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Decentralization Among Proof of Stake Chains

By Michael @ CryptoEQ | CryptoEQ | 20 Feb 2024


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Intro

In the evolving landscape of blockchain technology, Proof-of-Stake (PoS) networks play a pivotal role in defining the future of decentralized finance and digital governance. The robustness and reliability of these networks hinge significantly on their operational decentralization, which encompasses the distribution of validators and stake across diverse geographies, hosting infrastructures, and software ecosystems. A network that achieves a high degree of decentralization in these areas is inherently more secure, resilient to external shocks, and less susceptible to failures arising from technical glitches, geopolitical tensions, or targeted attacks on physical infrastructure.

The Significance of Decentralization

Decentralization is paramount for several key reasons:

  1. Enhanced Security: More decentralized systems demonstrate a superior defense against network attacks, offering more robust security guarantees.
  2. Reduced Risk of Manipulation: Higher levels of centralization could increase the risk of malicious community members taking control or exploiting decentralized applications (dApps).
  3. Resilience Against Regulatory Capture: Less decentralized systems could become victims of regulatory capture.
  4. Greater Transparency: The decentralized model facilitates less conflict of interest and more transparency, as changes cannot be enacted unless a majority of participating parties concur.

Moreover, proponents of Bitcoin argue that traditional monetary systems can exacerbate the disenfranchisement of specific populations, particularly in countries where financial product access is scarce or non-existent. Traditional financial products often demand two or more forms of government-issued identification, verifiable addresses, credit checks, and more, creating barriers to access for many. Cryptocurrencies, while criticized by some for potentially facilitating illicit activity, offer a solution for financial inclusivity, leading to a net positive impact regardless of such activity.

Decentralization vs. Autonomy

It is critical to distinguish between decentralization and autonomy when assessing these platforms. While Ethereum is designed for immutability, autonomy, and censorship resistance, Solana's model of passing security costs onto validators and DApp providers impacts its ability to achieve trust minimization. Additionally, the reliance on sophisticated data centers for validation in Solana raises concerns about potential censorship due to the ease of subpoena or seizure of these centers.

Decentralization is fundamentally about the dispersion of intrinsic power within a system. In the context of blockchain, this concept pertains to the power inherent in block creation, an essential feature that cannot be eliminated but must be judiciously managed. Decentralization seeks to distribute this power among a wide array of actors—miners, validators—to prevent arbitrary or unfair exertion of power and to ensure its availability on equitable terms. Thus, decentralization is not merely a technical attribute but a strategic distribution of power within the blockchain ecosystem.

Autonomy, in the blockchain lexicon, transcends the simplistic notion of automated processes. Smart contracts, often mistaken as merely automated entities due to their self-executing nature, are in fact embodiments of autonomy. This autonomy is not derived from their automated characteristics but from their intrinsic property of censorship resistance. This resistance is crucial as it empowers self-sovereignty and independence, shielding the contracts and the blockchain itself from undue external influence, be it governmental, intermediary, or otherwise. In essence, autonomy in blockchain signifies a state of relative freedom from external powers, a bastion against attempts to alter, halt, or confiscate digital assets or functionalities.

While autonomy and decentralization are distinct concepts, their interplay is crucial in the blockchain realm. Decentralization acts as a facilitator of autonomy. By dispersing the power intrinsic to the blockchain (such as block production) among a diverse, potentially anonymous group of participants spread across various geographies, the system fortifies itself against external influences. This wide distribution of power complicates efforts by any single entity, be it a government or a malicious actor, to exert control through coercive means like bribery, fines, or force. Consequently, the autonomy of the blockchain system, or its ability to function as a self-sovereign entity, is enhanced by its decentralized nature

Why Do We Want Decentralization?

Bitcoin blossomed from the CypherPunk Movement and was born amidst the Great Financial Crisis of 2008, a time when banks were bailed out and the Fed deployed quantitative easing in an attempt toward economic recovery. This caused many people to question and criticize our monetary system: Why should the Fed have the power to expand/contract the money supply and decide who gets “bailed out”? 

After all, inflation has destroyed the purchasing power of the USD over decades of money printing. There are still millions of people living paycheck to paycheck worldwide, many of whom do not have access to productive financial services. Theft and violence are also commonplace in these cash-based economies. Many Bitcoiners and Crypto fans are disturbed by this inequality and aim to serve this audience. 

Bitcoin and many cryptocurrencies strive to circumvent the power of central banks and eliminate the requirements of the financial world through decentralization. Because they have no central entity that could censor transactions, charge fees, alter the existing rules, or be attacked or extorted by governments or bad entities, citizens of the world have the opportunity to gain a new form of freedom of speech. Additionally, this process of decentralization also removes the need for two forms of government ID, verifiable addresses, credit rating, and other requirements that are regularly needed in the financial services industry. People are tired of putting up with governmental monetary damage, various bank fees, and the growing degree of censorship when conducting their financial activity. Decentralized blockchains give everyone the chance to take back their privacy.

PoS

Operational decentralization is a multifaceted concept that demands a comprehensive understanding of how validators, the linchpins of the PoS mechanism, operate within the network. These entities perform critical functions such as transaction validation, block addition, and consensus achievement, ensuring the network remains Byzantine Fault Tolerant. This resilience is crucial, allowing the network to maintain functionality even when some validators act maliciously or malfunction. Validators' commitment to network integrity is reinforced through staking, where they lock up network tokens as collateral against dishonest or incompetent actions, thereby aligning their interests with the overall health of the network.

The path to achieving operational decentralization is fraught with challenges, primarily due to the inherent trade-offs between security, scalability, and usability that different network designs entail. Architectural differences among various Layer-1 blockchains necessitate a tailored approach to evaluating their decentralization, making it imperative to adopt standardized metrics and qualitative analyses. The Nakamoto coefficient, for example, offers a quantitative measure of decentralization by identifying the minimum number of entities required to disrupt a network's operations. However, this metric alone is insufficient to capture the nuances of operational decentralization, which also depends on the distribution of stake and validators' ability to withstand and recover from massive infrastructure outages.

This discussion highlights the importance of understanding the roles and operational dynamics of validators within a PoS network. Factors such as the cost of entry, ongoing operational expenses, stake delegation mechanisms, and active validator set caps significantly influence the degree of decentralization. High upfront and maintenance costs can limit the diversity of validator operators, while mechanisms like stake delegation and pool saturation policies aim to distribute stake more evenly across the network. Yet, these measures can also inadvertently lead to stake concentration and create barriers to entry for new validators, thereby impacting the network's decentralization.

The analysis of operational decentralization in PoS networks such as Avalanche, Cardano, NEAR, Solana, and Aptos reveals that while these platforms have made strides toward decentralization, substantial opportunities for improvement remain. Enhancing the resilience and reliability of these networks requires a balanced approach to validator distribution, stake allocation, and infrastructure robustness. By addressing these challenges, PoS networks can better safeguard against a wide array of threats, from technical failures to adversarial attacks, ensuring their long-term viability and success in the decentralized ecosystem.

In conclusion, the journey toward operational decentralization in Proof-of-Stake networks is complex and nuanced. It demands not only a technical understanding of the blockchain architecture but also a strategic approach to governance and stake distribution. As the blockchain industry continues to mature, the development of more sophisticated metrics and frameworks for evaluating and promoting decentralization will be critical to the resilience, security, and overall success of PoS networks.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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