Decentralization vs Centralization


One of the main arguments in favor of bitcoin has been its decentralized architecture. The fact that no single entity can have control over the network was a feature that was celebrated by supporters of bitcoin and used as an attack against the current monetary system and blockchain projects that were not fully decentralized such as Ripple.

While decentralization certainly has its benefits, such as an increment in network resilience because there’s no single point of failure, it also comes with the drawback of longer transaction confirmation times. It is much easier to get one hundred nodes to agree on the state of the network than one million nodes. This drawback is becoming more evident in Bitcoin with the amount of time it takes now to confirm a block (a group of transactions) having at times more than doubled compared to a few years ago despite transaction rates remaining mostly under 10 per second, a far cry of the 2,000 transactions per second Visa handles on average. A solution to this problem used by most miners supporting the network is to increase the transaction fees. However, this is not a real solution to the problem of network scalability since it does not address the problem of handling much more than 10 transactions per second, since higher fees lead to a lower number of transactions being processed. In addition, the higher transaction fees make bitcoin less competitive against traditional online transaction methods especially during times of rapid appreciation in the value of bitcoin. Therefore, unfortunately the full decentralization feature of bitcoin renders the project’s goal of becoming a global currency unfeasible.

That decentralization increases the time a network takes to reach consensus is a well known fact that extends beyond the subject of technology. Most modern democracies use a representative system in their legislative process where a citizen is assigned to represent the interest of a large group of citizens instead of having every single citizen participate in the legislative process. While a complete dictatorship would be the most efficient way to create new laws, it fails to protect the state in the event of a less than capable dictator. A democracy on the other hand diminishes the risk of bad actors in the legislative process, but also increases the time it takes to create new laws. Therefore, a representative democracy serves as a compromise between the two extremes. That compromise is seen in different parts of the organization of modern societies. For example, instead of every participant in society specializing in every single field of value to society we rely on different people that specialize in a single field (medical doctors, lawyers, engineers, bankers, etc.) to help us achieve our goals. Supporters of full decentralization would have us believe that this is terrible for society, yet society has progressed in every way imaginable under the current system. Having every single member of society become an expert in every single field would be unfeasible and highly inefficient. No one can be an expert in everything and it is better to be an expert in something than a mediocre in everything.

Therefore, blockchain projects that do not fully decentralize their transaction confirmation processes like Ripple are not counter to the revolution being brought on by blockchain technology. Instead, they are the future of the blockchain industry if it is to extend beyond its niche number of users. The benefit of blockchain technology is not full decentralization but the lower barriers to entry to provide certain services. Its self regulation through algorithms renders much of the legal framework in existence for the systems it tries to supplant obsolete, thus generating big savings for society.