Bitcoin and Cryptocurrency Technologies

11.3 Template for Decentralization
We have reviewed a number of avenues for achieving decentralization on a block chain. Next, it would
be useful to establish a template for what decentralization looks like in terms of what is being
decentralized, which type of block chain is appropriate, and what exactly decentralization means in
terms of entities and security.
Levels of Decentralization
Decentralization through disintermediation.​Let’s return to the example of the smart car. To
understand it better, let us ask, what is the real‐world process that this digital type of ownership
transfer seeks to replace?
Sticking with cars as the example of property, in the United States, ownership is determined by the
title document. This is a centralized form of ownership. The title document only has meaning to the
extent that the Department of Motor Vehicles (DMV) recognizes it. When a car is sold, it is not enough
to physically transfer this document from the seller to the buyer. The transfer has to be registered in
person with the DMV, who will update their central database. With block chain transfers, we move
from a state‐controlled centralized process to one without any intermediaries. It achieves
decentralization through ​disintermediation​.
Dispute mediation: decentralization through competition.​Now assume that there is a dispute about
the sale of a car. Perhaps the seller sold a lemon car to the buyer, and the buyer is unhappy and wants
to reverse the transaction. In Chapter 3, we discussed 2‐out‐of‐3 multisignature transactions which
can allow escrow if, in addition to the buyer and the seller, there is a judge or a mediator. In this
scenario, the buyer can transfer bitcoins in a separate transaction from the car, not directly to the
seller, but instead to a two‐out‐of‐three address which is controlled jointly by the buyer, the seller
and the mediator. The mediator can either approve the transfer or revert it with the help of one or
the other party, but cannot steal the money.
This is a good start to building a dispute‐resolution mechanism, but there are still many details to sort
out. First, we lose the atomicity of the car sale that we relied on earlier. Second, it is not clear if the
car’s ownership can be reverted with the money. Third, if the car is transacted to a 2‐out‐of‐3 address
as well, whose key fob should be authorized to unlock it while in this state? Our purpose here is not to
iron out these issues but to use the example to carefully consider the role of the mediator.
Specifically, let us compare this model of mediation to a more traditional model.
How would dispute mediation happen in the physical world? It would likely go through the court
system, a centralized, state‐controlled mediation process that is best navigated with the help of hired
lawyers. On the other hand, with a digital contract, the parties are free to choose any mediator they
want. No longer mandated to work with the legal system, a private market for mediation could
emerge where potential intermediaries can compete on perceived fairness, efficiency, and cost. There
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