Alright, we’re all in the crypto space because we want to decentralize control from the governments & centralized entities on our data privacy & wealth. Many have covered why decentralization is important but not many have covered the other side of the coin on decentralization. After all, everything will have it’s pros & cons right?
So let’s dive in to why decentralization may not be ideal in some cases.
1) Decentralization is slow
This is the major downside of decentralization. Higher decentralization involves a high number of parties involved in a collective decision making, while centralization mostly involved single or very few parties in the decision making.
To make matters worse, if the community can’t agree to a certain direction in the decision-making, it will lead to something called a Prisoner’s Dilemma. The Prisoner’s Dilemma is a paradox in decision making to which two individuals acting in their own self-interests do not product the optimal outcome.
For example, if 50% of the community (Community A) wants instantaneous transaction speeds (1s) but will lead to more centralization & the other half (Community B) wants higher decentralization in the expense of slightly slower transaction speeds (10s), we can say there’s no majority agreeing which parameters to implement, thus no decision is made. It will take lengthy discussions and more iterations of proposal changes before the majority can agree on a path forward.
While slow systems can affect the scalability to support high user activity as user adoption scales, when it comes to governance, slower decision-making will be better in a way that it considers the collective discussions, arguments & opinions of thousands of participants to agree on a new path forward, instead of making fast but rash decisions that may destroy the future development of the blockchain network upgrades & ecosystem growth. Likewise, this method shows a stronger democratic system that benefits most people instead of just a handful of people.
2) Decentralization Makes Funding & Development More Difficult
In terms of funding blockchain development, a more decentralized approach is to be funded generally by the community in a permissionless manner so that anyone will have a fair chance of investing in products & platforms with any amount of capital. The downside of this method of funding is that it can be slow because you’ll need to convince a significant larger audience to invest in your business idea. Besides, community investors have a significantly lower amount of investment capital than larger VCs thus raising the necessary funds will be much slower, while this method is more suited to fund smaller projects that don’t require much investment.
Coupled with a permissionless nature of the crypto space, anyone can come up with a business or project proposal that utilizes the underlying blockchain technology. This will also cause a bloom of proposers in 100s or 1000s, which will make it even harder and more time-consuming for proposers to compete with each other for funding, while investors also need to spend more time & effort researching the vision, utility and the team building these products & platforms.
However, private investors or big VCs are well-known for having significantly larger war chest than community investors. Therefore, project proposers or developers would choose these big VCs so that they will have more money & runway to develop bigger and more complex projects.
Nevertheless, one way to strengthen the power of community investing to level with the big players is a decentralized type of funding mechanism with strong economic values, such as sustainable revenue streams to build up a treasury that is controlled by the community instead of only handled by a foundation or a few people. Furthermore, developers will utilize this treasury fund to build great products & platforms for the community to use, resulting in a sustainable economic cycle. So far, Project Catalyst from Cardano is implementing something that is closest to this idea, with more improvements needed towards maturity and real-life adoption.
3) Decentralization is still bad if more bad actors are governing a network/system than good actors
Decentralization can only be better if the majority of the parties reached an agreement to a decision with good intentions and beneficial for the growth & improvement of a system, an ecosystem or a community.
For example, let’s say you have 1,000 validators securing the blockchain network, it looks decentralized right? However, 550 of the validator nodes are operated by only 10 companies that profited significantly from securing the network, but they do not contribute much to the growth of the DApp ecosystem and network improvements. Is it still decentralized? It’s still more decentralized than 1 entity controlling 550 nodes, but is it a good type of decentralization? No, it’s basically siphoning money out from an ecosystem whom needed the money to build great products, but it’s been prioritize for self-interest and insiders’ profits.
On the other hand, if the 550 validator nodes are operated by 550 different validators in 100+ different countries with different economic & social backgrounds, it is a much better representation of good decentralization. Even though some of them may also do it for their own economic self-interest, there will also be many who would utilize the power of blockchain & smart contract technologies to contribute back to the blockchain ecosystem by building useful products & platforms.
Summary
Decentralization can be disadvantageous due to:
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Slower decision-making for growth due to consensus needed by larger amount of participants.
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Slower funding process and lower funding amount compared to large VC-funding.
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Not ideal if the intentions of the majority are only for self-interest & personal profits.
However, decentralization will benefit everyone regardless of the social & economic status if the systems are built correctly and with good intentions of improving the blockchain network & ecosystem growth.
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