How to Measure the Degree of Centralization vs Decentralization of a Project

How to Measure the Degree of Centralization vs Decentralization of a Project

As the name DeFi (decentralized finance) suggests, we believe the most important feature of DeFi is the degree of decentralization. The very nature of governance is changing in the long run and “policy-making is increasingly moving away from top-down governance by the state toward more horizontal modes of governance.” This could be the main reason why users are shifting to crypto and the main driver for public adoption.

However, can we ever truly achieve a decentralized system and how can we measure the degree of what is considered decentralized versus centralized? Let’s take a look at these questions and methods on how to answer them.

Central vs. Decentral vs. Distributed

Central governances are systems or networks that are managed by a central entity. This means that all participants in this space trust a central party, its decisions, its vision, its beliefs, and even its carbon footprint. Those systems are deployed and hosted on a central server and easily managed.

On the other hand, in decentrally managed systems, the management is distributed between a decentralized autonomous organization (DAO) and the community. This means that decisions are democratic and can be influenced by the individual members of the network.

Decentralization promotes transparency and trust because in—the best case—no processes should run in a black box or be hidden from the community. Blockchain technology is a fully distributed system and has the least form of centralization, the so-called distributed (ledger). This state is true decentralization, but difficult to govern because there is no hierarchy.

(source: bluewire)

We can see in the graphic above the nodes and their connections, reaching from centralization on the left to full distribution on the right-hand side.

How to Measure Centrality Mathematically

Here’s how to calculate the degree of centrality of a network.

(source: sscnet)

(a) For each network, calculate the three centrality indexes (degree, closeness, and betweenness). Do this for each entire graph, not for each node of a graph. Review the indexes, and then you will see which network is centralized versus decentralized.

The basic idea of centrality for the entire graph is to calculate the average deviance of each node from the most central node.

Network A

Node 1 - centrality score  3

Node 2 - centrality score 1

Node 3 - centrality score  1

Node 4 - centrality score  1

The maximum score is 3.

Use Eq. (n-1) * ((n-1)-1) = n2 -3n+2

((3-3)+(3-1)+(3-1)+(3-1))/(16-12+2) = (0+2+2+2)/6 = 1

The degree centrality score of Network A is 1.

Network B

Node 1 - centrality score  3

Node 2 - centrality score  3

Node 3 - centrality score  3

Node 4 - centrality score  3

The maximum score is 3.

Use Eq.  (n-1) * ((n-1)-1) = n2 -3n+2

((3-3)+(3-3)+(3-3)+(3-3))/(16-12+2) = (0+0+0+0)/6 = 0

The degree centrality score of Network B is 0.

Using this example, we can see Network A is more centralized than Network B for the degree of centrality. In theory, by applying simple math we could easily measure the centrality score for any project.

How to Analyze the Decentralization of a Project

Below are some ways to measure the decentralization of a project.

Company Address

Google the project and look if there is a company address. This is a small but easy indicator of how decentral a project really is. Decentral projects should in theory not have a company address that suggests central governance.

Single Point of Failure

If we look at the security setup of a specific project or protocol we could easily spot their degree of centralization within their available security structures. The presence of a single point of failure is a strong indicator for low decentralization, meaning that if an entity in the project (a single human or database) can be a threat to the whole system, the degree of centralization is high.

Tokenomics

The tokens available should be well distributed within the global community, as this assures the balance of power and decision making, also in terms of the availability of staking and validation opportunities (PoS and dPoS).

Consensus Algorithm and Variables

A consensus algorithm is of fundamental value for the grade of decentralization of projects. Those algorithms and functions are tailormade by each project. This means the developers decide what variables are taken into account and also how certain variables are weighed, which influences also the validators and delegates.

Team

It might be very subjective, but in the end, there is a team behind every project. Stay updated, look at how they communicate and connect to the community. Trusting in the team, and their commitment to the project and their community is an important part of believing in and investing in a project.

True Decentralized Mechanics

Take for example the Theta Network. As we can see on their website, they enable central organizations to apply as validators. On the one side, they enable the network to function well and in this case provide quality streaming to users. On the other side, those are centrally governed organizations, thus influencing the degree of centrality in this realm.

Even though it appears to be a decentralized solution, we cannot be sure that all the participating nodes are acting in a truly decentralized way. The graphic below shows the distribution of all nodes across the globe. As we can see, there are different kinds of nodes, which show some sort of hierarchy within the system, which does not support the idea of full decentralization.

For projects you’re interested in, it’s always wise to dig a bit deeper to see the mechanics of their decentralized nature. Some projects claim to be decentralized but once you review the mechanics of the project, their system leans more towards a centralized one.

Conclusion

As we have analyzed today, there are different ways to measure the degree of decentralization. We can approach it either with simple mathematics, token distribution, or research. Beyond that, we still need to have a certain amount of trust in the project and their team.

Reef Finance is actively working on true decentralization. The Reef ecosystem is run by its community of validators. The validator slots are available to all serious contributors to the Reef ecosystem (developers, projects, DeFi protocols, etc). The mechanics of how Reef operates is one of true decentralization.


About Reef Finance & Reef

Reef Finance is building Reef Chain, a DeFi blockchain built using Substrate Framework. Reef Chain provides high scalability, enabling almost instant low-cost transactions, and supports Solidity and EVM, allowing developers to seamlessly migrate their DApps from Ethereum without any change in the codebase. Our vision is to make DeFi easy for everyone to invest in and build DeFi applications on top of Reef Chain.

Reef Finance has developed a fast, scalable, and EVM-compatible chain for DeFi applications, Reef Chain. Reef Chain is a customized blockchain that allows developers to build DApps or deploy existing projects from Ethereum. Learn about Reef’s recent official news: Website | Twitter | Telegram