Decentralization: Paradigmatic Shift in Representation and Responsibility
There is a prevailing misconception, both within and outside the blockchain industry, that the term “decentralization” is simply antonymic to “centralization.” Unlike the latter, which signifies a trusted authority responsible for facilitating interactions and ensuring accountability among its participants, most imagine the former to be a nebulous cloud of chaotic entanglements without rules or order. The cryptocurrency crash of 2018, fraudulent ICOs, and malicious exchange hacks have certainly added color to this imagery, but it lacks a holistic perspective in understanding what decentralization truly implies.
At Hashed, we have the privilege of working with founders and industry leaders zealously working toward a common goal of realizing a decentralized future through the network building of the protocol economy, a concept proposed by our CEO Simon Seojoon Kim. This vision is also a philosophical one as we believe that the evolution of democracy enabled by blockchain will allow us to be more in control of our affairs.
Before elaborating on what we mean, it is helpful to recollect one of the most fundamental principles of democracy: representation. And personally, I cannot think of anyone more appropriate to quote than Alexis de Toqueville, the author of Democracy in America (1835), especially given his meticulous assessment of democracy as well as his cautionary tale of its potential consequences:
“In America the people appoint the lawmakers and the executive; they form the jury which punishes breaches of the law. Not only are institutions democratic in principle but also in their consequences; thus the people directly nominate their representatives, as a general rule, choose them annually so as to hold them more completely dependent. Therefore, in reality it is the people who rule.”
Comparing the vestiges of nobility in his home country of France, Toqueville highlights how democracy in America is possible through both separation of power and representation. With respect to representation, the public votes and exercises their agency by supporting a candidate that best suits their views. And by holding their elected officials accountable during their time in office, a balance of power can be achieved between the people and those who represent them. Almost 180 years later, the principles of representative democracy continue to reverberate throughout most developed countries around the world.
Freedom in the World 2017, Freedom House
However, so much has changed since the time of Toqueville. For one, he could not have anticipated how computers would change the way we process information in terms of quantity and speed. To put this into perspective, it is estimated that by 2020 humanity will have accumulated about 44 zettabytes of data, equivalent to roughly 10 quadrillion copies of the Bible. Moreover, we now have supercomputers capable of parsing through 200 petaflops or 200 quadrillion calculations per second. In human terms, a single machine can now outperform roughly 6.3 billion people working every second for an entire year in a single second.
The exponential growth of available data and processing speed is a notable phenomenon in itself, but what matters more are the social and political consequences of this phenomenon that we are only beginning to understand. For one, while Toqueville could not have foreseen our technological advancements, he did righteously point out democracy as another form of power structure prone to new forms of subjugation. To illustrate, we need not go further than the recent Cambridge Analytica scandal in 2018 when personal data 87 million people were misused for election engineering purposes. The significance of this scandal is that it has demonstrated the vulnerability of today’s democracy: if access to our data facilitates manipulation, can we safely rely on our elected officials, let alone ourselves, to recognize and advocate for our best interests? And if data makes us controllable by the select few with access to previously unimaginable computing power, what checks and balances should we put in place to defend us from unwarranted acquiescence?
The answers to these questions will have to be interdisciplinary. At the moment, most countries are looking at legislative pressure, such as the GDPR in the EU and CCPA in California, to put in buffers to protect our digital independence. Unfortunately, the law is never a perfect system, especially against today’s technological behemoths. So in facing technology, the law must adapt even if it means embracing the very technology that has posed the problem in the first place.
Blockchain Governance: the SKALE Network
It would be naive to suggest that blockchain offers all the solutions, but it would be equally unfair to dismiss its potential since decentralization fueled by blockchain systematically favors more equitable divisions of power. In essence, the goal of decentralization is not the removal of a central authority, but rather a redistribution of power among trustworthy participants. Consequently, while decentralization diffuses concentrated power by allocating it to functionally separate groups, it also demands that the level of responsibility of these groups actually increase since they are directly held accountable for themselves. As the saying goes, with power comes great responsibility.
In blockchain, there are two ways to manage such responsibility: on-chain and off-chain governance. The on-chain governance institutes changes at the protocol level by encoding rules within, whereas the off-chain governance requires external coordination similar to political institutions in the real world. Practically speaking, however, even projects that are deemed sufficiently decentralized, such as Bitcoin and Ethereum, have yet to achieve the full extent of automation envisaged by their on-chain governance regimes. The current reality is that both on-chain and off-chain governance are needed.
Given that full decentralization via on-chain governance is yet an aspiration, most projects under development rely on off-chain governance models to transition into their decentralized objectives. Among various models that exist out there, SKALE Network led by CEO Jack O’Holleran has implemented a design reflecting the decentralized ethos of equitable division of power and representation. And for Skale, governance starts at the foundation level — the NODE Foundation — with the following Statutes:
“[The Foundation] is set up with the goal of supporting Open Source Software Development and the general progression of decentralized web infrastructure in particular to support the growth and development of the SKALE Network. The principles are to be aligned with those of decentralized networks that help self-sovereign systems grow and prosper. The system itself will grow to become a self sovereign entity without centralized control and will be controlled in aggregate by supporters, users, and builders of the network technology. Governance will grow to support the voices of users via fair chain based voting mechanisms. In summary, the foundation does not seek to take profit or rent from its users but enable the growth and development of the network so that the users can benefit from the system without control or profit motives from large public corporations.”
This excerpt highlights many of the values of decentralization previously mentioned. First, the Statutes clearly indicate that the foundation is a non-profit organization unmoved by “control or profit motives” embedded in traditional corporate assumptions. Second, it affirms the goal of any decentralize project in which it aims to become a fully “self sovereign entity” by first relying on the principles encapsulated within the Statutes. Last, it clarifies what decentralization means. Here, “without centralized control” does not imply an anarchy, but rather an aggregate of “supporters, users, and builders of the network technology.” Instead of a mere absence of a central authority figure, decentralization actually implies a collection of more empowered foci that are functionally divided within the community.
So how does functional division work exactly? Like traditional branches in government — executive, legislative, judicial — Skale employs Network Representatives encompassing the following:
1. two members comprised of builders of the SKALE Network
2. one member from the group of validators
3. one member of the group of token holders
4. one member from the developers of the decentralized applications
In turn, the “builders” are technicians and initial founding members in charge of developing the network. The “validators” are those who execute transactions on the blockchain, and they are integral to maintaining a public record that is verifiable and trustless. The “token holders” are citizens of the network who participate and demonstrate uses cases for the network. And the “dApp developers” are those who build applications on top of the network to diversify the network’s potential. Overall, these Network Representatives are those with a clear understanding of their best interests and united under the common mission of ensuring the success of the network.
The Network Representatives are also critical since the Foundation Council cannot alter or change economically significant parameters of the Skale protocol without their approval. And “as long as the token is not actively circulating and set up for on-chain voting, the Network Representatives will be directly responsible for making changes other than total supply which cannot be altered ever for any reason.” In other words, the Network Representatives are the true decision makers before full decentralization via on-chain governance is possible for Skale.
Furthermore, following the launch of the MainNet, the role of the Network Representatives shifts primarily to supporting on-chain voting. Historically, on-chain voting has suffered from low turn-out or biased positioning towards one segment of the market; however, Skale has overcome this issue by properly aligning the goal of the Network Representatives to streamline and optimize the process so that all sides are heard and the best outcome is achieved for the greater good of the network.
Looking closely at the makeup of the Network Representatives, we can also appreciate how the Skale governance structure allows for functionally distinct groups to collaborate. As a point of comparison, unlike the Libra Association (Facebook’s digital currency project) which only consists of validators, Skale’s pluralism in involving four communities amplifies their representation. In fact, one could argue that Skale’s model is closer to direct democracy because it removes the need for intermediaries necessary in representative democracy, for these communities directly own and exercise their agencies.
Decentralization and SAFT Negotiation
The overall alignment made possible by the principles of decentralization, namely equitable division of power, direct representation, and consequent responsibility, have significantly altered how we at Hashed approach our investment negotiation tactics. In the case of Skale in which Hashed has not only invested, but also committed to become one of the validators, the paradigm has shifted from an antagonistic position to one that is amicable since Hashed and Skale have mutual stakes in the success of the project.
For instance, unlike other project companies who we had to insist on a more robust language on the use of proceeds section, Jack and I worked together to create one that is both fair and reasonable, and reflective of the project’s true aim of decentralization:
“The Company will use the proceeds of SAFTs only to make significant investments to develop, grow, market administer, and launch a viable Network and subsequently to build a fulsome, decentralized network upon which users may use the Tokens and for general administrative purposes.”
Furthermore, to acknowledge their increased level of responsibility, Skale has favorably responded to our request to ensure its sustainable and long-term growth by promising a longer vesting schedule than that of the investors. In fact, Skale took a step further by volunteering to codify its vesting and lockup schedule into smart contracts and have these audited by a trusted third party on a good faith basis.
These two points alone, and the fact that we have negotiated them to be listed under the Company Representations section, speak volumes about Skale’s commitment to becoming a successful venture aligned with our investment thesis. And by redefining and reshaping our legal precedents, it is our hope that we will elevate the industry standard by constantly challenging and paving a new path towards a more decentralized, democratic future.
Perhaps Toqueville was right in recognizing something providential in our human endeavor to create a more equal society:
“The gradual unfurling of equality in social condition is, therefore, a providential fact which reflects its principal characteristics; it is universal, it is lasting and it constantly eludes human interference; its development is served equally by every event and every human being.”
And even technology such as blockchain.
