Path To Decentralization
Reflections on transitioning power from centralized inc. to decentralized community
Several posts on governance got me thinking about the path to decentralization (if you’re wondering why decentralization is needed, read this past post):
- Blockchain Governance 101 (Medium) by Vlad Zamfir from Ethereum;
- Blockchain Governance (Medium) by Peter Zeitz from 0x.
The landscape is fragmented. On one hand already launched networks like Bitcoin and Ethereum are figuring out how to coordinate decisions amongst various stakeholders without any formal process. On the other hand a new generation of centralized and privately funded projects with a plan to open up and decentralize are trying to figure out the best forward in a fast-paced ever changing technical landscape and uncertain regulatory environment.
The two posts above represent both of these angles:
- Vlad Zamfir (from Ethereum) takes a general approach looking at governance as a coordination and decision making process problem for public blockchains;
- Peter Zeitz (from 0x) looks at governance as an accountability problem that needs to be managed such that voting incentives are aligned amongst various stakeholders. He looks at how decisions on a protocol impact other layers and implications for end users who interact with the full stack. Zeitz also explores the tension between funding early stages of a project via investors vs. doing what’s right for the end users i.e.the ultimate token holders and beneficiaries of the protocol.
A previous post already touches upon governance for launched networks, so this one will focus on yet-to-be launched projects that plan to decentralize.
Everyone agrees that projects should do what’s right for stakeholders and design token economics in a such a way that all are represented. The challenge lies in figuring out how to best roll-out and balance power taking into account the numerous stakeholders: investors, nodes responsible for running and securing the network, core developers contributing to the protocol, app developers building on top of the network, end users (e.g. gamers, traders, etc.) and more.
The table below summarizes at a high-level the stages through which a network evolves and key stakeholders along the way.
Looking at the above, the contentious part lies in figuring out when a project should start handing over to the community, who in the community should have decision power, and what’s the best way to transition power? 0x for example are looking to transition power using Token Curated Registries (TRCs), then allowing the community to veto proposals made by the 0x team, and then move to liquid democracy (source).
Another aspect to consider is the role tokens play in the ecosystem: are they just a governance token or do they also hold value? Projects like MakerDAO and 0x that have governance tokens need to pay extra attention to who own their tokens, ideally these token holders should also be users of the network, whilst projects that have tokens with value can use economic incentives via proof-of-stake type of mechanisms to reach network objectives. The risk in this case is that investors with too much power may override other stakeholder preferences (e.g. node or developer preferences). Networks that have a lot of pre-minted tokens also need to be mindful of implications at launch. They need to ensure that not just investors but also nodes (e.g. miners) and early stage adopters have a say in how the network is governed.
As for rewarding developers and initial users, we haven’t yet found a compelling way compensate and incentivize them. In the past early adopters were also investors and were rewarded for taking financial risk but with markets going private that dynamic has changed. Airdrops are a first attempt at incentivizing users but they don’t necessarily attract the right kind of people because they haven’t had to invest anything (e.g. time, money, or something else) to receive tokens. Airdrops could just as well attract speculators that will hodl.
To conclude there are many moving blocks and the key to success will be learning from each other and remaining agile where and when possible.
Note: At this stage I have more questions than answers so if you have any thoughts on what this could look like, reach out on Twitter @clairebelmont.
From around the web
Conversations Versus Interviews (avc.com) — Recorded conversation between Fred Wilson from USV and Chris Dixon from a16z crypto where they discuss and share thoughts on the current state of things in crypto-land.
The Myth of The Infrastructure Phase (USV blog) — Argues that to build good infrastructure we need apps that inform infrastructure requirements, which in turn creates new app opportunities, which require new infrastructure, and so on.The process is iterative. Post highlights some historical examples.
Twelve reasons I’m bullish about Ethereum today (CryptoNYC) — Highly acclaimed posted that provides 12 reasons why Ethereum is here to stay and will play a dominant role in the Web 3.0 ecosystem. Growth of educational material, significant funding, and strong community are some examples.
Bitcoin Core Bug CVE-2018–17144: An Analysis (Medium) by Jimmy Song — In-depth analysis of one of bitcoin’s biggest bugs.
A Distributed Systems Primer For People That Don’t Have the Time (Sekniqi blog) — Short clear explanation on types of consensus models for distributed systems and highlights where bitcoin falls within the landscape.
A Simplified Look at Ethereum’s Casper (Medium) by Jacob Eliosoff — Visual explanation of how Casper, Ethereum’s Proof of Stake mechanism, works. Well articulated and easy to follow.
Smiley corner 😄
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The views expressed are my own and do not necessarily represent the views of my employer.
