Finding Balance Exploring Decentralization in Web3

Harmonizing Web3 A Journey into Decentralization and Balance

When talking about Web3, “decentralization” is a key feature that is frequently mentioned. However, we must approach the complexity of this feature with cautious rationality, rather than blindly pursuing it. Decentralization involves a dynamic balance, and the optimal level varies depending on the project’s development stage.

Web3 projects are difficult to achieve complete decentralization from the beginning. They usually go through a process of evolving from centralization to decentralization, but achieving complete decentralization in the end may still be an ideal rather than a reality. In fact, each project retains some centralized elements throughout its lifecycle, as these elements may have practical value in different stages of development.‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍

This complexity not only requires project teams to think carefully, but also requires legal regulation and community involvement to ensure the long-term sustainability and success of the project.

‍‍‍Today’s topic is decentralization. We are currently in the process of decentralization at the Forta Foundation, which made me start thinking about when decentralization becomes an advantage and when it becomes a hindrance.

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In Web3, the two most common forms of decentralization are decentralized infrastructure (i.e., hundreds of nodes, each operated by different entities) and decentralized governance (i.e., no central decision-making authority). Today, we will focus on discussing the latter.

Finding the right balance is crucial for long-term sustainability. Now, let’s delve deeper into this topic…

The Decentralization Spectrum

In the Web3 field, decentralization often means that there is no single authoritative institution that has sole control over everything, as is typically the case with companies led by executive teams. So, does the absence of this central entity mean decentralization? Not exactly. In fact, decentralization is not a binary concept; it exists on a spectrum.

On one end is the manifestation of centralized decision-making, represented by CEOs or even dictators. On the other end is decentralization characterized by cooperation or democracy. The wording used in the previous sentence was intentionally chosen because businesses and countries are the most easily understandable examples for dissecting the complexity of decentralized governance.

Most mature Web3 projects fall somewhere in the middle of this spectrum. Here, there is no clear CEO or executive team that dominates decision-making; instead, they rely on a small group of independent collaborators and beneficiaries.

It is important to remember that no project is completely decentralized from the beginning. Otherwise, things would be hard to get moving! There must be someone or some people to push things forward. MakerDAO may be the closest project so far to achieving decentralization from the start, but it also faced many challenges in the early stages.

However, for many, decentralization is the goal they are pursuing, and there is a relatively mature path to transition a project from initial central control towards decentralization.

There are many factors and features to consider when determining the degree of decentralization for a project. Here are some incomplete examples:

1. Which decisions need to be made through token holders’ voting?

2. Who can participate in the decision-making process?

3. How is ownership of the tokens distributed?

4. What influence does the founding team have in making decisions?

5. Who has the power to modify, pause, or shut down this protocol?

6. Is there a multi-signature with special privileges?

7. Who are the people involved in the multi-signature?

8. Who is responsible for resolving security issues?

9. How is the treasury managed?

Today, the transition from centralization to decentralized governance often involves introducing governance tokens, making things more complex. Most projects do not have a clear exit plan; they simply issue a token so they can say, “Look, we have become decentralized!” They hope to avoid scrutiny from regulatory bodies, and therefore rush into this change too early.

However, this transition is not without trade-offs, and projects should be careful and develop wise strategies when deciding when, if, and how to transition.

Weighing Pros and Cons

There are pros and cons to consider at both ends of the decentralization spectrum. Centralized operations are susceptible to regulation, corruption, and single points of failure. On the other hand, decentralized operations may sacrifice some efficiency and speed.

As a general guideline, projects operated by traditional companies tend to be more efficient and flexible than projects with decentralized governance structures because decision-making power is concentrated in the hands of a few individuals who are usually most capable of making such decisions.

True decentralized governance brings a harsh reality where decision-making is reduced, and each decision takes longer to complete. We have seen this situation repeatedly in the DeFi space.

Although there is no concrete data to prove this, my personal feeling is that in Web3, most of the innovation happens before a project achieves decentralized governance. Afterwards, the community seems to adopt a “let’s not mess this up” attitude.

Each project’s goal should be to find the optimal position on this spectrum while recognizing that the optimal position may change as the project evolves.

As an example, a brand-new DeFi protocol would benefit from more centralized control in the beginning, as the frequency and importance of decisions to be made are much higher. You want to maintain flexibility, agility, and control over the vision.

Then, fast forward a few years, the once brand-new DeFi protocol has now become a foundational protocol supporting a whole new application ecosystem. At this stage, the protocol is more likely to benefit from decentralized governance, as predictability and reliability become crucial. It’s difficult to build a stable ecosystem on top of it if constant changes are being made.

Ethereum is a great example of this. It has flourished precisely because it has made few major changes.

As I realized while writing, this aligns perfectly with the Web3 technology stack. As you move up the stack, each layer becomes less reliant on decentralization.

Can some matters be centralized?

The higher you are in the technology stack, the less you benefit from decentralization.

This means that user interfaces, data aggregators, and wallet applications are best managed by companies rather than communities. Honestly, users should want it this way.

I need an outstanding user interface and user experience, timely technical support, and most importantly, accountability when problems arise (because it drives behavior as much as incentives).

I’ve come across some projects recently that have stated from the start, “We’re taking a centralized approach to build our product,” and it’s been refreshing to hear. To me, it indicates that they have a certain self-awareness of their optimal position on the spectrum. It also tells me that they are committed to finding a true business model, rather than relying on tokens.

Overall, centralized and decentralized projects can coexist harmoniously.

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