Decentralization is the key innovation of blockchain technology. Every advantage offered by cryptocurrency and smart contracts derives from decentralization: transparency, security, trustlessness, openness, reliability, efficiency, irreversibility, and more.
Decentralization is therefore critically important to crypto, but it can so often be compromised in a range of different ways. It’s not always easy, or even possible, to maintain decentralization to the extent that confers the maximum benefits. Sometimes, centralization can creep in, and it takes a concerted effort to deter it.
Before looking at how Ergo maintains its high level of decentralization, it’s important to establish two points:
- Firstly, decentralization is a spectrum, rather than a binary state. A system is not centralized or decentralized, but exists somewhere between complete centralization and full decentralization. It is often possible to move it incrementally along the spectrum to become more decentralized, but attaining perfect decentralization is impossible (and trying can sometimes be unhelpful). The goal is to ensure it is decentralized enough to maintain important advantages, such as security.
- Secondly, there are many different spheres of decentralization. We’ll look at a few of them below.
Network Infrastructure
The first, and arguably most important, sphere of decentralization is network infrastructure: the dispersed group of full nodes and mining nodes that communicate and validate transactions.
Decentralization of network infrastructure is vital, because it helps ensure the security of Ergo. The more nodes there are, the less risk there is of any single node, or subset of nodes, being compromised. Similarly, the more miners there are, and the more distributed the hashrate is, the lower the chance of a 51% attack.
Ergo has opted for proof-of-work (PoW) consensus in part because it enables greater decentralization. In an open PoW system, anyone can join the network and help to secure it with the right hardware (more on that in a moment). Their mining rigs are typically kept at home or in a dedicated facility. Either way, the physical hardware is distributed around the world.
In a proof-of-stake system, anyone can join the network, as with PoW. However, there is generally more reliance on hosted servers, typically with a concentration of use around certain big companies (like AWS). This unfortunately introduces vulnerabilities, in a way that grassroots PoW mining does not.
The accessibility of Ergo mining is also important for this reason. Bitcoin mining is now highly competitive, requiring specialist hardware. Ergo’s use of Autolykos, a memory-hard hashing algorithm, means it is possible to mine using a GPU, thereby allowing anyone with a gaming computer to participate in securing the network. That means more miners, and better security (though Ergo cannot claim to compete with Bitcoin’s level of security, since the hashrate is less).
Decentralization is about more than network infrastructure, though. There are several other domains in which Ergo strives to be as decentralized as possible.
Coin Distribution
Another metric that can hinder a blockchain’s degree of decentralization is coin distribution. If the majority of coins are controlled by just a few large holders, these wealthy entities can manipulate the market, or crash the price single-handedly.
This was the case with Nxt, an early and ground-breaking second-generation crypto platform launched in 2013 (and in which several of the Ergo community were closely involved). Unfortunately, only a few people bought into the ICO, and the result was that most of the one billion NXT tokens were held by just 20 community members. A small number of “whales” drove the price relentlessly downwards for many months, eclipsing the impact of any new features introduced to the network, or the effect of new people joining the community. Solana is another example. Venture capital investors were able to buy large tranches of tokens at a far lower price than regular retail investors. When the bear market hit, they sold en masse, destroying the value of smaller traders’ SOL. In Solana’s case, the community and platform bounced back strongly.
Ergo had no ICO, no premine, and no VC investors. Distribution has always been solely through PoW mining, just like Bitcoin. As such, it’s as fair as it could possibly be, and there is no unnecessary concentration of ownership.
Exchanges
Exchanges are a vital component of the crypto world, but they have historically also been single points of failure that have occasionally posed a systemic threat to the entire ecosystem.
When MtGox collapsed in 2014, it was responsible for 70% of trading volumes. 850,000 BTC was lost (later revised down to 650,000, after 200,000 BTC were “found”). In 2022, FTX declared bankruptcy. It was the second-largest crypto exchange in the world, and took with it billions of dollars of customers’ money. The effects of both failures are still being felt within the crypto space today.
It’s hugely important that users can convert their coins and tokens into different currencies, both crypto and fiat, but that must not come at the cost of introducing vulnerabilities that can threaten the whole crypto industry.
Ergo can be traded on a number of different popular exchanges, including Gate.io, Coinex, Kucoin, and several others. There are different trade-offs to using each of these, but the range of exchanges on which there is good liquidity means there is no single point of failure.
Of course, holders are encouraged to withdraw their ERG to an external wallet that they control and avoid leaving coins on exchanges. Additionally, decentralized exchanges are being developed as part of Ergo’s DeFi ecosystem. These will ultimately reduce reliance on centralized exchanges.
Development
Lastly, the development team is a point of centralization for most crypto projects. In the early days of a platform, when core software is still being built, the dev team is foundational. This was the case even for Bitcoin. Had Satoshi not been around for at least the first few months, it would not have survived. But efforts were made to reduce reliance on him and decentralize development as quickly as possible.
Today, few projects place such a strong emphasis on making the dev team obsolete. As a result, the departure of a key team member can spell the end for a project, even after many years. Ergo has focused on fostering community growth and welcoming contributors from outside of the Ergo Foundation, reducing reliance on a small number of developers.
Conclusion
Ergo has sought to maximize decentralization and security across a number of different domains: network infrastructure, coin distribution, exchanges, and development. None of these are (or can be) perfectly decentralized, but the Ergo community and ecosystem has a strong ethos of doing the best it can to maintain decentralization and strives to continually improve it whenever it can.
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