Decentralization Myths: Uncovering the Truth Behind Blockchains
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Chapter 1: Understanding Decentralization
Discussions about blockchain often emphasize terms like “decentralized,” claiming that power is distributed among all users and that trust is unnecessary. However, is this truly the case? Likely not.
True decentralization requires that every element of a system operates independently. Many so-called “decentralized” blockchains may not be decentralized in practice. These systems often harbor significant centralized vulnerabilities that can be challenging to identify. In this analysis, I will highlight examples of such vulnerabilities.
Section 1.1: Node Providers and Centralization
Let’s begin with the foundational question: how do you connect and interact with a blockchain?
Surprisingly, nearly 99% of users rely on centralized servers, known as “node providers,” which are controlled by single entities. These companies possess the authority to restrict your access to specific blockchains or smart contracts at will.
For instance, when the U.S. government mandated action against Tornado Cash, prominent node providers like Infura and Alchemy were compelled to block users from accessing the associated smart contracts. There was no debate or voting; the decision was made unilaterally.
Fortunately, alternatives exist for interfacing with blockchains, and individuals can even set up their own nodes.
Subsection 1.1.1: The Role of Staking
Staking on proof-of-stake blockchains is indeed more energy-efficient than proof-of-work mining. However, it also becomes easier to exert control over the network.
Why is this the case? Not everyone can become a validator on a proof-of-stake blockchain due to requirements such as:
- High-performance servers
- A significant number of users staking their assets on your node
Ultimately, possessing substantial capital simplifies the process of controlling a blockchain. Although there are mechanisms in place to prevent monopolistic control, holding a majority of staked assets confers considerable influence over the network’s governance.
Section 1.2: The Influence of Stablecoins
Imagine having control over a blockchain without being a validator. This is possible, albeit subtle.
When a large user base relies on specific assets, this often signals centralization risks. For example, centralized stablecoins like USDC, USDT, and BUSD collectively manage over $550 billion on the Ethereum blockchain, which is significant.
Should a mass migration occur to a new proof mechanism, the only dissenters could be these stablecoin issuers. If they refuse to support the shift, the entire economic ecosystem tied to those stablecoins would be jeopardized.
This concern became a reality when Circle announced its support for the new proof-of-stake chain while disregarding the forked proof-of-work chain. Such actions underscore the immense power held by just a few companies.
Chapter 2: Oracles and Cloud Dependence
The same centralization risks apply to oracles, which are crucial for decentralized applications (DApps) and decentralized finance (DeFi). These smart contracts relay off-chain data, such as cryptocurrency prices, essential for various operations, from loans to liquidity pools.
Chainlink, a leading oracle provider, similarly decided to support only the Ethereum proof-of-stake chain, effectively marginalizing the proof-of-work fork.
Furthermore, a significant portion of validators and DApps are hosted on cloud platforms like AWS and Google Cloud. This creates another layer of centralization, as these corporations control the infrastructure that supports the blockchain, possessing the power to shut down services or alter blockchain protocols at any time.
Capital Control in Blockchain
It is well-known that excessive control by a few entities is detrimental to any market, which is why such practices are often regulated in traditional economies. In the blockchain realm, capital translates to influence.
The Terra collapse illustrated that capital mismanagement could devastate entire ecosystems. If a token distribution shows that two-thirds of the supply is held by a couple of wallets, it’s a clear indicator of centralization and should be approached with caution.
Conclusion: The Illusion of Trustlessness
Despite blockchain technologies being marketed as “trust-less,” multiple entities require trust to function:
- Node providers like Alchemy and Infura
- Stablecoin issuers (e.g., Circle, Tether)
- Oracles like Chainlink
- Major cloud service providers (e.g., Google, Amazon)
- And likely many others
It’s crucial to scrutinize claims of decentralization and to conduct thorough research to understand what is truly meant by the term. It should extend beyond mere marketing jargon.