Hey there!
So, I have been doing some SUPER SERIOUS thinking about a couple things very much related to the heart of crypto, and I thought I would field them here. Of course, being a dry asshole never really made any technical information interesting, so I hope to intersperse it with a little bit of fun in-between to keep you motivated. Why? Because it often took a little fun to feel motivated myself while putting this together.
Feels Like Paying ETH Gas Fees Right Now. Oh, Sorry, I said "FUN".
ANYWAY. I have put a lot of thought on the differences between centralization and decentralization, and the rather lovely relationship that the Crypto Space has with the latter. De/Centralization is a big topic not only in crypto, but in many different areas of life from economics to government and so on. Naturally, I have interest in these things as well (along with Cybernetics), so I asked myself a really simple question.
When we are talking about Centralization and Decentralization, what in the Actual Fuck are we talking about?
It's a good question, though one people might not immediately see the value of asking. Decentralization is obviously superior, right? That was the whole point of Bitcoin and is the buzzword! If it hits more common usage, it will be because of us, folks. Mark my words. It can be a good thing, for sure.
Alright Ginger Man, So... Why Should We Not Murder You On the Spot For Tacitly Suggesting Otherwise?
Good Question, hypothetical reader. My goal here is to (as formally as possible) define what it means for a system to be centralized or decentralized. In order to do this, a few definitions come in handy:
System - A non-empty set of interacting entities that compose a whole.
Entities - Those parts which are a subset of the system and interact with other entities within the system.
Regulation - The defined methods of interaction between entities that affect and control other entities within the system for a particular purpose. An example of this would be something like, say, the pancreas. Through interaction with other entities in the body, the pancreas secretes insulin to regulate blood sugar. This is an example of how an entity (pancreas) instills regulation (insulation) into the body (blood sugar levels). I think this is a really good analogy.
Okay, what does this mean with respect to De/Centralization? In short, when we are talking about these concepts, we are really asking ourselves where the Loci of Regulation are placed or "distributed" within the system. For example, a central bank holds the LEDGER and has complete control over the transactions, money supply, interests rates, etc. On the other hand, Bitcoin has a ledger distributed among many nodes over the entire system. No one node has the ability to completely control the others (in most ideal circumstances - more on this in a moment).
And that's what we are talking about: Where are the loci of regulation placed within the system? If you can answer this question, you can determine whether a system is either centralized or decentralized.... right? Well, it turns out it is not so easy. One can break down the question of Loci of Regulation into TWO additional questions:
1.) What is the nature of power/regulation within the system? How is that defined?
2.) Who possesses this regulation?
The Ideal Situations
In order to understand Loci of Regulation, we must also understand the two "ideal" systems that represent the extremes of Loci of Regulation.
IDEAL CENTRALIZATION. In Ideal Centralization, one entity within the system possesses ALL Defined Regulation within the system. Think of an Autocracy. One leader makes every decision. Everybody else in the system is subject to the decisions without exception. If we were to define N as the total defined regulatory power in a system, and P (or Power) as the amount of defined regulatory control a entity in the system has, then we can easily see that for a Single Entity, P = N and for the rest of the entities in a system, P = 0. Another way to phrase this is The Loci of Regulation is Placed within a Single Entity In the System. Take a Look-see at this figure I made to understand further:
Oh Yeah, That's a THICC BOI In The Middle There.
IDEAL DECENTRALIZTION. In Ideal Decentralization, All entities within the system hold an equal measure of defined regulation within the system. Think of Bitcoin Ledgers (In Theory). Think of a True Free Market Economy. Decisions are made autonomously between the entities in the system, and each has a limited - but equal - measure of power to enact those decisions. Using the above definitions P and N, and further defining m as the number of members, or entities within a system, the power of each entity within the ideally decentralized system is P = N/m. Everyone gets an equal slice. The Loci of Regulation are Evenly distributed. Check this figure here:
Aww, Look At That, Everyone's EQUAL.
Now, in order to proceed, we need to discuss the positives and negatives of both of the above situations in general.
FEATURES OF CENTRALIZATION. The key main benefit of a centralized system is that decision making power comes from one source. If a decision must be made quickly, it can be made. This would in a manner of speaking be like a touching a hot stove. Your brain doesn't have to take a vote from all of the body cells in order to send the "OW HOLY FUCK THAT'S HOT SHIT" command to the central nervous system. It just does it, and an immediate command to remove hand is undertaken. Swift decision making can entail life or death. However, the efficacy of the Ideal centralized system is contingent upon the efficacy of the one "decider", or the entity whose P = N. If the one entity is not capable of efficiently handling its defined regulation, bad shit happens. See Hitler for more details on this.
Furthermore, say you took an ideal centralized system (or something close to it) like a centralized power grid. All of the houses and other places connected to that grid are completely dependent on that Grid. If the central power plant goes offline, everybody loses power. Failure cascades from the single locus of regulation.
FEATURES OF DECENTRALIZATION. Ah, here we go. The dear of Crypto. Now, decentralization has a really great feature of being the answer to keeping a system from collapsing if say, a centralized system is unable to efficaciously handle being the sole locus of regulation. Regulation is placed in the hands of all entities equally. The benefit here is the opposite of above; say you had a decentralized energy grid. This would be something akin to say, a city where every building has its own solar panels for electricity generation. If one of those houses loses power, everyone else is still generating and using their power. This is a fantastic feature for a system to have, but it comes with a cost.
Say the system needed to make some sort of global change - something that would effect every entity in the system. Since each entity holds the same amount of power, each entity must consent to the change. In other words, consensus must be reached to make a global change. In many different types of decentralized systems, this may take the form of voting, where a consensus is defined as a simple majority or some such. The major issue with reaching consensus is that it takes time. Each entity must make its decision, then all of the decisions in the system must be tabulated in order to reach a conclusion. This allows a more equitable situation in terms of decision making, but it also takes longer than if a central entity made the decision.
Furthermore, if the entities of a system are not able to efficaciously handle their power, then consensus decisions that are ultimately mal-adaptive to the system can be made. Decentralized entities can be just as imperfect as a single centralized entity. If consensus cannot be reached, then we find that turmoil within the system is inevitable, and schisms or successions from the system can occur. A good example of this in the crypto world is hard forking.
THE PROBLEM OF LARGE SCALE DECENTRALIZATION AND POWER CONDENSATION
Whew, that's a mouthful of sub title. So, what's the biggest issue of large scale ideal decentralized systems? This one is easy to understand. Take an Ideal Decentralized System with m entities. Again, let N and P Be defined the same as above. If m is a small number, each entity holds a larger proportion of N. If there are many entities, then each hold a much smaller proportion. In fact, if the entities become too numerous, we run into a big problem as defined by this formula:
Don't Let This blow Your Mind.
All this means is that in a large ideal decentralized system, the loci of regulation are so thinly divided among the entities that each entity essentially has nearly no defined regulation whatsoever.
That's a problem. A Big problem.
BUT FEAR NOT! This is only true in an IDEAL Decentralized System! In actual systems left to their own devices, we see that the entities, for whatever reason, and "Join Forces" and add their individual negligible power together into a Bloc of power. I call this phenomenon Power Condensation. Basically, The state of an ideal decentralized system will eventually get to the point where the particular entities will condensate their power, leading to these groups of entities being indistinguishable from a single entity. See the image to better understand what I mean here:
Oh Yes... come Together...
Consolidation is a natural consequence of these types of systems. So.... the question now is, WHAT IN THE HELL KIND OF SYSTEM IS THIS? It's not an ideal centralized system. It's not an ideal decentralized system. It's a bit of both. And that's the ticket for the next part:
THE SPECTRUM OF LOCI OF REGULATION
You will recall that I suggested that Ideal De/Centralization represents these absolute extremes of where regulation is placed within a system. If you have been keeping up thus far, it may not be surprising for me to say this: Due to Power Condensation, we can easily extrapolate that where we place Loci of Regulation is set upon a spectrum. In other words, you can have a system where decentralized entities are more common, or where centralized entities or more common. And of course, our basic ideas come full circle to magic internet money:
WHAT YOU SHOULD TAKE AWAY FROM THIS:
Our schemes of placing Loci of Regulation can be as centralized as a central bank, or as decentralized as bitcoin. Also, it can be another regulation structure somewhere in between. What immediately becomes clear to me here is that the question of De/Centralization is a question of optimization. More specifically, given the defined system and regulations, where should we place the loci of regulation such that the entities or stakeholders receive maximal benefit, and minimize the risks involved with the extremes?
Perhaps some things are left to a vote. Perhaps others are left to the discretion of a central entity. From here, there are many ways to determine exactly what the system should look like, but it is clear based on my model that there is an optimum model. Of course, this depends on what the purpose of the system is, and the nature that system's regulation.
In short, no. Decentralization for its own sake is not the best thing for any type of system, such as Bitcoin or governments. As far as we can tell, no system is ideally decentralized and if it were, we would immediately see power condensate within that system, landing its loci of regulation somewhere on the spectrum. Perfect Decentralization doesn't exist and we wouldn't want it to exist either. Same for Perfect Centralization, and that is the point.
Whew. Holy ShitBalls. That was a brain buster. Have fun. I'll add more to this as I continue, but I think this is enough to mull over for now.
Until next time, keep your eyes on the markets and WATCH WHERE YOU PUT YOUR REGULATION! I just cleaned this place...
