In cryptoland “decentralized” doesn’t mean what you think it does

“Decentralization” is one of the words that is used in the cryptoeconomics space the most frequently, and is often even viewed as a blockchain’s entire raison d’être, but it is also one of the words that is perhaps defined the most poorly. — Vitalik Buterin — “The meaning of decentralization (2017)”

Vitalik’s article focuses on how decentralized a protocol can be; and he divides the term into three definitions: architectural, political and logical. However, the term decentralization has become so prevalent in the crypto space that it has stepped out of the protocol layer and we have started to see things like decentralized autonomous organizations, decentralized exchanges, decentralized applications and even decentralized digital democracies. In this article I will try to explain what “decentralized” means in each of those cases.

So I feel like first, we need to go to the broadest definition of “decentralization” possible to understand what is going on; one that will encompass Vitalik’s three definitions, and any other you want to throw in. In order to do that, let’s head to the Wikipedia, and judging by all the changes that the definition has suffered, I’d say that the current one has enough consensus:

Decentralization is the process by which the activities of an organization, particularly those regarding planning and decision-making, are distributed or delegated away from a central, authoritative location or group. — Wikipedia

So it seems that if something were to be decentralized its fate probably shouldn’t be decided by a small group or just one person. However, look at this news from a few weeks back:

“Coinbase Acquires Decentralized Exchange Paradex

Ok, so apparently a decentralized exchange can be bought, and as if that wasn’t enough, it only takes a private agreement between two people to do so. You can’t even do that with centralized exchanges such as Nasdaq or the NYSE, where, at least, you have to agree a price with the main stockholders.

So obviously, decentralized exchanges are not decentralized in the sense that most people would use that word. So why are we calling them “decentralized” exchanges? The reason is because in these exchanges the owner of the assets holds the private key and the exchange is just a facilitator that puts buyers and sellers in touch. In contrast, in “centralized” exchanges you relinquish your assets to the exchange, and they have the obligation to return them to you upon request, similar to what happens with fiat money when you give it to a bank.

Decentralized exchanges are superior to centralized exchanges in the sense that users don’t have to reveal their identity, they don’t have to be authorized to operate, there are no withdrawal limits and they don’t have to surrender control of their assets in order to trade them, but they are in no way decentralized. They are tied to a specific url that has an owner, usually only the founders have commit access to the project and if the whole development team goes to a deserted island with no internet there will be no more updates. So a decentralized exchange is mostly an oxymoron, since an exchange is by definition a centralized place where buyers and sellers come to meet.

And hey, as Vitalik points out in the aforementioned article, there is nothing wrong with centralizing some things, so maybe we can start using the term “permissionless exchanges” which seems a bit more accurate.

Decentralized Applications (DAPPs)

According to the Wikipedia “The definition of a decentralized application is still in development and under debate”. So as you can anticipate this definition is even muddier, and there really isn’t a consensus.

Two properties that most definitions agree upon:

  • The code is open source.
  • Some of the logic of the app is written and executed on the blockchain, therefore cryptographic tokens are necessary to use the dapp.

The problem is that these properties don’t necessarily point towards decentralization. Theoretically the fact that the code is open source means that anybody can fork the project, and make any changes they want to it. However, the truth is that almost always the founding team has an exorbitant decision power in the community, and seeing somebody forking away from the founding team is an extremely rare event and usually very contentious.

Regarding the fact that the logic is run on the blockchain, this means that anybody can interact with the dapp, making it more “permissionless” rather than “decentralized”. Because the reality is that most dapps are very centralized:

  • The founding team decides the initial token distribution, and usually keep for themselves a part of those tokens, which may range from 5% to 90% of them. (From my observations, I’d say that the quantity of tokens that the founding team keeps is inversely proportional to the projects probability of success.)
  • Even though the core functions of the dapp are written on the blockchain, most of the UI is on a webpage controlled by the founding team. This means, that even if the smart contract is permisionless, it may be useless without the permissioned web interface.
  • In the most successful projects the founding team, directly or indirectly, controls the intelectual property related to the project, and they even make you agree to their “Terms and conditions” before interacting with the dapp.
Before you use the App, the Smart Contracts, or the Site, however, you will need to agree to these Terms of Use and any terms and conditions incorporated herein by reference.
(…)
You acknowledge and agree that we (or, as applicable, our licensors) own all legal right, title and interest in and to all elements of the App, and all intellectual property rights therein. — CryptoKitties Terms of Use

So much for decentralization.

Decentralized Autonomous Organizations/Corporations (DAO/DAC)

This one is pretty tricky too. The term seems to have been coined, or at least formalized, by Vitalik (who else), but the definition is not at all clear.

The ideal of a decentralized autonomous organization is easy to describe: it is an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do. — DAOs, DACs, DAs and More: An Incomplete Terminology Guide

If we go to the Wikipedia it is a bit more specific, but still isn’t clear what it is referring to:

A decentralized autonomous organization (DAO) (…) is an organization that is run through rules encoded as computer programs called smart contracts.

This kind of organizations seem more hypothetical than real, but there is a least one example of a successful DAO: the Dash’s treasury system. Dash is a cryptocurrency that appeared in 2014 to make some improvements upon bitcoin. Its most interesting feature is that 10% of all the mining rewards go to a “treasury system”. This treasury system is a DAO in itself, and Dash holders are able to vote what to do with the funds that it holds. The DAO used these funds to pay promoters, developers, organize events and create a virtuous cycle that allowed for the price of Dash to increase, and for the treasury to have a larger budget.

Along these lines, Aragon is working on the creation of a framework for DAOs. Their vision is the following:

(…) intermediaries and third parties such as governments decrease the output of those [traditional] organizations by imposing restrictions and creating complex regulatory frameworks. Aragon was born to disintermediate the creation and maintenance of companies and other organizational structures.
- Aragon Development Plan [PDF]

In their eyes decentralization means that anybody should be able to start her own company, regardless of her background or the geographical distance between the founders. So as they point out in their own landing page, maybe the following would be more accurate than decentralize:

By making it possible for everyone in the world to organize, we are enabling a borderless, permissionless and more efficient creation of value.

But “borderless, permissionless, efficient, onchain companies” doesn’t sound as sexy as Decentralized Autonomous Organizations.

Decentralized Digital Democracies

So if we can have decentralized companies, why not decentralized democracies? Projects like Democracy Earth are trying to do to democracies what Aragorn is doing for companies, this is, create a framework for social governance based on the principles of Delegative Democracy. The truth is that Democracy Earth and most similar projects are mixing “delegative” with “decentralized”.

Protocols vs use cases

In summary, protocols can be decentralized, but the things you build on top of them, usually, are not.

The “decentralized” term has definitely caught on, so just keep in mind, that in the same way that nowadays “literally” can mean “metaphorically”, “decentralized” can mean “centralized”.


Originally published at exponent.capital on June 19, 2018.