Decred Use Case

Decred claims to be redefining governance using blockchain technology. With a focus on true decentralization, the project has developed a community of passionate users who work together to develop the cryptocurrency project.

Originally developed to combat the shortcomings of Bitcoin, how does Decred provide a truly decentralized blockchain and cryptocurrency, and what is the use case of DCR?

What is Decred?

Decred (which stands for Decentralized Credit) is an open-source blockchain project with on-chain governance and a focus on true decentralization. It was originally developed from Bitcoin’s code and has retained many of its features, however a notable difference is the hybrid Proof-of-Work/Proof-of-Stake consensus mechanism in use.

Decred has a native token, DCR. It was designed to function similarly to Bitcoin (BTC) and like BTC, DCR has a total supply of 21 million and is produced by mining blocks. It is used as digital money like Bitcoin and also in its governance system and consensus mechanism.

Decred was proposed in 2013 by two pseudonymous individuals, _ingsoc and tacotime. In 2014 an open source development team called Company 0 (led by Jake Yocom-Piatt) started working on the project and the mainnet was launched in February 2016.

Decred did not do an Initial Coin Offering and does not receive funding from corporations. Instead it was originally self-financed by members of Company 0 and at its launch, 8% of tokens were premined and split between developers and the first adopters of the platform. Since then it has used a self-funding model where 10% of the block rewards go to a development fund.

Decred Use Case: Governance

Decred aims to have a truly decentralized governance system. With many blockchains, proposals and changes are made by a group of developers and discussed off the blockchain on forums or in teams. This means that a small group of people decide the direction of the blockchain.

It can also lead to hard forks when users do not agree on the direction taken and the blockchain splits. This has happened many times with Bitcoin including the Bitcoin Cash and Bitcoin Gold hard forks. Decred tackles this with a form of on-chain governance with a staking mechanism.

Any holder of DCR tokens can stake their tokens to suggest a proposal or vote on changes. Once a vote is complete these tokens are unlocked and returned to the holder. There is a small fee of DCR tokens for submitting a Decred Improvement Proposal (DIP) to reduce spam and increase the quality of proposals.

Politeia

Decred uses a governance software platform, Politeia, to manage proposals and voting. It tracks discussion, proposals and voting and submits necessary data to the blockchain. It is a slight variant of on-chain governance to reduce clogging the public blockchain with discussions.

The discussions, initial votes and proposals are stored within the Politeia software and the final proposals and votes are carried out on the blockchain. Politeia is similar to GitHub in its method of tracking data. 

This form of on-chain governance prevents hard forks as a change can only be made when it reaches a certain consensus within the network. Once a consensus is reached it is automatically carried out. It also incentivizes DCR holders to take part in governance and means every individual has a say in the roadmap of the Decred network.

Decentralized Treasury

Decred has taken decentralization a step further by giving control over its development fund to the token holders of DCR. Normally funds for a blockchain are managed by a small group of invested individuals (often the creators or foundation). Similarly Decred had its funds initially controlled by the Decred Holdings Group.

Decred has decided to put the funds for future development under the control of a Decentralized Autonomous Organization (DAO). Once a proposal is approved by the stakeholders, users can release the funds using a smart contract (a self-executing agreement with the rules of the agreement written directly into the code). This is a novel method of managing funds and the Decred Project Leader had veto power initially for the transition.

Decred Use Case: Consensus Mechanism

Decred was created from the Bitcoin code but with a focus on avoiding many of the problems that they saw in Bitcoin. One aspect of the Bitcoin blockchain that they wanted to change was how the consensus mechanism worked.

Bitcoin follows a Proof-of-Work consensus algorithm and over time the highly intensive mining has led to specialized equipment being used and huge energy requirements. As a result only a small group of miners have the resources to do this and the majority of the mining has been consolidated into a few organizations.

Currently 70% of the mining is done by 5 mining pools. The 3 largest pools currently do over 51% of the mining. This is a major issue as combined they could carry out a 51% attack on the Bitcoin network. These mining pools have a huge amount of say and influence in the Bitcoin platform.

Decred was designed to decentralize the governance and block production methods in its network. Instead of using purely mining and Proof-of-Work, Decred has a combination of Proof-of-Work (PoW) and Proof-of-Stake (PoS).

Hybrid POW-POS

This hybrid POW-POS system works by miners mining a block using PoW similar to Bitcoin. After this 5 validators are chosen to verify the block. If at least three of the validators agree the block is added to the blockchain. This avoids malicious miners having all the power in block production and disrupting the blockchain.

Validators are chosen by a slightly varied PoS system. DCR holders can purchase tickets using DCR tokens to take part. After 20 hours the ticket becomes a part of the lottery in which 5 ticket holders are chosen to be validators. Validators can also join staking pools so if their ticket is chosen and they are not available at the time of the block the pool will validate the block for them.

This system reduces the computational resources needed for PoW systems and has greater security than a PoS system. One of the issues with PoS is the ‘nothing at stake” problem. Essentially users can validate an incorrect block with no repercussions as tokens are returned after staking and there is no cost to staking.

With Decred there is a cost to the staking involved as malicious voting can result in the staked tokens being burnt. The balance of miners and stakers also increases security.

Once a block is mined and verified, a block reward is issued. Of this block reward, 60% goes to the PoW miners, 30% goes to the PoS validators and the remaining 10% goes to a development fund. This incentivizes participation and contributes to the self funding of the network. So any holder of DCR can stake their tokens to receive a portion of the block reward.

Decred Use Case: Digital Currency

Like Bitcoin, Decred is designed to function as a digital currency. It has a focus on solving some of the scalability issues that Bitcoin faces. Like Bitcoin, it also uses the Lightning Network for off-chain instant settling of certain transactions. This vastly improves the scalability and increases the amount of transactions that can be carried out per second.

Overall it has most of the same advantages as Bitcoin – security, privacy, immutability, but with a faster transaction time (Bitcoin transactions can take between 10 minutes to an hour to settle while Decred transactions take about 5 minutes). The transaction fees are minimal too in comparison. Bitcoin transaction fees have been as high as $70 in the past year while Decred has stayed under $0.15.

It also has an advantage over traditional fiat currency as it is not limited by banking hours and conversion fees. So transferring money globally on a weekend using Decred will take a few minutes and have an extremely low fee. Using fiat currency, this transaction could take days and incur a high fee for conversion and transferring between institutions.

Decred: A Truly Decentralized Alternative to Bitcoin

Decred has seen steady growth in its passionate user base. While still at a much lower value than Bitcoin, Decred has seen many users move from Bitcoin to Decred because of its unique consensus mechanism and governance. It has similar uses as a form of digital money to Bitcoin. Most users who choose Decred over Bitcoin however do so because of the governance and decentralized nature of Decred. 

The token functions to provide a source of income for miners and stakers as well as facilitate a robust form of decentralized governance. Overall, the coin has the potential to grow in value as more users adopt it who are passionate about cryptocurrencies and the concept of decentralization.

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