Blockchain Learning

Six Degrees of Decentralization: Approaches to Decentralized Network Architectures, Incentive Structures, and Lessons Learned

This is Part I of a multi part series in which I will take an in-depth look at the role decentralization plays in Crypto Networks. In this article I will explore the tradeoffs between decentralized and centralized networks and the role decentralization plays in blockchain protocols. I will also highlight some of the key factors that influence how distributed a network is in both number of participants and power. The remaining parts of the series will be a collection of 6 case studies of existing protocols that explores the different strategies they have employed to decentralize their networks, how that has influenced the behavior of network participants, and some of the pros and cons of these decisions. Now let us get into Decentralization!

Decentralization is the essence of blockchain technology. Ever since the release of the Bitcoin whitepaper in 2008, the idea of a decentralized, peer-to-peer network for exchanging digital value has been the cornerstone upon which all other subsequent protocols have been built. However, it seems that  the reasons why Bitcoin had to be decentralized from the start and what decentralization actually accomplishes are consistently overlooked. Instead, decentralization has become inherently associated with ‘good’ and centralization has become analogous with ‘bad’. Yet, decentralization is not binary, nor simply a state of being. It is a far more nuanced concept that comes with varying degrees and serves as a tool to meet a network’s needs. 

Decentralization, and the degree thereof, influences everything from a blockchain protocol’s architecture and physical distribution, to how consensus is reached, and how network governance decisions (i.e what is updated and when, how incentives are aligned, etc.) is managed. ( A great breakdown of these different components of decentralization can be found here). Seeing as decentralization touches every aspect of a blockchain network, it is understandable why this is such a hotly debated topic. It is still far too early to tell which approach, or approaches to decentralization will prove the most optimal in the long-run, but there are a plethora of lessons to be learned from the strategies different networks have tried and the outcomes (culturealley, technically, and economically) of their decisions. 

In an effort to provide a comprehensive overview of the ways protocols are approaching decentralization, I will present case studies on several blockchain networks and assess the strategies used to decentralize their network, the implications of these decisions economically, technically, and politically, and extrapolate some lessons learned. In sum I will explore the role of decentralization in the following six networks: Bitcoin, Factom, Cosmos, Celo, Terra, & Kusama (Polkadot’s experimental ‘Canary’ network). However, before we dive into the different shades and hues of decentralization, its first important to understand the goal of decentralization and the different factors that it influences in a blockchain protocol.

The Goal of Decentralization: A System’s Level Perspective

Systems are put in place to create a reproducible set of outcomes with constraints that optimize for certain criteria. Hence, when building a system, it is critical to identify the desired end goal and then what optimizations are needed. From this perspective, centralized systems and their distributed counterparts are simply different system designs optimizing for different criteria. 

Consider the outcome that most crypto networks are designed for at the most fundamental level: recording digital transactions. Is this not the same outcome that more centralized payment processors seek as well? Both of these methodologies strive to maintain accurate accounts of all transactions they process. The difference, however, is in the design of these systems and what they are trying to optimize for. Centralized payment processors are designed to record as many transactions as possible, in the least amount of time, and do so by assuming total control of the process and responsibility for the data and its security. In short, these systems are optimized for speed and control. Decentralized systems, on the other hand, are meant to optimize for trust, immutability, and uncensorable transactions by giving participants sovereignty over their own data. The process of signing transactions, verifying they are legitimate, and arriving at consensus takes time. However, because of this, all transactions have finality, the ledger is immutable, and people have full control over their funds and what is done with them through their private key. Centralized systems like Visa can process over 60,000 transactions per second at peak demands, but take days to clear and they have the ability to freeze funds, move them, or edit the transaction history if they suspect fraud or otherwise. Hence, it is less a question of if centralization is bad or good, but rather one of the value of complete participation in a system by all participants and their ability to control their own funds.

Factors Influencing Decentralization 

As you can see, decentralization is not simply a yes or no decision, but a design choice for a blockchain protocol that determines how the network will behave as it records transactions. So how do protocols factor decentralization into their network design? As we said earlier, decentralization touches every part of a crypto network and fundamentally shapes how it operates at scale. Consequently, it is important to understand a few of the key mechanisms by which protocols attempt to engineer and control the decentralization of their networks before we dive into an in-depth examination of the decentralization strategies of the six networks mentioned earlier.


Governance is perhaps one of, if not the strongest shaping forces in a blockchain network for how decentralization will propagate at scale. At a high level, governance refers to how network participants decide on what changes are made to the network and what needs to be done across the broader community. Governance decisions often result in changes to the code base for the network and consequently correlate with major updates, or hard forks. A network must decide if it will have on chain or off chain governance. If they elect for the former, they must decide on factors like how voting power is distributed, if all participants are included, and how proposals are made by network participants for network updates. This also brings with it a sizable technical investment as all of this logic must be programmed into the network itself. All proposals are written in code and broadcast to the broader community to vote on over a particular time horizon. If they elect for an off chain governance model they must determine what is made transparent to the community broadly, if they should include community members in decisions, or if only core devs should be included in the discussions on updates and product roadmap. 

Economics/Financial Incentives

The financial incentives structure for how network participants are rewarded is another one of the strongest forces for shaping the decentralization of a crypto network. How a network rewards its participants defines how the network will perpetuate. One of Bitcoin’s innovations was creating an incentive structure for miners to ‘play by the rules’ this allowed the network to grow to the strength it is today. There are other factors to consider as well; are all participants rewarded evenly or is it only advantageous for a small handful? Are the largest investors in a protocol or top technical contributors the most rewarded (Think Proof of Stake or Proof of Work)? Are developer efforts rewarded in the community, or are only the core devs compensated? How a network answers these questions determines how wide a reach the network will have, how many different parties run their software, and the motivations behind the participants running their software. It also determines what kinds of technical contributions are made to the protocol and signals what types of projects or community members are valued.

Tiered Architectures

Lastly, a network must decide if all of its participants operate at equal levels or if there are tiered classes of participants. For example, many Proof-of-Stake Networks have different layers of network participants that come with different levels of responsibilities, requirements, and rewards. Validators are rewarded for participating in consensus, investing in high quality infrastructure to support the network, ensuring network uptime, and handling updates and governance. Others, however, can still be rewarded by trusting their funds with a Validator and being proportionally compensated for the amount they ‘stake’. This provides the network with decentralization though may consolidate the majority of the economic and political power in a smaller cohort of participants. In other, typically proof of work, protocols participants are divided between miners and node operators. Miners are rewarded for their donated computing power and while node operators are not directly compensated, they chose what version or fork of the software to follow and thus can control the outcomes of software updates (see BIP 91 and SegWit2x). If miners want to increase their economic rewards, they must invest into more of the same infrastructure, but this seldom comes with added responsibilities like governance as is seen in a more tiered infrastructure like the proof of stake model. Instead any committees or pseudo governance structure tend to be a self-formed group of motivated participants who work together on upgrading and evangelizing the protocol.

As you can see, there is much for a network to consider as it attempts to engineer decentralization into its network, and this is just scratching the surface. In the next article, I will start diving into the case studies surrounding different networks’ approaches to decentralization. I’ll go back to where it all began with the Bitcoin network, and assess how the network decentralized over time, what approaches it took, and how that has translated to the network being what it is today. 


What Blockchain Should and Shouldn’t be to Healthcare: Part 1

By Connor R. Smith, Originally Published March 14th, 2019

Blockchain saw significant interest from major corporations in 2018. IBM began deploying initial proof-of-concept solutions to do things like sourcing food throughout Walmart’s supply chain. Many other enterprise use cases were speculated on and announced for Blockchain technology, and the year culminated with Amazon Web Services announcing it would be deploying business-ready blockchain solutions. While juggernauts like IBM and Amazon making strides in the space may be a strong indicator for the future of blockchain, with the “Crypto Winter” in full stride, one cannot help but look back with 2018 with some disappointment. Blockchain was supposed to change the fabric of how modern society does business, but very few proofs-of-concept actually made it past a whitepaper. Healthcare should be undergoing a total transformation because of the Blockchain, but we instead received niche, unneeded solutions, such as a cryptocurrency for dentists. People were more focused on creating a killer dApp or cryptocurrency than focusing on developing solutions for the actual problems that healthcare faces. An examination of the alignment between what the potential uses for blockchain are in healthcare versus the immediate needs healthcare has for blockchain is warranted if the technology is to see growth in this sector. Before considering what healthcare could do to healthcare, let’s look back and assess what has not worked in healthcare so far.

What Blockchain Should Not be for Healthcare:

A Cryptocurrency for Medical Professionals

New altcoins keep popping up every day. There are literally thousands of cryptocurrencies, each claiming to be “highly scalable”, “more secure”, and “the fastest”! To make matters worse many of these have very specific use cases, that are oftentimes laughable like WhopperCoin or HempCoin. Obviously, not all altcoins are created equal and many are intentionally memes or get rich quick scams that will die out over time. However, when ‘legitimate industries’ create their own cryptocurrency for a solution that doesn’t need it, it has major implications for the crypto and blockchain communities if they wish to be taken seriously and see adoption. In healthcare, the most glaring example of this is DentaCoin.

Many of DentaCoin’s goals are fantastic. They want to shift dental care to a patient-centric model and make care preventative as opposed to corrective by providing continuous care, access to a dentist, and good dental hygiene tips through a mobile platform powered by DentaCoin. If successful they could significantly drive down the cost of dentistry and maybe improve a few smiles along the way. But can someone legitimately tell me why the platform needs its own cryptocurrency associated with it? Their use of blockchain and smart contracts is to track payments and establish financial incentives for both the patient and dentist is legitimate, but there is no reason it needs its own cryptocurrency. 

Projects like DentaCoin with a native cryptocurrency will only harm blockchain-enabled healthcare solutions in the long run. It is just shortcutting systemic issues like interoperability and regulation. There are already projects that are optimized for financial transactions like Bitcoin and Stellar, as well as conventional fiat payment systems. Each service we use does not need its own cryptocurrency with it. Are consumers really going to keep track of and maintain the wallets of tens or hundreds of cryptocurrencies? I don’t think so. For a more in-depth article on blockchain projects not needing their own cryptocurrency click here.

A Way of Storing Medical Records

Does the U.S healthcare system need to continue to improve its storage and management of patients’ medical records in pace with technological growth? Absolutely. Medical records are the number one target for hackers to sell for identity theft purposes. A single medical record can go anywhere from $10 – $800/record on the black market depending on the record compared to just $1/record for stolen info from a credit card. Is storing medical records on the blockchain the way to fix this problem? Absolutely not.

Regardless of the encryption and identity protections used to preserve anonymity on the record, if so much as one item could lead to a network member to identifying a patient, Health and Human Services would be all over you for violating HIPAA privacy and security standards for handling patient information. If you live in Europe, GDPR restrictions are even more restrictive for health data, as computer IP addresses classify as health information identifiers. Just because you can do something doesn’t mean you should. Yes, HIPAA can make sharing medical records difficult, but it’s important to remember too that these regulations exist to protect and ensure the rights of the patient. Violating these isn’t only going to get you fined, but is doing a disservice to the patient’s rights to their data.

Moreover, storing medical records on a blockchain just doesn’t make sense. Blockchain was never meant to fully replace databases. Electronic medical records can range anywhere from 1 MB to over 3 GB of data depending on the file. This automatically eliminates secure, proof-of-work networks like Bitcoin with block size limitations from being contenders. Even protocols like Ethereum and Storj that don’t have any block size limitations would be impractical choices. Yes, you could theoretically do it, but the sheer computational power and operating costs to do so would be entirely impractical. The U.S Healthcare system, which costs over 18% of the United States’ GDP ($3.5 Billion), is not going to pay even more money for sophisticated mining equipment so it can hash and store medical records on a blockchain.

Improving Electronic Medical Records’ (EMR) security and access isn’t going to be done by hashing medical records to a blockchain. It’s going to be done by innovating at endpoints of the system and improving secure IT infrastructure to reduce the likelihood of a malicious actor accessing the records. Yes, improved cryptography and distributed databases may play a hand in accomplishing this, but that is distinctly different then hashing records to a blockchain.

Wrap Up:

Blockchain can really have a transformative impact on healthcare, but tokenizing medical services and storing EMRs on a blockchain are not going to be the solutions that have a lasting impact. Blockchain will revolutionize healthcare by creating things like audit trails and digital identities for credentialing and care tracking. I will be following up in a future article on these blockchain use cases and more that could provide significant value to healthcare. Thanks for reading!

(Part II Coming Soon!)