W3PG: Basics of Decentralization

In this piece we uncover decentralization and how it applies to Web 3.


Last updated on 5/12/2021

The future will be decentralized.

Welcome to the Web 3 Pocket Guide. 

Have you heard of Web 3? Chances are you have, but you’re unsure about what it is. Web 3 is a term related to crypto, and if you’re new to the space, it can be intimidating and confusing. So we decided to help you, the newbies, by giving you an easily digestible introduction to Web 3. 

Currently, we are at the beginning of a shift from Web 2.0 into Web 3.0. This change is the most drastic shift to happen in the history of the internet, so obviously we’d like you to be informed! Over the following weeks, we’ll be releasing a series of articles that break down why this change to Web 3 matters. So stay tuned!

Before you read these articles, we want to warn you: you might become a frothing crypto savage. Or, at the very least, a crypto savant. The last few decades have brought new technologies and innovation to the forefront. Mobile devices, laptops, and digital applications have forged new ways of communicating and connecting in society. And with blockchain technology, it’s untelling what the next decade will bring. Which is why we‘re writing this piece, to inform, educate and prepare you for the future. Forward thinking is required in this guide and if you are glued to the old ways of doing things, it might be best to stop here. However if you’re open minded, curious, and believe in a more equitable, digital future, then you are going to like what’s coming up!

This piece is about decentralization, a core Web 3 concept. As decentralized finance and cryptocurrencies start to gain acceptance, the word decentralization has become a hot topic of conversation. Everyone is talking about it, from mainstream media to your homies in the group chat. But what does it mean? Before we dive into what decentralization is, let’s first define centralization to understand its place in the world we currently live in. 

WARNING: You will hear the words decentralized and centralized used throughout this article many times. Just saying, we warned you! 

A Centralized Network 

The world we live in is primarily operated by centralized entities. And we comply with these entities in order to carry out various kinds of activities. Take governments as an example: each state has its own body that convenes to decide the laws and regulations within its jurisdiction. In a democracy such as America, a centralized government is voted into power by a decentralized set of citizens across the nation. 

Government is a physical representation of centralized authority, but let’s look at the web (since this is the Web 3 Pocket Guide, right?). The internet, by original design, was a decentralized system that allowed anyone who could connect to participate in it. Websites and applications, such as this one, live at a specific location (which is this url: mag.ntheos.com). You’re allowed to travel to this website without worrying that someone will stop you. You type in the address and poof, you’re here. 

You might say: “That sounds decentralized to me.” But not so fast. The internet was quickly snagged by large companies, and these companies started to “own” many corners of the internet. Whether it be a search engine that directs you to websites, cloud servers that host the websites, or platforms that enable easier content creation; the internet now belongs to a small handful of organizations. And I’m sure you can guess, they’re centralized. 

It’s easy to gloss over how much is controlled by centralized entities and how our daily activities are at the discretion of these entities. Banks decide if you deserve a loan, companies decide what news stories to publish, and centuries old legislation determines what is legal. In some cases this works, however recently it has been clear that an alternative is needed.

On most of today’s web, there are intermediaries that facilitate the various actions that any user can perform. Between APIs, databases, servers and other centralized entities, there are many centralized points. These points can be seen as points of failure, points of profit, or points of utility. Typically it’s a mixture of each. You need somewhere to host a website, or a server to send a tweet. It’s the default method of interactions in real life and on the web.

Most internet tech companies are set up with a front end of their website/app that we interact with on our devices. This interface then interacts with servers, databases and APIs. Each of which is partially owned by the company running the application. However, since so much data is now stored in the cloud, the majority of the web now is owned by the large companies who rent out digital real estate in the cloud. 

This picture below illustrates the way that centralized parties own the current web.

Decentralized Networks 

Now that we have an idea of the current centralized systems in place, let’s break down decentralized systems. Decentralization is the act of dispersing power from a central authority and distributing it to others. Basically, it’s a network where everyone has access, authority and dispels middlemen. This can be applied in many ways, let’s look at some examples.

Compare Bitcoin and the American dollar. The recent surge in Bitcoin was fueled by the pandemic, more specifically the federal government printing more money as a result of the crisis. There were a few people in control of the Federal Reserve and, as the world shut down, they printed more dollars so they could give them out to the American citizens. The moment that the money lever was cranked, the value of the dollar lessened. This means that, at that moment, people had less value than previously before. This was a decision that was in the hands of few but impacted many: centralization.

Bitcoin has no lever that can be pulled by any person or group of people. It is software that is firmly set in its rules and operates in the same way that it did when it was first created. It is impossible for more bitcoin to be printed than is determined and set by the software. Miners around the world mine bitcoin with computer hardware and then make it available to those who would like to purchase it. No unexpected inflation, no possible corruption. 

Bitcoin is a result of many operations performed by many non-related people/computers, whereas printing money is a result of one operation performed by a small group of related people. There are an estimated 1 million Bitcoin miners in the world, and the software dictates how much Bitcoin exists, not the miners. There is one Federal Reserve with a few hundred people who dictate and print as much money as they deem appropriate. Which seems like the better system to you?

The power of decentralization has been realized by many people who participate in the decentralized financial system (DeFi), but what about other centralized systems on the web? Most of this is unexplored land that we at Ntheos are focused on pioneering in. It’s still very early, but let’s look at a possible situation.

Imagine a blockchain specifically built for publishing news. Good news is rewarded and verified, while bad news is not approved. Obviously, what is “good” and “bad” is subjective, but for the sake of simplicity let’s assume that this can be determined by the software. A decentralized system would then be able to empower better news, since the poor news would not make it beyond the software’s checks. If someone were to dislike the news, even though it’s deemed correct, they would not be able to stop what the blockchain has already accepted because it is immutable (non-erasable). 

The blockchain based media site would be similar to Bitcoin, which is if a group of people found the good news to be upsetting, they would not be able to take it down or corrupt it. Traditional, centralized media sites are susceptible to censorship and possible deplatforming, since it’s controlled by a specific company that runs their application on another’s company’s cloud. Decentralizing these entities makes room for various voices to be lifted. Not only that, but decentralizing them allows for people to have a say in what can or cannot be posted. 

Hopefully, these examples opened your mind to how powerful the decentralization of internet technologies can be... 

Why Decentralization? 

Good question. 

Decentralization, though a profound and innovative technology, isn’t flawless. Decentralized networks act as a hedge against the current flaws and inefficiencies existing in centralized networks. Compared to centralized networks, decentralized ones act as a better alternative when it comes to reliability, privacy, and security.  

Centralized networks operate in a top-down structure, leaving a single person or server in charge to process things. Information flows from one person, to the next and to the next, until it finally reaches its target. That means specific individuals are responsible for certain tasks, and if something happens to that individual, all tasks are hindered from being executed. Because it's distributed, a decentralized network won’t be hindered or completely shut down. 

Decentralized networks also mitigate mistakes made by centralized networks. Centralized systems are more susceptible to human errors that can come from biases, lack of knowledge or simple mistakes. Decentralized networks run off AI, or artificial intelligence, and are completely autonomous, written and instructed by threads of code on the blockchain. Decentralized networks leave little room for human corruption and act as a better means to efficiency and accuracy. 

Finally, decentralized networks offer tighter security and privacy. And it’s all possible through blockchain technology. What the blockchain does is store bits of data and distribute them across the network. Blockchains’ encrypted and distributed nature makes it possible to prove if data has been altered. After a record is set on the blockchain, it's nearly impossible to alter or remove it. To hack the blockchain isn’t entirely impossible, but nearly impossible, because to do so requires breaking into all nodes simultaneously. And to do that requires a lot of computing power! 

DeFi and Dapps   

Bitcoin birthed a new and profound use case for blockchain technology and decentralized networks, which we’ll discuss in the next piece that focuses on blockchain technology. Bitcoin revolutionized the financial industry by erasing the need for intermediaries to authorize payment activities. 

Ethereum also gave way to new innovations, especially in the DeFi space. Ethereum is a blockchain that allows cryptocurrencies to be traded while simultaneously allowing Dapps (decentralized applications) to build on top of their platform. Dapps also are open sourced interfaces built with blockchain technology, using smart contracts that establish peer-to-peer networks. Ethereum makes it easy for anyone with an internet connection to have access. And with so many financial services and products using Ethereum to build marketplaces, it’s no surprise that DeFi is getting popularized. 

But fiinance isn’t the only field being decentralized. It just happens to be the most popular, largely due to Bitcoin and Ethereum. The reasons for their popularity are for their innovative use cases in the space: Bitcoin forged a peer-to-peer network via transactions and payment, while Ethereum became a building foundation for Dapps and DeFi. No other blockchains have produced such a thing, at least before Ethereum. The other chunk of it is due to the numerous crypto exchanges that have been emerging. 

Take CoinBase, for example, which is a hybrid of decentralized and centralized networks. Hybrid exchanges are composed of decentralized and centralized network qualities, mixing the advantages of both networks. The popular crypto exchange company released their IPO mid-April, noting in their Q1 earnings for 2021 that they accumulated 1.8 billion in revenue. Their company also saw a rocketing increase from 43 million verified users at the end of 2020, to 56 million at the end of their Q1 in 2021. Coinbase is leading the frontier, and only more and more crypto exchanges will soon emerge. 

Fully decentralized exchanges such as UniSwap live and operate on Ethereum’s blockchain. In contrast to a hybrid exchange like Coinbase, UniSwap doesn’t take control of their user’s funds. UniSwap is arguably the most popular decentralized exchange to date, due to its automated market maker (AMM). Decentralized exchanges rely on set algorithms instead of traditional buyers and sellers in an active market, which is typical behavior in centralized exchanges.  

So what else, other than finance, is feeling the ripple effects of decentralization? Thanks to Ethereum, more than one use case for blockchains was able to be created. Ethereum’s platform also implemented smart contracts: contracts that are embedded with a piece of code that holds all existing terms and conditions. Smart contracts enable decentralized systems to function by replacing intermediaries through autonomous software that ensures transactions are legitimate. The smart contract code is trustworthy, which allows people to negotiate on their own terms. Pretty cool, right?

As this paves the way for more decentralized applications, we will start to see decentralization spread into other industries such as gaming, insurance, art, and media. Consider CryptoKitties, which is a famous gaming dapp built on Ethereum’s blockchain. On CrytpoKitties, users utilize Ethereum to breed and trade virtual cats amongst each other by using smart contracts. SuperRare, an art dapp where people can create NFTs and trade them, is also built on Ethereum. The gaming industry and crypto art industry are quite popular, but this is only the beginning of the dapp movement. As I’m sure you can start to imagine now: the decentralized surface has barely been scratched. Blockchains and the decentralized networks they create will eventually be the foundation of tomorrow’s applications. 

Looking Onward 

Most of society is engaged in a centralized system. We utilize entities like banks, governments and tech companies to middleman our information, handle our finances, and tell us what to do. Decentralized networks and systems break apart this middleman dynamic by dispersing power from a singular source to multiple sources. That means civilians will have more access and fewer restrictions. It’s not that centralized networks are incapable of resulting in a net positive, but that the current and innovative technologies that are being created offer seemingly better alternatives. 

Physical centralized systems are in place, but so are centralized systems on the internet. Centralized applications on the internet, such as Twitter, Instagram, Facebook, and several others, are the authorities of the Web 2 era. They control the content that goes up, the narratives that are told, and the ideas that are shared. But as the DeFi space widens and the more dapps that are built, the path to Web 3 is getting clearer. In the not-so-distant future, decentralization will be a staple feature for applications and technologies. 

Decentralization is the first step in the technological revolution, and it’s just beginning. Though it’s disruptive and its future is unpredictable, it offers an alternate solution to the current state of technology: where access, profits and freedoms are constrained. 

The value of a decentralized network lies in the distribution of power, access, authority, and security. People are able to exchange freely with fewer restrictions. As more is built with these new technologies, the playing field will become more equitable, fair and prosperous for everyone involved.

Heads high,

The Ntheos Team

Thank you for reading.