Analysis of Key Elements of Decentralization in Web3 Protocols

Decentralization is the core innovation of blockchain technology and one of the most important characteristics of Web3 protocols. In order to more accurately assess and compare the level of decentralization of various Web3 protocols, industry professionals, policymakers, and regulatory bodies need to form a more unified and detailed understanding of decentralization. This not only helps in formulating regulatory policies that adapt to decentralized characteristics but also encourages Web3 developers to pursue decentralization, thereby maximizing the public interest of Web3.

This article defines three types of Decentralization and proposes relevant elements for each type, applicable to tokenized blockchain protocols and tokenized smart contract protocols deployed on the blockchain. We also provide two tables for analyzing the Decentralization components of these two types of protocols, to offer more specific and standardized definitions.

When analyzing the degree of Decentralization of blockchain protocols or smart contract protocols, it is essential to comprehensively consider all factors related to the protocol. The elements proposed in this article aim to provide a framework for such analysis.

The Significance of Decentralization

Web3 has ushered in a new era of "reading, writing, and owning" on the internet. The technology supporting Web3 has achieved "trustless computation", eliminating the reliance on centralized entities to access the internet and databases. This enables us to develop more complex and advanced protocols that provide the functionality of the modern internet while being truly owned by users.

Decentralization is a key feature of Web3 protocols, driving this paradigm shift. Decentralization will create a more democratized internet, achieving three important transformations: promoting competition, protecting freedom, and rewarding stakeholders.

1. Decentralization enables Web3 systems to have reliable neutrality and composability, resembling public infrastructure rather than proprietary technology platforms. Anyone can build internet businesses on it without the permission of the original protocol deployer or using centralized control interfaces.

2. Decentralization requires a broad distribution of control and participation rights in Web3 protocols, ensuring that the development and use of the network reflect the opinions of various stakeholders, not just the companies that created these protocols.

3. Decentralization allows for the design of systems that focus more on stakeholder capitalism, aiming to meet the interests of all participants more fairly. Web3 protocols and networks become a diverse design space, providing a more stable internet infrastructure that enables a wider range of stakeholders to build on it with confidence.

Decentralization Types

We can view decentralization from three different but interrelated perspectives: technology, economics, and law. All three perspectives are important, but there are often competing interests, presenting complex design challenges in maximizing overall decentralization and utility.

Technology Decentralization (T)

Technical decentralization mainly involves the security and structural mechanisms of Web3 systems. Programmable blockchains and autonomous smart contract protocols can support technical decentralization by providing a self-governing, permissionless, trustless, and verifiable ecosystem, thereby enabling value transfer.

For blockchain protocols, technological Decentralization is a highly challenging issue that requires balancing multiple competing forces. For smart contract protocols, this type of Decentralization can be relatively quick and easy to achieve by making smart contracts immutable.

Economic Decentralization (E)

Blockchain and smart contract protocols utilize native tokens, unlocking the potential for these open-source and Decentralization systems to have their own decentralized economy, allowing more people to participate and benefit from these decentralized ecosystems.

Through careful design decisions, builders of Web3 systems can facilitate the formation of a decentralized economy that exchanges and accumulates value from various sources. Decentralized ecosystems can leverage token incentives to encourage participants to contribute value to the ecosystem and more fairly distribute value to the stakeholders of the system based on their contributions.

The ongoing incentive balance among stakeholders can drive more value contributions to the entire system, benefiting everyone. This is all the benefits brought by modern network effects, but without the drawbacks of centralization and a closed economy.

Legal Decentralization (L)

The decentralization of law depends on whether the decentralization of a system eliminates the risks that specific regulations aim to address. Technically decentralized blockchain and smart contract protocols can eliminate risks associated with trusted intermediaries.

Technological and economic Decentralization can also eliminate other risks, including those related to the tokens of Web3 systems and their potential value. This Decentralization will eliminate the need to apply U.S. securities laws to token transactions, which could otherwise severely restrict the widespread distribution of tokens.

According to SEC guidance, legal decentralization can be defined as a Web3 system that is able to eliminate the potential risks of significant information asymmetry and does not rely on the degree of important management work by others to drive the success or failure of the enterprise.

Decentralization Elements

In Web3 systems that use local tokens, it is essential to comprehensively consider the three types of Decentralization: technical, economic, and legal. These types influence each other, and changing one may affect the other two.

We will break down decentralization into many factors that may affect it. These elements are categorized by type (technical, economic, and legal) and by category (computation, development, governance, value accumulation, as well as use and accessibility).

Decentralization is an evaluative process that is not based on absolute standards, but rather on a series of circumstances that includes all aspects of any Web3 system. The relative importance of factors will change depending on the Web3 system and the evaluator's objectives. Furthermore, the trade-offs between different types of decentralization may vary by project and individual.

I hope these tools can help Web3 participants build more decentralized projects while enabling decision-makers and regulatory bodies to design regulatory frameworks that recognize the power of decentralization to reduce and eliminate risks.