This introduction to decentralization examines decentralization’s past, present, and future. By tracing the history of past and existing decentralized systems and by examining emerging decentralized technology solutions, the author highlights the trends that lead to higher levels of decentralization in commerce and society.

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Abstract

Part 1 – The Past: Examines how we got to where we currently are with decentralization. The author provides an overview and concrete examples of existing decentralization trends. The author examines the different types of decentralization and shows how they are interdependent. The author shows that the movement of decentralization creates many unknowns. Yet, technology has already decentralized many parts of society and empowered society at an unprecedented scale. Take for instance the emergence of smartphones and how they changed and enabled consumer behavior around the globe, putting an unprecedented amount of information and possible choices in the hands of individuals. Through smartphones, information is increasingly available real-time and comes unfiltered from the edge. This is just one example of a remarkable transformations that one technology has spawned by enabling consumers, and especially the unbanked. The open source movement in combination with the fintech boom, powered by artificial intelligence (AI), big data, and machine learning provide other examples. For instance, AI enabled location-based marketing, among many other innovations that are seemingly overnight enabling tiny companies to compete with the leading worldwide financial and other institutions.

Part 2 – The Present: Examines the current state of decentralization and identifies the opportunities, disruption, and challenges that are associated with the increasing trend towards decentralization. To contrast existing decentralization attempts, to explain the associated opportunities and limitations, and to outline what is needed for truly decentralized commerce solutions, the author examines Bitcoin and its features as one existing example of an unevolved decentralized culture. The underlying foundational infrastructure technology that enabled Bitcoin is blockchain technology. Given the complexity of the topics, the author uses analogies, storytelling and real-life examples to elucidate the core limitations and associated infrastructure needs for the evolving decentralized commerce. For example, the way in which in the 1880s electricity was invented and implemented as a foundational technology, including by way of creating standards to instantiate, transfer, and sell electricity etc., gives many opportunities to draw analogies. Similarly, the invention of the internet in the 1990s, the cyberpunk movement, the debate over who the president of the internet may be, among other stories, allow for the examination of real-life examples that underscore the complexities and opportunities of decentralization attempts and solutions. The author also examines the factors that allow people to feel safe in a transaction at, for example, Starbucks in 2019 and connect the identified factors back to what would work in decentralized systems.

Part 3 – The Future: Addresses the future of decentralized systems and examines the impact of increased levels of decentralization on commerce and society. The author discusses some of the core infrastructure elements that are needed before the first genuinely decentralized transaction can materialize, including: 1. The legal environment, 2. Underwriting in insurance, 3. A truly decentralized blockchain that can overcome the blockchain trilemma (decentralization, scaling, security), 4. Governance of blockchains, e.g. evolutionary protocol upgrades that address the economic cost of hardforks. After outlining the opportunities for commerce and society that are associated with a truly decentralized technology solution, the author examines the associated risks and ethical challenges. The author provides an outlook on what seems possible in the future of decentralization, based on existing models.

 

Keywords: Decentralization, Disruptive Innovation, Emerging Technology, Stable Cryptocurrencies, Illiquidity, Cost, Speculation, Inflation, Price Stability, Transparency, Feedback Effects, Market Stability, Stability Mechanisms, Monetary Policy, Crypto Economics, Token Models, Incentive Design, Tokens, Initia

JEL Classification: K20, K23, K32, L43, L5, O31, O32

Kaal, Wulf A., Decentralization – Past, Presence, and Future (June 28, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3411897

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