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Decentralized Decentralization

What is Decentralization and Why Is it Important?

Before we get to decentralization, let’s quickly find out what is centralization. In few simple words. Centralization refers to a small group of people making decisions that affect the rest of the people in our societies. I don’t need to tell you it is a problem. Make no mistake, this article is not to say we need to eliminate centralization. In fact the point of this article is to tell you that we must bring a high degree of decentralization in various shapes and forms across our societies with reasonable level of centralization and regulations. So let’s dive in right away to find how we can adopt decentralization in our societies. This actually looks interesting and quite easy to adopt for a better world.

Introduction

So, what is Decentralization? According to Feross (Founder, WebTorrent) “The Decentralized Web is a system of interconnected, independent computers that work together to provide private, secure, censorship-resistant access to information and services.”

Centralization vs Decentralization
Source: Decentralized Systems

Decentralization, say in a consumer centric platform, would mean breaking out from large centralized organizations that collect, harvest, and sell data from/to their users. The Internet and the World Wide Web are the most powerful decentralized frameworks available to mankind. Because a huge number of devices are connected in an open environment, no single individual can theoretically own it, control it, or turn it off as and when they like. It offers a system where services such as communication, banking, publishing, social networking, research, and archiving are offered via user-powered technologies.

Large and powerful intermediaries are eliminated in this system. Smart contracts, for instance, can be envisioned to be signed directly between users and their preferred advertiser making user information available only to such reliable sources. This saves money for both retailers and customers by minimizing irrelevant and costly promotions.

Decentralization of the Internet – Web 3.0

Web 3.0 was originally called the Semantic Web by Tim Berners-Lee, the inventor of the World Wide Web, and is aimed to be a more autonomous, intelligent, and open internet. It is the third generation of the internet, in which websites and apps use technologies such as machine learning (ML), Big Data, and decentralized ledger technology (DLT) to process information in a smart human-like manner.

Web 3 is an upgraded version of the internet as we know it today with a decentralized points of control driven by open source blockchain technology. It enables users to interact without the need for central databases.

Features of Web 3

  1. Semantic Web 
  2. 3D Graphics
  3. Artificial Intelligence (AI)
  4. Use of distributed networks and registers: Blockchain, DAG.
  5. Support for mesh networks
  6. Increased privacy, anonymity and security
  7. Support for dApps and decentralized organizations (DAOs)
Source: Medium

Advantages of Web 3

  1. Users are not required to trust a central authority
  2. Single points of failure minimized
  3. Censorship resistance
  4. Ownership of Data
  5. Open development

Decentralization of Money

Anything which has the following characteristics can be treated as money: Limited supply, divisibility, fungibility, acceptability, durability, and portability. Throughout history many items were used as money by our ancestors.

Money Cryptocurrency
Source: VectorStocks.com

Since the early days of civilization, the wars and the international trades gave birth to the banking system in the 14th century. After World War 2, all the then major countries agreed to trade in US dollars, with dollars pegged to gold. However the US in 1971 abolished the gold standard after several countries started dumping the greenback for gold on account of trying economic and political circumstances.

The US somehow managed to come out of the situation by declaring greenbacks will be backed by the US government come what may. This essentially led to what we now know as Fiat Currency which has no intrinsic value except the backing of the issuing governments.

The present-day money system (banking system) is more or less an organized ploy that often falls over due to central/single points of failure. Consider this for a second. The central banks print the money and the treasury assigns them IOU (I owe you) certificates out of thin air. The treasury uses this money to pay the nation’s bills and also utilize it for nation-building activities. Externally, the IOUs are sold by the treasury department in the global financial market to other governments. Those who are willing to lend loans to the US government are presuming it to be risk-free.

Now, when the US govt faces a default say due to a recession, they print more money and more IOUs. These are further sold to other countries in the name of govt bonds, hence the debt keeps increasing! In 2005 US national debt was under $5 Trillion and as of 2022 Feb, it is around $30 Trillion (so debt was 25% of GDP in 2005 and 98% of GDP today).

Trustless System

The other problem of the government and central bank’s business of printing money out of thin air is that it gives rise to inflation. This diminishes the purchasing power of people who keep their life savings in bank accounts for paltry returns. Presently major economies have enormous trust in the US government and hence in the US dollar. That’s the only saving grace at the moment. What can be a better alternative to “trust”? Well, being trustless!

Considering the history of money, there was a need for some trusted commodity to replace the existing government controlled fiat money system, where ordinary folks don’t pay the price for the mistakes of a few. Due to massive developments in international trade in the last few centuries coupled with ecological and economic cost of mining/storage, gold cannot be considered a viable alternative for the long term.

It was immediately after the 2008 financial crisis that an individual or a group of individuals under the pseudonym ‘Satoshi Nakomoto’ released a white paper for a digital currency that did not need a trusted intermediary or a centralized authority to issue currencies or regulate its supply. Though multiple attempts at a digital currency were made earlier (B-Money, hash cash, Digi cash, Digi gold), none of them solved the double-spending problem – a mechanism to ensure that an owner did not spend the same unit of currency twice.

Bitcoin, to a great degree, solved all the above mentioned problems in a trustless manner. Yes this would take a higher degree of automation than ever before and yet involves human beings, albeit, in an independent and liberating way paid for by meritocracy instead of subservience.

Decentralization of Governance

Decentralized governance refers to a governance structure wherein every individual can :

  1. Propose a change or an initiative for the entire organization 
  2. Access full information on every new proposal and can discuss/share opinions on a platform before the proposal goes to vote
  3. Has a choice of the vote in every decision

Decentralized Autonomous Organizations or DAOs in Web 3.0 are a group of people working towards a mission with a decentralized governance structure. These can potentially be a new model replacing the existing corporate and administrative structures.

Decentralized Governance is Easy to Adopt As a Result of…

  1. Adoption of the internet by a majority of the population
  2. Sustainable economic models for open-source software funded by network native cryptocurrencies
  3. Blockchain public ledgers recording transactions, which are open to audit by anyone in the world
  4. Digital identities (decentralized identifiers/DIDs) and Sybil protection with analytics that can flag fraudulent votes

Advantages of Decentralized Governance

  1. Higher transparency, lower information asymmetry
  2. Higher ownership and participation in the ecosystem
  3. Lower management overheads for companies
  4. Lower election logistics expense for governments – ability to involve the entire population in decisions making which currently happens only in a few small countries
  5. Mechanisms such as quadratic voting and quadratic funding are making decentralized governance effective

Decentralized governance is the way forward to achieve fair and equitable society. This applies to any group of people: non-profits, for-profit corporations and even governments.

Decentralization in Workplaces

5000 years back, a group of people used to live together where every individual knew every other individual as the group size used to be small in number. The only activity they did for survival was hunting and gathering hence every member of the group was equal i.e. no one had more power than others and everyone coordinated with each other for common objectives. This changed when agriculture was invented for both right and wrong reasons. The power in the society slowly moved from being decentralized to centralized. All of human history after the agricultural revolution is influenced by the centralization of power in the hands of a few.

Currently, every established organization or corporate in the world has a centralized hierarchical structure, where the power is concentrated at the top. Usually the consensus from the bottom layers of the hierarchy is NOT taken into consideration. Because of this top-down approach to management style, you end up with ‘Principal-Agent’ problem. Here ‘Principal’ is the organization and ‘Agent’ is the employees in the organization.

The Principal-Agent problem is the conflict in priorities between the owner or administrator of an asset and the person to whom the operations of an asset is delegated. Hence the next statement holds true in the present-day context for any organization. “Employers pay just enough that employees don’t quit and employees work just hard enough not to get fired”. This is the ‘Nash Equilibrium’. At this state both the employer and the employees has no incentive to deviate from that state. With this type of structure in place, the true potential of the workforce or an organization can never be reached.

Decentralized Workplace
Source: organizationalphysics.com

That’s where DAOs come into the picture. Decentralized Autonomous Organization is an entity represented by rules encoded as a transparent computer program, and controlled by the organization members (the community). They are not influenced by any centralized authority because there is none in this setup. The architecture is setup such that it allows members from different parts of the world to collaborate and achieve a common goal in a trustless way.

In the top-down hierarchical system, the lion’s share of the value created is subsumed by the top management and the remaining is distributed among the bottom placed layers of the hierarchy. In decentralized organizations though, value created gets massaged throughout the community in an even manner. And this helps because it directly solves the Principal-Agent problem seen in centralized setups. Here an individual gets the commensurate reward as per his/her contribution to the ecosystem. Further, you are not expected to please anyone for your increments and bonus. As long as the project you associate with does well, you can expect to do well.

Advantages of Decentralized Structure in Workplace

 1. Job Satisfaction : Since the decision-making power is decentralized, it translates to a better level of job satisfaction as well as community morale. You no longer would mind opening your laptop on a weekend (when it is necessary of course!).

2. Improved Strategies : Since the power of decision making is distributed, the founder or a technical lead for instance can focus less on day-to-day activities and more on long-term sustainability of the project volunteering in an advisory role. As more people are involved in the vital organizational process like capital raising, hiring, expansion and development, carrying out these processes will be more efficient.

3. Better Accountability and Transparency : A community in a DAO will be motivated to take more ownership as the responsibility increases. Decentralization, further, allows detecting the areas of improvement within the organization swiftly with increase in transparency.

4. Better Leaders of Future : Provides an opportunity to nurture and develop future leaders of the world vested in collective power of people more their individual influences.

5. Quick Decision Making : Decentralization allows the community at the scene to take the necessary action. This leads to quick decision making since the decisions do not have to be vetted by a management personnel sleeping at 4 AM on the other side of the world.

6. A solution to the Principal-Agent problem : A properly executed decentralized platform aligns the incentives of all the stakeholders from founders, technology leads, developers and the community to coordinate and achieve its collective goals.

References

  1. https://bitcoin.org/bitcoin.pdf
  2. https://ncert.nic.in/textbook/pdf/keec101.pdf
  3. https://www.researchgate.net/publication/273257207_Traditional_Agricultural_Tools_used_by_Tribal_Farmers_in_Eastern_India
  4. https://www.britannica.com/topic/history-of-work-organization-648000/Division-of-labour-in-the-workplace
  5. https://www.nationalgeographic.org/article/key-components-civilization/
  6. https://www.sagepub.com/sites/default/files/upm-binaries/43186_1_Work_Before_Industrialization.pdf
  7. https://en.wikipedia.org/wiki/Web_2.0
  8. https://www.youtube.com/watch?v=NJd6RKsY5H4&t=10s
  9. https://www.youtube.com/watch?v=BFKZoq2z39s

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Disclaimers : Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum Foundation.

Contributors :

Shuwam Rana, Harsha Karanth, Vishwanath Holin contributed to this blog.

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