Decentralization, a matter of education

A decentralized system is an open, non-permissioned system for entry and exit, in which users make individual decisions without supervision by a central authority.

Each participant is a peer and interacts with the rest, exchanging information and offering products and services.

There is no need for an intermediary; the protocol replaces it, defining the transaction criteria. Thus there is no need for prior trust required between the peers.

For Cardano, its Ouroboros protocol is peer-to-peer trust.

Not all members are willing or able to run a node to validate transactions in block creation, a task performed by pool operators. There are those who prefer to delegate their participation to pool operators.

People act based on their economic interests and their desire for power. The protocol consensus is just a set of rules and algorithms created to allow the network to reach a majority consensus.

In Ouroboros, total decentralization is parameterized with d=0 from the mathematical point of view of calculation, and will occur as scheduled, in March 2021 when IOG decommission all of its pools.

Another important parameter is k, and at the beginning of 2021 it is set at 500. It will be increased to 1000 shortly, which implies that more wells will sign blocks in each epoch.

The increase of k determines the saturation point, calculated on the amount of delegation it gathers, (k=500 saturates with approximately 65 million ADA), and this is when the rewards start to decrease and induce delegators to choose another pool with better performance.

Another parameter of incidence is the a0, a value that determines the amount of rewards that are granted per signed block according to the pledge that guarantees each stake pool. It is currently very low and does not make a difference.

The increase of a0 rewards with better rewards per signed block to the pools with more pledge, and by requiring more capital for each pool it avoids the creation of many of them to take control of the network. But it happens that increasing the a0 hurts the smaller pools and this impacts against decentralization because it eliminates players in the consensus.

It is in this design that algorithmic decentralization is taking place.

In the case of Bitcoin, the hash rate (computational power of the blockchain) is the measure of consensus decentralization.

But the increase in the hash rate does not necessarily make the network more secure, because if we analyze the increase in the number of mining pools (association of miners), it indicates a concentration of power in fewer actors with respect to the consensus.

Thus the blocks are created by the mining pools and the respective individual miners simply provide their hash rate and mine the block suggested by the pool they belong to, which is why Bitcoin is no longer PoW, but Delegated PoW (DPoW).

It is also to consider the production of mining equipment concentrated in 4 manufacturers and the location of mining pools are more than 50% in China, by the end of 2020.

The concept of decentralization goes beyond transactional, it also matters the control centers at all levels.

True decentralization is completed when there is no concentration such as to affect the consensus sought by protocol.

In the case of Cardano, at the beginning of the year 2021, the distribution of the delegation is concentrated in 12 companies with almost 50%. The 17% is held in 2 companies, BNP and 1PCT, which hold several pools in their management. IOG will no longer participate in the consensus in March 2021.

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The saturation of pools indirectly provokes in some cases, the creation of new pools to carry part of their delegation, avoiding the affectation in the rewards. This process is known as splitting own pools, which of course is not desirable for decentralization.

Some members participate in the consensus by creating new pools without even having the reason for the saturation, because for a matter of economic scale it is not relatively as expensive the second pool, as the first, this in order to have more commercial presence in the blockchain.

If this situation were to be corrected from the protocol, measures could be implemented to prevent delegating to saturated pools, or the operator itself could have the possibility of denying access to the requesting delegator.

Or perhaps with a measure that would make it impossible to create several pools under the same ownership.

But of course, all this would go against Cardano’s leitmotiv, incentives rather than punishments.

Decentralization is dynamic

Network consensus rules may work well for some time, but as conditions in the physical world evolve it may be necessary to adapt the protocol rules to preserve the desired conditions.

The rate of adoption is accelerated by the increasing utility of the network. That increase in demand means more delegation, as holders do not want to dispose of coins.

The more people participate, the more decentralized the network becomes.

The community has the power

While a good protocol design, from the conceptual side, as well as its technical implementation with an algorithm, everything always ends up in how the actors behave, both pool operators and delegating members.

How they accept the measures of the system, or how they make tricks to avoid them and thus benefit more and more, is that human ambition or even greed, are present in all economic fields.

In the ideal assumption that no operator would split her/his pool, despite saturation, it would imply that the delegators would look for another pool with better rewards, returning to this one a new equilibrium without saturation with the delegators that remained.

If delegators were analytical, and frequently studied their delegation situation, and even more, divided their funds into several pools, decentralization would be increasing.

Therefore, even if we have the best systemic design with parameters that are periodically adjusted to balance the blockchain, the education of all members of the community is the key to make sustainable the decentralization that we all desire, and for the good of all.