hash" and are rewarded with Bitcoin in return.

Another mechanism is the "Proof of Stake" which has gained popularity in recent years under this name. The "validators" in this architecture do the work of adding blocks. The chosen one adds the new block to the network and receives the reward. At this point, the amount of coins owned is important. In other words, the higher the number of coins on hand, the higher the chance of qualifying for adding new blocks to the chain.

Benefits of Decentralization

In a decentralized blockchain system, you don't have to know anyone on an individual level. Each member of the network has a copy of the data as a distributed record, or exactly the same information. If any member's record is altered or tainted in any way, it is rejected by most people on the network. It can also reduce vulnerabilities in systems where specific actors need to be trusted.

We can list sensitive issues such as failure to provide promised services, system deficiencies, inefficiencies due to depletion of resources and even fraud. It optimizes resource allocation to deliver promised services with better performance and consistency, as well as reduce the likelihood of failed scenarios within the system.

References: 1–2–3–4–5

Vitalik Buterin, the founder of Ethereum, highlights the frequent use of decentralization in the field of crypto economics and mentions that it can be seen as the reason for being of blockchains

and points out the confusion surrounding the concept In his Medium article about the meaning of decentralization. When discussing decentralization, he states that there are three separate axes that can be discussed and that they can generally be independent of each other. These axes are architectural decentralization, governance decentralization and logical decentralization. He explains these headings in the context of blockchains as follows:

Buterin continues by listing arguments in favor of decentralization's benefits. He emphasizes the validity and importance of the arguments that decentralized systems rely on many separate components, reducing the probability of failure, that they do not have vulnerable central points that can be attacked, making it more expensive to eliminate them, and that making secret agreements is very difficult. He also provides a deeper analysis by listing different perspectives. For further reading, you can access the article titled "The Meaning of Decentralization" here.

References: 1–2

In Web2, which is considered to have started in 2004, internet users can produce content and upload it to social networking services, blogs and various sites, that is, users contribute to the sharing of information. However, these shares are possible with centralized services provided by companies such as Google, Facebook and Amazon. At its most basic level, Web3 refers to a blockchain-based, decentralized online ecosystem. Platforms and applications built on Web3 are not owned by a central person or organization, but by users who gain ownership by helping to develop and maintain services. You can take a look at the journey of the web in the second newsletter of ReFi Turkiye.

Decentralized social networks operate on servers that operate independently rather than on a central server owned by a business. With blockchain technology, it allows data entries to be stored on servers anywhere in the world, increasing transparency as the data can be viewed in near real time by anyone on a network.

Decentralized social networks give users more control. A person can set up their own social network and determine how it works and what users can say. Instead of content being watched by a company, the founder or founders of a unified social network can act in partnership with other users.

Activities that you can do on any social media platform, such as commenting and using hashtags, can also be done within these social networks. But the fact that they are decentralized makes them unique. In addition to the doubts and inadequate information about the data privacy of users on current social media platforms, decentralized social networks provide privacy to users. Here are some of the existing alternatives:

Kaynaklar: 1–2–3

Another area where the concept of decentralization is frequently encountered is the business world. A decentralized organizational structure is shaped by assigning decision-making responsibilities, especially in terms of top management, to department heads, project managers, and sometimes team members. Organizations with a decentralized structure allow the top management to focus on strategic planning and growth opportunities rather than tasks that can be distributed among various roles.

Let's take Johnson and Johnson as an example of a decentralized organization. As the company grew, it transitioned to a decentralized organizational structure that provided more freedom and autonomy to its managers and employees through various functional and divisional groups. Former CEO William Weldon stated that relinquishing control was challenging for the company, but they trusted their managers in managing the business. He summarized the reason behind transitioning to a decentralized organization with the following statements:

🌱 Within the scope of ReFi Turkiye program, the 9th episode of our podcast series, which we made with the pioneers who think and build on Web3, is online! In this episode, our topic is decentralization and DAOs.