Why Decentralization Is A Myth

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Finance circles today are abuzz with a much-hyped technology called blockchain. Data in the blockchain is secure because it is user-controlled and dispersed across a vast network of systems. Instead of having a single organization making all the decisions, with blockchain the network users are in control, and need to agree to any changes in the chain. The goal is to wrench control out of the hands of big businesses, banks, or governments. 

Based on these benefits, many people in tech circles are envisioning a new version of the World Wide Web, called Web3. The financial implications of Web3 are fairly significant. Theoretically, Web3 would let you send digital money securely to someone else in the blockchain without needing approval from a central bank. The blockchain’s digital ledger would record the transaction data and disperse the funds safely through the system. 

You’ve no doubt heard of cryptocurrencies like Bitcoin (BITCOMP) or Ethereum (ETH-X). These digital ducats are part of an emerging wave of fintech that employs secured digital ledgers and peer-to-peer networks in a system that’s come to be called decentralized finance, or DeFi. DeFi distributes financial data across the blockchain, which is purportedly secure because everyone on the chain needs to approve of any changes. 

One key concern here is access: How can users retrieve their financial data, say for quarterly reports or financial forecasting, if that data is spread out over different computer systems in the blockchain? How can investors successfully navigate the markets if they don’t have direct access to the appropriate trade data? In other words, how is “decentralization” a benefit if it means financial data is scattered to the four winds? 

Bringing Data Together

Normally, to bring this kind of data together IT professionals would use a language called SQL (Structured Query Language). However, SQL only works for internal databases, and wasn’t designed to search for and collect data from dispersed external sources. Which means DeFi needs an additional tool to bring all this data together.  

The query language GraphQL could be the answer. GraphQL provides users with a way to gain access to data in the blockchain, specifically using APIs (application programming interfaces). You’re already using APIs, whether you know it or not. Any time you see an auto-updating graph on a web page showing current stock values, or use a third-party authentication service to access password-protect bank accounts, APIs make those tasks possible. 

A GraphQL API can retrieve financial data and bring it together in a central place so you can use it. That means you can get your financial data and still experience the security and anonymity that decentralization provides. Of course, you may wonder, is financial data really decentralized if we can use GraphQL to access it wherever it is? Is DeFi just a myth?

Myth or No?

Decentralization may not exactly be a myth, but it is certainly a concept that hasn’t been fully realized in finance. For one thing, GraphQL APIs and other tools can access the data even though it is spread out, making it easy to centralize. What’s more, centralization creeps in at every stage of DeFi. 

Centralization affects crypto exchanges, despite the fact that cryptocurrency is based on decentralized technology in the blockchain. Crypto exchanges are 90% centralized exchanges (CEXs) and only 10% decentralized exchanges (DEXs). That means that for the most part crypto exchanges are recorded and/or validated off the blockchain. 

CEXs rely on off-chain validation because it is often less expensive than paying a blockchain transaction validator. Blockchain transaction validation costs are called “gas fees,” and they can be pretty significant, so most users choose to allow some centralization in order to avoid those fees. 

Centralization also affects system governance in many DeFi platforms. A platform may centralize control to certain members over others, effectively sacrificing fully decentralized control in order to experience the benefits of tighter governance. As a result, some DeFi platforms have already been recognized as corporations. 

Lastly, government regulations have increased centralization in DeFi. Government policies are currently in development to address safety and cost concerns associated with digital currencies and blockchain technology, and more regulations are expected in the future. 

So much for the idea of perfectly decentralized financial systems free of fees, corporations, and government regulations. As the Bank for International Settlements (BIS) recently warned on Twitter, “Beware the ‘myth of decentralization,’ as #DeFi cannot escape some centralized governance.” 

Going Forward

Using GraphQL APIs to access and sort data is just one of many challenges to total decentralization in finance. DeFi lives in two worlds: the decentralized world of Web3 blockchains and the Web2 world of CEXs and centralized data. GraphQL can help you navigate both. 

DeFi is a constantly-changing landscape. We don’t know exactly how we’ll interact with Web3 financial data in the future. We do know you’ll need both blockchain-based DeFi software and GraphQL if you want to get the full benefits of DeFi and blockchain data in Web3 as it emerges.