Web3 decentralisation: The path to a secure future or recentralisation in sheep's clothing?

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Technology

Peter Moulton

I had an interesting debate with Bishal Sapkota, Sensand’s Head of Engineering, about the current state of decentralisation recently. An article titled Web3 by Professor Galloway—which aimed to poke holes in the decentralisation narrative of Web3—is what sparked our debate.

Prof Galloway made some pretty big accusations, saying: the aim of decentralisation is centralisation in disguise, web3 is nothing more than an iteration of web2.0 and Silicon Valley is taking over the world. And no, I’m not joking about that last one. After reading through the article and chatting with Bishal, I wanted to share my take on decentralisation and web3.

The problems with innovation

It’d be nice if innovation was as easy as snapping your fingers, but it’s not. Things don’t always work—innovation can be slow and sometimes ends in implosions. But when innovators get it right, new technology quickly feels natural, like we’ve always used it. And the solutions seem obvious in hindsight.

And in the middle? It’s dicey

Hundreds—if not thousands—of companies imploded during the 1999/2000 dot-com crash. In response, the finance media played up the “told you so” narrative, questioning the value of tech and advising people to only invest in “real” companies—those with physical assets and brick-and-mortar stores like Kodak…

In that dire moment, everything they said seemed sensible. But—again, with the benefit of hindsight—we know technology itself wasn’t a fad. Some of the biggest organisations in the world today are tech companies, and most of them became household names after the dot-com crash. That’s why it’s essential to look at technology’s long-term potential, rather than zooming in on what’s happening right this second.

Source: Prof Galloway

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Why people are wary of decentralisation

The main argument against decentralisation is that a handful of prominent players own an outsized market share. Prof Galloway claims that 2% of wallets own 95% of Bitcoin and insiders plague the crypto markets.

He also called out ConsitutionDAO, (a project that aimed to own an original copy of the US Constitution) for not having a working decentralised governance model. Then, he argued that democratising governance will kill intelligent, long-term decisions. He cited Andreessen Horowitz (a16z) as a player that wants to control the market, arguing that their investments in “companies that build centralised, toll-taking platforms” (such as OpenSea and Coinbase) are another example of decentralisation’s failure. Finally, he threw in the most extraordinary claim of all: that Silicon Valley aims to take over the world. If you ask me, this sounds a lot like the post-dot-com-bubble warnings we heard back in 2000 but applied to crypto.

Decentralisation isn’t recentralisation, nor the end of the world

First, early investors in innovative projects are obviously the ones who’ll become major market players—a.k.a. “whales”—if their plays come off. The truth is, without these whales, many of these projects wouldn’t have been able to create the value you see today. Becoming a whale is the payoff investors get for betting on something that had a tiny chance of success.

But that doesn’t mean that the ecosystem isn’t decentralised. Decentralisation is about structure, not about who owns how much of what. It’s about changing the incentive model and the capitalisation mechanism—linking financial outcomes to utility (e.g., having a token for spending and use). And because of the nature of decentralisation, anyone can invest in the cryptocurrency market to balance larger positions.

While early investors may have outsized positions, this doesn’t mean they get to control the project they’ve invested in. Some governance models use methods other than attributing one token to one vote, such as vote-per-wallet and quadratic voting. Plus, there’s always the chance that the projects the big players invest in go bust… like Terra!

Man, it’s tough being an investor in this market if you’re not allowed to invest and get a right sized reward for the risk. I’d wager that the vast majority of funded web3 projects won’t survive, but the ones that do will create the next trillion-dollar projects. If venture isn’t going to underwrite the risk of that innovation, and share in the subsequent rewards for the winners, then who will? Pets.com and Webvan didn’t make it, but I reckon that Amazon and Google (and their investors) did alright.

Packy McCormick of Not Boring also had an interesting rebuttal to Prof Galloway’s points:“Arguments around specific attributes of web3, or of any network, like centralization or the existence of bad actors, are besides the point, like arguing that the internet is bad because Facebook or 4chan exist.” Source: Packy McCormick

Other significant points Packy McCormick raised:

Like the dot-com analogy above, Web3’s value doesn’t lie in what it can do right now. It’s about the potential benefit it can create in the future. If everyone gave up during the tech bubble, we wouldn’t have Facebook, Google and so many other companies that are responsible for innovations we use each day.

Decentralisation doesn’t have to be an all-or-nothing proposition. Some things may work better with centralised governance, while others function better with decentralisation. The point is to give people the opportunity to decide which fits best. Bitcoin ownership concentration isn’t as bad as Prof Galloway claims. The 95/2 statistic the professor shared didn’t account for exchanges like Coinbase, which hold client funds. In reality, the top 2% own around 71.5% of Bitcoin.

Reputable DAOs have working governance models, and ConstitutionDAO would have been one of them. The Verge article Prof Galloway referenced disproves his point: in it, Jonah Erlich, a core member of Constitution DAO, acknowledged the problem of whales and highlighted some possible decentralisation strategies to minimise their influence.

And finally, one of my favourite points, a16z isn’t prioritising centralised investments or taking over the economy. The venture capital firm also invested in Uniswap, a decentralised crypto exchange, alongside their centralised bets. Plus, the VC firm is a big proponent of regulation in this space.

a16z’s Web3 policy recommendations. Source: a16z

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The crypto ecosystem and decentralisation are still in early days

Now, I don’t know if we’re in the middle of a bubble as I write this. But I think that if we are in a bubble and it does pop, the phoenix of innovation will eventually rise from the other side. Remember, innovation doesn’t always work the first time around. But when it does, it will seem so obvious that we’ll all be asking, “Why didn’t I think of that?” Plus, the investors down at a16z are smart. If they’re confident enough to invest in something, I’m paying attention to it. And if they do end up being whales, there’s plenty of capital left in the world to dilute their positions and balance the market, especially if they want to take their profits one day!

But hey, this is just my view on the great decentralisation debate. What’s yours? Let me know in the comments. And, of course, this is just my opinion, it’s not investment advice.

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