Princeton’s Arvind Narayanan on The Advantages Of Decentralization

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Advantages of decentralization still exist

Although the merits of decentralization are sometimes overblown, Narayanan is not trying to dissuade anyone from experimenting with blockchain technology. In fact, he noted that he and the other lecturers who put together the Bitcoin and Cryptocurrency Technologies online course are “very optimistic about bitcoin as a technology.”

Narayanan made it clear that, when we’re talking about blockchain-powered decentralization, we’re referring to technological alternatives to legal, social, and financial institutions. Blockchain technology may very well be a useful tool in altering or outright replacing some of those institutions, but it’s not a magical solution that can simply be thrown at every centralized institution in the world today. Having said that, there were some specific benefits of blockchains and decentralization pointed out by Narayanan:

  • Efficiency for small transactions – Narayanan explained, “If you’re selling, for example, your smartphone, your laptop, or something like that (not something as valuable as a car), then if there is a dispute you’re very unlikely to actually litigate that. And so, if you have a purely technological enforcement mechanism that gives you . . . a stronger sense of security than simply shipping goods to someone over the Internet and hoping for payment back, then that’s a little bit of a win.”
  • Anonymity and privacy – This gets back to the cypherpunk roots of bitcoin. If someone is seeking anonymity or privacy, then decentralization should be the most important factor above everything else. The possible negative implications of decentralization are no longer relevant because centralized solutions are not an option.
  • Freedom to choose mediator – Although the lack of a “sophisticated” mediation system was also viewed as a negative of decentralization by Narayanan, he did seem to value the application of democratizing the mediation process on a platform like PayPal.
  • Lower barrier to entry – Whether you’d like to be a mediator for transactional disputes or a data feed for a decentralized prediction market, the benefits of a lower barrier to entry should be obvious to anyone who wishes to interact with these systems. The example used by Narayanan is that anyone can act as an oracle on a decentralized prediction market. In the case of something like InTrade, only the company behind the platform has complete control over the system.
  • No need for intermediaries – Although there are still plenty of situations where intermediaries make sense, removing them can also be helpful for cutting costs and disabling censorship. Bitcoin itself is a beautiful illustration of this point.

Finding the right opportunities for decentralization

At the end of the lecture, Narayanan explained where he thinks the big opportunities for bitcoin and decentralization exist. He noted that the reasons a decentralized system makes sense are usually going to be economic or political. Narayanan added:

“From a political perspective, there are certain use cases that one might look for — when state regulation of some market is particularly inefficient . . . or when there is a state abusing power in some context or too much inefficiency.”

Cell phone minutes replacing currency in some African countries was then used as an example of such political disruption by Narayanan. The key point that Narayanan ended his lecture with was that decentralized solutions need to be able to work within the existing system rather than trying to replace it. He concluded, “I would argue that the new friendliness of the bitcoin community with regulators is partly the reason for the commercial success that it’s enjoyed recently.”

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