Will We Realize Blockchain’s Promise of Decentralization?

By Hanna Halaburda & Christoph Mueller-Bloch

Since its inception, blockchain has promised to make “trusted third parties” redundant. In practice, though, whether blockchain is actually decentralized depends on what is governed and how this governance is enacted. As more businesses explore blockchain, this distinction becomes increasingly important. There are many expected benefits from decentralization that may elude us if it fails in practice.

Blockchain is commonly defined as a distributed ledger shared by multiple parties who can add transactions to it. Bitcoin, the first blockchain implementation, has succeeded in allowing for digital payments without having to rely on any trusted third party acting in the user’s best interest.

Such decentralization is expected to bring cost savings and empowerment. If it fails to materialize, we return to the problems of power and trust. We can understand this contradiction by identifying the four different ways Bitcoin, as a prototypical example of blockchain, is governed.

• Governing new transactions: Users unwilling to pay high transaction fees may choose to either not transact at all, or have to wait longer to get their transactions validated.

• Governing consensus: New transactions need to be validated to become part of the blockchain. Consensus mechanisms allow for decentralizing these validations, a crucial element in any argument that the Bitcoin system could replace banks. In practice, however, achieving consensus is more centralized than was envisioned.

• Governing updates: Once the blockchain is operating, updates to the protocol may be needed or desirable. In Bitcoin, it is envisioned that anyone can develop and suggest protocol updates. In practice, these changes are typically proposed by only a handful of developers and the discussions are highly centralized.

• Governing the design: Before the blockchain starts operating, the protocol needs to be designed. In practice, protocol development is typically highly centralized and coordinated.

Despite how they were envisioned, governance of blockchain technologies is often more centralized in practice, since decision-making power is usually costly to acquire and exercise. Expertise, reputation, time or money can all be required to gain decision-making power. The higher these costs are, the fewer are the people who want to participate, which contributes to centralization.

Managers need to carefully consider two things. First, that decentralized governance is not a necessary feature of blockchain; it needs to be enacted. Second, that the benefits of decentralized governance may not always be worth the associated costs.

Hanna Halaburda is an associate professor at NYU Stern School of Business. Christoph Mueller-Bloch is a doctoral candidate at the IT University of Copenhagen.

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