Decentralization Needs a Re-think for Cryptocurrency to Fulfil its Promise
For some time now, it has been widely considered that blockchain technology will allow for the development of a ‘world without middlemen’, enabling instant transactions for millions of simultaneous users who will pay little to no fees.
Indeed, since the beginning of bitcoin, there has been a proliferation in the number of blockchains offering digital solutions to numerous industries such as finance, health and infrastructure.
Yet, as the demand for effective blockchain based solutions increases, the largest cryptocurrencies have been unable to satisfy the vision of instant, little to no fee transactions. This is due to a few crucial reasons, most notably, the nature of the openness of decentralized blockchains where anyone can join and leave at free will.
Proof-of-Work (PoW): a wasteful legacy
Although PoW is an effective way of reaching consensus in a decentralized network, there are many problems associated with its implementation. Most notably, PoW is expensive. This emanates from the rationale of ‘Higher Cost for Higher Security’.
PoW is designed to use huge amounts of energy and resources to ensure that it would be ‘too expensive’ for a malicious actor to attack the network. This has led to PoW systems being far less efficient than the blockchains that use more centralized mechanisms for reaching consensus.
The ‘slide’ to centralized alternatives
As such, there has been a tendency for some projects to neglect decentralization in favor of more centralized solutions which are deemed to be more efficient. This is concerning as centralized networks act fundamentally against a vision of a world without middlemen.
The issue here is that more centralized blockchains currently have the edge when it comes to performance. Centralized blockchains allow for increased speed and smaller transaction fees as a trade-off for a loss of security and certainty.
These developments are unsettling as it is only decentralized public blockchains, allowing digital interactions in a trustless and secure environment, which will see cryptocurrency live up to the promise of peer-to-peer digital cash.
The case for decentralization
Here are some key ways in which decentralization guarantees an immutable user interaction:
- Resilience: there is no single point of failure in the system – if one part fails then the whole system is not jeopardized as multiple copies of the blockchain are distributed across the world.
- Non-custodial financial intermediaries: users remain owner and in possession of their own funds.
- Censorship resistance: distributed networks are far less likely to be coerced by a government agency to disclose the information about their user base.
However, there is a compelling case for more centralized aspects of blockchain technology given its increased immediate tangible benefits to users.
So, the question we need to ask ourselves is this: if the centralization of elements of a protocol enable it to outperform a decentralized protocol, is there anything that we can do to build decentralized networks which offer the efficiency of centralized ones? Luckily, the technology is on our side.
The multi-layered approach: a new understanding
Blockchain has been designed to be decentralized and it is made up of ‘layers’. It is the architecture of blockchains themselves which hold the key to our ability to blend aspects of robust decentralized base layers with more flexible second layers.
It is at this point that we need to articulate our redefinition of decentralization. We need to remember the importance of striving for decentralization, while still adapting and enabling some of the benefits which more centralized ‘layers’ can bring to user experience. This in turn will encourage scalability and, eventually, mainstream adoption.
Thus, it is crucial that we keep the base layer of the protocol highly decentralized whilst building layers with more flexible and efficient parameters on top of the base layer.
But how will these developments help cryptocurrency fulfil its promise of peer-to-peer digital cash?
The promise of off-chain payment hubs
Off-Chain Payment Hubs offer the benefits of centralized and decentralized blockchains alike. As a second layer solution, Off-Chain Payment Hubs would be built on a public, permission less blockchain like ethereum, but offer benefits of more centralized alternatives.
Crucially, Off-Chain Payment Hubs enable decentralized blockchains to scale to the integration of millions of users. The debate over scaling for projects like ethereum and bitcoin is well documented and has presented itself as a major hurdle against the mainstream adoption of cryptocurrency.
Off-Chain Payment Hubs offer a solution to the problem by:
- Enabling the scaling of decentralized blockchains to allow the efficient participation of millions of users.
- Allowing users to transact with little to no fees.
- Giving strong assurances that only a decentralized system can bring.
This vision can only be achieved if we are to accept the notion of a multi-layered system. We need to continue to strive for the creation of a decentralized blockchain ecosystem, whilst acknowledging the need to give users the functionality of more centralized systems.
However, we also need to be aware that if there is an increased demand for more centralized blockchains, then the technology will lose its reason for existing as a public network. We would be left with just another set of centralized networks which resemble the ones we are already familiar with today. If we are ever to satisfy Satoshi’s original vision of a truly peer-to-peer digital cash world, it falls to us developers to bring it to fruition.
Liquidity.Network is a new scalable off-chain payment system which allows Ethereum users to make payments without costly transaction fees. By utilising payment hubs, Liquidity.Network allows multiple users to send cost efficient Ethereum micropayments for the very first time via a mobile-friendly app.
Arthur Gervais’s bio
Dr. Arthur Gervais is a blockchain, security and payment expert. He is an assistant professor at the Imperial College in London and the co-founder of Liquidity.Network – a third-generation, off-chain payment solution that resolves and improves ethereum scalability issues.
Dr. Gervais is also a regular speaker at industry events, such as the upcoming Crypto Valley Conference, (where he also serves as the event organizer) and the Blockchain Developer Conference.