The term “decentralization” has become a significant and repeated buzzword in the Web3 space, as it is immediately associated with favoritism. Often, blockchain protocols, applications, and networks use the term to establish successful marketing tactics. It helps attract capital and users to an ecosystem.
The problem here is that many of web3’s top projects are not fully decentralized. To examine this, decentralization must be defined and separated from a distributed system. Many cryptocurrency protocols and Web3 projects are distributed – but not all are decentralized.
Define decentralization
Decentralization refers to a form of organizational structure in which decision-making power is delegated from top management to middle- or lower-seated parties. In the case of Web3 protocols, decision-making power of founders and developers is given to the protocol’s supporters, users, node operators and / or liquidity providers.
It differs from a distributed system. In a distributed system, the system itself is not concentrated, but rather distributed across multiple locations and entities – mostly nodes that secure a network. It has nothing to do with decision making, it just relates to the network infrastructure itself.
This is a very common misconception in many different projects’ functioning tokenomics and management models. To achieve decentralization, it is not enough to simply distribute a portion of the signs to the community or public. Those signs must also carry an equivalent voting power to adequately give the community a respected voice within the Web3 project.
Investigate Core Web3 Protocols
To examine which Web3 protocols are most decentralized, it is necessary to measure the level of decentralization versus the level of distribution.
Organizations / protocols can be graded in the following matrix:
There are four key quadrants emerging from the above matrix. They are:
- Concentrated & Centralized
- Distributed but centralized
- Concentrated but decentralized
- Distributed and decentralized
Factors and variables
It is important to recognize that the amount of variables needed to accurately classify protocols is extremely high. Distribution is related to how accessible and widespread a project’s core asset is – usually the cryptocurrency or token. In this study, any entities that are not subscribed and rely on equities or privatization are separately classified as concentrated and centralized.
The more valuable a protocol’s market capitalization and the number of unique containers, the higher the reward level of distribution on the matrix.
Decentralization is much more difficult as it combines several dynamic elements of a protocol, including:
- Token Distribution – It’s not just related to the number of unique wallets for a protocol, but the number of unique, actual containers of a project. Keep in mind that a single entity can control multiple wallets. So for example, Web3 projects launched with pre-extracted tokens for a group of seed investors, token distribution is obviously lower.
- Management and decision making – True decentralization lies in the amount of decision-making power that the average user has over a Web3 protocol. A key point to emphasize here – participation in management is not in itself sufficient to make a protocol decentralized. For most protocols, drawing ownership is directly related to voting power. An unequal distribution ensures a centralized management model.
- Protocol functionality – For many protocols, management is not necessarily extremely important for functionality and the average user’s ownership of a sign. If a protocol is immutable, which means that the core function cannot be changed by management, it has a higher degree of decentralization versus a project that can be controlled entirely by a sign.
Classification of Web3 projects by decentralization
Web3 protocols can be divided into one of three core categories. Those categories are:
- centralized
- decentralized
- in the middle
centralized
Projects that fail here are generally not accepted and protocol management is typically highly skewed towards large containers (usually early supporters). Many projects, such as a number of Layer 1 smart contract platforms, were initially funded by privatized token sales. This has enabled venture capitalist firms, hedge funds and institutional investors to acquire a significant portion of the outstanding signs of these projects prior to public launch.
On top of that, restrictions in management usually go hand in hand with these private token sales. A popular form of Proof-of-Stake (PoS) consensus is that of Delegated-PoS. This means that users who hold a token can choose to be delegated by validators on the blockchain, who are usually the largest token holders who manage nodes. This allows the majority of users to “participate” in management, but gives them little direct influence over the protocol.
This is similar to direct management models that delegate voting power based on the number of characters. Thus, the containers with the largest amount of tokens (usually early supporters, developers, etc.) have significantly more voting power than the average user.
There are quite a few Web3 protocols that fall into this category, including:
- Sunshine (SON)
- NEAR Protocol (NEAR)
- Algorand (SOMETHING)
- MakerDAO (MKR)
- Internet Computer (ICP)
Centralized exchanges (CEXs) also fall into the centralized category for obvious reasons. There is separation between Coinbase and other exchanges like Binance solely because Coinbase does not offer a real token.
Along with Coinbase are other corporations * & companies that use high (centralized) organizational structures such as:
- currency base
- Manzana
- Intel
- IBM
- Goal
decentralized
Web3 protocols that are more decentralized give users more control over how they use the protocol and to what decision-making power they have over its functionality. The two assets here that are most obvious are Bitcoin and Ethereum. Bitcoin is the world’s first peer-to-peer electronic payment network and is secured by Proof-of-Work consensus that requires computing power to mine new bitcoins.
Ethereum is the world’s most distributed and decentralized blockchain smart contract network – the original Layer 1. With thousands of nodes participating in network security and thousands more applications already built on top of its blockchain, Ethereum is the best example within the cryptoeconomics of a decentralized Web3 protocol.
Other projects that operate with a high degree of decentralization – regardless of overall acceptance – are the following:
- Chain link (LINK)
- The graph (GRT)
- THOR chain (RUNE)
- AAVE (AAVE)
- Ampleforth (AMPL)
- Uniswap (UNI)
- Polygon (MATIC)
in the middle
There are a number of projects that fall right in the middle in terms of their level of decentralization. There are a large number of variables that come into play, which makes it more difficult to classify these projects wholeheartedly in one way or another.
The majority of these projects used private funding to start, but are expanding decentralized functionality or assisting ecosystem development that provides decentralized features for everyday users. Project age, overall acceptance and market dynamics all play a role in these projects.
Examples of projects in the middle include:
- Polkadot (DOT)
- Cardan (ADA)
- Avalanche (AVAX)
- Axie Infinity (AXS)
- Decentraland (MANA)
Final Analysis
Web3 projects were placed on the original matrix above with respect to the following discussed factors:
- accessibility
- adoption
- Token distribution
- Protocol functionality
- Management mechanisms
The following represents the Web3 matrix in terms of distribution versus decentralization:
Keep in mind that due to the extreme amount of variables, it is difficult to measure each project accurately from the same lens. The above matrix is also not accurate to scale. Consider projects grouped together to be similar in terms of distribution and / or decentralization.
In general, the majority of web3 protocols follow or actively contribute to the larger Web3 / cryptoeconomic space. Some protocols do this in a much more decentralized way than others, such as Ethereum’s high rate of node participation versus Algorand’s more centralized management mechanism.
Web3 as a whole has a significant number of actively contributing projects that maintain appropriate levels of decentralization over the previous web2 iteration of the internet.