Demystifying Decentralization

Matt Snow
Matt Snow
Apr 13, 2020 · 8 min read

How Haseeb Qureshi is Challenging the Narrative on Decentralization

Source: Evan Andrews/CoinMonks

Outside of the word “blockchain” itself, the word that has probably witnessed the most inflation (in terms of eroding the value of its definition) within the blockchain sector may well be “decentralization.” Putting my neck out here for a minute — albeit much less so than Haseeb has— it is important to objectively question our own narratives and beliefs in the search for truth and with the objective of properly directing the energy/talent in the cryptocurrency and broader blockchain industry (coming from an outsider but avid proponent and user). This is very much so in line with the spirit of Bedrock Capital’s “narrative violations” thesis.

In this article, I will be breaking down some of the key concepts from Haseeb Qureshi’s piece in Unchained Capital titled “Why Decentralization Isn’t as Important as You Think,” which can be found here:

Decentralization as a Means To An End

Let me ask you this: why did Satoshi choose to make Bitcoin decentralized?Actually, it’s a trick question. Satoshi didn’t have a choice. Bitcoin had to be decentralized, or else it wouldn’t have worked. Before Bitcoin, every previous attempt to create Internet-native money either went bankrupt or was forcibly shut down by the government (see DigiCash, E-gold, or Liberty Reserve).

As Haseeb explains, decentralization in the case of Bitcoin — the most prominent and arguably most important cryptocurrency — was simply a means to the end of dethroning the currency from the state. Decentralization was not directly a critical piece of the network’s architecture.

Source: MIT Tech Review

Bitcoin Thought Experiment

Haseeb proposes an interesting thought experiment around Bitcoin — imaging a parallel universe in which everything about Bitcoin was the same (in terms of software, the appearance of UTXOs, the specific lines of code) but without a decentralized network or consensus. In this universe, Bitcoin would rely on one big centralized database.

He proceeds to explain that in terms of functionality, from a user experience (UX) perspective, nothing about the network would be too different. The supply cap of 21 million Bitcoins would still make Bitcoin an extreme form of hard money. The only weakness would be that the centralized miner could be shut down by a government. As he explains further:

Satoshi made Bitcoin decentralized to solve a specific problem: that previous forms of Internet money kept getting shut down. A decentralized form of money is resilient to insolvency, attack, or censorship. But decentralization wasn’t itself the point. It was just a means to an end. The point was to make a form of Internet money that worked! To Satoshi, decentralization was valuable insofar as it mitigated some other fundamental risk: censorship, platform security, corruption, etc. It’s the properties decentralization gives us that we care about, not decentralization itself.

That last line is the real kicker. The point is not to disparage the benefits from Bitcoin’s decentralized structure, but to be critically honest about the relative value of a network’s sub-properties. In the case of Bitcoin, Haseeb’s logic is perfectly clear — it is the means to an ends not the end in itself.

“The Decentralized Version of X”

A Bad Pitch

In the venture capital world, many VCs like to joke about hearing pitches of companies that claim to be “The Uber of X” which can be an indication that the VC’s time could be better spent doing literally anything besides hearing the pitch.

As a crypto/blockchain focused VC at Dragonfly Capital, Haseeb explains that the newest iteration of this fiasco is hearing pitches that strive to be the “Decentralized Version of X,” indicating that founders do not understand the lack of underlying network value derived from decentralization itself (a “first order consequence”) versus the indirect benefits of a decentralized network (a “second order consequence”). Haseeb explains this further through an analytical framework credited to Nathan Wilcox and Tony Sheng.

The “Decentralization Matrix”

Source: Haseeb Qureshi

Haseeb explains that decentralization is in the lower-right quadrant, as a both global and emergent property.

[Lower right quadrant properties] are the most insidious properties; they apply to everyone, but nobody experiences them directly

Bitcoin’s decentralized network does in fact apply to everyone — it has real world consequences for merchants, savers, investors, and other users of the Bitcoin ecosystem — but it cannot be felt directly. You cannot buy or spend Bitcoin and say “that felt decentralized,” which again goes back to the Bitcoin thought experiment mentioned earlier.

Decentralization and DeFi

Source: theblockcrypto

There are many implications of the over-hyped nature of decentralization within the cryptocurrency (and broader blockchain) sector. Haseeb dedicates much of the article to exploring this, but one particularly striking example is in Decentralized Finance (or “DeFi”). DeFi has received increasing amounts of focus, developer talent, and venture dollars in past few years.

At the core of DeFi is the use of decentralized apps (dApps) to create an open financial infrastructure, primarily for the use of smart contracts, which (in the simplest terms possible) are automated contracts that can execute if/then functions without requiring a trusted third party. However, as Haseeb explains from the many illusions of value derived from decentralization, this whole “movement” may be relying on fundamentally flawed underlying assumptions.

Decentralization is a global, emergent property. These properties are almost impossible to compete on…Decentralized Finance (DeFi) is commonly claimed to be more secure because it’s “decentralized.” By this they mean its code is implemented in smart contracts directly on a public blockchain. Any normal programmer would retort: wait, why would it be secure just because it’s written in code? And of course, nothing about DeFi inherently provides security! In fact, a single bug in these programs could wipe out all of the money inside. Just look at the 0x hack, where an attacker could have stolen all of the money in the system! Then of course there is the DAO hack, the Bancor hack, the bZx attacksThere is nothing at all inherent about DeFi that makes it secure.

To be clear, I am not a developer, nor do I have any pretenses of becoming one. I also have a clear bias towards Bitcoin that I cannot hide. But I take pride in challenging myself critically on my own assumptions and it seems clear that there is at best, misplaced perception of value in “decentralization,” and at worst, a sort of cult-like mysticism. And with over $1 billion locked up in DeFi contracts as of February 2020, there is certainly a non-zero-dollar value of questioning the underlying assumptions of decentralized network designs.

Developer Incentives


But here’s the problem: developers don’t care about “decentralization” either. When a developer is evaluating whether to use Linux, npm, React, or Twilio, they don’t give a damn whether they’re decentralized or not. Developers care about risk. They want to minimize technical risk. They want to minimize the risk of their APIs dying on them. But they also want to minimize the risk that their users migrate away from the platform (or never show up to begin with); they care about the risk that the underlying tech breaks; they care about the risk that the tooling degrades or never improves, and so on.

As Haseeb explains, the common rebuttal that developers are the ones who will shape the future (and push a decentralization-focused world of DeFi) doesn’t account for the actual risks that developers face. There are serious trade offs for a developer deciding which project to work on that will impact their professional careers. Working on a DeFi platform where their code may fail and thousands or millions of users could lose their money is a pretty risky gamble. This is not to discredit any of the brilliants devs working on DeFi projects, but simply to illustrate the faulty logic used when over-hyping “decentralization” as some utopian end in-and-of itself.

The Decentralization “S-Curve”

Source: Haseeb Qureshi

Your early attempts to decentralize don’t accomplish anything until you’re decentralized enough to not be censored…Then, after you climb up the S, decentralizing the governance, the token ownership, the admin hooks, you hit a plateau where the system is basically censorship-resistant…any change at the margin doesn’t actually change the properties of the system that much, for anyone…most of the large decentralized networks are closer to the plateau than most people like to admit…there are diminishing returns to decentralization. This is obvious marginal analysis, but people seldom apply this to the concept of decentralization itself.

The S-Curve brilliantly portrays the trade offs of using a decentralized network design. There is an optimal point of decentralization, beyond which diminishing returns come into play. Again, I’m no developer, but I challenge any reader to poke holes in this logic (just don’t go blowing up Haseeb’s feed).


If you enjoyed this, I highly encourage you to read Haseeb’s full article for yourself (also available in a convenient audio feature). Additionally, if you’re new to the space like me, you should take advantage of Haseeb’s free course, “An Introduction to Cryptocurrencies.”

Through a series of nine modules (two of which have already been released) this course offers an unparalleled opportunity to accelerate the learning curve. I’ll be working through it myself and we should all be extremely grateful that it’s not behind an expensive paywall.

Further Reading

Ethereum Co-Founder Vitalik Buterin provided his own take on decentralization. In fairness, take note that this was published in 2017 and Vitalik may have developed more nuanced views in the three years since then.

Andre Cronje recently published a fascinating piece on his experience building for which may validate some of Haseeb’s points on developer incentives.

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Matt Snow

Written by

Matt Snow

Investor at MassVentures, BCO Board Member, & Stanford UIF Alum. Previously at Greenspring Associates & JKS Ventures. Elon ’18. | All opinions my own

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +792K followers.

Matt Snow

Written by

Matt Snow

Investor at MassVentures, BCO Board Member, & Stanford UIF Alum. Previously at Greenspring Associates & JKS Ventures. Elon ’18. | All opinions my own

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +792K followers.

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