Introduction: What is Decentralization?
Decentralization is defined in the Merriam-Webster dictionary as the following:
“the dispersion or distribution of functions and powers”
Within the context of a blockchain, a large aspect of decentralization is the power to maintain and update the distributed ledger in a dispersed way. This dispersion means not needing a central party. For Cardano, the first third-generation blockchain to emerge out of a scientific & peer-reviewed philosophy, decentralization will come with the upcoming release of Shelley. Shelley, the second phase of Cardano’s development, will bring about the full decentralization of Cardano. The first generation of these decentralized blockchains is bitcoin. How exactly will Cardano be different than bitcoin once it achieves decentralization? As we will analyze in this blog post, both ecosystems ensure they remain decentralized in two very different ways.
Cardano & Bitcoin: Two Very Different Routes to Decentralization
Within bitcoin, the people with the power to keep the ledger updated are the bitcoin miners. Once Cardano is fully decentralized, the people with the power to keep the ledger updated are those who have a stake in the system. This means that anyone who owns ADA (Cardano’s native cryptocurrency) can help keep Cardano decentralized.
How Does Bitcoin Work? How Does Bitcoin Stay Decentralized?
For bitcoin, it’s helpful to imagine the blockchain as a supermarket with many different checkouts. Imagine that behind the desk of each checkout is a cashier. Each time a cashier scans a full basket of goods that a customer wants to buy, they are rewarded financially. Each item in the basket can be seen as a single transaction that someone makes on the bitcoin blockchain, and a full basket can be seen as a single block. A block is simply the collection of all the different transactions. The miner is the cashier, responsible for validating that each of these transactions is correct. For their effort, they are rewarded in bitcoin and the block is added to the blockchain.
Imagine that in this supermarket there can be hundreds and hundreds of checkouts, each with a cashier. Over time, it becomes less likely that a customer will visit a checkout of an individual cashier. A cashier (miner) might need to wait for years until they get another customer. This happens when the difficulty of Bitcoin mining increases. The more miners there are, the less chance a single individual will have for validating a basket of transactions. As a result, it makes sense for cashiers to combine their checkouts. Rather than a large number of small checkouts, they could create a few, very wide checkouts. Each miner could help out at these very large checkouts each time a basket of goods (transactions) is presented. As a result, each of the cashiers (miners) at the checkout receive a proportion of the total rewards. These collections of cashiers and wide checkouts are known as mining pools.