BTC vs ETH - Decentralization
What is Decentralization?
Decentralization is by far the most foundational concept in blockchain. Before we dive in, let’s clearly define decentralization within a blockchain and cryptocurrency context:
Decentralization refers to the shift of control and decision-making power from a central authority to a participatory network of peers.
Priorities of the blockchain network, whether it’s private or public, play a significant role in deciding the extent to which decentralization is employed. Decentralization is imperative to minimize the amount of trust that participants of the network must place in one another to validate its current state. By distributing the responsibility of securing the network to more participants, the network becomes more resilient. However, decentralization to any extent will have its tradeoffs such as speed or throughput.
Why should you care about decentralization?
It allows for global participation in a trustless system. Users are not required to place all their trust in one central authority or entity. Instead, that trust is distributed across a network of node operators such that no single entity holds singular control.
It lowers the risk of systemic failures. Because trust is distributed, there is no single point for systemic failure in a decentralized network. When a node goes offline in what’s known as an outage; the workload of that specific node is passed off to the other nodes securing the network, thus enabling the chain to stay up and running while the problem is being resolved.
It promotes a more meritocratic culture, meaning the collective’s needs are more promptly addressed. In a centralized system, the controlling entity has ultimate decision-making control. By distributing decision-making power to the participants in a decentralized system, the priorities, needs, and concerns of the collective can be more accurately and promptly addressed.
How decentralized are Bitcoin and Ethereum?
Now let’s evaluate the role of decentralization within the two largest cryptocurrencies, Bitcoin and Ethereum. Take a look at the infographic below:
Here are two important inferences we can make:
- Bitcoin is arguably more decentralized than Ethereum (at time of writing), however Ethereum’s daily average generated fees is nearly 40x that of Bitcoin’s. Does this mean Ethereum is more expensive to use than Bitcoin? Yes and no. Because Ethereum enables DApps to be built on top of it, it’s faced with securing the economic activity the network attracts. So, think of fees as a way to measure the demand for block space because at the end of the day, that’s what blockchain networks are in the business of.
- If Ethereum were to employ the level of decentralization of Bitcoin has, Ethereum would not be able to sustain a transaction throughput nearly 6.6x that of Bitcoin. The more nodes a network is comprised of, the longer it takes for that network to reach consensus on any given transaction, making throughput the tradeoff for increased security.
Bitcoin and Ethereum, without a doubt, sit on two different sides of the decentralization spectrum. In the next article, we’ll dive deeper into the technology that powers them both as we learn more about the transparency of blockchain.