1.3.1 Decentralization approach

DLT (Distributed Ledger Technology) operates based on two fundamental concepts:

• Distributed computing: This concept entails storing and processing data simultaneously on multiple servers (nodes) located in various geographic locations. These nodes may have different software configurations and varying levels of security.

• Decentralization: This concept involves the participation of multiple owners (organizations or individuals) who own the nodes. Due to potential conflicts of interest among these owners, there is a possibility of intentional or accidental misrepresentation of data by one or more parties.

Systems can exhibit various combinations of distribution and decentralization. They can be both distributed and decentralized, or they can possess only one of these characteristics. Furthermore, different systems may have different levels of distribution and decentralization.

Historically, since the late 1990s, large information systems have primarily followed centralized approaches. These systems were structured around a single super server that provided business logic and data to numerous relatively simple clients, adhering to a flat client model. However, the digital revolution, driven by the exponential growth of connectivity, has transformed the organization of data and computing systems. This transformation has led to the emergence of a new generation of systems driven by several key factors:

• Globalization: Globalization has resulted in the need for unified business practices worldwide, intensified competition, and the rise of highly dynamic organizational structures. These factors demand a fundamentally different approach to economic activity.

• Escalating Data Volumes and Quality Concerns: Data volumes have witnessed significant growth, but there has been a simultaneous decrease in data quality. This has disrupted the monopoly on data even for global organizations like Google, Facebook, and Amazon. Moreover, ensuring data quality, personal data security, and swift decision-making has become increasingly critical.

• Virtualization of Daily Life and Emergence of Business Platforms: Everyday life has become more virtualized, and business platforms have disrupted traditional business models by eliminating intermediaries and creating marketplaces for suppliers and consumers. These platforms reduce intermediary functions to algorithms and software solutions (e.g., Uber, Amazon, Netflix).

These objective factors have accelerated the transition to a new generation of systems, necessitating a revaluation of the principles of distribution, decentralization, and data management to adapt to the evolving digital landscape. Distributed and decentralized architectures align more effectively with modern real-world business models such as ecosystems, consortia, associations (requiring horizontal integration), supply chains, and logistics (vertical integration). However, implementing such systems introduces several complexities that need to be addressed:

• Creation of synchronized and consistent data repositories across multiple nodes.

• Building resilient networks of nodes that can withstand temporary outages, failures of individual nodes, or even malicious behavior from specific components (e.g., if a node or group of nodes is compromised by hackers).

• Ensuring adequate system performance despite the potential redundancy of computing power, as the distributed nature of the architecture may introduce additional latency compared to centralized architectures.

• Developing an effective economic model that facilitates the fair distribution of costs for network maintenance among nodes, while also reaping the benefits resulting from network effects.

These challenges require careful consideration and solutions to ensure the successful implementation and operation of distributed and decentralized systems. The solution to these challenges was initially proposed by Satoshi Nakamoto in 2009 for the cryptocurrency Bitcoin, known as blockchain technology. This technology introduces several key solutions and concepts:

• Network Participation: The network is supported by various participants, each owning a node that stores its own copy of the data ledger. These copies are synchronized with others through mechanisms like the Gossip protocol.

• Immutable Data Structure: Data is stored in a specialized structure known as a ledger, represented as a chain of blocks. Each block is connected to the previous one through cryptographic functions (which store the hash of the previous block). Additionally, blocks themselves utilize special structures connected by cryptographic functions (such as a Merkle tree). This design ensures data immutability, making it resistant to unfair or accidental alterations. The first block in the chain, known as the Genesis block, is the only uncontrolled element.

• Transactions: Participants engage in information exchange through messages called transactions. In the Bitcoin network, a transaction represents a change in an individual's account balance as a result of receiving or transferring a specific number of bitcoins. However, transactions can have broader meanings beyond just monetary transfers.

• Consensus Mechanism: The insertion of new data is carried out by individual participants known as miners. Miners compete to quickly create a "correct" block that meets specific conditions. This process, known as the consensus mechanism, ensures data integrity. Bitcoin employs the Proof-of-Work consensus mechanism, while other networks, including DGT, may adopt different mechanisms. Miners maintain the network by deploying nodes and are rewarded for their efforts, which can be exchanged for fiat currency.

• User Participation: Regular users generate transactions by sending or receiving digital currencies (e.g., Bitcoin). They do not participate in the consensus process directly but contribute to the overall network by engaging in transactional activities.

These concepts form the foundation of blockchain technology, enabling secure and decentralized data storage, transaction validation, and network maintenance.