No One Agrees on What It Means. You Should Still Try and Evaluate Its Various Dimensions Anyway.
Five components of decentralization:
- Widespread developer contributions
- Roadmap for decentralized governance
- Lack of Concentrated Holders (via Wallets)
- Would function normally without creators
Given the uncertainty inherent in cryptoasset investing decentralization is an important factor to evaluate, the more decentralized a project is the more resilient it will tend to be.
Decentralization requires power and control to be dispersed across a wide variety of actors preferably located worldwide. Diversifying legal and regulatory exposure and increasing the potential impact from access to additional resources and potential users.
You’d like to see no developers with over a 20% share of recent commits. This is less realistic for small projects. The higher the share for the top contributing developer(s) the more key man risk the project is subject to.
Optimally, no more than 5% share for any one wallet. This number is a bit arbitrary and for smaller projects with recently raised funds unrealistic. Even Bitcoin has a relatively high degree of concentrated ownership. When evaluating wallets it’s important to understand the context of concentration along with the absolute numbers.
One wallet holding 50%* because it’s the treasury wallet of a project is less concerning than 5 wallets holding 10% if the 10% was the result of an insider pre-mine prior to public launch. So if you see concentrated ownership drill into the details to understand the dynamics behind why the funds are disproportionately held by a few accounts.
If a project is just getting started and there is a trend towards less concentrated ownership over time. This is less of a concern than a project that’s been out there awhile where the largest holders continue to grow their share of the outstanding tokens.
*Note the 50% would be concerning because no responsible project should hold all of its treasury in one wallet.
Would Function Normally Without Creators
The mechanisms used to govern protocols are continually evolving. At this point, there are no clear best practices. Numerous experiments continue to try and define sustainable approaches.
On the one end, you have Bitcoin, theoretically completely uncoordinated and decentralized from a governance perspective. Although practically speaking this is clearly not the case.
On the other end, you have private projects like Ripple where governance is conducted primarily by the entity initiating the project.
In between, you have the foundation governance model when a foundation is set up to support the project, with interested parties outside the foundation still in a position to influence its direction.
While no model is demonstrably superior at this point, projects that would continue to function normally without their creators are more decentralized and robust against failure.
Take Ethereum, clearly many token holders are comfortable with Vitalik Buterin’s outsized influence of Ethereum’s direction, viewing the breadth and depth of his contributions as a compelling driver of its value.
If the proverbial bus were to hit Vitalik tomorrow, Ethereum would be in a position to move forward due to its large ecosystem of contributors in a way many other founder oriented projects couldn’t.
The key is to be comfortable governance mechanisms exist ensuring the project can move forward even if its founder disappears, ala Bitcoin, which has seen minimal contributions from Satoshi since 2011.
Roadmap for Decentralized Governance
Given the increasingly competitive landscape for crypto projects, to get off the ground most projects require a certain degree of centralization in the beginning. The question becomes are the leads comfortable giving up power to the community over time. Is this commitment concrete with publicly available plans indicating how they intend to do so?
Augur is a good example of a project that communicated a clear plan and followed through on it. As initial development proceeded Augur’s lead developers had a kill switch they could use to disable its prediction markets. If it evolved in unexpected ways given the uncharted territory they were crossing trying to set it up.
Maintaining when development was far enough along they would burn the switch so Augur couldn’t be shut down no matter how things evolved going forward. The concern being if unsavory prediction markets were built out for things like assassinations, the availability of a centralized kill switch could be leveraged to shut the project down.
In July the Augur team burned the switch when the project went live living up to their previously announced commitment to do so once initial development was complete.
Now the project leads will continue to have outsized influence going forward.
This influence will only be maintained if they earn it by continuing to successfully build out the project.
If they would choose to abandon the project it’s out in the wild now and other standard bearers could step forward to continue the work if needed.
Complimenting technical efforts to decentralize a protocol are outreach efforts to bring additional users into a projects orbit.
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