Ask anyone with a basic knowledge of blockchain what makes it so revolutionary and I assure you that one of the first items in the list will be something along the lines of “because it is a decentralized system”. Decentralized applications, or dapps, that can be built on blockchains, are said to be more flexible, transparent, resilient, and have a better incentivized structure than current software models. They most likely will be, and the person who cited decentralization as an advantage would be correct, but… what does that even mean? What is decentralization and why does it even matter? Why do we keep saying that the future belongs to decentralized technologies? Well, in order to understand that, we have to go back a few centuries.
Centralized systems are historical exceptions
One of the advantages of studying history is realizing that (1) things haven’t always been like this and (2) they can change in the future. We are used to a world in which most things are centralized: an economy run by large conglomerates, decision-making processes concentrated on governments, monetary systems controlled by central banks. That doesn’t mean, however, that it has always been this way. On the contrary, during the Middle Ages, the “economy” used to be just farmers and artisans trading their products at local markets. Similarly, “the State” as we know it, is a European creation of the Modern period (if you want to be really precise, from the 1648’s Treaty of Westphalia). Central banks came to exist around the same time (the Bank of Sweden, founded in 1668, is said to be the world’s oldest).
The point of this little digression is to show that centralized systems only become the norm when societies develop to levels of complexity that cannot be managed directly by people. When production grows and one no longer knows everyone at the local market, it becomes hard to know if the person who bought the product will actually pay for it. When people can no longer meet at the squares and decide the future of the community, someone must be designated to make those choices. The same goes with issuing and managing money supplies.
The interesting part of this, however, is that, while centralized systems are more suited to larger societies, they are not necessarily more efficient. Since they rely heavily on middlemen, bureaucracy and rules that can usually be broken, they tend to become massive, slow and expensive. If only there was a way around them…
Technology at the heart of structural change
Turns out that there might be. Centralized systems become necessary when there is not enough information (when the seller doesn’t know the buyer), or when communicating with the relevant people becomes harder (when we need to know whether or not to increase taxes or start a war with the neighbouring country). That means that if we can make information more readily available at a low cost (in economic-speak, if we can reduce the transaction costs involved), we can go back to decentralization and the advantages it brings.
Nowadays, thanks to technologies such as the blockchain, that’s within our reach. Using the distributed ledger, then, can really lead to more efficient structures. Blockchain enthusiasts always emphasize the fact that trust is embedded in the very architecture of the system – which is to say, they work on reducing risk and making information available. Note that by reducing those transaction costs, it can be faster and cheaper to use. They are also much more resistant to failure: even if one or more computers in the network fail, the rest of the system can keep on running. Additionally, not having a database in which everything is stored makes hacking harder, preventing all the headache that privacy breaches can cause. Personal data will no longer be held by big corporations, but owned by the individual. A potential new era of decision-making will arise, changing how we perceive democracy. Overall, smoother systems can lead to increased connectivity and collective empowerment.
What happens now?
Blockchain technology is still in early stages, but we are already seeing some very interesting applications being developed. Cryptocurrencies are challenging the monopolies of central banks. Decentralized Autonomous Organizations (DAOs) are rethinking the way we organize companies and institutions. At the time of this writing, the State of the DApps lists 891 projects on Ethereum, such as Streamr, Golem, Augur, Status, and Storj.
Investment in these applications is also on the rise. According to the report produced by Fabric Ventures and TokenData, in 2017, 435 ICOs (Initial Coin Offerings) managed to raise U$ 5.6 billion (an impressive number considering that the amount raised in 2016 was in the order of U$ 240 million). Traditional venture capital “only” accounted for U$ 1 billion in investment in 2017, but that number is posed to become much higher in the coming years. Fabric VC, for example, a fund backed by OpenOcean and Firestartr, combines the long-term VC strategy with the focus on decentralized systems. They understand decentralization as a “fourth age of open source” – deeply rooted and naturally emerging from the ‘free software’ movement and hacker culture back in the 1950s.
What we are witnessing now with Web 3.0 is a whole new decentralised economy, unleashing a completely new level of experimentation. With the help of new ideas and technologies, and with venture capital willing to back bold projects, we just might be walking towards a very exciting – and decentralized – future.