The Decentralization Design
The design of decentralization can be thought of as spanning over three segments:
- Technical Decentralization
- Economic Decentralization
- Legal Decentralization
While all three are different in their scope of operations, they are interconnected and additive (meaning improvement in one adds to the collective outcome), thus making it important to understand them together.
Let’s have a look at each one by one.
Technical Decentralization
This is the foundation upon which economic and legal decentralization is built. It is the core technology that enables the functioning of a permissionless, trustless, and verifiable system. Not only that it provides a platform for products and services to build on the technology, thus, making it scalable.
It simply means a trusted middle party is not required to run the operations.
For example, in a scenario where Neha wants to send INR 50 to Akash, they can simply transfer the money via a blockchain network without the intervention of any central authority such as a bank (intermediary). Such transactions are also known as peer-to-peer transactions. In a centralized setup, this intermediary has complete control over and custody of your funds. One needs to trust that intermediary that the latter will fulfill its obligations of paying him/her whenever needed.
Economic Decentralization
The core idea is the ability to create your own economies through coins and tokens. These economies can be facilitated through careful design of providing value to the users of these tokens. This value can be in terms of money, voting rights, information, etc. It has led to the formation of a new study called Tokenomics.
It simply means that the users now themselves have control over how their money will be treated.
For example, Polygon Network has created its own economy by utilizing its token, Matic, as a Digital Asset to reward developers, users, and investors in Matic, and drive behavior to ensure the delivery of value in the form of various projects such as Polygon PoS, Polygon ID. And also create various financial products such as collateralized and uncollateralized loans, staking, yield farming, etc. Reward minters and validators, a moderate supply of tokens, create AMMs (liquidity pools) to facilitate trading, etc.
Legal Decentralization
The core idea is to eliminate information asymmetries and reliance on the managerial efforts of humans to drive a certain outcome. This way the application of law will be drastically reduced to only extremely necessary subjects.
Simply put, we can build code to drive outputs, thus helping us avoid human errors.
For example, Even today, the year-end employee appraisals are a function of manager feedback which is subjective and prone to multiple biases. With legal decentralization, the power to make critical decisions would not remain concentrated and will be shared with all the participants of that community/organization. Such mechanisms are implemented through a smart contract, which is a piece of code containing the logic to make governance democratic.
Reference Link: https://future.a16z.com/web3-decentralization-models-framework-principles-how-to/