Decentralization is the foundation of blockchain technology, promising a more flexible and censorship-resistant alternative to centralized systems. But are the industry-leading protocols as decentralized as they claim?
Decentralization can be measured across multiple dimensions. At first glance, the number of entities involved in a network validation or mining process is one of the simplest and most straightforward metrics. However, other factors also contribute to strengthening or eroding decentralization:
- Hosting facilities: Where nodes are hosted directly affects who controls them. If thousands of entities host nodes on facilities controlled by one or a few entities, this puts the network at risk. For example, Hetzner unilaterally shut down 40% of Solana’s validators In 2022.
- Jurisdiction: Geographic location is important because it provides diversification of risks related to unfavorable or unpredictable regulatory actions.
- Client software: A blockchain that has all nodes running on a single client program is more vulnerable to the risk of bugs and vulnerabilities than those with a single code.
The following table compares the degree of decentralization of leading protocols using these dimensions:
source: Solana report on decentralization, Ethernodes Geographic location of ETH nodes, Tron contract, Bullcwatch
Decentralization comes at a cost: the longer the distance between peers, the longer the response time. Latency is critical for auditors to complete assigned tasks in a reasonable amount of time. Failure to meet these deadlines results in lost rewards for validators, which increases the incentive to place them closer to larger peer groups, thus increasing centralization. The larger the block size, or the shorter the block duration, the greater the incentives for centralization.
In other words, many protocols indirectly penalize decentralization by reducing the rewards of those who dare to deploy infrastructure in areas where no one else is doing so. Pioneers bear the burden of blockchain’s flexibility with no incentive other than to do what needs to be done, where it needs to be done.
Few protocols provide the kind of clear and predictable incentives at the protocol level (e.g., higher priority when proposing blocks, higher issuance of stake rewards) to drive decentralization in the network. In most cases, incentives are administered as arbitrary grants or delegations from the protocol foundations to specific network participants on a case-by-case basis.
If decentralization remains the cornerstone of the blockchain ethos, the industry must act accordingly. Protocols need to adopt mechanisms that incentivize nodes to operate in diverse jurisdictions, be hosted in independent facilities, and use diverse client software (if available). Without such incentives, the natural pull of economic efficiency will drive centralization, threatening the promise of blockchain: flexibility to resist censorship.
The future of blockchain technology depends on networks designed to remain decentralized, not by accident or good faith, but by design.
Let us ensure that decentralization is not just an aspiration, but a measurable and motivating reality.
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