In the wake of the FTX collapse, one term — central to the very ethos of Web3 — has found itself under the microscope: decentralization.
This concept has been the driving force behind Web3, and will continue to be the single most important element of the space as it matures.
By dictionary definition, decentralization means “the transfer of control of an activity or organization to several local offices or authorities rather than one single one.”
Crypto interprets this just a bit differently — Web3’s definition is all about giving control back to the majority, rather than leaving it in the hands of a minority.
Either way, the notion of full decentralization, although tantalizing, is a goal that can never be achieved in reality.
The question “at what point are you deemed decentralized?” has no true answer.
Sure, the removal of intermediaries sounds appealing. However, a multitude of endpoints factor into achieving decentralization. Contrary to popular belief, simply launching a DAO or storing data on a decentralized service provider are not the only boxes to check to become “decentralized.” Whether it be too few governance token holders or a financial backer with misaligned return on investment goals, decentralization often falls into a gray area — it’s black and white.
Decentralization is a spectrum. Projects can be more or less decentralized, but rarely, if ever, entirely decentralized. And that’s what Web3 needs to understand.
(Somewhat) decentralized autonomous organizations
The idea of decentralization is a fun goal to pursue. It embodies the promises of independence and freedom, which brought many people to Bitcoin to begin with.
Bitcoin itself emerged following the greatest failures of centralized banking, and decentralization has been the cornerstone of the space ever since. Decentralized systems claim to have no single point of failure and cannot enact changes unless the majority of participating parties agree.
In pursuit of this goal, many projects spin up DAOs as a way to prove that decisions are reached by consensus. One of the the first DAOs, aptly named “The DAO,” was created as a vehicle for investors to fund projects without a centralized point of control — representing the vanguard of a new era in business.
However, time and time again, DAOs fall victim to the age-old financial structure of those with the deepest pockets holding the most influence. In more than a few instances, DAO members with the most governance tokens simply bully a vote into passage. In some cases, members of DAOs have gotten together to boot out other members. Problems can easily arise even as they try to be solved: For example, MakerDAO aimed to set up a virtual board of directors, but critics then claimed that some members had outsized influence to push for proposals.
All of this does not signify a failure of the decentralization principle.
Instead, it just highlights the fact that decentralization isn’t black and white. It’s important to understand that projects can be somewhat decentralized without necessarily achieving full decentralization, as is the case with MakerDAO.
Businesses cannot operate entirely democratically, and neither can DAOs
DAOs are akin to Web3 businesses, and thus should be graded using the traditional business model. Traditional businesses do not, and cannot, operate according to a democratized model. Without a singular point of authority or expanded executive team, businesses would fail to progress in a meaningful way.
To that end, there are reasons why everyone’s voice does not count equally in a traditional business — some have more experience than others, some have more at stake than others. Processes like boards and committees were instituted to allow for more informed decision-making, which is more akin to how a DAO operates.
DAOs should simply weigh the voice of the people, and execute with the information they have at their disposal. Of course, the critical aspect of a DAO is their ability to make everyone’s voice heard. However, DAOs must be also seen as encompassing the board or committee structure too — a means to take stock of opinions before executing a decision.
This is perhaps not the most decentralized path forward, but it’s crucial that the vagueness of “true decentralization” does not inhibit efficiency.
Building toward greater decentralization
If decentralization is a spectrum and not a black or white achievement, the question then becomes: How do we skew toward greater decentralization?
Achieving decentralization goes beyond simply removing intermediaries and central points of failure: It demands improved process efficiency.
Decentralized storage providers and the prioritization of community are great places to start. These elements will not guarantee full decentralization, but help projects skew more toward that goal.
The concept of decentralization is integral to Web3, and it is up to projects to ensure that decentralization is pursued in an actionable, measurable way.
The extent to which more or less decentralization is reached depends on the amount to which controllable endpoints are decentralized. However, the notion of full decentralization still presents a far more challenging prospect than originally envisioned.
But while decentralization may always remain a spectrum, projects can still operate with the goal of becoming more decentralized to achieve progress and efficiency. The pursuit of full decentralization is fallible in that there is no point in which a project can ever be considered “decentralized.”
Projects need to weigh the opinions of their constituents and the logic of their decisions in order to move closer to decentralization, rather than moving forward with decisions for decentralization’s sake alone.
Projects must approach decentralization as a spectrum — not as a zero-sum game. And that’s ok.
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