Decentralization and Web3

Decentralization

Decentralization refers to the process of transferring and maintaining control and decision-making from a centralized entity to a distributed network. Decentralized networks strive to reduce the level of trust that participants must place in one another, and deter their ability to exert authority or control over one another in ways that degrade the functionality of the network in favor of special interests. Decentralized networks are designed to be more resistant to corruption and interference, and to provide better service overall. However, decentralization has some tradeoffs, such as lower transaction throughput due to less personalized decision structures. Ultimately, the decision of whether or not to decentralize a network depends on whether the tradeoffs are worth the improved stability and service levels that decentralization can provide.

Benefits of Decentralization

There are several benefits to decentralization, including providing a trustless environment, improving data reconciliation, reducing points of weakness, and optimizing incentive distribution:

A decentralized system provides a trustless environment because each member in the network has a copy of the exact same data in the form of a distributed ledger. If a member’s ledger is altered or corrupted in any way, it will be rejected by the majority of the members in the network. Decentralization benefits can be also attributed to data reconciliation. Companies often exchange data with their partners. This data, in turn, is typically transformed and stored in each party’s data silos, only to resurface when it needs to be passed downstream. By having a decentralized database, every entity has access to a real-time, shared view of the data. Decentralization can also reduce points of weakness in systems where there may be too much reliance on specific actors. These weak points could lead to systemic failures, including failure to provide promised services or inefficient service due to the exhaustion of resources, periodic outages, bottlenecks, lack of sufficient incentives for good service, or corruption. Finally, decentralization can help optimize the distribution of resources so that promised services are provided with better performance and consistency, as well as a reduced likelihood of catastrophic failure. Decentralization of workflows and actors can help to enable an efficient use of resources and talent without creating capital-intense redundancies as a result of frictionless access and interaction of infrastructure and talent.

Drawbacks of Decentralization

Despite the described benefits, there are a few downsides to decentralization:

It can lead to duplication of effort and confusion if there is not a clear leader or decision maker. It can be difficult to coordinate and communicate between different decentralized units. New members are often required to take initiative to create value rather than receive clear directives. It can be less time-efficient than centralized decision making, since decisions have to be made by consensus.

Blockchain

A blockchain is a distributed ledger of transactions, paid for with cryptocurrency. It is a constantly growing database as blocks are finalized with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp, and all new transaction data since the previous block.

For example, Bitcoin nodes use the blockchain to differentiate legitimate Bitcoin transactions from attempts to double-spend coins that have already been spent elsewhere.

Ethereum

Ethereum is a decentralized blockchain that runs smart contracts: applications that run exactly as programmed without any possibility of fraud or third party interference.

Ethereum is used as a "world computer" whereby developers can create decentralized applications (dapps) and run them on the Ethereum network. This is possible because Ethereum has a native programming language, which allows developers to create their own smart contracts and dapps.

The Ethereum network is powered by ether, a cryptocurrency spent to run transactions and dapps on the network. When a user wants to run a transaction or dapp, they must first pay a gas fee in ether. The fee goes to the miners who validate and execute the transactions and dapps on the network, ensuring its security.

Web3

Web3 is an idea for a new version of the internet which would be more decentralized than the current version. The term was coined in 2014 by Gavin Wood, and has gained interest from cryptocurrency enthusiasts, large tech companies, and venture capitalists in 2021. Some argue that Web3 would provide increased data security, privacy, and individual sovereignty.

Web3 refers to the next generation of the web's infrastructure, which is based on decentralization and incorporates blockchain technologies as cryptocurrencies and non-fungible tokens (NFTs). The intention is to make the web more secure and allow users to have more control over their data. Technology scholars have argued that Web3 will likely run in tandem with existing web sites, with the latter adopting Web3 technologies in order to stay relevant.