Does Decentralization Guarantee Stability?
In the era of Industry 4.0, the world has become progressively interconnected and digital [1] [2]. Through progressive technological innovations, physical objects in today’s world are also increasingly interconnected and digitized [3], such as industrial machines, automobiles, cities in the sense of “smart cities” or everyday household appliances. [1] [2]. Even within complete entrepreneurial value chains, interconnectedness is being applied to an ever greater extent [1] [2]. We humans are also increasingly moving in a digital world. [3] and interconnect through social media or innovative telecommunications, such as LinkedIn, Facebook or video conferencing, which have become essential during the pandemic [4].
Interconnectedness brings many advantages, but also some disadvantages [2]. It helps us to communicate over great distances, share media, control devices or make entire processes more efficient. It also enables us to develop new business models and implement them using innovative and disruptive technologies [3]. However, in addition to the many benefits, increasing digital interconnectedness also gives rise to risks such as insufficient cost-benefit allocations in the context of necessary IT protection mechanisms, data protection risks or misuse of information, which companies can fortunately reduce by means of suitable measures [5].
For companies that want to continue to position themselves successfully on the market, some of which are even transforming themselves into software providers, digitization is a mandatory program [3]. As a result, the topic of digitization and the associated conception and positioning of suitable services must be firmly anchored in every corporate strategy to be able to position themselves on the market with new and innovative business models. [3].
To establish these new business models, companies are increasingly joining forces in networks, which can take on different forms and intensities (platform-based exchange of data vs. joint value creation, for example in business ecosystems) [1]. Innovative and disruptive technologies, such as blockchain, artificial intelligence (AI) or the establishment of the 5G standard, help companies with the technical implementation of multilateral business models [1] [6]. Driven by technological progress, the future is expected to see an intensification of multilateral collaboration between differentiated companies with a collective business model, for example in business ecosystems [7].
As a result, the term “interconnectedness” will play an increasingly significant role. With stronger interconnectedness, the relevance of digital communication platforms is also increasing considerably [8]. In this context, the failure of the social media company Facebook[1] at the beginning of October last year has shown that progressive interconnectedness does not always work without challenges [9]. In this regard, it is essential to evaluate what the effects and consequences are when interconnectedness is compromised and what role the infrastructure plays which enables companies to realize their business models.
In the case of Facebook, among other things, the internal reconfiguration of the backbone router[2] [10] and the failure of DNS[3] (domain name system) servers, among other things, caused Facebook to completely disappear from the Internet for about 3.5 billion users for a few hours. [11]. The increased number of application restarts by users due to the inaccessibility of the services further contributed to the instability and increased in the problem of reaching the services [11].
In the Facebook example, however, there is one crucial feature: Facebook’s products and services are largely organized centrally [12] [13]. Through this centralization, Facebook gains exclusive control over the established system architecture and the content published via its services (such as posts by Facebook or Instagram members) [14] [15]. Unlike decentralized information technology infrastructures, such as blockchain, Facebook has sole control over its globally established data centers, their functionality, and the complete data [14].
However, the trend is changing from a centrally organized information technology infrastructure to a decentralized one [16], which is often designed using blockchain technology [14]. Tech giants, such as Twitter, are aiming for a decentralized transformation of their social media platforms [17]. In the Twitter example, decentralization would lead to a self-controlling (blockchain-based) social media platform with an agreed set of rules over social media content and applications, and would mean the loss of central control on the part of Twitter [18] [19]. However, the reduced control is intended to stimulate collaborative development of the services offered and accompanying user interactions without a central intermediary [18] [20]. Moreover, decentralization transforms the ownership of data from “one party owns all the data” to “no one owns all the data.” [14]. Furthermore, information decentralization prevents a “single point of failure” (SPOF) because the network is self-governing through the respective consensus mechanism and is operated and provided by a fully networked infrastructure [21].
Both information technology centralization and decentralization have different advantages and disadvantages. First, however, it is essential to understand what centralization and decentralization mean in a generic context.
What Is Meant by (De)Centralization?
(De)centralization can be broken down and differentiated into three categories: architectural (de)centralization, political (de)centralization, and logical (de)centralization. [22]. The different forms of (de)centralization are shown in Figure 1.
Architectural (de)centralization describes how many units a system consists of [22]. Classical centralized information technology networks or systems, for example with one server, as found in (smaller) offices, consist of several participants, but these are all connected to a central server. The server is the central unit of this network [23]. If the server fails, no participant in the network can access the data stored centrally on the server, and it is no longer possible to work collaboratively within this network [23]. The situation is different with architecturally decentralized systems. The failure of one network participant can be compensated for by other participants. For example, more and more research is being conducted into how a decentralized energy supply can be established [24]. On the one hand, this seeks to avoid total power failures caused by the breakdown of a power plant; on the other hand, the scaling of sustainable energy-generating infrastructure, such as decentralized solar systems on single-family homes [24], also makes this necessary. The avoidance of total breakdowns and robustness are one of the most important drivers of architectural decentralization.
Political (de)centralization describes which participants control the system [22]. Participants can be individuals or organizations. While a system administrator has complete control over the central server, for example over access rights, roles and data of an office (political centralization), this is softened or non-existent in a decentralized system. In decentralized blockchain networks, control is autonomously executed through a generalized consensus [22]. The chaining of blocks also makes it impossible to modify data [25]. As a result, there is no need for a central authority to coordinate and monitor the decentralized network [25].
Logical (de)centralization describes the common consensus within the system or network [22]. Logically centralized systems are characterized by a commonly agreed state, which must be accepted by the participants of the network [26]. In logically decentralized systems this consensus does not exist or the adherence to the established rules is not controlled[4] [27]. Furthermore, logically centralized systems act as one object, e.g. a company [22]. An example of a logically centralized system is the blockchain [22]. Architecturally and politically decentralized blockchain networks require a common consensus to maintain the benefits of a decentralized infrastructure.
What Are the Advantages of Decentralization?
It is possible to look at the benefits of decentralization on the basis of the dimensions already mentioned. As the recent events of Facebook & Co. have shown, there is a risk of a “single point of failure” when the infrastructure is centralized in terms of information technology (architectural centralization) [23] [22]. Architectural decentralization thus implies that the risk of a “single point of failure” does not exist because, should a component fail, the information technology infrastructure continues to function [28]. As a result, decentralized information technology networks also have a higher fault tolerance. [28]. The risk of a “single point of attack” is avoided because there is no central authority that maintains the information technology infrastructure and that could become the target of an attack. [27].
Political decentralization of a system allows different parties to participate and jointly control the system while ensuring trust and transparency. Democratic processes allow this collaboration and are carried out in the form of consensus decisions [27]. In the case of blockchain, an established consensus eliminates the need for a central authority (intermediary) to control and verify transactions [27]. This leads to more efficient execution of transactions, time and cost savings. The universally valid consensus – the logical centralization – reduces the trust required of the participants [27] [28].
Outlook on Decentralization in the Context of DLT and Blockchain
Although decentralized information technology systems have existed for a number of years [28], discussions about (de)centralization have been rekindled by disruptive technologies such as DLT and blockchain. New use areas and use cases based on blockchain and DLT will continue to contribute to the importance of decentralized information technology systems in the future. Relevant use cases include the increasingly occurring (and demanded) tokenization of assets [29] or use cases in the area of supply chain, such as tracking and tracing of goods [30].
What Does This Mean for Companies and Banks?
Decentralization is becoming an increasingly relevant topic in the context of distributed ledger technology and blockchain. The opportunities presented by this technological development are being exploited in various business areas, sectors or industries, for example tracking and tracing of a supply chain [31], trading with cryptocurrencies [32] or through the tokenization of assets [33]. For banks, their interface to diverse customer groups, companies and industries opens up a wide range of application areas and the opportunity to develop new products and services based on decentralized technologies, such as offering non-bankable assets, decentralized finance or cryptocurrency trading [34] [35]. In addition, the importance of collaborative business models for companies and financial service providers will continue to increase in the future [36]. The reason for this is, among other things, the challenge of establishing innovative and complex business models independently in the future [7]. Decentralization and the accompanying technological innovations will enable companies and banks to engage in new types of interorganizational collaboration, characterized by improved information exchange [37]. The use of technologies with a decentralized character, such as blockchain, can promote this collaboration on the basis of the greatest possible transparency and trust [38].
[1] Facebook refers, among others, to the services Facebook, WhatsApp and Instagram
[2] The backbone routers connect all of Facebook’s existing data centers around the world [10].
[3] The DNS resolver converts names into IP addresses (“address book”) so that the user of the Internet does not have to remember extensive numbers (e.g. the input www.google.de vs. 2001:4860:4860::8888)
[4] One example is language. This is fixed in writing in a set of rules. However, the execution is not consistently controlled
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