Blockchain networks of most crypto tokens are not decentralized: Experts

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Terra temporarily halted its blockchain network last week, when its crypto token Luna and UST stable coin started crashing. Since last year similar outages were seen in Solana’s network. Such incidents raise a question on whether crypto’s blockchain technology is actually decentralized. Industry experts said apart from Bitcoin and Ethereum none of the crypto tokens are really running on decentralized blockchain.

Most new age crypto companies are opting for quick scalability over decentralization and security. Adhering to such strategy also leaves the blockchain network of these companies vulnerable to network attacks and decentralized finance (DeFi) hacks.

“Blockchain has the capability to operate in a completely decentralized way but that doesn’t mean blockchain always is decentralized. So if all the computers and nodes connected are run by one company, it is pretty much centralized. In the case of Terra, they were running the required blockchain and obviously had some sort of management switches in place where they could turn it on and off. This is definitely not like Bitcoin, where the network is completely decentralized. When things went south, they decided to halt blockchain to bring stability,” Sathvik Vishwanath, Co-founder and CEO of Unocoin, told BusinessLine.

He added, “These kinds of halts happen for good reasons at time. Centralized blockchain does have the benefit of being able to mitigate risks if something goes wrong. But beyond that, it definitely has more meaning when it decentralized and run by people in consensus. Usually, to make any change in algorithms of decentralized networks, almost 50 per cent of the users on the network would have to do the same change in their copy of the blockchain.”

Ethereum founder Vitalik Buterin came up with the Scalability Trilemma, where he says principally one could pick only two from scale, security and decentralization to build a blockchain network, Sharat Chandra, VP- Research & Strategy, EarthID told BusinessLine.

Most decentralized networks

“While Bitcoin and Ethereum have the most decentralized blockchain networks. All other new age blockchains have chosen scalability over decentralization, which could lead to possible network attacks, DeFi hacks and thefts. Layer-2 blockchain companies like Polygon’s blockchain, however, have managed to achieve scalability and adoption. Its network has never faltered so far,” he said.

Chandra explained, “Terra too focuses on scalability more than decentralization. It uses Delegated Proof of Stake (DPoS) mechanism which allowed validators to halt the network when UST prices plummeted. Consensus details are usually disclosed in the blockchain network’s white paper but users are either not aware enough or choose to invest in its token anyway, as lending protocols like Anchor protocol offered high yield of 20 per cent on staking UST tokens”

Decentralization can be subjective

Blockchain doesn’t store information in a central location, it is copied and spread across a network of computers. When a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change and each of these computers will hold the entire ledger and become a node. Now very node can verify a transaction’s authenticity against the other. Therefore, the network’s security then relies on who holds the nodes and how many are there.

Abhay Sharma, CMO MetaOneVerse told BusinessLine, “It is easy to see that validators (nodes) run the network. To illustrate, only 21 validators run Binance Smart Chain, with a market cap of $63.1 billion. In stark contrast, Ethereum has 2,471 full node validators. Solana has 70 per cent fewer, at 1,447 nodes. Although this means the network is faster than Ethereum because fewer verifications and confirmations have to be conducted, it also means the network is less decentralized.”

Starting in September 2021, the Solana network was down several times, with the entire network down for at least 17 hours on one occasion. This led to attackers flooding the network with transactions, overloading the network’s memory capacity.

Sharma added, “This is another sign of Solana’s high centralization is its partnership with Arweave. Although touted as a “decentralized permanent data storage solution of ledger data,” the “decentralized” part refers to storage redundancy, not the community.”

‘Low transaction fees’

By providing a centralized network Solana is able to afford ‘low transaction fees’, which ends up becoming a point of attraction for users.

“While ETH gas fees can go up as much as $200, Solana charges merely $0.00025 per transaction. However, with the number of network attacks and restarts, more investors are seeing that the price might not be worth it,” Sharma said.

Published on May 16, 2022

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