The importance of being decentralized

January 17, 2020
Gabriele Cacciola

Gabriele Cacciola

CTO of Ocyan

Hi! I am Gabriele, Co-Founder and CTO of Ocyan, and in this article I will try to go through some of the characteristics of a decentralised system.

Characteristics of a decentralised system

So, first of all, what is a decentralised system? As every serious writer, in order to find the right images and words to better express my thoughts on that, I went on Google and started documenting myself. Well, while doing that I came across the following diagram.

diagram

This diagram is definitely one of the most common images you find when you search this matter. I personally find it confusing, if not quite misleading for certain aspects, because the definition of centralised/decentralised/distributed system is much more complex than that.

As our old dear Vitalik Buterin explained almost 3 years ago in one of his Medium articles here, we can explode this concept into several different dimensions of decentralisation:

  • Architectural: different location of the technical infrastructure
  • Political: different entities that are contributing to the system
  • Logical: user experience of the system when used. Unicum or independent entities?

A blockchain system is logically centralised, while architecturally and politically decentralised.

Blockchains are politically decentralised (no one controls them) and architecturally decentralised (no infrastructural central point of failure) but they are logically centralised (there is one commonly agreed state and the system behaves like a single computer).

Let's go through some pros and cons of decentralised systems:

ProsCons
Fault ToleranceComplex structure
Transparency and immutabilityConsortium management
ResiliencyMedium-high steep learning curve

Let's go through the most important points:

  • Fault tolerance and resiliency: being a decentralised network, we can leverage the different location and ownership of the node as an additional "safety net". Using an AWS comparison, it is best practice to deploy the nodes of any cluster in 3 different Availability Zones, to make sure you always have HA.
  • Transparency: Due to his immutable and ledger based nature, blockchain technologies are intrinsically transparent. Having said that, there are some protocols (like Hyperledger Fabric or Besu, both supported by Ocyan 😎)
  • Complex structure: as you can easily guess, a blockchain platform involves a series of components and actors that is quite difficult to find in the other distributed systems
  • Consortium management: in most of the cases, you will find yourself in the situation where other companies will be sharing the network with you, contributing to the ledger and exchanging assets. Like in a condominium, this means that the consortium will need a bit of regulation in place in order to function effectively while scaling.
  • Steep learning curve: due to all the characteristics mentioned in this list, a blockchain project involves some quite tough challenges like building and maintaining a decentralised system, creating a set of policies that is accepted and respected by every component of the network, etcetera etcetera.

A real life example

In order to understand the power of this technology, let's deep dive in an example of real case where blockchain could have been extremely useful. I will try to be as accurate as possible, but please consider that I am not going to go through the historic and economic rabbit hole. Summer 2007. The banking system, which used to be split between investment banks and commercial banks, is enjoying a period of growth and deregulation. Briefly, what is the difference between those type of banks?

  • Commercial banks: those are the banks where we open our bank accounts. They are supposed to keep our money safe, and for this reason those banks are not re-investing the money that get deposited but they are partially forwarded to the Central Banks and partially will be offered to other clients (e.g. bank account overdraft). The money that come from customer's deposits cannot be invested, neither they can lend those money that they receive: they are projected to be safe.
  • Investment banks: those institutions are take care of re-investing the money that they receive or gain. Typical activities vary from the private equity space, corporate lending, investment banking and an immense amount of risky operations. Investment banks cannot open a bank account to a family, for example, neither they have access to Central Banks.

While commercial banks have access to the Central Banks where they can access some liquidity, investment banks instead have to issue bonds in order to get funds to be invested. A way where investment banks can access liquidity is the inter-bank market, which is a network where banks buy/sell capitals. Banks are extremely familiar within this network: it is a consolidated routine, it hugely relies on people networking and faith between those institutions. We can immediately see why it is very risky to blend together those 2 types of institutions: while commercial banks are the foundation of our society, investment banks represent the engine of our economy at scale. At the end of the 90's the merge was finalised, after more than 60 years of separation. In the same period there is another phenomenon happening: explosion of subprime mortgages and the real estate bubble. For a lot of reasons that I am not going to mention here US banks started to target subprime borrowers, who have weakened credit histories and a greater risk of loan default. In UK, they were known as loans "Zero charge plus furnitures". This facilitated access to credit brings to an inflated increase of the value of the real estate properties, and to the creation of a special type of bond, a derivative named Asset Backed Security. ABS, like every bond, are supposed to be a guarantee!

Subprime mortgage offer

We start to see now what happens: banks sell to each other, every day, a large quantity of ABS as bargaining chips for the liquidity access. At a certain point, every bank that was accessing the inter-bank market was full of those toxic ABS bonds, and couldn't afford buying any more of them.

After the music stopped... On August, 2007 BNP Paribas announces that 3 of her investment funds are not solvent anymore; in a few words, they run out of money. It is a catastrophe: thousands of people won't be able to get back the money they invested, and those funds are not getting any more credit in the inter-bank market. It's the credit crunch, which sits at the foundation of the economic crisis. The rest of the story is a tragic history we all know.

Innovating is caring

Now, back to the topic. Could we avoid that? Could have we monitored this market any better, and maybe spotted the beginning of this crisis before it was too late? I will be obviously oversimplifying, as oversimplified is the story I mentioned above, but let's imagine for a moment that all the banks and public institutions sharing a real marketplace where they could exchange bonds and liquidity, maybe with a certain level of transparency too. Revolutionary, isn't it? Let's imagine that every bank, every day, was tracking its movements on the inter-bank market in a blockchain platform where the other nodes would be hold by other banking institutions and conduct authorities. Once we have all those informations securely stored, immutable and distributed, maybe we would have been able to spot in advance the growth of the ABS bonds. If we would have had such a platform, maybe we could have analysed those transaction being written in the ledger, we would have spotted in advance that huge institutions like Lehman Brothers was suffering, for many different reasons. Let's recap the advantages that such a platform would have represented:

  • Visibility: insight in a opaque and complex market
  • Traceability: full tracking of the asset exchange, in real time
  • Security: due to its nature, a blockchain platform would allow to natively setup regulation between parties as smart contracts, to control monetary over-exposure using specific policies and consensus algorithms, to avoid any situation of double spending
  • Integration: a tightly coupled market is able to promptly react to any perturbation of the status quo, and stabilise the system
  • Reliability: data would be shared across a decentralised network, so truly belonging to everyone and resilient to failures and downtimes

Conclusions

At Ocyan, innovation is of paramount importance for us. Decentralisation can represent a huge competitive advantage in some cases, and bring advantages that were completely unimaginable just a few years ago. Ocyan is a Cloud Operating System that deploys all the required infrastructure, automation, monitoring, security and data integration components to run any blockchain and P2P (Peer to Peer) network on any corporate production environment (always on-prem).

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