Decentralization For Web3 Builders - Principles, Models, How

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overview

The success of these [decentralized] systems will depend on their ability to deliver the actual benefits of decentralization, including more equitable ownership among stakeholders, reduced censorship, and greater diversity. But the more familiar models of decentralization used for DeFi

• this is a good point. Crypto has been particularly successful in the finance space because, in a sense, it was built for that — in a nutshell: cryptocurrencies is money for internet natives and more general characteristics of decentralized systems (composability, verifiable, transparent, etc.) are yet to hit their crtical mass in terms of use cases.

The design challenge of web3 decentralization

• there are 3 main “types” of decentralization: technical, economic and legal
• On technical decentralization:

The core innovation behind programmable blockchains is that they can support technical decentralization by providing a permissionless, trustless, and verifiable ecosystem in which value can be transferred — and, more importantly, upon which web3 products and services can be built.

• On economic decentralization:

The advent of programmable blockchains and digital assets unlocked the ability of open source and decentralized systems to finally have their own decentralized economies (i.e., autonomous free-market economies) […] This is a critical breakthrough. The open source and decentralized protocols of previous generations of technology like web1 (such as http, smtp, ftp, etc.) stagnated because they lacked the ability to incentivize ongoing development and/ or further investment of critical resources back into their systems. This left fertile ground for the centralized companies of web2 to emerge and succeed as they were able to leverage their efficiency and resources to build products and services that surpassed those of web1.

• Interesting that the framing here is saying “web2 exists and was able to become as powerful as it is, because of web1’s inability to efficiently monetize its protocol”. I’m not really sure that’s quite an A → B situation though
  • If web1 protocols had the monetization mechanisms of web3 (i.e. crypto), then we’d surely have better-funded open source projects, but I’m not convinced others wouldn’t have still had the incentive to abstract away those protocols and still build powerful applications with aggressive take rates from a consumer’s perspective.
  • side note: I want to be aware of the assumption being made here that web3 will eventually “surpass” web2, like it’s a logical next step. While I’m still largely an advocate of these decentralized systems, I’m still not convinced they are necessarily competing. related: web3 will not replace web2
• On legal decentralization

To start, U.S. securities laws are generally intended to create a “level playing field” for securities transactions by limiting the ability of those with more information from taking advantage of others with less information. This is the principle of information asymmetry, and U.S. securities laws typically seek to eliminate asymmetry in certain securities transactions by applying disclosure requirements. […] Based on the above and SEC guidance, we can surmise that if a web3 system can (a) eliminate the potential for significant information asymmetries to arise and (b) eliminate reliance on essential managerial efforts of others to drive the success or failure of that enterprise, then the system may be “sufficiently decentralized” such that the application of U.S. securities laws to its digital assets shouldn’t be necessary.

• This generally tracks with the caveat that instead of “application of US securities law isn’t necessary”, I think it’s more like: “US securities law should broaden its definition to incorporate digital assets which (if done right) can technologically enforce”.
  • It’s not that we won’t need any human intervention / “managerial efforts” but that we now don’t need to rely on it for specific financial agreements being made during business
    • e.g. a securities law that legally forces a business to disclose its earnings to all shareholders/investors can now be replace with transparent, verifiable (on-chain) business models
    • OR e.g. a law that forces disclosures to use certain language to convey reasonable expectations of profits can now be replaced with audited smart contracts, public treasuries, etc.

How the components of web3 systems can be used to achieve decentralization

• technical decentralization promotes legal/economic decentralization:

by enabling transparency — for example, anyone can currently view where the most digital assets have been deposited, and where the most fees are being earned in Ethereum’s DeFi ecosystem;

• I think, currently, this one is a little overstated. We have theoretical transparency, but not practical. Sure, everything on Ethereum is on https://etherscan.io but what good does that do for a broader non-crypto audience?
  • I would love to either build or contribute to a data aggregation tool that summarizes and highlights the important things about a protocol. Currently, the information is searchable, but never really systemically translated into a clear economic/legal framework that tells you whether or not a project is doing something shady, helps visualize where treasury money is going, etc.