Decentralization. It’s a buzzword in Web3, one that comes up in debates about blockchains, metaverses, and even non-fungible token marketplaces. But it’s one that remains misunderstood at times, especially for newcomers in the space.
If you want to know more about decentralization, how it affects different aspects of Web3, and why it’s important, you’ve come to the right place. In this article, we’ll answer the following questions:
- What is decentralization in Web3?
- What is decentralization with non-fungible tokens?
- What is decentralization with finance?
And much more. Let’s get started with the most general question: What is decentralization in Web3?
What is decentralization in Web3?
Decentralization refers to the act of taking a technology, system, or group and dispersing power between numerous sources. Rather than centralization, which focuses power within a single entity, decentralization spreads that power between different entities. There are several differences between centralized systems and those that are decentralized, along with pros and cons of each.
- Decentralized systems are less vulnerable to attacks
- Decentralized technological systems may be considered trustless
- Decentralized technological systems may be slower than centralized systems
To first understand the push towards decentralization in Web3, we must analyze the history of the internet. When the internet was first conceived, the creators believed it would become a decentralized system, almost democratic in nature. But over time, as Web1 became Web2, large technological companies began to control most internet traffic and dominate our experience on the internet. Some of those companies are:
- Search engines, most notably Google
- Social media companies, like Facebook and Twitter
These companies not only control our experiences when using the internet but also our data. This puts the average user at a disadvantage. We use these services for free, but ultimately become the product. And our experience using the internet has suffered as a result. That’s where Web3 comes in.
Web3 promises to be the decentralized version of the internet. It, according to proponents, will have many characteristics:
- An internet owned by the users, including platforms like social media
- Decentralized apps where users own (and can sell) their own data
- Digital identity solutions where one identity will serve all sites
- Ownership of digital property in the form of non-fungible tokens
- Ownership of digital currency like crypto
- Censorship-resistant, so that no voice can be silenced
Decentralization in Web3 ties into all the buzzwords you’ve heard as well: non-fungible tokens (NFTs), metaverses, the blockchain, and even finance. So, how does decentralization affect these facets of the next iteration of the internet? Let’s find out, starting with NFTs.
What is decentralization with non-fungible tokens?
Decentralization is a popular term thrown around by NFT proponents and a battling cry that some use to put one blockchain over another. In the NFT community, the more decentralized the blockchain, the better.
Specifically in relation to NFTs, decentralization refers to two parts: the technology itself and the place NFTs have in the larger ecosystem — one that includes marketplaces, blockchains, and hundreds of thousands of individual owners.
First, the technology. NFTs exist as unique tokens on the blockchain. These tokens, when uploaded through a process called minting, come with references to specific files (the images you see as the “NFT art” and specific characteristics of the NFT itself). Often, if the team behind the NFT collection is doing their do diligence, they’ll decentralize the files through a system.
The most common is the Interplanetary File System (IPFS), which is a distributed system for storing files on the web. Like most distributed technological systems, IPFS relies on computers all around the world (known as “nodes”) to retain a copy of the files stored within the system. That makes IPFS resistant to attacks, censorship, and failures.
Second, is the NFTs’ place within the larger system of non-fungible tokens. There are many stakeholders in the world of NFTs: marketplaces, blockchains, NFT companies, Web3 wallets, and individual owners. This system, while not completely decentralized, has aspects of decentralization that appeal to Web3 proponents:
- Non-fungibility ensures a more distributed ownership level among individuals
- Users can take their NFTs across marketplaces, to the ones they wish to buy and sell on
- The blockchain ensures that the NFTs will remain available even if marketplaces fail
- Even if NFT companies go bankrupt, the underlying NFTs will still exist
- Creator fees and marketplace fees are subject to a more decentralized process
- Users can store their NFTs in a variety of Web3 wallets, all of which can be accessed across wallet providers
This makes the world of NFTs a largely decentralized system, and one where users have a great deal of power. Now, for the metaverse.
What is decentralization with the metaverse?
The metaverse, or virtual worlds where users can socialize, shop, and work, became a buzzword in late 2021 when Mark Zuckerberg changed Facebook’s name to Meta. By doing so, he conveyed to the world his intentions of building the most popular and comprehensive virtual world around. The move sparked a gold rush, with investors buying metaverse land and crypto related to these worlds.
Still, some people feared the metaverse of Zuckerberg, which many thought would be corporate, controlled, and policed. Soon, a term emerged for this type of metaverse: walled garden. And it plays right into the subject of our article: decentralization and what it means in Web3.
Metaverses, as they exist today, can be divided into two categories: centralized and decentralized. While users can log into both to socialize, shop, and work in virtual worlds, there are some stark differences between the two. Here’s a quick run-down:
| Centralized Metaverses | Decentralized Metaverses |
| Are controlled by one entity | Are controlled by the users |
| Lack property owning mechanisms | Feature non-fungible tokens |
| Have ‘fake’ currency | Operate with cryptocurrency |
Some examples of centralized metaverses are Roblox and Fortnite. Users have ‘privileges,’ which the centralized entity (the metaverse creator) can revoke at any time. Items can disappear, the currency has no inherent value, and the company running the metaverse can ban users at any moment.
Some examples of decentralized metaverses are The Sandbox and Decentraland.
Users have ‘rights,’ can participate freely in open markets, and can own property. In addition, users have a say in the development of the metaverse, with the ability to vote on proposals and drive the metaverse forward.
This voting power is critical for the functioning of a decentralized metaverse. In these virtual worlds, the users have the say, enact the rules, and contribute in direct fashion to the growth (or death) of the metaverse in question.
There are many who believe that a decentralized, open metaverse is critical for Web3. With the world becoming more and more digital, an environment that empowers the users rather than the companies will lead to less corporate propaganda and a more free-flowing stream of ideas.
It is the difference between an open, democratic virtual world and a closed regime with users unable to tell the true from the false. Decentralization for metaverses, then, is not just a structure or mechanism: It is a human imperative.
Related article: How to Invest in the Metaverse
What is decentralization with the blockchain?
Blockchain is the technology that underpins the parts of Web3 we’ve already discussed. Without the blockchain, non-fungible tokens and cryptocurrency wouldn’t exist in their current form. And without NFTs and crypto, a decentralized metaverse owned by the users would be difficult to achieve.
So, what is decentralization as it relates to the blockchain?
Decentralization serves several purposes when it comes to the blockchain technology:
- Increases fault tolerance
- Increases security as each individual has a copy of network data
- Spreads control of the network over many individuals
- Decreases the risk of hardware failure
- Decreases the need for individuals running the network to trust one another
That’s why, in Web3 circles, blockchain decentralization is more than a buzzword: It is central to the ethos of Web3 and the communities that support it. Each year, debates rage about which blockchains have the most decentralized nature, and those that argue for decentralization over other concepts like network speed generally are seen as adhering to the Web3 culture.
One blockchain that has gained a reputation for being truly decentralized is Ethereum, the chain that produces the Ether coin, which is the No. 2 cryptocurrency by market cap. Others, like Solana, receive criticism for being too centralized.
What is decentralization with finance?
Perhaps the most obvious example of decentralization in the world of Web3 is DeFi or decentralized finance. DeFi emerged in 2018 as the counterpoint to centralized finance. While applying decentralization to finance has numerous benefits, some of which are still being realized, it comes with its challenges.
DeFi fosters an atmosphere of peer-to-peer (P2P) financial transactions. This is counter to the world of centralized finance, which relies on entities like banks and credit card companies to manage the transactions of individuals. For their part, the banks and companies would charge a fee to handle the transactions, leading to a higher cost for individuals.
Decentralized finance eliminates the middlemen in these transactions, reducing fees for users. Because it relies on the blockchain, the need for trust between parties is reduced. In addition, users can hold money in secure digital wallets, without a need for bank accounts which may also be subject to fees.
While that sounds like a dream to many people, DeFi is not without its challenges.
Hackers often target DeFi platforms due to the amount of money they store, resulting in a loss of funds for participants.
Also, DeFi is complex and not easily understood. This presents a barrier for the average person, who may be used to the legacy system.
DeFi still holds a great deal of promise, especially for those who don’t want to rely on banks, credit card companies, or other entities. Time will tell if it is successful and can reach many people. For now, it remains another way Web3 is implementing decentralization and an example of the possibilities of a world without centralization.
What will decentralization in Web3 mean to me?
So, the big question: What does decentralization mean to you, dear reader? While that will depend on your unique situation and the role you take in Web3, there are several possibilities that users will be able to take part in. Here are nine:
- Own digital assets
- Buy, sell, and collect digital assets
- Exist in a virtual world owned and run by users
- Participate in virtual worlds that have a free flow of ideas
- Run a node for a blockchain
- Contribute to the functioning of a blockchain
- Exchange money without needing a third party
- Take out of a loan without the need of a centralized entity
- Be your own bank
Essentially, Web3, the next iteration of the internet, restores power back to the individual. And it does that, in large part, due to decentralization.
Final Thoughts on Decentralization in Web3
Decentralization impacts nearly every aspect of Web3, including non-fungible tokens, the metaverse, the blockchain, and finance. With these innovations, the end user has more control over their experience on the Internet and throughout their daily life. It seems every few years that another development in Web3 comes along, and with it more decentralization.
Here at Rarity Sniper, we’ll keep an eye out for the next big one and report back.
Read more: What does fungible mean?