The race to create the future internet, Web3, is heating up daily. Providers are competing against each other, demonstrating a healthy, expanding, and decentralized Web3 ecosystem to come.
Users interact through various open-source applications such as MetaMask, Web3 gaming, the metaverse, and DeFi protocols. However, they don’t usually stop and think about what happens behind the Web3 scenes, or what is piecing the blockchain-based web together. If we imagine Web3 as a burgeoning new metropolis, it’s the providers of the underlying infrastructure and power grid that make all these operations possible.
Every Dapp relies on communication with one or more blockchains. Daily, full communication nodes serve billions of requests from Dapps to read and write data onto a blockchain. We require a massive node infrastructure to keep up with the ever-expanding Dapp ecosystem.
However, the running of nodes is both time- and capital-intensive. Dapp builders must turn to external providers for remote access to nodes. This requirement results in extreme monetary incentives for infrastructure providers to serve as many of the Web3 ecosystems as possible. But, who are the ones winning this race?
The Problem of Centralization
The most expeditious way to provide the reliable infrastructure that can power Dapp ecosystems is for centralized companies to set up a web of blockchain nodes, which would commonly be held in data centers such as those of Amazon Web Services (AWS). They would allow the developers to access these from anywhere for a subscription.
This system is precisely the method that a few players in the Web3 space did, but it resulted in centralization, which is against the ideals of the self-named decentralized space.
Centralization is a significant issue for the Web3 economy because centralization means that first, the ecosystem becomes susceptible to 51% attacks, and second is at the mercy of a few powerful players.
Let’s consider that 81% of Ethereum beacon chain nodes are located in the United States and Europe. Additionally, if the three largest mining pools were to come together, they could conduct a 51% attack on the Ethereum network. Today’s blockchains are less distributed and more centralized than we think them or would like them to be. This structure starkly contrasts the vision expounded by Satoshi Nakamoto’s Bitcoin white paper.
If the large node providers were to collude, then the advantages Web3 has over Web2 would be lost. What’s more, the reliance that users would have on centralized providers can increase the chances of system outages. The Ethereum outage that occurred in 2020 due to Infura, one of the larger node providers, shows the problems of a centralized system. The outage caused several crypto exchanges, including MetaMask, Coinbase, and Binance, to suspend their withdrawals of Ethereum and ERC 20 tokens because the exchanges could not entirely rely on the Infura nodes.
It must be noted that Amazon is often the backbone of these centralized providers. It has suffered from several past outages, which now creates a second, severe layer of vulnerability.
The Infura outage was not the only such outage, with the Ethereum network’s move to Ethereum 2.0 or “The Merge.” The move to ETH 2.0 was interrupted by a 7-hour outage resulting from a single-node hardware failure on the network. A genuinely decentralized network would not have these types of worries.
Decentralization remains a crucial tenet of Web3 and its economy, and a centralized blockchain infrastructure is a threat capable of undermining it. The Solana blockchain has suffered through multiple outages, all due to a lack of decentralized nodes. The network was insufficient to handle a spike in traffic.
Solana’s problem is common for many blockchains that are trying to scale their operations and throughput. Many of the top decentralized blockchain protocols continue to struggle with a pathway to scale while also being decentralized. The largest blockchains, Bitcoin and Ethereum, are steadfast in their part in the decentralized war, but ETH is still vulnerable.
In the early days of blockchain, on June 8th, 2013, Feathercoin (FTC) was the victim of a 51% attack. One entity was able to control over half of the FTC network’s total processing power. This strategic move allowed them to reverse the confirmed transactions on the chain and even prevented new transactions from going forward. FTC has fallen into blockchain obscurity with a price that plummeted, alongside a delisting from all major exchanges.
The reason for the ongoing centralization is due to the overreliance on Web2 cloud providers such as AWS and Infura, which have continued in their roles from Web2 and have provided the infrastructure for Web3 and its economy. However, the current strategy to avoid centralization and blockchain’s problematic “single point of failure” is gaining significant steam. This change is good news for the future of Web3 ecosystems that wish to remain healthy, secure, and decentralized.
Better Solutions With Decentralized Infrastructure
With the advent of novel innovations, there is a rise to a new breed of decentralized provider. These node providers are running their services on-premises or even in users’ homes instead of relying on centralized cloud providers.
The Architecture of Web2 vs. Web3
The key advantage that decentralized nodes provide is that they cannot be taken down in the same way as a single point of failure. They can also provide faster connections for global users. Additionally, providers of decentralized node infrastructure create new economies, where these independent providers serve requests for data and earn rewards in their native tokens.
Several providers in the decentralized Web3 space, such as Flux, Ankr, and QuickNode, compete for market share. This competition ensures that providers are consistently motivated to improve their services and provide the best possible user experience for their customers. Such a competitive environment is good for the Web3 economy because it leads to innovation while also lowering prices.
Investors are seeing great returns acting as pooled node providers as well. Yieldnodes sets up decentralized nodes for investors and has paid 10% returns a month for over two years, with a high of over 19% in February 2021.
What’s even more important is that competition for blockchain infrastructure results in a more decentralized Web3 economy. The more decentralized the network, the more resilient it is to censorship, and 51% attacks will remain an issue of the past.
The idea behind Web3 is not just to create a better internet but a better world. Decentralized infrastructure providers are building an internet foundation that is more equitable, censor-resistant, and secure.
By shaking things up, they are supplanting the status quo of giant, centralized hosting providers that are carryovers from Web2 and which make blockchains more susceptible to attacks, outages, and censorship. The new decentralized providers are on the cutting edge and have an incentive to push innovation, providing their users with both the best possible service and the greatest level of integrity.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.