The word "**decentralization"" is often tossed around the world of cryptocurrency. Not that it is wrong, but it is something that became a buzzword. It also only captures a part of what needs to take place.
Perhaps we are stumbling over semantics but utilizing both words provides a much broader focus. It appears one is commonly applied to architecture while the other to tokens. This is the conclusion looking at the average user at least.
Ultimately, it is both that are required. As we will see, those that fail to do so will be at risk of being attacked.
This is a concept most of us are familiar with. When we say something is decentralized, especially within the context of the cryptocurrency world, we are usually referring to a blockchain or an application.
What is the first thing that comes to mind when talking about a "decentralized blockchain"? Obviously, we look at the architecture to determine who is or is not controlling the system.
For example, we all know Bitcoin is decentralized. How do we know that? There are hundreds of thousands of miners, spread all over the world. They are putting up an increasing amount of hashrate while having the percentage of any single entity, as part of the whole, is declining.
We also know that the recent ban in China further helped to decentralize Bitcoin since it took a large portion of the mining that was concentrated geographically and spread it to other areas of the world.
At the same time, we can look at something like Hive. This is decentralized by having block validators also spread around the world. It is a system where there are 20 consensus "Witnesses" along with near 80 others who rotate through. Here again, we see the block validation spread over a large number, with no single entity controlling the bulk of the activity.
Therefore, anything that is built upon it has the chance to be decentralized. At least the core layer is not turning something into a controlled application.
The flip side is we know chains that are not decentralized. For example, people question chains such as BSV, which was hit by 51% attacks. In this instance, the validation process is switched into the hands of a few (one) who then is in control. This is often done for nefarious purposes.
Here we are dealing with what appears to be the perception of the masses. There is no doubt that for technical people, the term distribution can apply to architecture. For example, we see the idea of "distributed computing" operating in that realm.
However, for the masses, when we see the term distribution, most associate it with the tokens. How widely distributed is the token?
There is also the consideration of how important is it. With Bitcoin, the token distribution means nothing for the state of the system. The mining process is what determines who is validating. Hence, processing power is more important than token distribution. If all the Bitcoin was in 5 wallets, the blockchain would still be decentralized.
This is not the case for many blockchains, especially those under the Proof-of-Stake model. Here the token holdings have the ability to impact who is in control of the chain. Token distribution can severely impact the operation of the chain.
Ethereum is one that would be described as decentralized. Their mining system is spread out. While not as wide and deep as Bitcoin, Ethereum miners appear to be at a point where the hashrate is well shared.
We do see the prospect of changes in the system eventually putting Ethereum in the state where it is centralized. By switching to a Proof-of-Stake system while adopting a deflationary model, it opens itself up to influence of larger players. This is happening at a time when the biggest player in the world, Wall Street, is getting very friendly with the Ethereum token.
From this, it is easy to see how those who have the largest amount of collateral are given a major advantage. Hence we can see how token distribution can vastly impact the operation of the network.
Follow the link read more about Proof-of-Stake versus Delegated-Proof-of-Stake.
In the article, Some Thoughts on Hive Backed Dollar (HBD), an issue was brought up that really drives home the point of what needs to be focused upon.
We see this comment which brings the discussion to the forefront.
Some very interesting points are made by this, most of which are outside the scope of this article. For those who are new, check out Hive Backed Dollar Becoming A Stablecoin to get a general sense of what is taking place.
The crux of the discussion is network vulnerability. How much is the possibility of something becoming centralized through the use of Hive Backed Dollar?
Nobody can argue that, at the base layer, Hive is fairly well decentralized. We also see the token distribution spread out. There is no founder's stake and the largest token holder has something like 3% or 4%. To amass an overwhelming percent of the tokens, especially to take control over the network, would be very difficult.
That said, the HBD could provide an opportunity. As was mentioned, if the price of Hive ran up, then one could accumulate a lot of Hive, which then could be converted in a market crash. This could potentially put tens of millions of Hive in the hands of a single entity.
So what is the solution?
Here again, we see how important distribution is. In this instance, it applies to both Hive and HBD. Both need to be spread far and wide. That is the best defense against attack.
A lot of this comes down to use cases. When tokens have more avenues to flow, they will not move towards a centralized honeypot. People will have a variety of reasons for holding a particular token, more than just speculation. The end result is a wider distribution even if there are some large holders. This, too, can provide defense against attack.
When it comes to HBD, it is crucial for the distribution to be strong. No matter what the haircut rate is set at, if there is a massive run up in the price of Hive like we expect, it could be a point of vulnerability. This is simply unavoidable since we have a stablecoin tied to the chain and paired with the DPoS token.
Each time the Hive "loyalists" put HBD in savings, this is akin to building a war chest. Those Hive Backed Dollars are available in the event that a large market drop occurs leading to someone trying to take over the chain. If one is creating tens of millions of Hive through HBD conversion, this could be counter-balanced by thousands of other people doing the same thing. Essentially, we are looking at a built in defense fund.
Of course, there are many other dynamics that are in play here. Real world market operations do not exist in a vacuum or proceed so cleanly as spelled out in this article. Lots of variables are always in place which is why discussions such as these need to occur.
Nevertheless, in the end, the better the distribution of both Hive and HBD, the more secure the entire ecosystem is.
Decentralized and distributed is going to be vital for the future, especially with the regulators and governments circling the wagons. To be out of their reach, this is truly the only course of action.
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