CHAPTER 7

Use of Decentralized Infrastructure for Businesses

By decentralized infrastructure, I mean public blockchain infrastructure such as Ethereum and Bitcoin. Some services are built on top of this infrastructure. I describe how to utilize those services in a later part of the book. In this chapter, I shall talk about what decentralization is in the context of public blockchain as an infrastructure, decentralized protocols, and applications.

Decentralization is all the rage in the blockchain world these days. I must confess that I find it confusing and sometimes even disorienting when describing what decentralization is. Mr. Buterin wrote an interesting blog article in Medium about decentralization and proclaimed that “[i]t is also one of the words that is perhaps defined the most poorly.”1 To paraphrase what Mr. Buterin wrote in the blog, there are three types of decentralized systems—architectural, political, and logical.

Architectural decentralization is all about how computers in the system are arranged. Political decentralization is about control of power over the network—about the number of individuals or organizations that ultimately control the system and computers that are part of the system. Logical decentralization has more of a swarmlike feature.

What Does Decentralized Infrastructure Mean?

According to Mr. Buterin, blockchain is architecturally and politically decentralized but logically centralized because there is one agreed upon state. By that definition, Ethereum and Bitcoin both fall into that category. It seems to me, from Mr. Buterin’s definition, that a system to achieve all three types of decentralization is quite difficult, perhaps even impossible. He does mention that interplanetary file systems may fall into a logically decentralized system, but is it politically decentralized?

In this chapter, I’ll discuss what decentralization means for businesses, whether it’s even feasible in a B2B environment, and how it might force businesses to rethink their strategies. I’ll also discuss why it is a difficult topic in terms of implementation and my own struggle to define it at dexFreight. I shall also discuss pushbacks and argue that we will see very limited, fully decentralized B2B systems in the foreseeable future.

Unlike other chapters, this one is filled with more questions than answers because that’s how we currently stand on these topics.

I submit that both Bitcoin and Ethereum are perhaps the most decentralized infrastructures out there. Bitcoin core developers do have a lot of say in the future path of development, but so do miners and nodes. Major updates to the core protocol must be agreed on by the core developers and powerful miners. Ethereum has the Ethereum Foundation in addition to core developers and miners. The foundation holds a large cache of Ether. Whether the foundation has a lot of influence in future implementation of Ethereum is debatable. Other cryptocurrencies have even more influential companies and core developers behind them.

Balaji Srinivasan, a former chief technology officer of Coinbase, used the Gini coefficient as a crude measure of decentralization of systems.2 Intuitively, the more uniform the distribution of resources, the closer the Gini coefficient (G) is to zero. In a highly centralized system, G is close to 1. Conversely, in a highly decentralized system G=0. Hence, a low Gini coefficient means a high degree of decentralization.

Censorship Resistance of Decentralized Infrastructure

One of the core value propositions of public blockchain is censorship resistance of the network and the underlying ledger. Censorship resistance, mainly in the blockchain community, means state actors or an institution’s ability to shut down the network and/or attack the ledger to double spend transactions. Although double spend attacks don’t shut down the network, they will effectively erode the users’ confidence in the security of the underlying blockchain. Double spend attacks on confirmed transactions are quite expensive, but on unconfirmed transactions they are feasible. This becomes especially problematic for small transactions that may not be picked up by miners to quickly confirm and get added to the ledger. Mining pools have different policies to confirm unconfirmed transactions.

As the network and the ledger have grown, the financial requirement to shut down the network is becoming larger and improbable. In addition, the computing requirement to double spend transactions or attack the network is also growing exponentially. Obviously, this statement doesn’t apply to all blockchain networks, some of which have had to hard fork because of 51 percent attack.

However, censorship resistance can take a different form, in which states may request decentralized platforms to de-platform, or remove access to certain decentralized applications, or dApps, to comply with existing laws and regulations of the country. For example, Tron confirmed that it will be collaborating with the Japanese government to prevent gambling dApps from being accessible within the Pacific island territory.3 Although dApps run on decentralized networks, de-platforming them from dApp stores can significantly reduce the traction or foot traffic to the application.

Traditional Businesses Using Decentralized Infrastructure

It would be naïve to think that every business in the world will start using public blockchain. That’s very unlikely owing to the regulatory and technical issues that we will discuss throughout this book. However, it is not far-fetched to think that traditional businesses can use decentralized infrastructure to support parts, or the entirety, of their business operation by connecting directly to a public blockchain infrastructure and/or using dApps developed internally or by a third party, as shown in Figure 7.1. This is discussed extensively later on in the book, with only a brief flavor of what that means provided here.

In the chapters titled “Transforming Current Business Models” and “Creating Innovative Business Models,” I discuss at length how traditional businesses can leverage public blockchain infrastructure. Essentially, that entails two broad methods, as follows:

• Anchoring some or all of the transactions to public blockchain to provide a much higher level of transparency and security as well as censorship resistance.

• Integrating with new types of business and dApps that are directly built on public, permissionless blockchain. Those applications may be oracles, decentralized finance, arbitration, and so forth.

Decentralized Applications Built on Public Blockchain

Let’s take a moment to describe what dApps are.

Decentralized Nature: As their name suggests, dApps store everything on a decentralized blockchain, or any cryptographic technology, to save the app from the perils of centralized authority and place emphasis on autonomous nature.

Incentivization: As the app is based on the decentralized blockchain, the validators of the records on the network must be rewarded, or incentivized, with cryptographic tokens or any form of digital asset that has value.

Algorithm: dApps need to have a consensus mechanism that portrays proof of value in the cryptographic system. Essentially, this endows the cryptographic token with value and creates a consensus protocol that users agree on to generate valuable crypto tokens.

Essentially, dApps are applications that run on decentralized, P2P networks. After the invention of blockchain, dApps have been associated with web applications that use public blockchain to store front- and back-end components, including smart contracts.

Are Politically Decentralized Applications Feasible?

OpenBazaar has shown that B2B applications are technically feasible even though the extent of their political decentralization is questionable because OpenBazaar essentially operates and maintains the marketplace. Assuming OpenBazaar relinquishes control of the protocol to buyers, sellers, and other token holders, they must come together and, through a consensus process, decide how the protocol is upgraded, priced, and governed. Sounds interesting, but why would buyers and sellers want to take control of the protocol and manage it when that’s not their core function? Their core function is to buy and sell things in the marketplace. Instead, they will rely on a few active delegates of the community or community representatives to make decisions about the future of the protocol.

Almost all dApps such as marketplace, mobility, insurance, and real estate, are neither politically nor architecturally decentralized. Just because some of them have made their code open source, it doesn’t make them decentralized. These applications are still politically, and to a large extent architecturally, controlled and managed by a core group of individuals who are part of a legal entity. This present state might be acceptable for the blockchain community and investors who purchased tokens in public sale. However, over time, these projects will come under intense pressure to decentralize.

I must mention that going fully decentralized with business-to-business applications is infeasible, or at least not yet, for two reasons. First, businesses who sell applications have bottom lines such as revenue and profit and therefore can’t operate at a loss for a long period. That requires them to retain control over the system to prevent a competitor from copying their idea and eating up their bottom line.

Second, businesses that buy or subscribe to systems expect a certain level of performance and service from the provider. Businesses don’t like to buy free stuff, not for a very long time. Hence, the provider has operating expenses to service their customers, which relates back to the first reason.

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1 V. Buterin. February 6, 2017. “The Meaning of Decentralization,” Medium Corporation. https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274.

2 B. Srinivasan and L. Lee. July 27, 2017. “Quantifying Decentralization,” Medium Corporation. https://news.earn.com/quantifying-decentralization-e39db233c28e.

3 K. Sedgwick. April 4, 2019. “Decentralized Networks Aren’t as Censorship Resistant as You Think,” Bitcoin.com. https://news.bitcoin.com/decentralized-networks-arent-as-censorship-resistant-as-you-think/.