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Components of Decentralization Design

In this article, we will explore the components of Decentralization in the Blockchain Ecosystem.

There are primarily 3 components:

  1. Infrastructure
  2. Tokens or Coins
  3. Governance

Infrastructure

Mainly consists of the Blockchain Network and Smart Contract protocols. They can have the following features:

  1. Transparency and Open Source: Anyone is free to view the data, use or test its functions
  2. Interoperability: Retain control and relay information from one infrastructure to another easily
  3. Composability: Enables interactions between elements thus allowing users to build

Thus shifting the system’s value from its tech stack to its network or community.

Tokens or Coins

These are digital assets that a user owns. They drive the sustenance of these decentralized economics by enabling behaviour of multiple stakeholders within these ecosystems. They provide economic incentives to people who are powering the decentralization by running nodes and ensuring robust consensus by mining the blocks. (Like a flywheel or network effects)

For example: The digital assets deposited in Ethereum’s DeFi protocols grew from ~ $600 million to ~ $150 billion from 2020 to 2022. It shows how developer activity yielded products and services that attracted users, which then attracted more developers and additional products and services, which in turn led to further user growth.

Governance and token adoption become a strong moat for the economies against their competitors in an ecosystem where the code is open source and replicating is easy.

Thus shifting the system’s value from its tech stack to its network or community.

Governance

Defining governance is important because it decides the future course of that asset. Governance is established in the form of Decentralized Autonomous Organisations, famously known as DAOs (Simply put, they are a set of technically controlled processes, aka computer code.). They help in:

  1. Distributing technical control thus reducing the possibility of single-party control
  2. Ensuring meaningful participation from all stakeholders through voting rights
  3. Eliminating human errors by removing managerial involvement from humans

Some of the popular DAO models historically have been as follows:

  1. Sub DAOs: DAOs establish multiple Sub DAOs under them. It is similar to a delegated authority from the Leadership of the firm to its Department level leadership (With the correct alignment of expertise and outcome such as legal, finance, etc.) Example: Yield Guild Games (YGG) DAO is the mother entity and YGG SubDAOs have been created to manage different games like Axie Infinity and League of Kingdoms.
  2. Governance Minimization: Limit the no. of decisions a DAO can make. Create hierarchical structures such that certain strategic decisions require more people to vote. This helps in improving dependability on protocols
  3. Incentivize Participation: Some DAOs provide monetary incentives to the participants after the value has been delivered. Example: Compound, a lending protocol, came up with a novel token distribution model that aimed to both incentivize capital growth within the protocol and provide users with better pricing on loans. This model involved the continuous distribution of Compound’s native tokens (COMP) to users who provided liquidity to the protocol and took out loans from the protocol. Every user of Compound instantly became a stakeholder, with some of them becoming active contributors and voters.
  4. Progressive Decentralization: Here, greater control is transferred from the foundation to the community as the DAO gets bigger and the safety of the protocol/ network increases. Some of the examples are AAVE and MakerDAO. We envision that some of the top chains will eventually cede their majority ownership to the community as their end-game.

The end motive for Web 3 builders should be to vest the power in the hands of the community. They should also take accountability to build safeguards against multiple attacks on their protocols and the blockchain.

Reference Links:

https://future.a16z.com/web3-decentralization-models-framework-principles-how-to/

https://future.a16z.com/building-and-running-a-dao-why-governance-matters/

https://fehrsam.xyz/blog

https://a16z.com/2020/01/09/progressive-decentralization-crypto-product-management/

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