Why Decentralization is Important

Decentralization is intuitively easy to understand but difficult to define precisely. Creating a blockchain-specific working definition helps attribute value to protocols and applications. Taken a step further, it can help identify the regulatory touchpoints for consumers and investors.

Decentralization describes an intention and level of control. For example, a system intended to be centralized could distribute power and become less centralized. Likewise, a decentralized system could accumulate power and still remain decentralized. The intention is important, followed by the degree.

There is an equivalency between decentralization in government and decentralization in blockchain. However, achieving it in blockchain should result in the final expression of decentralization in government - self-sovereignty. If a blockchain protocol or application permits self-sovereignty it is sufficiently decentralized.

Decentralization is Intent

The intention to decentralize is the first step. A decentralized protocol implies a fault-tolerant, attack- and collusion-resistant system—a necessary condition and collection of features that help establish the validity of the intent. Without them, or at least the ability to realize these features, a protocol or application is unlikely to have the intention to decentralize.

Realizing the intent is the next step in assessing decentralization. Blockchain applications are generally comprised of four layers:

• Settlement layer (the underlying blockchain)
• Backend layer (smart contracts)
• Frontend layer (UI)
• Data layer

Evaluating control in each layer and considering them as a whole leads to an overall assessment of technological decentralization. For example, determining who controls the frontend layer (Is it the founders? The community?), combined with where control lies within the other layers, provides the level of technological decentralization.

A protocol or application with the intent to decentralize should result in self-sovereignty. It is conceptually straightforward to see self-sovereignty as “engaging independently with the protocol,” but what does it actually mean?

Decentralization in Government

Governments see decentralization as transferring authority and responsibility for public functions to smaller governmental organizations. Self-sovereignty takes this concept of decentralization to its natural conclusion; it represents the transfer of authority and responsibility of public functions to individuals.

Still, governments are centralized systems that look to distribute power and responsibility. The belief is that decentralizing to a certain extent is part of a democracy, but the intention will always be to remain centralized. Transferring control to individuals represents a change in intent—to become decentralized. Before the advent of blockchain, that option was unthinkable, but now that it is possible, what does a transfer of control entail?

Self-Sovereignty and Sufficient Decentralization

There are four parts to decentralizing control:

• The first is political decentralization - transferring power in public decision-making and providing more influence in creating policy.
• The second is administrative decentralization - moving responsibility for planning, financing, and management.
• Third is fiscal decentralization - financial responsibility to generate revenue and control expenditures.
• Last is economic decentralization - through privatization or deregulation, it transfers the supervisory power over the markets.

Self-sovereignty is possible if the four types of decentralization are accessible to the individual.

A blockchain protocol or application that has its community determining policies, direction, and contributing to the administrative operation is politically and administratively decentralized. Further, suppose the community is provided with the levers to decide on revenue and expenditures and ultimately responsible for the economic value created. In that case, the protocol or application is also fiscally and economically decentralized.

In the case above, any individual, if they choose to, could independently engage directly as a user and as a community member. If the community is publicly accessible, it can be considered a public function.

Putting it all together, if self-sovereignty is possible within a public function, and if the four layers of control (settlement, backend, frontend, data) discussed previously are met to make the protocol or application technologically decentralized, it can be regarded as sufficiently decentralized.