Why Decentralization Matters
Decentralization is more than censorship resistance, it’s about rebalancing power
Last week we saw how permissionless ecosystems can unleash innovation. So, what’s new that made this possible?
In short, it’s the combination of the two following components:
- Openness: defined as unrestricted access to information enabled by open source code; and
- Inclusiveness: defined as including many different people in decision making enabled by division of governing power and distribution of resources.
The rest of this post examines the role of openness and inclusiveness in cryptonetworks and why they’re both necessary for permissionless innovation and consequently for economic growth.
Openness
Throughout history technological innovation starts off as open but as an industry matures it becomes proprietary so that value can be extracted. For example, the Wright Brothers were able to build the first airplane using publicly available knowledge provided by others also attempting to defeat the skies but as soon as they succeeded and had something of commercial value, the brothers put down patents and stifled aviation innovation for decades.
This is known as “cumulative innovation” and research shows that in certain industries (including computers) it blocks downstream innovation. Although slightly different, we’ve seen a similar scenario with the Web 2.0, which started as open source but became dominated by walled gardens where innovation is controlled by centralized gatekeepers. See Chris Dixon’s post on Why Decentralization Matters for more.
Therefore, openness is essential but, as history shows, it’s insufficient for sustainable innovation. So, what’s missing? Chris Dixon rightfully argues that it’s decentralization, which takes us to the next section where we’ll look at what specifically in decentralization enables innovation.
Inclusiveness
Assuming cryptonetworks are akin to digital economies with their own cryptocurrency, monetary policy, and governance structure, is there something to learn from history on creating prosperous economies?
According to the book Why Nations Fail long term economic growth depends on the inclusiveness of political and economic institutions where decision power and resources are divided amongst many allowing for checks and balances and providing an incentive structure for creative destruction. Extractive institutions on the other hand, extract wealth from others; they remove incentives to innovate and stifle anything that could threaten their ruling power. The book authors, Acemoglu and Robinson, illustrate this by comparing North and South Korea. Originally both countries were similar but as their governance structures diverged, South Korea became one of the richest Asian countries whilst North Korea one of the poorest.
We’ve seen the above play out in the ICT an media industries. In The Master Switch, Tim Wu shows how corporate moguls stifled innovation in the telephone, radio, television, and film industries because their power was threatened.
Now the Web 2.0 is heading in the same direction but cryptonetworks with decentralized governance mechanisms and distributed infrastructure have the potential to rebalance power. More specifically, it’s decentralization of decision making combined with decentralization of computing resources that are changing the rules of the game and that are enabling innovation.
Conclusion
In conclusion, openness and inclusiveness are essential for creating healthy and successful cryptonetworks. It’s for this reason that I’m excited about permissionless cryptonetworks and believe that they’ll ultimately win and create more value than any permissioned blockchain ever will.
From around the web
Chris Dixon on How Trust is the Best Lego Block (Unchained podcast) — Excellent listen. Chris Dixon, partner of a16z’s new crypto fund, shares his thoughts on how he sees the space evolve, why automating trust with blockchains is the best lego block, why incumbents will have trouble embracing cryptonetworks, and much more.
Governance (avc.com) — Fred Wilson, partner at USV, highlights how his partner Albert Wenger was right (albeit ~10 years early) about governance being the next big thing in software and examines what this means for crypto.
Vitalik Buterin: “I definitely hope centralized exchanges go burn in hell as much as possible” (TechCrunch) — Clickbaity title aside, this post contains a video and summary of Vitalik’s fireside chat at “TC Sessions: Blockchain” in Zug; covers topic of decentralization and more.
On-Chain Vote Buying and the Rise of Dark DAOs (Hacking, Distributed) — Fascinating read on how on-chain votes can be bought and how a decentralized cartel called a “dark DAO” can opaquely buy votes to hijack a network.
Crypto-incrementalism vs. Crypto-anarchy (Tony Sheng blog) — Compares the two schools of thought surrounding blockchains and explains why they can co-exist.
Paying to be Bought: A Token Network Acquisition Blueprint (Medium) by Andy Bromberg — Exploration of what a “friendly” network “acquisition” could look like. Provides food for thought but feels like “parity thinking” where old word mental models are applied to a new world. Network mergers will probably play out in a way we can’t yet imagine.
Dapp User Experience Audit (Medium) — Must read for anyone building a dapp.
Fun charts 📈
Weekly newsletter published internally at Google. The views expressed are my own and do not necessarily represent the views of my employer.
