Calling a system "decentralized" because its architecture looks decentralized causes two serious problems:
- It ignores the fact that decentralization isn't binary, it is a spectrum. Systems claiming decentralization can be characterized by their "Nakamoto coefficient":
The number of entities sufficient to disrupt a blockchain is relatively low: four for Bitcoin, two for Ethereum, and less than a dozen for most PoS networks.
This number varies through time, but for both is almost always between two and five, which is not very "decentralized". Given that the "entities" in question are known to coordinate their behavior off-chain, this number doesn't tell you anything useful about the system.
What calling a system "decentralized" even though it actually isn't does usefully do is to inhibit regulation. It creates the false impression that responsibility for the state and actions of the system is so diffuse that regulators lack a viable traget.
Because a system's Nakamoto coefficient is variable, somewhat difficult to measure and likely to be an over-estimate, the claim that a system is "decentralized" is always subjective.
There is a much more useful, completely objective criterion. Participation in a system either is, or is not subject to permission from some authority, and this can be confirmed by the experiment of trying to participate without asking permission.
Permissionless systems can claim some advantages, but they suffer from some serious disadvantages. Chief among them is the need to defend against "Sybil attacks
". Below the fold I discuss Sybil attacks, the defense against them, and the implications for the systems that adopt this defense.