The 8 Principles of Decentralisation and Their Influence on the Blockchain Industry

Many in the industry analogise the blockchain space to the Wild West; reasons for this include there is no central means by which trades are cleared or settled, ascertaining the real value of coins and tokens is challenging and accordingly speculative, and more. In this sense, it becomes clear that the blockchain industry is viewed as the Wild West because it is nascent and lacks the financial standards that are prevalent in the traditional finance (TradFi) space. Whilst the cryptocurrency sector is still growing, there are fundamental ideologies and principles that are directly related to the concept of decentralisation. These principles of decentralisation can be applied to making sense of the blockchain space, despite its lack of standards in comparison to TradFi. Awareness of such principles provides insight into the likely future of the industry as a whole. This article highlights and delves into the 8 principles of decentralisation as well as how they foundationally will move the space.

What are the 8 Principles of Decentralisation?

The 8 principles of decentralisation are a set of guidelines for designing decentralised systems and organisations. These principles were proposed by Ori Brafman and Rod Beckstrom in their book “The Starfish and the Spider: 8 Principles of Decentralization“. The purpose of these principles of decentralisation is to provide a framework for designing and identifying decentralised systems that are effective, efficient, and resilient. With consideration for these principles, decentralised networks can be designed in such a way where their strengths are maximised and weaknesses are minimised. 

The origin of the 8 principles of decentralisation can be traced back to the work of Brafman and Beckstrom, who were interested in studying the characteristics of decentralised systems and how they differ from centralised systems. They created the principles through the “starfish” and “spider” analogy to synthesise their research and provide a useful, digestible latticework for building decentralised systems. The 8 principles were designed to be applicable to a wide range of decentralised systems, including political systems, economic systems, and social systems. 

The Principles and Their Influences

Principle 1: Decentralised Systems Become More Decentralised Over Time

This principle states that decentralised systems tend to become more decentralised over time, especially when they are attacked or threatened. This is because decentralised systems are typically more resilient and flexible than centralised systems, and they are able to adapt and respond to challenges in ways that centralised systems traditionally cannot.

Principle 1 was explained by Brafman and Beckstrom through the metaphor of a “starfish” which represents decentralised systems; the “starfish” does not have a central brain, and each of the five legs works together independently. If harmed, the “starfish” will regrow the leg; indeed, for some species, the severed leg will actually become a new “starfish”. The authors explain that “starfish” legs make decisions through consensus whereby one leg will move in a direction and the remaining legs will either follow it, symbolising they agree or let it fall off, emblemising they disagree.

Source: Dall-E

This principle is one of the key features of decentralised systems: they are composed of multiple, interconnected parts that are able to function independently of one another. This means that if one part of the system is disrupted or damaged, the other parts can continue to operate, which helps to ensure the overall resilience of the system.

Principle 1’s Influence on the Blockchain Industry

The influence of this principle on the blockchain space has already been seen. Since the establishment of Bitcoin in 2009, the community has constantly been under attack by those who did not believe in the technology. Despite these attacks, the Bitcoin community has grown, becoming increasingly more decentralised under political, regulatory and geographical threats. In this way, these attacks, which as the first principle suggests, have made the system more decentralised, and contributed to their long-term sustainability.

Furthermore, the principle that decentralised systems become more decentralised over time when they are attacked or threatened has significant implications for the future of the blockchain industry. If a decentralised blockchain network is attacked, it will likely become more decentralised as more nodes join the network to help secure it and more users adopt technologies. Evidently, these threats to decentralised systems make blockchains more decentralised as they become more resistant to censorship and other forms of interference.

This principle also has implications for the governance of decentralised systems, as it suggests that they are likely to become more open and transparent in the face of attacks, facilitating greater participation and collaboration among stakeholders. Accordingly, attacks on blockchain networks may render the system more responsive to the needs and preferences of their users, strengthening it as more individuals involve themselves in the network

Principle 2: Starfish can be Easily Mistaken for Spiders

Through the second principle, Brafman and Beckstrom articulate that it is easy to mistake decentralised systems for centralised systems, or “starfish” for “spiders.” This is because decentralised organisations often have some centralised elements, such as a single leader or a central hub, making them appear more centralised than they actually are. In this context, the authors utilise the spider to symbolise a centralised system in which there is a central point of control wherein all decisions flow from the top down. In this type of system, the loss of central control is directly linked to the failure of the organisation as the entire system will collapse.

Source: Dall-E

Although decentralised systems are modular and multifaceted, certain features can make them appear more like a “spider” than a “starfish”. This can make it difficult to distinguish decentralised systems from centralised systems, and it can lead to misunderstandings about the nature and operation of decentralised systems.

Principle 2’s Influence on the Blockchain Industry

This principle has significant implications for the design and operation of decentralised systems as it highlights the importance of understanding the characteristics as well as the capabilities of blockchains to effectively design and manage them. The second principle of decentralisation underscores the need to carefully examine decentralised systems in order to distinguish them from centralised systems, and to avoid mistaking them for “spiders”.

The influence of this principle has already been seen. Following the FTX collapse in November of 2022, many made the claim that crypto’s decentralised nature had failed. This is one example where the “starfish” of decentralised blockchain systems were analogised to “spiders” like FTX, a centralised, opaque cryptocurrency exchange. Such blurring of the lines verifies the validity of this principle whilst concurrently accentuating the importance of sufficiently examining and ascertaining the difference between resilient decentralised networks and failure-prone centralised structures.

Likewise, an important distinction must be made in what many in the community viewed to be a decentralised blockchain, Terra. Upon its spectacular crash in May of 2022, the decentralised space took a severe hit with the total value locked (TVL) in the blockchain space falling by over US$20 billion; however, Terra and most of its protocols, most notably Anchor, were centralised, merely a “spiders” disguising itself as a “starfish”. The Luna Foundation Guard was sending substantial amounts of funds, including a lump sum of US$450 million in March, to Anchor so that it could continue paying out exorbitant and sustainable yields – this is not an example of a decentralised ecosystem given the reliance on an unelected centralised authority.

Principle 3: Distributed Intelligence, not Central Intelligence

This principle highlights that decentralised systems do not have central intelligence, but rather, the intelligence is distributed throughout the organisations via participants. Like the “starfish”, decentralised systems are replete with interconnected parts that are capable of functioning independently of the other. With this independence, each part of the decentralised organisation advantageously contributes to the overall intelligence and capabilities of the holistic system.

Unique to decentralised systems is their ability to harness the collective intelligence and capabilities of their constituents in order to solve complex problems and make decisions. This is in direct contrast to centralised systems, which rely on a single, central source of intelligence and decision-making authority. Brafman and Beckstrom elucidate that “an open system doesn’t have central intelligence; the intelligence is spread throughout the system”. They go on to detail that through this difference, decentralised systems are vastly superior to centralised structures in decision-making and curing diseases plaguing the network.

Further, centralised systems become subservient to decentralised networks given they are less able to innovate. Brafman and Beckstrom posited that “when you give people freedom, you get chaos, but you also get incredible creativity.” This statement highlights the idea that decentralisation can foster creativity and innovation, as it gives individuals the freedom to independently contribute and participate in the system. This creativity is one of the primary differentiators of decentralised systems from centralised companies, and it is a key factor that has contributed to the success and growth of these open systems. 

Source: Dall-E

Principle 3’s Influence on the Blockchain Industry

The principle of distributed intelligence suggests that blockchain networks only reach their full potential when harnessing the collective intelligence and knowledge of their users when making decisions. As well as making them more effective than centralised systems, this principle can guide blockchains to ensure that they are aligned with the needs and preferences of their users.

Furthermore, the third principle foregrounds the importance of improving and iterating governance structures. Currently, most Decentralised Autonomous Organisations (DAOs) are governed by the community through the use of platforms like Snapshot. However, these governance frameworks face severe shortcomings; one such failure of these structures is that an address’ influence over the outcome of a governance proposal is determined by the number of tokens they hold. In this way, those with more funds to spend on tokens will obtain an increased ability to determine the future of the DAO. To successfully leverage the collective intelligence of the decentralised network, existing governance structures must be improved; Zerocap’s Innovation Hub went more into detail on building an effective, frictionless governance latticework in this report.

Additionally, this principle spotlights the importance of determining the ways in which centralised intelligence is superior to decentralised intelligence; it would be foolish to assume that the current iteration of harnessing the collective understanding of a network’s participants is entirely more effective than trusting a single authority to make decisions. The efficiency of decision-making in monolithic structures is a notable strength in comparison to decentralised networks that reach a social consensus through governance votes before making decisions. By determining the comparative flaws of accessing distributed intelligence, builders and thought-leaders in the blockchain space can envision methods to overcome these shortcomings through future versions of decentralised networks.

Principle 4: Decentralised Systems can Mutate Themselves

This principle states that decentralised systems are able to mutate themselves, or adapt and evolve over time in response to changing circumstances. Decentralised systems are more flexible and adaptable than centralised systems by nature given that they are composed of a plethora of geographically, philosophically and ideologically decentralised participants. Brafman and Beckstrom use this principle to establish that decentralised networks are able to respond to challenges in ways that centralised systems cannot.

Unlike monolithic, centralised systems that typically adapt a singular structure at the onset of the concept and stubbornly stand by it, irrespective of external developments that render its initial structure archaic, decentralised systems are designed to adapt and evolve over time in response to changing circumstances. These open networks are fundamentally composable – a key tenet of blockchain technologies – giving them the ability to efficiently combine different parts in order to create new and more powerful systems. 

This principle is conveyed through the authors’ choice to analogise decentralised networks to “starfish”; a creature that is highly capable of mutating itself when necessary. As mentioned earlier in the article, starfish can regrow limbs if one falls off, mutating itself in order to survive. Furthermore, as previously mentioned, the starfish is also able to regrow a new creature from the lost limb, foregrounding its capacity to generate novel iterations of itself when one ostensibly heretical part of the decentralised system is in disagreement with the remaining parts.

Source: Dall-E

Principle 4’s Influence on the Blockchain Industry

The mutability principle heralds meaningful influences on the blockchain industry as it indicates that decentralised networks are able to and should evolve to remain competitive and usable. This could make them more resilient and more responsive, ergo contributing to their long-term sustainability. In line with this, open blockchain networks should ensure that one of their binding principles of decentralisation is not to stagnate with respect to developments.

An example of this might be a blockchain incorporating new consensus algorithms or cryptographic techniques as they become available and their effectiveness has been established. This has occurred with Ethereum which shifted from a Proof of Work (PoW) consensus-based blockchain to a Proof of Stake (PoS) network in September 2022, improving the security and efficiency of the network. Similarly, a decentralised social network may be able to incorporate new features or functionality as they are developed, making the network more attractive to users and helping it to remain competitive. Additionally, if (or when) quantum computing is advanced enough to decrypt SHA-256 and similar hashing functions, many blockchains relying on this cryptography will need to iterate and evolve, ensuring that they can survive.

Importantly, this principle reiterates that networks should not tie themselves to one structure. Although Ethereum has already displayed its mutability through The Merge, additional features that were established at the onset of the blockchain are being revamped. The Ethereum Virtual Machine (EVM) which is responsible for the execution of all smart contracts called in a transaction is being optimised for the future of the blockchain under the network’s roadmap. Likewise, Ethereum was initially envisioned to be a monolithic blockchain, however, with the introduction of rollups and future Ethereum Improvement Proposals (EIPs), Ethereum is gradually becoming a modular blockchain.

Principle 5: The Inevitability of Decentralisation Approaches All Industries

Perhaps the most significant principle to the broader traditional industries external to the blockchain space, Brafman and Beckstrom illuminate that “the decentralised organisation sneaks up on you”. This refers to the idea that decentralised systems might initially be difficult to identify or detect until they have already gained significant traction and influence. As open and transparent systems which do not have a single point of control, decentralised systems cannot always be attributed or encapsulated by one, well-known individual. This results in them often flying under the radar before becoming dominant forces in industries with unparalleled economies of scale.

Decentralised systems tend to emerge and grow in a more organic and decentralised manner, relying on the participation and contributions of their users in order to function effectively. This can make it difficult for traditional centralised systems, such as traditional corporations and conglomerates, to detect or respond to the emergence of decentralised networks until it is too late for them to remain commercially competitive.

Source: Dall-E

Principle 5’s Influence on the Blockchain Industry

In the blockchain industry, this principle of decentralisation is becoming increasingly relevant as blockchain networks continue to evolve and mature. Many blockchain networks are gradually becoming more decentralised over time, as they seek to achieve sufficient decentralisation to ensure their resilience and security. Due to the nascency of the industry, most companies are required to raise the capital needed to thrive as a centralised network, with the intention of eventually reaching the point of sufficient decentralisation. In this context, the paradigm of decentralisation does “sneak up” on these companies, allowing them to leverage the power of their communities to become more effective and sustainable without the influence of a single source of authority.

As blockchain networks continue to grow and mature, they are clearly becoming more decentralised over time, as they seek to achieve sufficient decentralisation to ensure their resilience and security. This trend is likely to continue in the future, as blockchain networks seek to ensure that they are distributed and impervious to external threats or challenges. 

Furthermore, this principle indicates that the influence of decentralised networks outside of blockchains will continue to expand to new spaces. As decentralised, open systems become more composable, effective and usable in novel industries through future iterations, these networks will “sneak up” on centralised companies, potentially dominating the field.

Principle 6: Decentralised Systems are Less Profitable

Principle six stipulates that decentralised systems tend to have lower profits when juxtaposed against centralised firms. In order to sufficiently laud decentralisation, these systems often have lower barriers to entry such that more individuals can participate in the network. Although this type of decentralisation benefits the system’s levels of censorship resistance and longevity, it results in each participant receiving a smaller share of the network’s profits.

In a decentralised system, there is less control over granting access and enabling participation, allowing for a greater number of firms to enter the market. This increased competition frequently leads to lower profits as each network participant is required to compete with a larger number of competitors. As an example, consider a decentralised ride-sharing network. In this network, any individual or firm with a car and a smartphone can potentially enter the market as a driver. This increased competition can lead to lower profits for individual drivers, as they have to compete with a larger number of competitors. On the other hand, centralised ride-sharing companies have the capacity to preclude certain drivers from entering the market, correspondingly preventing their current drivers from losing profits in a saturated market.

Source: Dall-E

Principle 6’s Influence on the Blockchain Industry

This principle is a crucial consideration for the blockchain industry as it crystallises that blockchain networks are inherently less likely to be profitable at an individual level. This highlights the importance of understanding the unique dynamics of blockchain networks. Further, the principle underscores the need for firms operating in the blockchain industry to be prepared to adapt to the different challenges and opportunities that decentralised systems present. 

The inverse relation between decentralisation and individual profitability is most commonly seen in the space through staking. With a capped amount of rewards dedicated to staking payouts, validators are required to share these funds between more and more individuals; this results in the rewards curve per validator exponentially decreasing. When Ethereum initially launched staking on the Beacon Chain, rewards were averaging above 15% per annum; however, with just under 500k validators, staking rewards have lowered to below 5% per annum, bolstering the validity of this principle.

With this principle in mind, blockchains must not concentrate on generating profits for every participant or extracting value from said participants, instead building public goods that benefit their communities. Rather than becoming a net positive game through generating value, the advantage of the decentralised network must come from its external impacts and usability. Accordingly, this principle is clearly in alignment with one of the primary ideologies of the blockchain platforms: designing and building open-source software to increase transparency and eliminate trust in centralised parties as opposed to profiteering in a similar fashion to these singular authorities.

Principle 7: Participants of Decentralised Networks Want to Contribute

Brafman and Beckstrom’s 7th principle concentrates on the community aspect of decentralised systems and how they drive these networks’ effectiveness and influence. The principle states that individuals who are included in decentralised networks will often automatically want to contribute to the success and growth of the system. Unique to these decentralised frameworks is their unparalleled capacity to offer a sense of belonging and community. Similarly, they provide individuals with the opportunity to have an impact and contribute to the collective goals of the open system.

One of the key features of decentralised systems is that they rely on the participation and contributions of their users in order to function effectively. This can inculcate a feeling of togetherness, unity and oneness among network participants, allowing them to feel that they are part of something larger than themselves. Humans are inherently motivated by a drive to have an impact; however, independently having an impact can be challenging. Hence, when working in coordination in the context of open networks, participants can more efficiently achieve this impact-focused purpose.

Source: Dall-E

Principle 7’s Influence on the Blockchain Industry

Without the ability to rely on a single centralised authority to drive decisions and growth, blockchain networks recognise this principle when leveraging their communities to burgeon into the eyes of investors and builders. For this reason, decentralised platforms do rely on users to validate transactions and maintain the integrity of the network, and they often provide incentives or rewards to encourage participation. Further, through the use of chat rooms like Discord and Telegram, individuals can very effectively be united under a single purpose that is fundamental to the blockchain network; this is extremely powerful in the context of decentralised systems as it expedites the creation of a community that autonomously desires to strengthen the blockchain.

As such, this principle highlights that blockchain networks without communities are likely to poorly perform when compared to decentralised systems with thriving ecosystems of individuals all driven to reach certain Schelling Points. DAOs are a prime example of how individuals can be galvanised to join a community and automatically begin contributing through internal desires. DAOs offer a decentralised alternative to traditional organisations; DAOs are not controlled by a single individual or group, but instead, they are managed and governed by a set of rules that are agreed upon by the participants in the system. Immediately, this process of bringing participants together to determine the DAO’s values encourages greater participation and collaboration among stakeholders as they all have skin in the game.

Principle 8: Centralised Systems Become More Centralised Over Time

This principle is the inverse of principle 1, emphasising that centralised systems, like traditional corporations, tend to become more centralised when they are attacked or under threat. A key facet of monolithic, centralised systems is that they are built atop a single point of control, such as a CEO or board of directors. In and of itself, this structure does not leverage the collective knowledge of the centralised system’s participants; for this reason, all parts of the company will look to the top of the stack for making important decisions during times of strife when defending against external challenges. Notably, under attack, the survival of these centralised systems is not guaranteed, meaning every decision can be construed as important; accordingly, such systems grow more centralised as a small group of individuals are entirely guiding the future of the entity.

Furthermore, another key feature of centralised systems is that they are hierarchical, with power and authority concentrated at the top of the organisation. This can make centralised systems more vulnerable to external threats or challenges, as this single point of control can become a single point of failure that may be targeted or disrupted. In response to these threats, centralised systems may become more centralised as a means of defending themselves, as they seek to protect their power and authority.

Source: Dall-E

Principle 8’s Influence on the Blockchain Industry

Despite this principle not directly relating to decentralised networks, it still has the potential to meaningfully influence the blockchain industry given it can be utilised as a tool to differentiate centralised companies in the space from decentralised systems. Although the blockchain industry has grown from the dream of a decentralised ecosystem, centralised authorities have a dominant role in the space. As mentioned with respect to principle 2, the result of this is that the general participants that lack specific education regarding decentralisation frequently confuse the two systems. This often eventuates in newcomers to the industry being turned off by what they perceive to be decentralised networks when, in reality, their interactions were limited to centralised systems; this has occurred with companies like FTX, Celsius, BlockFi and more.

In this way, the influence of this principle on the blockchain space is that it can increase users’ ability to identify decentralised networks, “starfish”, from centralised companies, “spiders”. By understanding the unique dynamics of centralised systems, which gradually become more centralised through the passage of time, individuals and entities can make more informed decisions about the networks and organisations to engage with. Further, the 8th principle has the potential to enable individuals to be more proactive in supporting decentralised systems that are aligned with their values and interests.

Conclusion 

As expressed in The Starfish and The Spider, although most would expect chaos and disorder to ensure in the absence of a traditional hierarchy or leadership structure, decentralised networks can clearly function highly effectively. With a deep understanding of the ideological and societal implications of decentralisation, accurate predictions can be made about the future of the blockchain industry. Like a seed that has been planted, decentralisation has taken root and grown into a mighty tree, branching out in new directions and bearing the fruits of innovation. The journey to decentralisation may be long and winding, but with each step forward, power becomes increasingly more distributed, and opportunities become open to all without the high barriers of entry which currently exist in the world.

About Zerocap

Zerocap provides digital asset investment and digital asset custodial services to forward-thinking investors and institutions globally. For frictionless access to digital assets with industry-leading security, contact our team at [email protected] or visit our website www.zerocap.com

DISCLAIMER

Zerocap Pty Ltd carries out regulated and unregulated activities.

Spot crypto-asset services and products offered by Zerocap are not regulated by ASIC. Zerocap Pty Ltd is registered with AUSTRAC as a DCE (digital currency exchange) service provider (DCE100635539-001).

Regulated services and products include structured products (derivatives) and funds (managed investment schemes) are available to Wholesale Clients only as per Sections 761GA and 708(10) of the Corporations Act 2001 (Cth) (Sophisticated/Wholesale Client). To serve these products, Zerocap Pty Ltd is a Corporate Authorised Representative (CAR: 001289130) of AFSL 340799

All material in this website is intended for illustrative purposes and general information only. It does not constitute financial advice nor does it take into account your investment objectives, financial situation or particular needs. You should consider the information in light of your objectives, financial situation and needs before making any decision about whether to acquire or dispose of any digital asset. Investments in digital assets can be risky and you may lose your investment. Past performance is no indication of future performance.

FAQs

What are the 8 principles of decentralisation?

The 8 principles of decentralisation are a set of guidelines for designing decentralised systems and organisations. These principles were proposed by Ori Brafman and Rod Beckstrom in their book “The Starfish and the Spider: 8 Principles of Decentralization“. They provide a framework for designing and identifying decentralised systems that are effective, efficient, and resilient.

How does the principle of decentralised systems becoming more decentralised over time apply to the blockchain industry?

This principle states that decentralised systems tend to become more decentralised over time, especially when they are attacked or threatened. In the blockchain industry, this has been observed with the growth of Bitcoin and other cryptocurrencies. Despite facing numerous attacks and threats, these communities have grown and become more decentralised, contributing to their long-term sustainability.

What does the principle of “starfish can be easily mistaken for spiders” mean in the context of decentralisation?

This principle highlights that it is easy to mistake decentralised systems (starfish) for centralised systems (spiders). This is because decentralised organisations often have some centralised elements, such as a single leader or a central hub, making them appear more centralised than they actually are. In the blockchain industry, this principle underscores the need to carefully examine decentralised systems in order to distinguish them from centralised systems.

How does the principle of distributed intelligence apply to the blockchain industry?

The principle of distributed intelligence highlights that decentralised systems do not have central intelligence, but rather, the intelligence is distributed throughout the organisations via participants. In the blockchain industry, this principle suggests that blockchain networks only reach their full potential when harnessing the collective intelligence and knowledge of their users when making decisions.

What does the principle of decentralised systems being less profitable mean for the blockchain industry?

This principle stipulates that decentralised systems tend to have lower profits when juxtaposed against centralised firms. In the blockchain industry, this principle is a crucial consideration as it crystallises that blockchain networks are inherently less likely to be profitable at an individual level. This highlights the importance of understanding the unique dynamics of blockchain networks.