Web 3 Series #5: What is Decentralization? Why is it so important?
Editor(s): Alan Nguyen#4569
Last updated: 2nd Oct 2022
Decentralization is a particular type of organizational structure in which top management delegates day-to-day operations and decision-making to middle and lower level staff. Simply put, it's more or less like a situation whereby the superiors in an organization, assign authority to their subordinates.
Decentralization can also be said to be the orderly distribution of power among all levels of management in a company. Tasks, duties, activities and control are passed down at various levels in an organization.
Decentralization in the context of blockchain describes the transfer of power and decision-making from a centralized entity (a person, an organization, or a collection of such entities) to a dispersed network. Decentralized networks have a major objective to reduce the trust or dependence that participants must have on one another, preventing them from acting in an authoritative manner.
In comparison, I will shed some light on Centralization.
How Does Centralization Work?
The process of consolidating planning and decision-making tasks to one leader or region within an organization is known as centralization. It indicates that centralized authority is in charge of the information and features of the specified platform. A structure of an organization where only a small number of people have the authority to make decisions is sometimes referred to as centralization.
Advantages Of Centralized Government
Clearly Defined Command Chain: The chain of command is well understood. This indicates that everyone in the company is aware of their responsibilities and to whom they should report. They are accountable for the activities of the person they are in charge of as well as the person they are in charge of.
Affordable: Compared to decentralization, any centralized network or infrastructure requires less maintenance and is less expensive because it involves fewer people.
Enables Quick Decision Making: As a result of the fewer nodes or people involved, less communication amongst the different levels of authorization is required. Less number of people to give permissions or opinions about activities as control is only given by a few.
Trust: Trust is simply an agreement that is established between the service provider and the user, agreements however, can break easily. Big corporations suffer from trust issues among their users, from time to time. Especially when there's a lapse of security in the system which could happen because all the data is stored in a centralized database. This makes the system prone to hacks, people tend to lose patience and trust in the service provider as a result of this.
Single Point Of Failure: In centralization, the entire organization is solely dependent on a single point of failure. Therefore, any form of mistake or breach in security tends to affect the entire network. Especially when mission-critical services are involved.
Scalability Limitations: As a single server is used in most cases, it leads to scalability limitations.
Benefits of Decentralization
Decentralization offers too many benefits and incentives to pass up. Responsibility, specific goals, results-based accountability, and more efficient and effective decision-making are all benefits of decentralization.
Hastens Decision Making:
As a result of the distribution of decision-making authority, this speeds up decision-making and helps to develop sensible decisions, which facilitates and expedites problem-solving.
Encourages executive development:
It boosts employees' self-assurance, in the sense that when authority is transferred to lower levels, they have to depend on their judgment regarding organizational matters. This leaves the executives constantly challenged to provide solutions to problems encountered in daily operations.
Promotes Development Of Managerial Skills:
Decentralization creates opportunities for subordinates to prove their abilities. It encourages a good number of competent and skilled manpower that can handle challenging situations, which gives a sense of responsibility by way of promotions.
Promotes Better Control:
It allows for accountability of each department in an organization, this is because the performance of each team or department can be measured. It's easier to know which department isn't efficient since there's transparency. The extent to which goals of the organization are accomplished as well as the contribution of each team is determined.
Relieves Top Management:
It reduces the burden of direct supervision (by superiors) of operations carried out by the subordinates, as there's already a distribution of decision making power amongst them as well as carrying out tasks accordingly within limits set by the superiors. Due to this fact, the superiors get to dedicate more time in solving more pressing and delicate problems.
Promotes Speedy Growth:
It generates a sense of competition among various teams/departments, as a result, they tend to work harder, carry out tasks faster and more efficiently in order to exceed other teams. This makes the organization grow in terms of size and generate more revenue due to work efficiency and increased level of productivity by various teams/departments.
Allows For Effective Communication:
Decentralization builds a concrete communication system between subordinates and superiors. It reduces the burden of top-level management and allows middle and lower level executives the chance to gain actual work experiences as well as preparing them for higher roles in the future. This improves the self confidence of the subordinates and their drive towards work.
Creates A Trustless Environment:
Each department/team or member has a copy of the exact same data of the operations going on in the organization. It's a transparent system, most information is not hidden from members, for example, in cases of DAOs, tasks are carried out openly and information is made available for everyone to have visual access. This way there's little room for corruption.
Makes Data Retrieval Easy:
When there's a decentralized data store, every entity has access to a real-time shared view of data. The decentralized system allows organizations to exchange data with their partners, this makes it difficult for data to totally get lost. It can easily be retrieved when need be.
Enhances Distribution of Resources:
Tasks and opportunities are distributed amongst the entire system. It ensures that services are provided with better performance and consistency also decreasing the tendency of failure.
Disadvantages Of Decentralization
As a result of a Decentralized system, communication among members can cause confusion as there are independent team members who are responsible for their roles, tasks and schedule. For instance, in discord servers for DAOs, it can be difficult to track important information as there are so many messages sent by different members at different times. Sometimes information can be rowdy and there could be irrelevant information passed across which could make it more difficult to track relevant ones. Each manager may have their own preferences, viewpoints, and methods of operation, which can make general questions, procedures, and rules unclear.
Decentralized organizations call for more managers to take responsibility for team members and the overall organization — which means managerial expenses are increased as these team leads have to be paid for their services.
Difficulty Working Together:
It might be challenging for two different departments to work together on a new project or coordinate functions when there are so many different leaders, viewpoints, and timelines.
Service Activities May Use Up Resources:
Service functions (including accounting and marketing) must be offered to each department in order for them to be self-sufficient. However, centralized businesses can save money by using the same service functions for all or the majority of their departments.
Poor Leadership From Individual Teams Can Damage The Entire Organization's Reputation:
In a situation whereby a team lead doesn't utilize resources properly or fails at executing tasks efficiently, this could lead damage to the reputation of the entire organization. When each team is productive and work efficiently in their individual teams, the organization experiences growth financially and gains credibility as well.
Types Of Decentralization
Decentralization of politics:
The sole goal of political decentralization is to increase the influence of locals or their elected representatives in public decision-making. It is typically associated with issues of pluralistic governance and agent government, but it can also support democratization by allowing citizens—or their representatives—more influence over the formulation and implementation of policies. Political decentralization proponents believe that decisions made by more influential groups will be more informed and relevant to varied public interests than decisions made solely by public political specialists.
This kind of decentralization aims to disperse power, responsibility, and financial resources for providing public assistance among multiple levels of government. It is the exchange of responsibility for specific public capabilities' preparation, support, and management from the focal government and its offices to handle government organizations' units, lower levels of government, partially independent public experts or businesses, or area-wide, regional, or functional authorities.
This can take many different forms, such as: self-financing or cost recovery through user charges, co-funding or co-production plans where users participate in providing support and framework through monetary or labor commitments, expansion of local revenues through property or sales taxes, or indirect charges, and intergovernmental agreements.
Decentralization of the economy or markets:
According to an administration's perspective, privatization and liberation are the most comprehensive forms of decentralization because they transfer responsibility for capacities from the general public to the private sector. Financial advancement and market improvement tactics typically, but not always, link privatization with liberty.
Examples of Decentralized Apps(dApps)
A US-based DApp on the Ethereum blockchain that was introduced in 2018. Users of the site can mainly swap and exchange ERC-20 tokens. By just connecting a cryptocurrency wallet, anyone can access the platform. The MetaMask wallet is the most popular option among Uniswap users for this use.
A liquidity protocol that is open-sourced and offers users total transparency. Users are able to stake, lend, borrow, and earn interest on deposits.
OpenSea is a global leader in NFT trading. It was the first NFT marketplace to receive widespread attention when it launched in December 2017. To save transaction fees, the application was initially built on the Ethereum network and later incorporated on the Polygon blockchain.
A credit service DApp built on Ethereum is called MakerDAO. Users can lock their ETH tokens on the site as collateral and get DAI tokens in return.
Steemit is a blogging and social media network built on the blockchain. You are able to create and publish material on the site. Then, several clients react and make comments about it. Each article is paid for by the client, and the prize is not totally covered by the associations it initiates.
DAO (Decentralized Autonomous Organization)
A DAO is an emerging form of legal structure. As the acronym implies, it's decentralized, every member within a DAO majorly has a common interest and objective. The objective is to work together toward achieving the Organization's goals. Popularized through cryptocurrency enthusiasts and blockchain technology.
Decentralization has helped improve service provision, as well as enhance the participation of members in an organization practicing decentralization. Decentralized networks as well as decentralized Apps have made it possible to safeguard user privacy and solve the problem of lack of censorship and flexibility of development. It has granted an alternative option to centralization which has its control and interference from a single authority.