The above diagram illustrates three different topologies. Centralized and Decentralized are concepts of authority, whereas distribution is a spatial concept, meaning it relates to the physical network topology. A network can be distributed, as well as being centralized or decentralized. An ideal network topology has a decentralized consensus process, with a distributed node topology.
A decentralized cryptocurrency network is a system of many different people using computers or mining hardware, called ‘nodes’ to verify transactions. This type of network is also known as a ‘peer-to-peer network’. None of the nodes or peers have a relative authority over any other. The higher the number of nodes, the more resilient the system is to outside attack or consensus manipulation. Therefore, the more people that contribute resources to a decentralized network, the more secure, resilient, and robust it becomes.
Many blockchains market themselves as decentralized technology. However, ICOs, Security Token Offerings (STO), venture capitalist backing, corporate partnerships, and authoritative consensus implementations, all create favourable conditions for centralization.
Likewise, challenges faced by the original blockchain protocol have also led to cryptocurrencies creating ‘off chain solutions’ that require central nodes or servers. This essentially gives control back to a third-party. Similarly, blockchains that have developed ‘Delegated Proof-of-Stake’ (DPoS) consensus mechanisms have also become more centralized.
Satoshi Nakamoto combined the architectures of B-Money and HashCash to create a peer-to-peer network in order to build a distributed ledger (a record of transactions), known as a Blockchain.
Bitcoin uses the PoW consensus, which was originally envisioned to be a decentralized system. However, the high energy costs and expensive hardware necessary to compete when mining Bitcoin, has led to the centralisation of the protocol via the formation of a few powerful mining pools. Therefore, only a small number of influential people control the future direction of Bitcoin.
Blockstream’s influence over Bitcoin is perhaps the best example of how centralization can destroy the integrity of a system. Blockstream agreed to increase the block size to 2MB in return for community support in activating Segregated Witness (a prerequisite to the Lightning Network). Ultimately, this decision resulted in the division of Bitcoin and Bitcoin Cash, due to a violation of the ‘Segwit2x’ agreement. Not surprisingly, once Segwit was activated, Blockstream dropped their side of the agreement, and refused to increase the block size to 2 MB.
Currentlty, a Proof-of-Work (PoW) coin exclusively, ETH accomplished a pre-mine, Initial Coin Offering (ICO), and suffered major controversy by reversing transactions relating to a Decentralized Autonomous Organization (DAO) attack. This situation also resulted in a divisive conclusion with a fork that led to the creation of Ethereum Classic without the blockchain reversal.
Additionally, they have numerous influential financial backers with the Ethereum Alliance Board Members and several third party solutions seeking to capitalize on the scalability crux and potentially governance decisions.
Despite all of the decentralization detractors and unreasonable costs, they have managed to enable one of the first blockchain deployments of citizen identity for Zug, Switzerland. Considering their previous actions, there is a high probability of tampering with the data-set to freeze, revoke or even sell your identity data based on health policy infraction, or other violation deemed necessary by the influencers.
People, known as miners, are given a monetary incentive to verify transactions. Miners use computers or specialized mining equipment to verify that the people spending cryptocurrency, indeed have the coins to spend. A record of transactions are then immutably chained together and recorded as a block, and appended to the chain. This record is stored on the computers of many different miners, creating a decentralized network.
Many blockchains use a mechanism called Proof-of-Work (PoW) exclusively that requires resource inputs such as hardware and electricity. Others use Proof-of-Stake (PoS) that requires less physical resources, however requires the miner to ‘wager’ some coins. Thus, there is an incentive to verify transactions correctly. To attempt a double-spend attack (to spend a cryptocurrency coin twice), a person would need 51% of the PoW and/or PoS power, which can be very costly to achieve. Therefore, the blockchain provides a trustworthy source of information, where all transactions are witnessed and verified by a global consensus rather than by a central trusted authority.
Today’s societies are organized by centralized databases, with a ‘trusted’ authority in the form of governments, institutions and third parties. Trusted authorities authenticate and process information of these databases in order to determine ownership, legal agreements, and to settle disputes. Centralized databases have provided many useful technologies including government ledgers (e.g. titles and deeds, voting rolls, licenses, customs records, and digital I.Ds), and corporate ledgers (e.g. bank deposits, and stock wealth). Though these databases provide many benefits to society as a whole, they often result in the selling of data to other organizations without the consent of the people.
Other notable issues with centralized databases are the rising number of data breach cases, that at times have affected millions of people. Blockchain can improve database security as there is no central authorization point to hack. Essentially, a decentralized system is difficult to compromise as there is no central point of failure.
The implementation of the world’s monetary systems, some of the oldest centralized systems of today, have become the source of one of today’s biggest challenges. This is due to the many global policies designed to create Fiat currency ($, £, €) out of debt, which is paid back with interest to central reserve banks.
There are many instances of central banks who have misused this enormous power, knowingly or unknowingly, resulting in hyperinflation. Hyperinflation is the rapid increase of prices, and is a result of excessive money creation. When more and more money is released, the money drives up the prices of goods, resulting in the reduction of the purchasing power of the currency.
In post-World War I Germany, hyperinflation reached 30,000% per month (the price of goods doubled every two days), during the Great Recession in Zimbabwe, hyperinflation reached 79,600,000,000% per month (the price of goods doubled every 24.7 hours), and in post-World War II Hungary, hyperinflation reached 41,900,000,000,000,000% per month (the price of goods doubled every 15.6 hours).
It is often thought that banks lend out the deposits of savers. However, banks do not simply act as middlemen or intermediaries between savers and borrowers. Banks are the creators of money (bank notes and digital deposits) also known as Fiat currency. Central Banks create money by issuing loans and by purchasing government bonds.
However, bank lending is only backed by a small fraction of deposits, by a process called ‘Fractional Reserve Banking’. Thus, savers’ deposits only account for a fraction of lending, which always results in the production of new debt that ultimately is required to be paid back to the central bank with interest.
Together, banks only hold approximately 10% of the entire money supply that exists, as actual reserves. The other 90%, called ‘Bank Credits’, is synonymous with an IOU. Consequently, if people began to withdraw their deposits all at once, known as a ‘run on the banks’, the banks would only be able to honour 10% of withdrawals.
Today’s debt-based monetary system is structured in a way that the creation of money also encourages cycles of boom and bust, increasing wealth inequality, resulting in an ever increasing amount of money and resources being transferred to a few people. In contrast, the Nexus Economic Model rewards NXS to stakers and miners, and is designed to create a more equal distribution of NXS to the community, whilst mitigating the possibility of unhealthy levels of inflation.