🌟 Network Effects w/ Decentralization
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🌟 Network Effects w/ Decentralization

By Stuart Hollinger | DeFiKnowledge | 27 Mar 2021


Central, but not too central — Stuart


Centralization is better than decentralization for early formation but decentralization is better when you have network effects. 

This is the takeaway from a research paper on the topic. By Mason Borda

The problem of centralization 

For the past four years, cryptocurrency has been the darling of Silicon Valley. It’s been the hot new thing, touted as a revolutionary new technology that is going to change the world and make us all rich. This belief has led to a Cambrian explosion of new coins and tokens. Over the past four years, over 5,000 new cryptocurrencies have launched, with many disappearing almost as quickly as they came. This is the problem of centralization.

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The space is too crowded, too noisy, with too many projects and teams competing for attention. As a result, the barrier to entry is too high. On CoinMarketCap alone, there are over 9,000 cryptocurrencies listed. There is no way to discover the best projects, nor is there any way to understand the differences between projects. 

The problem of discovery

The problem of discovery is that there is no way to see the real value or potential of any given cryptocurrency. In a centralized world, you rely on the centralized authority to tell you what’s good. In the fiat world, you rely on Yahoo Finance or Google Finance, or CoinMarketCap to tell you what’s good. In a decentralized world, you rely on the wisdom of the crowds to tell you what’s good. In the crypto world, you rely on Reddit and Twitter, and Medium

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The problem is that, currently, there is no way to filter out the noise in order to get a real signal of what’s good. As a result, you’re forced to take the word of people who don’t have your best interests at heart. 

Why decentralization is actually better than centralized networks

In a centralized world, people are incentivized to put their own interest ahead of your interest. In a centralized world, there is a conflict of interest. In a decentralized world, there is no conflict of interest. There is no incentive for any one person to manipulate the data in order to make themselves look better. People are incentivized to only put their honest opinion. This is why decentralization is actually better than centralized networks. This is the takeaway from a new research paper on the topic. It states: “Our analysis suggests that centralization may be useful in the early days of network formation, but once the network has reached a mature state, decentralization is actually better than centralization when you have network effects.” The paper goes on to add: “This may explain why many successful centralized services, such as Facebook, Twitter, and YouTube, have eventually been forced to implement some level of decentralization to remain competitive.” 

How to decentralize

The solution to this problem is to decentralize. In a decentralized world, there is no conflict of interest. 

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There is no incentive to manipulate the data in order to make yourself look better. The solution is to create a system of incentives that motivates people to be honest. The paper states: “A more effective way of preventing the manipulation of data is to create a system of incentives that motivates people to be honest. Such a system would be designed such that there is no incentive to manipulate the data.” This is the key. The way to solve the problem of centralization is to make sure that there is no incentive to manipulate the data. The problem with most decentralized platforms is that they do not incentivize people to be honest and they do not penalize people for being dishonest. In order for a platform to be truly decentralized, it needs to have a system of incentives that align the interests of individuals.


It should be interesting to see what types of companies/sectors benefit the most from decentralized protocols. Only time will tell…

Thanks for reading!

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Stuart Hollinger
Stuart Hollinger

Stuart Hollinger — Head of Marketing @ YSL.io | Technical Writer @ JigStack.org I love all things Cryptocurrency and Decentralized Finance and use this page to write about what I want!


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